Summer Infant, Inc. (SUMR) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SUMR Brands Second Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, August 12, 2020. I would now like to turn the conference over to the moderator, Chris Witty. Please go ahead.

Hello, and welcome to the SUMR Brands 2020 Second Quarter Conference Call. With me on the call today is the company's interim CEO, Stuart Noyes; and CFO, Ed Schwartz.

I would now like to provide a brief safe harbor statement. This call may include forward-looking statements that relate to SUMR Brands' outlook for 2020 and beyond. These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company's annual report on Form 10-K for the year ended December 28, 2019, and its quarterly reports on Form 10-Q and in our other filings with the SEC.

During the call, management may make references to adjusted EBITDA, adjusted net income and adjusted earnings per share. These metrics are non-GAAP financial measures, which the company believes help investors gain a meaningful understanding of changes in SUMR Brands' operations. For more information on non-GAAP financial measures, please see the table for a reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued yesterday evening.

And with that, I'd like to turn the call over to Stuart. Go ahead, Stuart.

Thanks, Chris, and good morning, everyone. We appreciate you joining our second quarter conference call today. I'll start by providing an overview of recent developments, after which, Ed will go through our financial results in detail. The quarter was one that clearly highlighted the purpose and benefits of the many actions taken to rightsize the company and improve our underlying operating performance. We reported revenue of $38.2 million versus $46.4 million last year due primarily to the ongoing impact from COVID-19. The pandemic kept some of our specialty brick-and-mortar stores closed, particularly in Canada as well as in our international markets and disrupted our supply chain for certain products made in Mexico. While our China and U.S. sources were operating near-normal during most of the quarter, the production of some items elsewhere was curtailed due to reduced manufacturing availability in the face of worker illness and/or government restrictions. That said, there is a reason for optimism moving forward based on performance. First, these facilities are now, by and large, back up and running at or near full capacity; and second, our inventory turns improved dramatically as many products in high demand sold through our distribution system to our major customers.

In addition, we believe there is still pent-up demand for our products that should positively impact quarter 3 volumes. We are optimistic about the second half of the year given these demand dynamics. At the same time, our focused business approach and implemented restructuring initiatives are producing positive financial results, evidenced by positive EPS in the quarter and significantly improved operating cash flow. G&A declined $6.7 million in the quarter from $8.1 million in the first quarter and $8.5 million last year. And we reported net income of $1.3 million or $0.61 per share, a first substantial profitable quarter in recent history. Adjusted EBITDA rose to $4.3 million, and we generated $9.6 million in operating cash during the quarter. The operating cash generated in quarter 2 was utilized to reduce debt by $9.3 million to a total of $35.2 million, significantly strengthening our balance sheet. All in, it was a very good quarter despite some top line challenges we had.

I'd like to remind our listeners that, in general, most of our leading customers have been and remain open, such as Walmart, Home Depot, Target, Lowe's and Amazon has obviously continued to do well. Our products are seen as essential to many moms and dads, leading to solid demand even in the face of supply chain challenges and the lingering economic impact of the pandemic. We saw double-digit revenue increases year-over-year within several product categories, including specialty blankets and playards. And our new travel systems are off to a good start with growing demand and attractive reviews.

As is evident from our quarter 2 results, we remain on track with regard to eliminating over $7.5 million in costs annually through our previously implemented restructuring initiatives including at least $6.2 million of those savings realized this year. Of course, we continue to assess the organization for ways to further reduce unnecessary expenses and improve our reaction time to changes in market conditions.

Before turning the call over to Ed, I wanted to mention that we were pleased to be granted additional tariff exclusions on certain products this quarter, resulting in a benefit to cost of goods sold, along with the right to receive refunds of duties previously paid on such items. However, these tariff exclusions as well as those previously granted were temporary and expired on August 7. Unfortunately, we learned that the U.S. trade representative has denied our application to extend the majority of these tariff exclusions. We knew this could happen and have put together a plan that would mitigate much of this additional cost in 2020 into 2021. Lastly, I wanted to remind our investors that the company will hold its annual stockholders' meeting on September 9, 2020. We look forward to seeing some of you then.

In closing, I'd like to say what may seem obvious, our results this quarter reflect not only our focus on streamlining the business, but just as importantly, the enduring demand for our innovative products and high-quality brands. I believe we are well positioned for a strong third quarter, and I'm upbeat about the future. I'm proud of the entire Summer team and what we've been able to accomplish together transforming Summer into a lean, customer-centric profitable organization.

With that, I'll turn it over to Ed to review our financial results in detail. Ed?

Thanks, Stuart, and good morning, everyone. As a reminder, our 10-Q and related press release were issued last night. In addition to listening to this conference call, I encourage you to review our filings.

Second quarter net sales were $38.2 million compared with $46.4 million in the second quarter of fiscal 2019. As Stuart mentioned, the lower revenue was primarily due to the impact of COVID-19 and store closures and supply chain disruptions, which negatively impacted shipments during the quarter. These manufacturing constraints have largely been corrected, and we are optimistic about a return to growth going forward.

Gross profit was $14.0 million for the second quarter of fiscal 2020 versus $14.8 million in 2019. And our gross margin as a percentage of sales was 36.7% versus 32.0% last year. The gross margin increase reflects a favorable mix of higher-margin product categories as well as additional tariff exclusions on certain items. These tariff exclusions resulted in a $1.8 million benefit to cost of goods sold during the quarter, of which $1.7 million was related to prior period sales.

Selling expense was $3.7 million in the second quarter versus $4.0 million in the prior year period. And as a percentage of net sales was 9.8% this year versus 8.7% in 2019. The increase year-over-year as a percentage of sales was primarily due to higher cooperative advertising, freight and royalty costs.

General and administrative expenses were $6.7 million in the second quarter versus $8.5 million in the prior year period. And G&A as a percentage of sale was 17.6% this year versus 18.4% in 2019. The year-over-year change reflects lower labor and other costs due to the various streamlining initiatives undertaken by the company. Interest expense was $1.1 million in the second quarter of 2020 versus $1.3 million last year. The company recorded net income of $1.3 million or $0.61 per share in the second quarter of 2020 compared with a net loss of $0.2 million or $0.11 per share in the prior period.

Adjusted EBITDA for the second quarter of 2020 was $4.3 million versus $2.4 million in the second quarter of 2019. Adjusted EBITDA in 2020 included $0.7 million in bank permitted add-back charges compared with $0.1 million in the prior year period, and adjusted EBITDA as a percentage of net sales was 11.4% in fiscal 2020 versus 5.3% last year.

Turning to the balance sheet. As of June 27, 2020, Summer Infant had approximately $0.8 million of cash and $35.2 million of bank debt compared with $0.4 million of cash and $48.6 million of bank debt at the beginning of fiscal 2020. We continue to use operating cash flow as much as possible to pay down debt, delever the company and strengthen our balance sheet. Inventory at the end of the second quarter was $18.8 million, compared with $28.1 million as of December 28, 2019, reflecting ongoing efficient working capital management, and our inventory turns were 5.1 versus 4.1 turns at the beginning of the year.

Trade receivables at the end of June were $28.0 million compared with $32.8 million at the beginning of fiscal 2020. Days sales outstanding, or DSOs, were 66 as compared to 70 at the start of the year. Accounts payable and accrued expenses were $32.5 million as of June 27, 2020, compared with $32.7 million at the beginning of the fiscal year. The company generated approximately $9.6 million in cash from operations during the quarter, as Stuart indicated. And at the end of June, we had approximately $7.5 million of availability under our line of credit.

In addition, let me note that Summer recently applied for a government-backed loan as part of the CARES Act Paycheck Protection Program, otherwise known as PPP. Given the economic uncertainty associated with the COVID-19 global pandemic, we believe there was a necessary decision to do so. On July 27, our loan application was approved. And on August 3, we received proceeds amounting to approximately $1.955 million. As our listeners may recognize this loan through Bank of America, will be used for payroll, lease payments and other eligible expenses allowed under the program. Overall, we accomplished a great deal this quarter and are encouraged by our progress and the company's improving financial results.

With that, I'll turn the call over to the operator and open it up for questions.

(Operator Instructions) And our first question will come from Mark Gomes with Pipeline Data.

Congratulations on the progress. Just to hit back on the napkin math, something would be at $5.5 million of EBITDA in 2019. You've identified $7.5 million cuts. Can we use that as kind of a rough guideline math to suggest that you're on track to get to a point where you're generating $13 million or more of EBITDA? And we'll go from there.

Well, look, I mean, we're forecasting an improvement in our numbers. And I think going forward, if you want to use that as a proxy, it could be, but there's a lot of other things happening with the tariff exclusions coming -- the loss of the tariff exclusions and other programs we have in place to -- that we're dealing with in the upcoming quarters. So look, we think the outlook looks fairly good for us at this point. And we're pleased with the sales growth that we anticipate coming forward here, and our position with EBITDA looks relatively strong.

Right. Yes. No, obviously, there's going to be pros and cons, tariff exclusions, et cetera. My impression is that the $7.5 million cut that you've identified was like kind of an initial run and while there might be -- not be another $7.5 million beyond that. Is it fair to say that there are areas where you might be able to get more than $7.5 million out of the operating lines? And if you can comment a little bit on whether or not you can get improvements on the margin lines as well, looking out more than just 1 or 2 quarters?

Yes. Yes. And Mark, this is Stuart. Thanks for the comment there previously. Yes, we are constantly looking at that. I think you and I have discussed that, and we do think there is more opportunity on price elasticity, I think you were referring to as well as some costing initiatives whether it be product costing and/or what I'll call SG&A in here. But that was a large slug. But there's definitely -- we'll continue to get better as an organization going forward.

Great. Last question before I go back in the queue. What kind of commentary can you give us in terms of maybe changes in demand trends brought on by COVID? And then secondarily, how is your positioning from a customer and channel perspective improved or changed your market share in the marketplace?

What was the first part of that question? I'm sorry, Mark, I...

The first part is how COVID has changed, not so much the availability of product or your stores being open in the chain [but were] demand for product. We hear families focusing on the home, for example. What are you -- do you see any changes as your supply chain opens back up and the stores open back up? What kind of demand trend might we see that impact your company? And then secondarily was how does your market share look versus the proposition given your positioning?

Yes. Look, we feel good in the major categories we're in. What COVID has changed, what I would call demand in some of those. Some that we thought were going to be higher demand actually been a little less because they weren't traveling. So if you had a stroller that was a travel stroller or something like that, maybe there's a little less demand while, to your point, stay-at-home demand is the POS, which everybody has access to is very positive there. And we see that continuing into the foreseeable future. Now one good thing we had were our customer base, as you know, our retail, a majority of retail that's still open, which was a -- we were, call it, lucky or whatever as well as we put a large push on dotcom with our large customers, their dotcom platforms as well as Amazon. And we are starting to reap the benefits of that going forward, the focus there. So we do see that demand continuing, though. And we'll be honest, if the supply chain challenges we had to catch up, let's call it, catch up on certain categories with certain vendors. So we feel good about the demand that we can see moving forward right now.

Great. Congratulations on the progress.

(Operator Instructions) We'll move back to Mark Gomes for a follow-up from Pipeline Data.

I guess we can keep going. So looking at your EBITDA-to-debt ratios, things like that. What are you looking for in terms of key inflection points to get you to the point where you can actually get some good debt restructuring negotiations thereon?

Well, I think we're in a much better position currently, as you can see by the numbers. We constantly look at opportunities to do any kind of refinancing that might help the business. We're going to continue to do what we're doing here and hopefully be able to reduce our loan balance even further than it is today and improve our -- both our FCCR and our debt coverage position. So I'm not sure we can project to you right now exactly where that point would be, but we're going to keep doing what we're doing. And as soon as we get to a point where we think the refinance might make sense for us, we'll take advantage of that.

Great. And then going back to the product side, what products are you seeing the most demand for? One. And then two, can you give a little bit more color on the -- on what you described earlier about some pent-up demand?

Yes. So products, I'll throw one out there. I mean obviously, gates are -- there's a lot of stay at home now, children are at home, so gates is a category that has a lot of demand in that was -- what I'll tell you was the catch-up kind of thing we had to chase after. On pent-up demand because of the POS data, well, as you know, Mark, originally, the Lunar New Year, China came back online, and this was not just Summer, but anybody that had manufacturing in China didn't come back online for anywhere between 4 and 8 weeks to get back up to 100% capacity and -- due to COVID there. So we thought we were behind the 8 ball at that point. Then COVID hit here, and everybody took a pause and did -- had no idea where demand was going. So we started to plan for the worst. And then the whole 6 weeks into COVID, 7 weeks into COVID, demand and POS is going through the -- is in high -- was way higher than we expected. So now we're on the phone with our manufacturers saying, "Oh, by the way, we've got to pull ahead POs." So you've seen kind of an up and down on the supply chain. And when we say pent-up demand is because we're, I think, many of the categories, again, not just summers that are out there. I mean you walk in some of those major retailers, and I mean, it's their hand to mouth and supply or safety stock, that type of thing. We still think we've got a good amount of demand just to get back into a safety stock position of where we should be. And then if you add the POS data, we're reviewing weekly on that, that's why we feel good about the pent-up demand out there.

Yes. So it sounds like there's going to be a shift in seasonality this year then as a result of that pent-up demand shifting from your summer quarter until your fall. Do you see -- how much did you see, like there's a big drop in revenue. So in a normalized quarter, do you think it would have been a normal quarter? And does all of that demand kind of translate through? And to what extent does your supply chain allow you to capture a lot of that in the upcoming quarter?

Yes, we can capture a decent amount of that going forward. We don't think that demand's gone away. There were a few different factors. Supply chain, I think we mentioned to you mid-market. We also did more direct import, which is at the lower revenue number, but a higher gross profit, which stuff doesn't have to flow through our warehouse. That takes cost out of our business. So there are many things affecting that top line number, but we're very focused on the bottom line. But I think, look, the company, as we've said in prior quarters, our major goal here was to get stabilized, to get profitable, to get cash flow and get our balance sheet in an area where now we can start to take advantage of the marketplace going forward and try to maximize that. So we would hope that we start to turn a corner to profitable growth, contained growth going forward.

(Operator Instructions) And the next question comes from John Cassarini with JAC Capital.

Congratulations on an excellent quarter. Many people have attempted turnarounds for this company, but you seem to have gotten the formula down path. So congratulations. If I look at your cost reductions, interest rate or interest expense declines due to lower debt balances, improved supply chain, the increase in some tariffs possibly going forward and take into account product mix, how should we think about operating margins as we go out to future quarters?

Well, John, I think the operating margins were obviously influenced in this most recent quarter by the tariff exclusions. I think what you're going to find is that they're going to be stabilized going forward in a range where we -- it's been acceptable to us in what we've budgeted for. So while they won't be in at 36%, 37% range, they'll still be in a range where we have room for continued profitability. And once the sales growth takes place, I think you'll see that we're able to manage our margins going forward, and they'll be very acceptable in terms of what the business needs.

Great. That's wonderful. And looking at the quarter's results, I see that the U.S. sales were down much less than international sales. Can you expand upon a few of the reasons why? And do you expect those sales to pick up? Or are you focusing mainly on optimizing profitability with more domestic sales?

Yes. So John, on the international, 2 things happened there. One, I think we talked about it in the first quarter, we did restructure our business over there, and we went from a run our own warehouse in the U.K. and staff it to actually a 3PL and more of a distributor model, okay, which helped on credit, helped on chargebacks we were getting, margins with customers, that type of thing, going through a distributor model. So part of it was that. We were moving the model, and you had to get to that model and then start to build that business back up because there were some direct relationships that weren't going to go forward.

And then the second piece is they've been clobbered by this COVID-19. I mean look, we have 4 calls a week with international and they are just starting to open up in this morning, New Zealand said they were shutting down. So -- and we do business there. So it's been a real struggle there versus other parts of the world on the product flow. So that's really what's happened there. To your last part of your question, going forward, we do see growth there, and we actually feel good about what we can do for profitability to kind of add to what we're doing here in the U.S. and in North America.

(Operator Instructions) There are no further questions in the question queue. So I'd like to turn the conference back over to Stuart Noyes for any closing remarks.

Super. Thank you very much. Well, thank you all for joining us on today's call. We look forward to speaking with you next quarter. Thanks again, and have a good day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.