Summer Infant, Inc. (SUMR) 2007 Q2 法說會逐字稿

Good day everyone. Welcome to today's Summer Infant Incorporated first-quarter earnings release conference call. As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Mr. Jason Macari, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thanks for joining us on today's call.

As most of you know, this is our first earnings release and conference call as a public company. We completed the transaction with KBL Healthcare Acquisition Corp. on March 6, so we have just about one month of public-company results in our first-quarter numbers. However, we will be focusing on the pro forma numbers of the underlying operating business, and therefore will compare the operating results to Summer Infant for Q1 '07 to the Q1 '06 numbers, excluding the impact of the KBL transaction. We are very pleased to be sharing these strong results with you today.

The format of the call will include my brief overview of the Company and recent highlights. Then Joe Driscoll will walk you through the financials. I will then provide an update on our growth opportunities and some of the key drivers of the business going forward. Following my closing remarks, we open up the call for your questions.

For those of you still new to our story, I wanted to give you a brief overview of our company. As I just mentioned, we consummated a transaction with KBL Healthcare Acquisition Corp. in March which resulted in our becoming a public company and improving our capital structure by significantly increasing our cash position. We are very excited about the benefits we see as a result of that transaction, as it will allow us to continue to invest in product development and design, further develop our retail relationships, and take advantage of select acquisition opportunities.

First, I would like to provide a little background on Summer Infant. We acquired the Company in 2001 when it had under 1 million in annual sales. We had one goal -- to build Summer Infant into a leading designer, marketer and distributor of infant products in the U.S. and Europe. Over the past five years, we've made significant progress, growing the business from under 1 million in sales in '01 to 52 million in 2006.

We currently sell proprietary products in a number of product categories primarily consisting of our nursery and audio/video monitors, safety gates, bath products, bed rails and a number of other categories. We have significantly grown our customer base and are partnered with leading mass-merchant retailers including Babies R Us, Target and Kmart and Wal-Mart, just to name a few.

So what is driving this growth? The cornerstone of our strategy is delivering the best to you and your baby, which means that we have positioned our company to deliver best-in-class infant products as opposed to (inaudible) style products often seen in many infant product categories. By positioning our products as better or best within each category, we are able to generate a higher margin as well as avoid competing with lower end products that have a tendency to be more price driven. The key to pursuing this growth strategy continues to be our focus on new product design and innovation across all of our core categories, as well as new categories, supported by a senior management team with significant product development and operational experience within this industry. I firmly believe that our commitment to developing innovative products and improved designs will help us build the Summer Infant brand, broaden our relationships with existing and new customers, and differentiate our products from our competition, as well as produce strong product margins. I will go into an detail on our current growth plan and the key drivers for our business model going forward a bit later.

Now, I would like to highlight a few points -- the key points in the first quarter. First, we continue to see strong revenue growth with sales up almost 30% in the quarter. This growth is being driven by a number of factors that Joe will further describe later in the call. Second, our EBITDA grew over 33% compared to the prior-year first quarter due to the sales increase and improvements in gross margin.

Now, I'd like to turn the call over to Joe.

Thanks, Jason. I will begin with an overview of the Summer Operating Company results for the first quarter, and then discuss our outlook for the full year of 2007. Please keep in mind that these results are pro forma for Summer Infant on a stand-alone basis, excluding any impact from the KBL transaction, and are meant to give the reader a comparison from the underlying Summer operations year-over-year.

Net revenues for the first quarter of 2007 were approximately 17.2 million, a 29.2% increase from approximately 13.3 million in the first quarter of 2006. This growth was driven primarily by continued growth at existing customers due to increased product listings and improved sell-through at the retail level. We also experienced strong growth in the UK, which increased 46% versus Q1 last year. New product introductions and the addition of new customers also contributed to the revenue growth in the quarter.

Monitors were the highest-growth category. In addition, the Company generated sales in new categories such as bouncers and swings. Sequentially, sales increased 39% from Q4 of 2006.

Gross profit for the first quarter of 2007 was 6.56 million, a 33.2% increase compared to 4.93 million in the first quarter of 2006. Gross margins for the first quarter of 2007 increased to 38.2% from 37.1% in the first quarter of '06. This increase is primarily attributable to our continued emphasis on cost reduction programs and a number of quality improvement initiatives that resulted in reduced product return.

Selling, general and administrative expenses for the first quarter of 2007, excluding depreciation and amortization, were 4.91 million or 28.6% of revenues compared to 3.68 million or 27.7% of revenues in the first quarter of '06. This increase in SG&A versus the prior year is due to a number of factors. The increase in sales has increased our variable selling costs by approximately 400,000. Another factor is approximately 300,000 of expense in Q1 '07, related to the soft goods group, which did not exist in Q1 '06. This group will start generating sales in Q2 of '07. The other major factor is increased payroll from employees who were hired during 2006 to support the continued strong growth of the business.

There are miscellaneous other increases from areas such as the start-up of a Canadian warehouse during the last half of 2006 and increased investments in product development. Going forward, our goal is to reduce SG&A as a percent of sales by leveraging our fixed cost structure over a larger sales base.

Earnings before interest, taxes, depreciation and amortization for the first quarter of 2007 was 1.66 million, representing a 33% increase from the 1.25 million reported in the first quarter of 2006. This equals 9.64% of sales compared to 9.37% of sales in the year-ago quarter. Our goal is to increase EBITDA as a percent of sales. The primary way to achieve this is to have increased sales for the balance of the year while controlling increases in fixed costs, such as payroll.

The formal or GAAP combined KBL/Summer results for Q1, which represent Summer's operating activities from March 6, the date of acquisition, to March 31, plus the KBL results for the first quarter shows 4.8 million in revenues and net income of $200,000. Included in these formal results are items such as non-cash stock-option expense, amortization of intangible assets from the KBL/Summer merger, and a 40% income tax rate.

I would now like to turn to the balance sheet highlights. As of March 31, 2007, we have 7.9 million of cash and an untapped $17 million line of credit. We paid off the balance on the line of credit using the proceeds from the merger with KBL. There is just over 3 million in both property and equipment and current portion of long-term debt which relates to the construction of the new corporate headquarters and distribution center in Woonsocket, Rhode Island.

We would also like to address the 18.4 million in outstanding warrants. We know they are an issue in terms of being dilutive. Therefore, we are actively discussing various strategies to address this issue.

In terms of 2007 guidance, we reiterate our guidance for the year, which anticipates revenues in the range of 70 million to 75 million and EBITDA of 7.5 million to 8 million. While we do not give specific quarterly guidance, we do expect to see increased sales in subsequent quarters due to the introduction of our soft goods line which will start shipping in Q2; mid-year product introductions at Wal-Mart and other customers; and the addition of new customers. If we are able to achieve the anticipated sales increases in subsequent quarters, we expect the year-over-year percentage increases will be higher than the 29% growth we achieved in the first quarter. We anticipate sales in the fourth quarter may be sequentially lower than the third, due to normal seasonality, although they are dependent on the timing of shipments of new products for 2008, which typically occur in the fourth and first quarters. Our goal is to increase EBITDA as a percentage of sales in the next few quarters as fixed costs are leveraged.

Now, I would like to turn it back over to Jason.

Thanks, Joe.

In summary, the first quarter was a solid start to our first year as a public company. As Joe mentioned, we are reiterating our full-year guidance of revenues to be in the range of 70 million to 75 million and EBITDA of approximately 7.5 million to 8 million.

Again, looking ahead, we believe the key drivers for our business, going forward, will include, number one, strong industry fundamentals. We are benefiting from a high growth industry driven by a number of favorable demographic trends, including a greater number of first-time parents in the marketplace, couples having babies later in life when disposable income is higher, increased public awareness of infant health and safety, all of which drive best-for-baby perception. This makes product innovation and quality critical, both of which are well aligned with Summer's business strategy and competitive advantage.

Number two, new products and new categories -- we continue to add new products in existing categories in an effort to expand shelf space at our major retailers. In addition to the new products, we are looking to leverage the Summer Infant brand into new categories. Most recently, we started shipping products in the baby gear category, which includes swings and strollers, highchairs and other large products. In addition, our new soft goods chain has been developing a wide assortment of new products, and these products will start generating revenues in Quarter 2.

Number three, new retailers and retail channels -- in addition to expanding within our current customer base, we continue to have significant opportunity to expand into new retailers and even new retail channels in both the U.S. and international. We have added several new accounts, including Wal-Mart, Sears, and Amazon.com, within the last year, which has also contributed to the year-over-year growth.

Number four, acquisition opportunities -- following the transaction with KBL Healthcare, we now have the capital to take advantage of acquisition opportunities. We are currently looking at various companies that could serve as new product platforms, brands, or points of distribution that we can use to further supplement our own organic growth strategy.

Number five would be focus on higher margins. We continue to experience significant growth in our two largest categories, monitors and gates. For example, we continue to benefit as consumers trade up from less-advanced audio-only options to full video monitors, one of our best-performing product lines. We continue to focus on reducing the cost of our best-selling items and improving the quality. These are the main factors in increasing our gross margin.

Number six, leverage fixed expenses -- we already have hired the major components of the senior management team that can drive the continued growth of the business. We therefore do not anticipate substantial increases in payroll. This is a key component to increasing the leverage on fixed costs and therefore increasing EBITDA as a percentage of sales.

With that, I would like to turn the call back to the operator and open it up for questions.

Thank you. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, undo reliance should not be placed upon them. There are many factors that can result in actual performance differing from projections and forward-looking statements. We refer all of you to the risk factors contained in Summer Infant's final proxy filed with the Securities and Exchange Commission on February 12, 2007, and its Exchange Act reports, including its annual report on Form 10-K for the year ended December 31, 2006 for more detailed discussions of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Summer Infant assumes no obligation to revise any forward-looking projections that may be made in today's release or call.

(OPERATOR INSTRUCTIONS). Bobby Melnick, Terrier Partners.

Did you have any costs of being public or commensurate with traditional Sarbanes-Oxley costs in the first quarter? If not, how much do you anticipate those costs will be for, let's say, the first full pro forma year of operation?

We had limited costs in the first quarter related to public-company stuff, but it's going to be -- we anticipate it will be about $1 million for the year when you add up legal, audit, D&O insurance, things like that.

Mr. Macari, this is the operator. We are unable to hear you at this time, sir.

I don't know if there are any other questions, but the question that Bobby asked -- basically, in the first quarter, there's not a lot of those expenses incurred, but as Joe mentioned, we have worked into the budget roughly $1 million for different expenses such as Joe just highlighted.

(OPERATOR INSTRUCTIONS). Seeing no further questions at this time, we'd like to thank everyone for joining the conference today. We do appreciate your participation. You may disconnect at this time.