Summer Infant, Inc. (SUMR) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant third-quarter fiscal 2007 conference call.

On the call today from the Company are Jason Macari, Chief Executive Officer, and Joe Driscoll, Chief Financial Officer.

By now, everyone should have access to the third-quarter earnings release which went out today at approximately 4 PM Eastern time. If you have not received your release, it is available on the Investor Relations portion of Summer Infant's Web site at www.SummerInfant.com.

Today's call is being webcast and the replay will be available on the Company's Web site as well.

Before we begin, we would like to remind everyone that 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 and therefore undo reliance should not be placed on them. There are many factors can result in the 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 in its Exchange Act report, including its annual report on Form 10-Q for the year ended December 31, 2006 for a 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.

With that, I would like to turn the conference over to Jason Macari.

Thank you. Good afternoon, everyone, and thanks for joining us on today's call. We are very pleased to be reporting our second full quarter as a public company and to be sharing these strong results with you today.

First, I would like to briefly comment on our recent warrant tender offer. We are very pleased with the results of our warrant tender which were announced on November 9, 2007. The total number of warrants tendered was 14.8 million, leaving approximately 3.6 million warrants still outstanding. Now that we have tendered the majority of the outstanding warrants, we have eliminated a significant portion of the overhang of warrants in the marketplace and streamlined our capital structure.

The format of the call will include my brief overview of the Company and recent highlights and comments on the current macroenvironment, and then Joe will walk you through the financials. I will then provide an update on our growth opportunities and key drivers of the business, going forward, that we laid out for you on last quarter's call. Following my closing remarks, and will open up the call for your questions.

I want to start by addressing some third-quarter highlights. First, sales trends remain healthy. As we anticipated, we saw substantial sales momentum again this quarter with total sales increasing over 55%, up from the second quarter's year-over-year growth of 45%.

There have been concerns out there regarding the macroenvironment and consumer spending, so I would like to take a moment to comment on what we're seeing in our sector. Historically, we have found the Infant Products category to be relatively nondiscretionary. It is generally one of the last areas where consumers will cut back spending. Thus far, our products have performed well at the retail level. In addition to strong sales in the quarter, we were able to increase EBITDA margins by almost 100 basis points to 10.6%, as our ability to leverage SG&A more than offset the pressure on gross margins from higher commodity costs and close-out sales of excess inventory in the quarter.

Looking ahead, we anticipate that, as we grow the top line through the addition of new customers, expanded product offerings in new and existing categories and potential acquisitions, we will continue to leverage our SG&A costs.

Before I turn the call over to Joe, I would like to address the recent recalls announced by some of our competitors relating to products manufactured in China and discuss the steps we're taking to help ensure we meet all quality standards. Summer Infant has always made quality and safety our number one priority. We're proud to say that we've never had a recall of any Summer Infant product in our six-year history. Nevertheless, we want to stay proactive on this front and have stepped up our internal and third-party product testing and quality initiatives to ensure that we continue to deliver safe, reliable products to our customers.

With that, I would like to turn the call over to Joe to run through the financials.

Thanks, Jason. I will begin with an overview of the Summer Operating Company results for the third quarter and then discuss our outlook for the full year of 2007.

Net revenues for the third quarter of 2007 were approximately $21.2 million, a 55% increase from $13.7 million in the third quarter of 2006. This growth was driven primarily by expanded product offerings at our existing customers and penetration into a larger number of stores within our customers' networks. While video monitors continue to be our strongest growth category, we also experienced significant sales momentum in several other core categories, including bath, bouncers and gates. Strength in new product categories, including softgoods and baby gear, also contributed to the increase.

Gross profit for the third quarter of 2007 was approximately $8 million, a 47% increase compared to $5.4 million in the third quarter of 2006. Gross margin in the third quarter of 2007 decreased to 37.6% from 39.6% in the third quarter of 2006. The decrease is primarily attributable to close-out sales on excess inventory, which we essentially sold at cost, in addition to the impact of higher commodity prices and a change in sales mix. Excluding the 400,000 related to close-out sales, our gross margins were 38.3%, which is comparable to the 38.6% achieved in the first six months of 2007.

We anticipate that higher commodity costs, reductions in Chinese government subsidies to manufacturers and increased labor costs in China will continue to put pressure on gross margins over the next few quarters. We're looking at various options to help minimize the impact, including various cost savings projects, alternative sourcing, and strategic price increases.

Selling, general and administrative expenses for the third quarter of 2007, excluding depreciation and amortization as well as stock-based compensation, were approximately $5.7 million or 27% of net revenues, compared to $4.1 million or 29.9% of net revenues in the third quarter of 2006. The year-over-year decrease as a percent of sales was primarily due to our ability to leverage our fixed costs on higher sales.

Earnings before interest, taxes, depreciation and amortization for the third quarter of 2007 was approximately $2.3 million, representing a 69% increase from the $1.3 million recorded in the third quarter of 2006. The EBITDA margin in the quarter increased to 10.6% of sales compared to 9.7% in the year-ago quarter.

We continue to realize our goal of increasing EBITDA as a percent of sales. We already have hired the major components of the senior management team that can drive the continued growth of the business.

Earnings per share for the third quarter was $0.08 per share. This includes a tax rate of 38.3% for the quarter. We project the tax rate will be in the range of 39% to 40% in Q4.

I would now like to turn to the balance sheet highlights. As of September 30, 2007, we had $1.3 million of cash and $4.3 million of debt on the balance sheet, with the debt being primarily related to the construction of the new corporate headquarters. As Jason mentioned, we announced the results of our tender offer on November 9, in which a total of 14.8 million warrants were redeemed. This left a total of 3.6 million warrants outstanding. As a result, we will be drawing approximately $14.8 million on our line of credit to fund the tender offer, resulting in $7.2 million still available under our $22 million line of credit.

In terms of 2007 guidance, we continue to anticipate revenues to be in the previously announced range of $70 million to $75 million, and EBITDA to be in the rate of $7.5 million to $8 million.

While the continue to expect sales in the fourth quarter to be sequentially lower than the third due to normal seasonality, we do anticipate that fourth-quarter sales will benefit somewhat from initial shipment of 2008 items.

While we had previously anticipated issuing 2008 guidance on this call, we've decided to wait a few weeks, at which point we expect to have greater visibility regarding EBITDA. A number of our industry peers have commented on the increase in cost in China, and we are seeing a similar trend. As a result, our pricing discussions with our Chinese manufacturers, which have typically concluded by this time of year, are still ongoing, so we feel it is important to have clarity on this before issuing our full-year 2008 guidance.

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

Thanks, Joe. In summary, we were very please with our results in the third quarter. As Joe mentioned, we expect our full-year revenues to be between $70 million to $75 million and EBITDA to be between approximately $7.5 million to $8 million.

I would like to conclude by updating you on the key drivers of our business and current growth initiatives. Strong industry fundamentals and favorable demographic trends continue to drive demand in the juvenile product space, 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 the best for baby perceptions.

Two would be new products in new categories. Our new softgoods and baby gear categories have been gaining traction, as our retail partners continue to look to Summer for innovative products in a broad array of categories. We will begin shipping our new line of products in the fourth quarter of this year in a variety of categories.

Number three would be 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 abroad. As we announced last quarter, we have secured placement with Lowe's, and more recently Home Depot has confirmed placement for 2008. We are attempting to expand our distribution into other channels, such as grocery, drug and warehouse clubs.

Fourth, acquisition opportunities -- our strategy here is to continue to look at various companies that could serve as new product platforms, brands or points of distribution that we can use to further supplement our organic growth strategy.

Five, continued focus on profitability -- in addition to driving our topline sales, we remain focused on improving our profitability by developing new, innovative products, improving product quality, reducing product returns, leveraging our fixed costs, and improving operating efficiencies.

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

Thank you, sir. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Steve Colbert, Canaccord Adams.

Congratulations on another strong. quarter.

Obviously, you continue to see strong growth. Is there a product or category that's outpacing your other products, or is the growth pretty broad-based?

You know, I think it's fairly broad-based. I mean, our core categories -- really monitors, gates, bath, bouncers, and bedrails -- are performing very well, but we have a lot of new categories that we're adding that have helped us realize the kind of sales growth that we have, including the bedding category and some new categories like potties and boosters.

Okay. Looking at a number of new retailers coming on board, as well as new product and categories you've entered, where do you see the most growth going forward -- the best opportunities for you?

You know, we have three product teams that are working now in three different, distinct areas, and we see growth in all three -- with all three teams. We have our core team, which as you -- you know, our other categories we just talked about. We also have our bedding team, which has -- is starting to gain some momentum. We have our baby gear team, which we have our first listings shipping in the fourth quarter and the first quarter of next year. So really, we see opportunities across the board. We continue to explore new categories and try to find out where the holes in the market are.

Okay. Then maybe a question for Joe -- the decline in gross margins, if you could just talk a bit more about what drove the decline. I know you mentioned commodity prices and China costs, and really what maybe we should be looking for going forward.

Sure. I guess one thing is, if you back out the close-out sales which happen periodically, the margin for the quarter was 38.3%, which is really comparable to where we have been for the first six months of this year, so that number isn't an alarming number to us.

Gross margins are going to be pressured, from a cost perspective, for the next several quarters into all of next year. There's many things going on in China right now as well as with resin prices. Right now, it's up to us to come up with enough costs-saving projects or look at other geographies besides China to try to source the products cheaper, or strategically raise our prices to the retailers. So a combination of those things we are hopeful will offset the price increases that we know are coming.

Okay, fair enough. Then maybe if you could just talk a little bit -- I know you don't want to give guidance yet for 2008, but about how the early retail resets look. Any indications you can share?

I would say that next year is very promising. We're very excited about it. Our retailers have reacted very positively to our product line that we showed all the way back in March and have been working on really since then. So we are very excited about it. I mean, you know, it's not for -- we certainly want to give guidance. It's just a matter of getting every together and getting all the details so that we are not having to revise that we really want to come out with it once and make sure it's accurate to all the new information coming in.

Okay, fair enough. That's it for me. Thanks, guys. Congratulations again.

(OPERATOR INSTRUCTIONS). Julian Allen, Spitfire Capital.

Good afternoon. Could you guys comment a little bit on some of your balance sheet ratios? So, for example, inventory, though it's down sequentially, it's still a little high at about 100 days. Can you comment on whether there are any seasonal drivers for that, or whether you expect that to come down in the coming quarters?

In terms of seasonality, there is some element of seasonality to our business, primarily as it relates to new product introductions. So, we have started to bring in inventory in the third quarter that we would consider to be 2008 product line inventory. So there is some element of that.

In addition, in Q4, we will also bring in inventory in advance of Chinese New Year, which is typically around February, so I don't think you'll see the inventory dollars going down in the fourth quarter. You know, our goal would be to increase the turn to between four and five times; that's really our goal right now. But we bring in so much product from Asia that it is difficult to get it much above kind of a five-times turn, but that is our goal.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Mr. Macari, I'd like to turn things back over to you for any additional or concluding remarks, sir.

Well, I would just like to say, in closing, that I'd like to thank our employees for their ongoing dedication and commitment to delivering the highest-quality products to our customers. You know, our retail partners continue to choose our products and continue to partner with us in growing their business as well as ours, and our stockholders for your ongoing support. We've had some great back-and-forth between all of our stockholders, and we kind of encourage that and are excited to be able to have that dialogue. We look forward to speaking with you again on our fourth-quarter earnings call, which we expect to be in February. Thanks very much.

That does conclude today's conference. I'd like to thank everyone for joining us and wish you a good day.