Summer Infant, Inc. (SUMR) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant first-quarter 2009 conference call. On the call from the Company are Mr. Jason Macari, Chief Executive Officer, and Mr. Joe Driscoll, Chief Financial Officer.

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

This call is being recorded and webcasted and a replay will be available on the Company's Web site as well.

Before we begin, 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 and therefore undue 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 detailed in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2008 filed on March 25, 2009, and subsequent filings with the Securities and Exchange Commission. Summer Infant assumes no obligation to revise any forward-looking projections that may be made on today's release or call.

With that, I'd like to turn the call over to Mr. Jason Macari. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thanks for joining us.

On the call today, I would like to discuss what we are seeing in the current market, as well as some highlights of our current initiatives. Then Joe will walk you through the financials and our outlook for the second quarter, and then we will open up the call for your questions.

We are pleased with our performance in the first quarter, given the tough operating environment. Consistent with the sales outlook we provided on our last call, our revenue came in essentially flat on a sequential basis. While shipments in February and March were solid, it was not enough to offset the slowdown in January due to the sharp reduction in inventory levels at our major retail customers heading into their January fiscal year-end.

We are encouraged that ordering trends appear to have stabilized based on what we have seen in February and March and so far for the second quarter. Specifically, most retailers are no longer destocking and are now holding more normalized inventory levels. In addition, our 2009 product lineup continues to gain momentum on our customers' shelves. As a result, we have experienced a pickup in shipments on many of these new items.

It is still a challenging environment, but we have been very encouraged by the results over the past few months. While the stabilization we have seen in recent ordering trends is encouraging, I would like to address the steps we have taken to ensure we are well-positioned to profitably grow our business in the current environment.

First, we have implemented a number of initiatives to refine our product mix by eliminating underperforming SKUs and focusing on our best-performing items. As we mentioned last quarter, we are in the process of eliminating approximately 25% to 30% of our SKUs which did not meet certain performance and/or profitability targets. We feel we have strengthened our offering and are now able to focus our efforts on our best-selling products and on generating greater profitability for these items. This, combined with the benefit of lower commodity costs and favorable negotiations with vendors, should positively impact our gross margins going forward. In addition, these initiatives also drove a $3.8 million inventory reduction in the quarter.

Second, in late March, we announced several cost-saving initiatives in order to right-size our cost structure in the current environment. We recently implemented a reduction in our workforce of approximately 10%. We also expect this to be completed over the next few months and to save the Company approximately $1 million on an annualized basis once fully implemented. While this was a difficult decision, we believe it is necessary to realign our cost structure in the current environment in order to maximize profitability. However, we are taking these actions without sacrificing the quality of our products or the service we provide to our customers.

We also are implementing a plan to consolidate certain warehousing activities in the fourth quarter of this year. We expect this initiative will save approximately $1 million on an annualized basis once fully implemented.

Finally, we remain focused on improving our capital structure. We completed a sale-leaseback transaction related to our corporate headquarters at the end of the first quarter, which resulted in a $4 million bank reduction.

We are also committed to running the business cash flow positive going forward to reduce our overall debt levels. In addition, the recent expiration of the remaining outstanding warrant has eliminated the overhang on our total shares outstanding.

So in summary, while we are disappointed by the slow January, the improvements we have seen in recent months are clearly a positive signal. Assuming ordering trends and retail sellthrough remain at current levels, we anticipate revenues and earnings in the second quarter to be up on a sequential basis from the first quarter. We continue to believe that, as one of the only public company pure-plays in the infant products space, we are well-positioned to weather these challenging times and capture the growth in the years ahead.

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

Thanks, Jason.

Net revenues for the first quarter of 2009 were $34.8 million, an increase of 23% compared to the year-ago quarter and up slightly from last quarter. Included in the revenue total is approximately $1 million of closeout sales at reduced sell price.

The year-over-year increase in revenues was driven primarily by new product lines acquired in Q2 2008 from Basic Comfort and Kiddopotamus. Revenues in the first quarter, excluding the impact of these acquisitions, would have been roughly flat year-over-year. Note that revenues would have been approximately $1 million higher in Q1 of 2009 if currency rates had remained consistent with the prior year.

While shipments improved significantly in February and March, it was not enough to offset the slowdown in retail ordering in January. However, as Jason mentioned, we expect revenues in the second quarter to increase on a sequential basis, assuming POS trends and ordering rates remain consistent with current levels.

Gross profit for the first quarter of 2009 was $11.7 million, a 17% increase year-over-year. Gross margin in the first quarter decreased to 33.5% from 35.0% in the first quarter of 2008. The decrease in the year-over-year margin percentage was primarily the result of increased sales of closeout inventory and a slight change in product mix. Excluding closeout sales in the quarter, gross margin was 34.9%, down just slightly from the 35.3% recorded in the fourth quarter of 2008.

Looking ahead, commodity prices have retreated and we continue to anticipate that this should benefit our gross margin starting in the second quarter. As Jason mentioned, we are constantly reviewing and refining our product mix portfolios to ensure we stay focused on the best-selling items, particularly in the current environment.

Selling, general and administrative expenses for the first quarter, excluding depreciation, amortization and non-cash stock option expense, totaled $9.3 million compared to $7.3 million in last year's first quarter. SG&A increased approximately 5% from the pro forma SG&A of $8.8 million in the first quarter of last year, which assumes that Basic Comfort and Kiddopotamus were acquired on January 1, 2008.

The year-over-year increase in SG&A was primarily due to higher levels of promotional activity, which was implemented in conjunction with our retail partners, and increased costs related to product quality testing due to greater [PTFE] regulations, as previously anticipated. However, SG&A as a percentage of revenues improved sequentially to 26.7% as compared to the 27.3% recorded in the fourth quarter of 2008. In addition, we have taken a number of steps to realign our cost structure, as Jason described earlier, which will reduce our SG&A as these programs become fully implemented in 2009.

EBITDA was $2.4 million for the first quarter of 2009, compared to $2.6 million in the first quarter of 2008. Earnings per share totaled $0.03 per share for the quarter, versus $0.07 per share in last year's first quarter. Our income tax rate in the first quarter of 2009 was 30% as we continue to implement tax-saving strategy in the first quarter.

In terms of the balance sheet, as of March 31, 2009, we had approximately $41.4 million of net debt. On March 27, we announced that we had completed a sale-leaseback transaction on our corporate headquarters. While the P&L impact was immaterial, it resulted in a $4 million bank debt reduction. On a pro forma basis, the bank debt to EBITDA ratio was 3.9 as of March 31, and the majority of our bank debt matures in fiscal 2011.

We haven't had any issues with our lenders in terms of being able to access our credit line and are in compliance with all debt covenants. We are focused on continuing to reduce our leverage over the remainder of this year.

Also, I would like to note that, on April 20, our remaining outstanding warrants expired, removing the potential overhang on our total shares outstanding.

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

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). Scott Van Winkle, Canaccord Adams.

Joe, I had a little trouble hearing part of your commentary. Did you say that the gross margin was 34.9%, excluding the closeouts?

That's correct.

Okay. Again, I kind of just missed a little piece of it; maybe it's my phone. Did you talk about the stock-option expense number?

No, but I can talk about it. We issued to some stock options and some restricted shares in the month of January, so that's why that number is higher in Q1. Going forward, it should be about $150,000 a quarter for the balance of the year.

$150,000 a quarter going forward?

Yes.

Okay. And so you had a tough January, which we had talked about on the fourth-quarter call. Things have gotten back to normal in February and March. Jason, your commentary about the new lines picking up steam, is that something that occurred throughout the quarter? Were the retailers slower to slot new products this year, or is that more of a quarterly commentary that it was just they picked up throughout the quarter?

Yes, January historically has been a relatively slow month at retail, and then it starts picking up in February and March.

We saw -- and I think I mentioned this on the last call -- but we saw sales pick up in early to mid-January. I think it was just pent-up demand from a lot of consumers kind of holding off purchases in the fourth quarter with all the news back then. Basically, January started picking up about mid-month at retail. Then February and March and April have been very strong, certainly at our forecasted numbers. But I think what really happened to us in January was a result of the retailers cutting back on the inventories, not so much point-of-sale information at retail.

Okay. With regard to the SKU reductions, percentage of completion in that effort as well as the closeout inventory -- kind of where you stand in the process?

You know, if I was to throw a percentage out, I would say we are about halfway through. We took a real hard pass at it in the fourth quarter, which most of the goods we were able to get commitments on at a fair market value. I don't think we are really taking a hit on it.

We have taken a second pass now in the first quarter. I would say that those goods, a smaller number -- it's a smaller overall number -- and those goods, we're starting to sell basically through different channels than our normal channels, and we will be I think eliminating that inventory over the next three to six months, I would say.

Winkle: Some items are just identified as phase doubts, where we continued to sell them at normal sell prices; we're just not going to reorder them. We're going to transition the customer into a different item. So not everything needs to be closed out at a reduced sell price.

Right.

A lot of those products I assume are just maybe minorly different than another SKU that's out there, something that was just an incremental size or color or something of that nature?

Yes, there is a good, a fair amount of that. I think what happened when we made the acquisitions there were a large number of SKUs, especially in the Kiddopotamus line, which we have cut back. They are basically different fashions of the same product. It is all good merchandise.

We've had similar things in our summer line in moving through some of that inventory.

The good news is that we've historically been able to move the merchandise without taking a loss. That's what our goal is, to do that.

To Joe's point, some of it is transitional; we do substitutions. Some customers allow us to substitute different styles or colors as long as the product is displayed on the box. So we will move through it, and our goal, as I mentioned on the fourth-quarter call, is to get down to around $25 million in inventory by midyear. So that's still our goal.

The cost reductions, the headcount reductions that you announced, was anything accrued in that first quarter?

No, we did not accrue anything. There is a little bit of carryover of some weeks of pay into the second quarter, but we did not accrue anything in the first quarter.

But still, nonetheless, given the timing, probably a lot of the savings will be seen in the second quarter?

A lot of it. You probably won't get a full quarter's worth of that $1 million number that we quoted on an annualized basis, but you will get a good slug of that.

When you look across the product portfolio, is there -- now that you're back to kind of normalized trends after the craziness in December and January, is there a set of products or a price point of products that is performing better or worse? Are video monitors holding up well in this environment? You know, are people running to the secondhand stores to save money on the higher-priced electronics?

You know, oddly enough, in the video monitor category, it's held up very well. Our best-selling new product happens to be our most expensive item. So I think the consumer that is purchasing video monitors is still purchasing video monitors. You know, through the fourth quarter, we saw some trading down, but I think that has bounced back, and I think we are pretty much -- we are back to a more normalized forecast. So we are pretty happy with that.

Overall, I would say our new lines, including the Carter's gear, including some of the safety items, including monitors and bath and gate things, bedding -- it's all checking out real well. We don't have any that I can think of that are real problem children.

What we see right now and I think in our line -- it's fairly balanced in that we are having less and less dependence on one or two SKUs or one or two categories. So it is broadening out a little bit to where I think we only have really one SKU that is 10% of our business. Everything else is a much smaller percent. So, I would say, across the board, items are performing.

Okay. I guess that's it. Thank you very much.

Sean McGowan, Needham & Co.

A couple of questions here as well -- Jason, could you comment on what your retail customers are telling you about how point of sales went throughout the quarter? I mean, did they get progressively better or was it just that January was bad and the rest of it was kind of even Steven?

Well, we watch our own personal POS, and we of course talk to the retailers. I think what's happening is that the retailers are -- and it is affecting us to some degree -- is that it's a heavy promotional time. You know, all of the retailers are looking to drive sales through promotions and through advertising and unadvertised promotions, etc.

So what's happening is that we have definitely seen a higher level of cost on that. But I do think that retail, the real true test will be how it holds up I think in the second quarter, quite honestly, because the first quarter in juvenile has historically been really strong with a lot of the spring sales between all of the major retailers, including Babies R Us, Kmart, Target, Kmart, Wal-Mart, etc. They all promote during the first quarter.

But you know, the real true test to me is how it holds up in May, June, etc. You know, April has been a good month; we've been pleased with sales in April. So, I would say that sales have been good at retail; I guess that is the best way to say it.

Okay, thank you. Joe, is the tax rate that you are showing in the first quarter as good a rate as any to use for the full year?

Yes.

Okay. Would you mind repeating what you said the EBITDA was for the quarter? It might be in the release but I didn't catch it.

The EBITDA was $2.363 million.

Okay, thank you. Given the sale-leaseback and the reduction in bank debt, could you just remind us then what the total borrowing capacity is and how that move gave you some extra flexibility?

Yes, we have $46 million of total capacity on our facility right now. So at the end of the quarter, we are a little over $42 million on the outstanding borrowings. Our goal for the balance of the year is to pay down an additional $3 million to $5 million, hopefully more than that, but our target is $3 million to $5 million between now and the balance of the year. So theoretically, by the end of the year, we would have an outstanding loan balance in the high $30s million range and a facility of $46 million.

Now, does that mean that you are explicitly ruling out acquisitions for the balance of the year?

Well, I'm not sure we are ruling out. Certainly, we are being cautious and looking for acquisitions that would not tax us from a balance sheet standpoint. So, we are looking for deals out there that would make sense for us without taxing us and having to deeply borrow.

Okay, so a big earnout component if you see one.

Exactly. I would say one more thing about inventory -- is that, you know, our first quarter typically is our highest-inventory quarter because of Chinese New Year and inventory pipelines. So it is coming down even as we speak.

Okay, that's helpful. Joe, can you talk about any profit impact of currency shifts that may have occurred in the quarter?

Yes. We buy everything in US dollars, so that has somewhat of an impact on our foreign operations. So, it was probably about a $250,000 EBITDA impact on profit in the first quarter.

Negative, you mean?

Negative.

Okay, I will take care of the rest of the questions I have later. Thank you.

(Operator Instructions). Nelson Obus, Wynnefield Capital.

Yes, what were the DSOs?

DSO is running about 70 days right now. Most of our customers have 60-day stated terms, and by the time you received a check in the mail and all of that, it's about 70 or so.

That has moved up, I assume, a little bit.

A little bit. You know, probably a couple of days.

I've noticed -- just to change the topic -- how much are you sourcing from mainland China now as a percent?

I would say approximately 80% to 85%.

Yes, I've noticed a trend that that number is coming down a little bit in all sorts of durables and even soft goods. I've seen some numbers come down 10% or 15%. Do you still feel comfortable over there, or are you trying to diversify a little bit more?

You know, I think last year was a bit of a wake-up call for a lot of manufacturers to think about diversification in your sourcing. Ours, we've looked into other areas, mainly in Southeast Asia. That continues to be something we look at. We've done a little bit, but I would say not significant. But it is something that is going to take a little bit of time to develop the sources and properly get the products made level in a quality level that would be acceptable to us.

We have had some nice US growth where the goods that we make in the US have been doing very well. So I think, if anything, that's been helping us.

But China continues to be a very viable manufacturing location. We have some great sources, great suppliers out there. So we're going to continue to use China, but I think just diversify over time.

Just to take one commodity -- say resin -- which has been pretty volatile -- does that have any meaningful affect on earnings from quarter to quarter, or is it mostly pass-through?

No, that's a good question, Nelson. You know, resin on our domestic products is a significant portion of the cost. To a lesser degree, it is on many of the components made in the Far East. So it does have an impact on us.

We saw our resin costs go down by almost a half from 2008 to 2009. So our -- that's one of the areas where our costs are coming down thankfully. I do think that, in the next few quarters, our gross margin should start inching up based on some of those commodity costs and negotiations.

Do you have any ability to buy forward, or do you just, you know --?

Oh, on resin, you're talking about?

Yes. Yes, yes.

We typically --

In other words, if you think it bottomed out, you know?

Yes. No, it's a good question. Yes, we have locked up as much as we feel is reasonable. Typically, it's not -- we typically don't lock up a full year, but three to six months I think is probably how far we are out right now.

Last question -- you know, there's been a lot of -- what's the word -- talk, I guess, about the baby boomlet that we are enjoying. But again, when you deconstruct it, a lot of it is Latino. I mean, are you still formulating a strategy to go after that particular ethnic group, or do you think it deserves a special strategy, or at the end of the day, is it all pretty flat across all ethnic groups in terms of what sells through?

Good question. We talk about that with our retail partners quite often. There definitely are segments of the US market that are growing faster than others. Those are areas that I think our product development team and marketing team take into account when they are developing everything from fashion to features to price points. So we definitely are taking that into account. But I also think that, as a business, we tend towards better/best positioning. Sometimes the price points that we are going after may not cross that demographic as well.

But it's amazing, you know? Those groups of consumers happen to spend a lot on their babies. They really are -- it's probably disproportionate to necessarily their income levels. So, it is still an excellent group for us, and I don't see any reason why it would be significantly different from our other customer groups.

It's really actually, what I see -- and we shop. Oftentimes we do focus groups, and we find that their buying patterns from a fashion standpoint can be very different but from a product standpoint is very similar.

Interesting. Okay, thanks.

Mike Mork, Mork Capital Management.

Yes, my question is on your fourth-quarter announcement. You said that, based on its early 2009 results, we expect our first-quarter revenues and earnings to be slightly down relative to the fourth quarter. So, it turns out your revenues were up about close to $0.5 million and your net earnings were dropped almost in half. I know it's still a small number, but did this surprise you or is this pretty much what you had planned on? Why were your revenues a little higher and your net income probably significantly lower than you had planned?

The $1 million of our sales this quarter were what we term to be closeout sales, which are basically at no margin. So if you take that out of the sales number, you will see that we were, in effect, slightly below the fourth quarter, as we thought we were going to be on normal sales. So that $1 million obviously impact our bottom line as well.

Okay. Then going forward then, you say the second quarter should be up sequentially. Do you kind of mean sequentially and then you would add back that $1 million of sales back to a normal profit margin on that?

I'm saying, yes, if you start with the $34.8 million that we did this quarter, I believe we are going to be higher than that number, that total number, including that closeout of $1 million in the second quarter.

Okay. When you get the second-quarter numbers in, will you feel comfortable at that point in time that hopefully the economy has stabilized a little bit more to give a full-year projection then?

We've been talking about that as a management team and with our Board certainly. You know, I think everybody is kind of in the same boat right now in that we are all looking at the economy and hoping that the current trend, the current positive trend holds, and that we in fact feel comfortable coming out with full-year numbers.

You know, our goal right now is to manage the business profitably. We've taken actions to reduce our overhead. We continue to take actions to try to improve our gross margins and certainly sell more. So we are confident that the sales trends are heading in a positive direction. We feel that we will improve our profitability throughout the year and to actually come out with projections. We certainly have them internally but it's only fear -- if we feel that the market is -- if it stabilized, it may make sense; if it's not, then it may just make better sense to hold on.

It's not a very seasonal business, so really the only fluctuation at this point is consumers buying products at the retail level. So, if they continue to buy at normal levels or current levels, then we feel pretty confident about giving guidance. So that's what we're just going to keep an eye on.

Okay. Well, fair enough and very good. Thank you.

Scott Van Winkle, Canaccord Adams.

A quick follow-up -- the headcount reduction, was that 10% applied to all departments, or were certain segments of the operation more impacted? Specifically, I'm wondering what was done on the product-development side.

Yes, I would say it was fairly evenly distributed. Obviously, our business is built on product development, so we are very careful to address that there because that is really our future growth. But we did cut back a little bit and probably in that 10% range. We also pulled in quite a bit of outside development, so we also cut expenses and basically just tightened the belt. But we reduced headcount in other departments also, including operations, sales, and just across the board really. So, it was not targeted at product development certainly.

Thank you.

At this time, there are no further questions. I would like to turn the conference back over to you.

Well, thank you. I would like to thank all our stakeholders in Summer Infant, and we would like to thank especially our shareholders for their continued support.

I think, despite challenges in the broader macroeconomic environment, I am very confident in our ability to grow our business, to build the Summer Infant brand, and our team really remains dedicated to executing on our growth strategy. We are expanding our business and, in turn, building shareholder value over the long term. So, thank you very much and we will talk to you at the next call. Thanks.

That does conclude today's conference. Thank you for your participation today.