Summer Infant, Inc. (SUMR) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant Second Quarter Fiscal 2010 Earnings Conference Call. On the call for the Company are Mr. Jason Macari, Chief Executive Officer, and Mr. Joe Driscoll, Chief Financial Officer. By now everyone should access to the earnings release, which went out today at approximately four PM Eastern Time. If you have not received the release it is available on the Investor Relations portion of Summer Infant's website at www.summerinfant.com. This call is being recorded and webcasted and the replay will be available on the Company's website as well.

Before we begin, I 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. Forward-looking statements or information are based on a number of estimates and assumptions and are subject to a variety of risks and uncertainties, which could cause actual events or results to differ from those reflected in the forward-looking statements or information.

There are many factors that can result in actual performance different 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 31st, 2009 filed on March 10th, 2010 and subsequent filings with the Securities and Exchange Commission. Should one or more of the risks and uncertainties materialize or should underlying estimates and assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information.

We do not expect to update forward-looking statements or information continually as conditions change, except as may be required by law and you are referred to the full discussion of Summer's business contained in Summer's reports filed with the Securities and Exchange Commission. Additionally, Summer Infant assumes no obligation to revise any forward-looking projections that may be in today's release or call.

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

Good afternoon, everyone, and thanks for joining us. On the call today I would like to discuss our second quarter operating performance and update you on the key initiatives and business developments we are working on for this year. Joe will then walk you through the financials and update our outlook for 2010 and then I will return and review our long-term growth strategy before we take your questions.

Our second quarter results were highlighted by strong sales growth over the prior year period, as the positive momentum we experienced at the start of the year has accelerated. Sales were up 29% after increasing 27% in the first quarter, as we continue to benefit from our efforts over the past few years to be a broad supplier of innovative products in the juvenile industry.

Through organic growth over the past nine years we have established Summer Infant as a leader in a number of key categories, including monitors, bath and gates. Over the past four years we have broadened our product offering beyond these core categories so that now we have a solid presence in baby gear, infant bedding, cribs, swaddling blankets and many other categories.

As retailers have continued to consolidate the number of suppliers they want we have been able to take market share in many areas because of our ability to service a wide array of the customers' needs within the juvenile category. As we discussed on our Q1 call back in May, we noted that based on our strong start to 2010, coupled with the early feedback on our 2011 product lines, we were expecting to grow shelf space in 2010 across most categories.

Since that time, sell through rates at the majority of our retailers have picked up quite a bit resulting not only in higher reorders on several key products during Q2, but has also resulted in mid-year placement of new products at our major customers. I believe this underscores the growing popularity of our product lines and points to our increased importance to retailers. On a year-to-date basis we have increased sales by 28% over last year, which far exceeds growth rates of our competition.

In regards to the acquisition of new shelf space, we have certain set up costs associated with new placements and there is a near-term impact on profit that we generate from that. Specifically, hence we replace another company's products we have mark downs associated with that, as well as clearing out remaining inventories, which Summer obviously gets charged for.

In many instances, there are promotional programs put in place and in order to get the product off to the right start, we oftentimes support that. Therefore, in the near term we are looking to grow and improve those placements. We continue to focus on increasing our EBITDA as a percentage of sales over time and we have developed a solid foundation for accomplishing this by gaining significant market share this year.

In order to take better advantage of our growing market opportunities, we are making important investments that will strengthen our entire organization, improve our speed to market and keep us at the forefront of product innovation. We've added key personnel in several areas including R&D, international and domestic sales and supply chain management.

We are also implementing new systems and processes that will be vital to helping us maintain our aggressive growth trajectory while at the same time drive efficiencies that will result in greater earnings power in the future. While this did create higher SG&A in the second quarter, we were still able to grow Q2 net income by more than 30% and we would expect earnings to grow at a faster pace than sales in 2010, even with additional investments planned for the back half of the year.

I will now turn the call over to Joe to review the financials.

Thanks, Jason. Net revenues for the second quarter of 2010 were $49.5 million, a 29% increase compared to the year ago quarter. This growth was driven primarily by an expanded product offering at existing customers and penetration into a larger number of stores within existing customers' networks. We continue to benefit from the diversification of our product categories and the innovation in our product development efforts. Retailers are giving us more shelf space versus the prior year due to their desire to consolidate their business with strategic partners who can provide them with a broad assortment of products.

Gross profit for the second quarter of 2010 was $18.5 million, a 36% increase year-over-year. Gross margin in the second quarter was 37.4%, an increase of 190 basis points from 35.5% for the second quarter of 2009. The year-over-year improvement in gross margin was due to the benefit of cost reductions that were negotiated during 2009 and continued cost improvement activities from re-engineering products and resourcing our manufacturing.

The margin percentage was slightly lower than Q1 of 2010 due to some rising commodity costs. Selling, general and administrative expenses for the second quarter, excluding depreciation, amortization and non-cash stock based compensation expense, totaled $13.6 million compared to $9.6 million in last year's second quarter. SG&A expenses increased year-over-year due to a higher variable costs related to increased revenues, increased promotional expense as retail customers continued to advertise significantly during the quarter and additional investments in new product development, information systems and other critical areas of our business.

As a percentage of revenues, SG&A increased in Q2 versus the prior year. However, we were able to improve the SG&A percent to 27.6% in Q2 from 28.7% in Q1 of this year due to improved leveraging of our fixed costs. Our goal is to continue to reduce SG&A as a percent of sales as revenues increase in the future.

EBITDA was $4.9 million for the second quarter of 2010, a 22% increase over the $4 million for Q2 of 2009. Net income for the second quarter of 2010 increased 33% to $2.2 million, or $0.13 per share compared to $1.6 million or $0.11 per share in the second quarter of 2009. For the six months ended June 30th, 2010 revenues increased 28% to $93.6 million. Net income rose 93% to $4 million and EBITDA increased 44% to $9.2 million.

Looking at the balance sheet, as of June 30th, 2010 net debt totaled $39 million. Our net debt to EBITDA ratio is approximately 2.2 times based on our trailing 12 month EBITDA of $17.5 million.

We are pleased to announce that we just closed an expanded loan facility led by Bank of America, which will enable us to borrow up to $70 million and which matures in June 2012. This facility underscores the confidence our lenders have in our strategy and it gives us plenty of availability to finance our aggressive growth plans.

Based on our second quarter sales performance and our current forecasts, we now expect full-year revenues to be at least $185 million for 2010, an increase from the $175 million we had previously estimated. We do expect Q3 to have somewhat higher sales than Q4 due to our retail customers generally ordering more seasonal product during Q4.

Looking at gross margins, we are projecting them to decline slightly from Q2 levels over the balance of the year due to the commodity price increases, labor cost pressures and currency issues that we detailed on our Q1 call. While we are working hard to offset those increases, many of the steps we are taking may not be fully realized until next year.

As Jason also mentioned we will be adding to our SG&A this year, specifically in product development in order to take advantage of major opportunities that are being presented to us by the retailers for 2011. We have also initiated several information system enhancements to support the growth of the Company and to add efficiencies to our operations.

In addition, we will continue to invest in our brand building and retailers have maintained significant levels of promotional activity that we noted in 2009 and Q1. We expect that SG&A dollars in Q3 will be at least equal to the $13.6 million that we incurred in Q2. These additional expenses have added to our 2010 SG&A. However, we are confident that these investments will lead to additional market share gain and increase our future revenues and profitability.

Overall we project that our profitability in 2010 will be in approximately the same range as we initially planned with increased sales being somewhat offset by lower gross margin and higher SG&A. However, our EPS is still projected to grow at a faster percentage rate than the growth in sales for 2010.

We also project that 2011 will have double-digit percentage sales increases based on the feedback we have already received from retailers on new products. Achieving this kind of sales growth should also lead to EPS growing at a faster percentage than sales in 2011 as well.

I will now turn the call back to Jason for some closing comments.

Thank you. Joe. We are pleased with the progress we have made this year executing our growth strategy and we are confident in our ability to further extend our business over the long term. As we look ahead, based on the market opportunities we have identified, we believe we are well positioned to achieve at least $300 million in annual sales by the end of 2012.

Main drivers of our growth over the next few years are diversified and include first; fully penetrating our existing account base. There are still many opportunities to grow our presence with most of our retail partners, most notably our mass merchants, mature accounts and specialty retailers.

Second, adding new customers within our three core markets, the U.S., Canada and the U.K; we see additional retailers, etailers and other channels of distribution that we are not currently doing business in.

Third, expanding internationally; our business outside the U.S. and Canada currently makes up less than 7% of our sales of which the majority of that is in the U.K. Over time we expect this percentage to increase, as we continue to build our market position in Europe, South America and Asia. We have added resources to go after these markets and we believe we have the right product line to compete internationally.

Fourth, entering new categories; at the moment Summer Infant does not compete in several large categories of the juvenile industry including strollers, car seats, feeding and infant toys, each of which provides a meaningful expansion opportunity for our Company.

And finally acquisitions, we have a proven track record of successfully integrating acquisitions that both have expanded our position in an existing category and provided us entrance in some new categories. This strategy will continue to serve as an important growth vehicle for us in the future.

I would now like to turn the call back to the operator for questions and answers.

(Operator Instructions). And our first question comes from the line of Sean McGowan of Needham and Company, to ahead please.

Hi guys, good afternoon. I have several questions. I'll ask a few now and then get back on the queue. First, do you have any indications from your customers on exactly how much share you are gaining, either overall or in specific categories? I'm not looking for specific numbers or any but just sort of as a general sense of where you're stronger and where you're picking up share?

Sean, are you referring to by category or you referring to--?

Yes by category, like where is it you're picking up share and what do you expect for the balance of the year there?

Well, we continue to strengthen our core safety categories. I would say that all of those categories continue to grow, not with all retailers but, as a group, they are growing pretty nicely. The gear category we are signed to get a mix in inroads and starting to see that grow and soft lines continues to grow, which has been strengthened by a couple of the acquisitions that we have made over the last couple of years.

And, furniture certainly is growing, so I really think it's kind of in each of our four key areas that we've been focusing in on we feel that we're making inroads. To say that there is anyone that is kind of surging ahead -- of course our safety and convenience line is our most established but the other three kind of new areas for us are doing quite well also. So the retailers don't really say, "Oh you're gaining share against this particular competitor or this particular competitor," but if you go the shelf you certainly can figure that out.

Yes, now within sort of an off shelf thing, but in cribs it's a relatively new category for you. How is that going in the early days?

Well I think 2010 has been a kind of an understanding the category and really digging into it and understanding it and trying to grow it. I would say that we will definitely grow that category next year. I don't want to really commit to how much, but there are a lot of opportunities there and I think there are competitors that exited because of the quality issues and for other issues going on in that particular space. And so I think there are opportunities out there that we will take advantage of.

Do you think it's actually been an advantage then being a relatively newer name in the category?

Yes, I actually do. I think that, you may or may not know this but I'm part of the -- I'm on the [JP&A] Board of Directors and a number of my staff work very closely with CPSC and ASTM to establish the new standards and the crib standard we're very, very intimate with and the new standard I think is a real -- is a great step towards taking that category and making it as safe as it possibly can be. And so we're kind of bullish on that and we feel like with the new standard it's actually not a bad time to enter the market.

Certainly competitors that have had difficulties over the last two or three years in that category, we can certainly understand why they would take a step back right now from that. You know, who knows whether they will come back in or not, but right now I actually think it's good for us.

Right, could be Simon says "take a step back," in other words not voluntary. A question for Joe, could you talk a little bit about the new bank agreement, how it differs from the old agreement in terms of size and terms and what the proceeds can be used for?

Yes, it's very similar to the deal that we have in place today. So the big difference is that it gives us a higher amount of money that we can borrow. So our old facility was $46 million. This deal gets us up to $60 million right away with the opportunity to go to $70 million under what they call an accordion feature.

The interest rate is slightly higher. It's going to be LIBOR plus two as opposed to LIBOR plus 150 and it's still going to be based on 3.25 times EBITDA, so that's no change and it pushes it out to another year. It goes to June of 2012.

Other than that it's really just an extension of our current deal in all material respects. We actually can use it -- we can use the money for really working capital or acquisitions. Acquisitions of a certain size need to be approved by the bank before they would loan money to us, but it's pretty much available.

Okay and is the difference between the upper end of $60 million and $70 million, is that difference based on a formula of inventory and receivables?

No the whole thing is EBITDA based so we would basically have to request the additional $10 million from the bank and they would have to approve it.

Against the EBITDA?

Yes and we would have to say here's why we need the extra $10 million and they would have to approve that. So what we have today is $60 million. That's committed funds and then the last $10 million we would just have to request it and I'm assuming that it would be approved as long as it made normal business sense.

And do you feel like these terms are a least as favorable as you would have gotten let's say six months ago? I know there was some discussion and it wasn't exactly an ideal environment, maybe six or nine months ago. Do you think this is a better atmosphere in which to be doing it?

Yes, it's a little bit better than it was six months ago. It's basically that everything we wanted, the interest rate is slightly higher but it's only 50 basis points higher so that's now too bad for what we're getting.

Thank you very much; I'll get back in the queue. Thank you.

Scott Van Winkle, Canaccord.

Thanks. Congratulations on good quarter. First, if you said something about the inventory, I apologize. I must have missed it. I guess my questions was a little higher than I though it would be sequentially and wondering if you were kind of building for what's coming ahead or kind of getting ahead of commodity cost?

Yes it definitely is higher than what we had hoped but there are good reasons. It's absolutely building for the third quarter. Probably a little premature from what we would have liked, but it's hopefully going to turn around and go back out the door. So it's not for any other reason -- it's good product. It's not inventory that's sitting there. It's actually almost all of the increase is "on the water inventory."

Got you and I guess the next question I'll tie that to guidance if you're expecting to turn that around pretty quickly, your guidance would look relatively conservative. Should we assume that that's the case?

It is conservative. We wouldn't want to go out any further, but the third and fourth quarters look good.

And on the commodity cost, is there anything you're doing or plan to do at this point to get ahead of that or are the gross margins kind of in the range that you're comfortable with?

Yes I think they're in the range that we're comfortable with. I think we're talking fractions of points rather than full point kind of changes. Mix could always change that if we kind of find ourselves shipping pipelines say of lower margin goods but in the fourth quarter but generally speaking I think our existing line margins are changing slightly. We're not really talking about big swings.

And in terms of commodities, obviously some are going up, but others are coming down, such as electronics, so it's not all bad news I guess on that front.

And, Joe, I think you talked about it last quarter about we should expect some lower gross margin that second quarter versus the first. Was commodities the reason three months ago you talked about that? Or I know at the time everyone was talking about potential revaluation of the [Rem&D]. Was that what you expected?

We know that commodity costs were higher and frankly we thought that there may be some impact from currency. There was no impact from currency in the second quarter and so we knew that commodities had gone higher so we were expecting Q2 to be a little bit lower than Q1 in terms of margin.

And retailer inventories, been a lot of talk from other companies and other categories about retail inventories kind of picking back up or rebuilding as sales came through. Have you seen that as well rather than the thinning of inventories we saw, what nine, 12 months ago?

Yes I would agree with that statement. We've definitely seen inventories rise a little bit at the retailers. It doesn't seem to be affecting a lot of orders, but their end of Q2, which would have been end of July, they did tighten up a little bit. I hope and I believe right now based on their forecast is that it will pick right back up.

And, Jason, pardon me for not getting this correct, but your comments about the cost associated with taking on some shelf space, were you talking about current time or are we talking about expectations going into the 2011 time frame?

No it's really right now. We were -- we've been challenged by our retailers in a number of ways to develop a much larger line than we probably had budgeted for. And so we're just kind of spending the money the first, second quarter and into probably the period of fourth quarter, we're spending more than we had initially planned, not because we're kind of fishing. It's because these real projects that we've been challenged to do and it's either kind of invest in them or walk away from the business, which doesn't really make sense. So, it's this year.

Now, going into 2011 our current plan is to hold steady so to speak and not invest more than at the rate we're currently on and hopefully pick up a little leverage on those dollars, so that's our current plan unless something changes. We'd like to get a little bit more leverage on the SG&A.

Okay and, Joe, just to clarify you said, you did say you expect earnings to grow at a faster rate than revenue this year?

Yes and definitely that would be the assumption for next year, given Jason's comments just then.

Great. Thank you very much and I'll look forward to seeing you guys next week.

Liz Pierce, Roth Capital Partners.

Thanks. Congratulations, nice quarter. I just want to pick up on kind of where we left off. I'm a little bit confused so maybe just clarify, when you talked about clearing the inventory and I thought you related it back acquisitions, so frankly I'm confused on what you were referring to because then it seemed like you jumped into a different--

See, Liz we're just talking about when we first get new shelf space.

Right.

So a retailer awards us a project, a certain product. Generally speaking, there are some start-up costs associated with the acquisition of this new shelf space and that can include marking down other people's inventory to clear their inventory off the shelves to that they can make room for our inventory.

All right that's what I thought you said and I just was, all right.

It's not an acquisition; it's our acquiring new shelf space by virtue of the retailer saying we want your product instead of somebody else's. So there's been kind of a significant amount of activity this year. We've been granted a lot of new placement and the only point is that there's some kind of initial costs associated with any new placement that we get.

I would also say that that's a common practice. All manufacturers in our industry are faced with that. It just so happens that when new placement picks up then so does that.

Right, it wouldn't make that much of a difference if we were just growing it 8% or something like that, but when you're growing like we are, you're acquiring a lot of new shelf space and therefore it's kind of -- it becomes a more meaningful near-term issue for you P&L, but obviously we want the shelf space and we believe it's going to be very beneficial for us over the long term.

Okay then, Jason, when you spoke -- I think, Jason, it was you or may it was Joe -- a second ago about not investing for next year, are you talking about that type of not investing in terms of acquiring shelf space or not investing in terms of infrastructure, kind of the initiatives that you've done today, this past year?

Well, let me clarify it. It's not really -- we are absolutely going to continue to invest in new product development and continue to build our line and broaden our categories and do all the things we've been doing, but what we -- I think it's year-over-year we don't plan on any additional or increased spending. So, we're hoping that we can kind of keep the development spending kind of constant and see the sales number and more drop to the bottom line versus kind of we feel like every time we grow the top line it seems like overhead costs grow a little bit or maybe not quite at that rate but too much.

And it's been for good reason because we've had so many opportunities, but I think we're getting to the point where we would like to see a little bit more leverage on the sales dollars. So our plan right now isn't necessarily to go out and hire a bunch of new people and in product development or change kind of our strategy. We feel pretty confident with the strategy that we're going forward with.

Okay, so we should look at the G&A dollars for Q3 to be similar to Q2 but my guess is that with the lower sales base we should expect that to drop off in Q4, the G&A dollars?

Just the variable portion so SG&A is made up of two pieces. One is a variable portion that goes up and down and sales go up and down and then there's I guess a more fixed piece, which is really payroll, rent, things like that. So the variable piece, depending on whatever sales dollar amount you're going to use there's going to be a variable piece associated with that and then the balance would be fixed.

Okay, so back to the investment then, because it seems, if I remember correctly, you've been bringing on a lot of people in R&D. When exactly should we start to see the fruits of that in terms of that in terms of product in the stores? I'm simplifying it dramatically but--

That's a reasonable question. I understand what you're saying. I think that third and fourth quarter we have some pipelines going out and first quarter for sure we should see it, so third fourth quarter always a little tentative because, as the retailer is kind of moving out of one product we also see the other one come into shift and pipeline shift, so there's a little bit of offsetting going on and that's why we're always conservative into the third and fourth quarter but the numbers look very good but we want to be conservative.

And but the first quarter for sure we should see an uptick.

And then I was curious, Jason, on your initial comments about taking market share and shelf space and seeing softer rates and mid year replacements. So I mean all of those obviously very positive and probably why the inventory is up. Is the mid-year replacements is it still because we're looking at the level of the river last year being a little too low or I'm trying to figure out if this is just getting back to normal or is this do you think something else happening?

Actually a lot of the mid-year activity is in the new categories, probably in our safety and convenience categories. I think it's more in the nursery and gear and bedding and furniture, so the second half is really more I think new replacements based on some of the investments in the acquisitions we've done over the last year or two years, including furniture. That was last year.

And what are you seeing on acquisitions in terms of more coming to you, pricing? I mean, it would seem like with what's going on with commodity prices, labor in China, freight, that you would -- I wouldn't be surprised if you'd seen more people approach you. Whether or not those are of interest to you is a different story.

Well, I think we've actually probably been pretty aggressive over the last few years of touching base with lots of companies in the market, whether they be big or small. I would say that we have seen an increase in people actually kind of letting us know that things are -- that people are considering their options. And but I don't think it's really changed a lot over what Joe and I have been doing on that front and the rest of the team in evaluating.

We have at any given time I think we're probably looking at anywhere from a couple to three or four potential acquisitions and it's been a little bit quiet simply because we've I think we have a pretty defined strategy of what we're looking for and how we want it to sit. And that's just hasn't come to fruition in the most recent half but we think that things will development in the next 12 to 18 months, should be a good market for acquisitions I think.

I would think so. I would think so. It's getting harder and harder for them to scale among the competition.

I would agree with that.

All right I'll get back in. Thanks and good luck.

Rob Strauss, Gilford Securities.

Good afternoon, guys, nice job on the quarter. Just a few follow-up questions on some topics that have already been discussed, Joe, regarding raw materials, you talked a few month's ago about your expectations. Could you give us a sense today how your expectations going forward on prices compares to what you thought would happen three month's ago?

It's still going in the -- I guess in the wrong direction in terms of our expectations but we had 38.4% in the first quarter for gross margin. We said before we think that's going to tick down as the year progresses based on the commodity prices and that's clearly what happened in Q2 so we went to 37.4%. As we sit here today, I would expect it to tick down a little bit more as the year goes along but we don't see it falling off a cliff or anything like that. But there's just enough pressure out there that it's going to be hard to maintain 37.4% for the next two quarters.

And so was your expectation that you expected for raw material price increases three month's ago roughly the same as it is today going forward? I understand that the gross profit margins are going to degrade to some degree throughout the year but that degradation is pretty much in line with what your thoughts were three month's ago as they are today, correct?

Yes and I don't see huge spikes going forward of raw material prices if that's what you mean. I mean, we think it's -- we've seen a lot of the increases already I guess but those are going to blend through our P&L as the year progresses.

Regarding market share gains, which you've talked a bit about, are you taking market share from smaller operators or are you also taking some market share from some larger operators in the segment?

I would say it's definitely both. We've seen the major retailers certainly have a desire to consolidate. In the last ten plus years there was really a proliferation of juvenile suppliers and I think they all -- I think it's kind of consistent across all the major retailers that there's a desire to work with fewer, stronger players and so what we see is a real -- because of our expansion into new categories, that's allowed us to take -- go into areas and take business that we weren't otherwise in in the past.

And that has come from both large and small and I -- because it's across the board in all the different strategic areas that we're focused in, it's tough to pinpoint exactly who it's coming from nor would I want to really comment on that. But I would say it's across the board because of these various things at work here. One is consolidation but the other is different quality issues and strategic issues with retailers.

And just to keep that to I guess from another angle, if you were to think of your existing product categories that you have today, again thinking about market share gain, do you have a sense for how far along retailers are in consolidating their vendors within your existing product categories?

That's a big question. I think we have a few categories that are probably more mature, which I don't see a lot more consolidation happening and I think some of the newer ones that we've entered we see it actually taking or happening over the next year or two. So it's been -- it's still happening in other words. It's not 100% where they're all kind of all where they want.

I mean, even this year going into 2011 we've been told that for instance a retailer in a category would be going -- they told us they're going from say three or four suppliers down to two or three, so we -- they've been very specific that they have plans to reduce and may the best man win kind of thing. And for the most part we've been winning with that. It's not 100% but we've been winning the majority of those challenges.

From the point in time that a retailer tells you that they're going to consolidate a specific product category, what is the time frame that that gets implemented over?

Well, usually it's through a calendar year and they're basically saying while they're doing their reviews for the for the following season, they're saying and most of the major retailers reset once a year, although the specialty and kind of category killer kind of retailers can do it much more frequently but most are resetting on annual basis. And but their plans, they put their plans together and then they start looking at vendors with new products and then they kind of make those reductions and it takes place maybe over the next six months or so.

And so, being we're sitting in August right now, I think most of what is going to take place we're probably 75% through or even 80% through our selection process of 2011 and which means that the retailers kind of have made a lot of these decisions and they've -- it's clear that they've kind of, they've cut back for 2011. So it can happen over a year or it can happen over a couple of years but usually once they get that in their minds they make it happen and I would say the major retailers are pretty specific about it. They actually have been up front in all of that with us so, which is good because then at least you know what you're up against.

And my last question is, Jason, a bigger picture type of question regarding international sales expectations. Today you're doing about 7% of sales from your international markets. You have spoken about a sales goal of about $300 million in 2012. When you look out to 2012 what sort of ballpark percent do you think international sale can contribute?

That's a great question. I would hope that if you pull out all international and you say domestic, which is U.S. only, versus all international including Canada, U.K., which are two biggest markets outside of the U.S., I would like to see that in the vicinity of 25% would be a good number based on our current business and kind of our trajectory in each of our key markets. That's pretty aggressive based on where we're at today so it's not a done deal and that could -- we actually from an acquisition standpoint have kind of kept our eye open for companies that are stronger in other markets. So that would be kind of a wish list kind of percentage that I would like to try to achieve, that 20%, 25% in the next couple of years.

So just one follow-up question to that, moving to 20% to 25% of sales for international sales in 2012 from the current 7%, what would you expect to happen to margins while you scale up to that level for the international business?

Let me just make one correction. I was including Canada so that would be another -- that would probably be another -- we're probably at 13% maybe today.

Including Canada.

Including Canada, and we want to take that to 20% to 25% so maybe doubling the importance or 50% to 75% anyway of the importance that it is today. Which means in a nutshell -- forgive me for not answering your question but, which basically means that we want to take it from 13% today at roughly $85 million in sales to 20% to 25% at $300 million in sales in two years. Is that clearer?

It is clearer and what would you expect to happen to your international margin structure or product gross profit margin?

Well, international business tends to be a lower gross margin business but hopefully more net business, net profitability because oftentimes you're selling the same product you're selling in the U.S. with minor revisions on packaging or whatever but you don't have any overhead costs associated against it. I would say that the gross margins might tick down slightly because of that but you may actually -- more may drop to the bottom line of that of that additional sales.

Thank you for answering all my questions. Good luck with the current quarter.

[Clay Kirkwin], Intrepid Capital.

You actually addressed a few of my questions already. I was just wondering if you could maybe provide a little bit more color around your EBITDA margins? I know that you had mentioned the $300 million sales goal by the end of 2012 and it's my understanding that EBITDA should be expanding a few hundred basis points by then into the mid double-digits. How do you see that playing out for the second half of 2010 and then going forward?

I think for 2010 I think we're probably going to be a 10% EBITDA type company for 2010. we've made a significant number of investments this year, which I believe are going to pay off in a big way going forward so we see 2011 and 2012, if we can achieve the kind of sales numbers that we're talking about, I think you're going to see some really good leverage on the SG&A in those years. And our goal would clearly be to get to 15% EBITDA in a couple of years. Whether we can do that or not depends on what kind of sales growth we have and are we running our business efficiency and all that but that would be our goal to get to 15% EBITDA in a couple of years.

Okay and so the -- so that's even in the face of, as you had mentioned, gross margins getting squeezed some and there is enough leverage on the fixed cost leverage to be able to achieve that or is that a pretty--?

Our gross margin comments are really specific for 2010 in terms of it ticking down a little bit for the balance of the year but we've got an awful lot of cost saving projects in the works and re-engineering products so there's no -- we're not making any statements I guess about gross margins going forward other than we've got a lot of plans in place to hopefully improve margins, gross margins, over the next couple of years so it's really our comments about margins should really be focused on the back half of 2010.

In addition to margin, I would also say that to get to a higher EBITDA percentage I don't think necessarily that we're going to get to 15 in two years, that we've stated that we believe that we should be a 15.0 gross -- I'm sorry, EBITDA margin Company but we're working towards that. I think your first statement when you said we might pick up a couple hundred basis points in the next year or two probably is certainly well within our reach and well within our plans. The challenge is how do we leverage SG&A so that we not only pick up 100 or 200 basis points but maybe 300 or 400 basis points. That would be the challenge and the management team is clearly focused on that.

Okay got you, perfect, and then last question just on the acquisition front I mean now there you have a little bit more flexibility with the new loan agreement. Is there any way you could just give I guess a little bit more color on how you're prioritizing, as far as if you're looking at something international or if you're looking -- you had mentioned strollers and car seats or feeding. Are you guys trying to break into the largest market there is or are you trying to keep your margins up because I would assume that something like feeding would be a relatively low margin business and might be a drag on your margins? Is there just any way you can give a little bit more color on the acquisition front?

Sure. Well, first of all, actually feeding isn't one of the lower margin categories. It's actually one of the highest margin categories. Of course, it's very brand driven so there has to be some equity so to speak in the brand. But we -- I would say that acquisitions for us right now are falling probably two or three buckets.

The first bucket would be small to mid-sized companies and what I mean is single-digit millions to maybe $25 million or $30 million, maybe $40 million in sales. That to me would be a kind of something that we could get our arms around by ourselves within our cash flow, within our P&L and balance sheet and be able to execute it ourselves. I am talking reasonable multiples on EBITDA so something at or below our current multiple, so that's -- those are acquisitions that we think are, make sense for us.

The next bucket is similar companies, only much larger where we may need to do more complicated funding process and companies $50 million plus in size and so those we look at a little differently and probably the third bucket which are companies for whatever reason are trading at very high multiples of EBITDA and we -- there are, we have seen a number of those and we kind of scratch our heads and try to figure out how our competitors are bidding so much higher at such a high multiple and where the value is.

So those are probably the three buckets we find acquisitions flowing into right now and we're focused on the first two. The multiple one is unless it's really strategic and it really makes sense we'd probably stay away from that but the small to mid-sized acquisitions that we can -- that are going to be accretive to our business and are going to be strategic to our business that makes sense. Those are the best for us and the larger acquisitions that are also going to make sense for us and be accretive are I would say those are of interest to us too but there are obviously a lot fewer of them so they're a little bit tougher to get your arms around. But the ones that are just really crazy numbers we stay away from because it's just tough to see the value.

Right, right because I mean in the past you've been pretty disciplined as far as paying five times EBITDA or less than one time sales so I was just wondering if it's kind of the same, anything we can assume going forward unless, like you said, it is the third bucket that's kind of a one off thing.

Yes and those are tough because they're such -- they're kind of anomalies and when you look at them and if they were smaller and we could get our arms around it and it made sense strategically, we might overpay a little bit but we're going remain disciplined. That's just bottom line for us.

Okay perfect. All right thank you, guys. Good luck.

(Operator Instructions). Arnold Brief, Goldsmith & Harris.

One of your major customers this year increased their retail, their inventories quite a bit in their April quarter and I recognize that doesn't overlap your calendar quarters and they have other businesses besides I&J so it's hard to glean it all out. This customer also had a pretty major sale in June. I guess I am wondering two things out of that observation. One, did your -- this is benefit at all from significant build up at one of the major customers? And two, if their sales have slowed up and they're trying to have sales to clean inventory, do you see less of a maybe even negative or a less of a benefit from that in the September quarter?

And then sort of related, Bye Bye Baby has not been a major player in this business for at this point but is now starting to expand to very rapidly and I think they will be a major player and I am just wondering to what extent you have a similar SKU penetration of Bye Bye Baby if you do of maybe a couple of the other mass retailers?

Well, as far as the first question on inventory goes, in looking at our sales numbers against our major customers, they're for the most part pretty in line for second quarter, meaning one retailer didn't necessarily jump way up or jump way down in their orders or their inventory so I'm not sure I'm seeing the same thing that you are referring to.

But with your second question with Bye Bye Baby, Bye Bye Baby is one of our top ten accounts and is a strategic customer and we continue to grow with them and I think all in all they're a big customer and we feel very good about the business with them so they're basically we would expect that as they expand so would our sales to them.

Could I squeeze in one more? The -- you mentioned a couple times getting further expansion of product line, getting into gear and some of those items and I could be wrong but it seems to me that the competition in the gear area is quite different than let's say bedding where it's very fragmented. Gear you have some major brand names, Graco etcetera. Do you anticipate the cost of getting into that business as the competition is going to be a little harder or how do you see it?

Yes it hasn't been easy, quite frankly. We've been -- we've had a team focused on gear for the last probably four years and I would say that in 2010 it's really our first year of real success and I would also say that part of the investment that we've been talking about is in the gear category so I would expect that we will be coming out with new products in those categories in third, fourth and first quarter. So there is kind of good things to come on that front and yes it is absolutely a brand driven business as compared to some of the other categories.

I'd say the two top brand driven categories are probably feeding and travel gear, which is car seats, strollers etcetera. Those are probably because of the safety aspects, those are pretty brand driven and feeding is a very brand centric thing because once mom kind of gets started on one particular brand she kind of tends to stick with that throughout the course of her baby going in the first two or three, four years of their lives all the way through toddler, sippy cups and whatnot.

But we are making investments in gear. We are seeing good growth, both with our Carter's brand and Summer brand and we believe that will be an area of growth in the future for us. But I would tell you that we've made a lot of investments in gear so part of the story that we're telling is that a lot of these investments over 2010, some of the clearly have been in the gear category.

I was wondering, you've talked about the retail consolidation of the vendors and I think that's a theme that has led through most of the I&J companies that I've heard make a presentation so it's happening.

I am just wondering could you give us some idea of -- you don't have to mention specific retailers but maybe what some specific actions the retailers are taking. You sort of mentioned one a little bit obliquely but could you be more specific in company A and what they're doing in this area or that area, give us some idea how fast it's happening because there seems to be a theme that has really arisen out of the last 12 or 18 months particularly with the Consumer Product Safety Commission business with the cribs and I am just wondering whether that whole thing is accelerating, how much more there is to go and whether you can give us any specific examples without mentioning specific names?

Yes I think there are a couple of factors and it kind of really got going after the financial issues in late 2008. I think a lot of people have start have questioning, a lot of retailers, major retailers, started questioning their need to be buying or having many brands within a category and too many SKUs on the shelf and almost confusing the consumer rather than helping them out. So I think it kind of started really with the financial kind of crisis in the U.S. and has kind of taken on a life of its own where retailers see that managing less suppliers actually allows them to be more profitable.

I think that's probably where it really got going but the second factor I think has been a drive within the marketplace to simplify and make shopping easier for the consumer so that a very clear statement within a category to the consumer so when the consumer goes to the shelf they can understand the category very quickly and make their selections based on a nice presentation by the retailer and by obviously the manufacturer to the consumer at shelf. So those are probably I think the two driving factors toward consolidation and so it's difficult for a small manufacturer to actually take a complete category and make it make sense because it's very costly.

Much of what we do is a lot of research, a lot of merchandizing, crunching numbers and really putting a story together that makes sense both to the retailer first and then obviously to the consumer but it's a very clear and concise statement and it makes sense and it's not confusing and it's not -- it's a simplified. And we all know when we go shopping and if there's, just to use a bad example, if there's ten trash cans on the shelf and every one is from a different brand you kind of scratch your head and why would I buy this one versus that one, when if there's two or three manufacturers and there's a good, better, best within each manufacturer it becomes very clear why you would buy each one.

So that's kind of the story. It's simplifying merchandising story, making it understandable by the consumer and very shop-able by the consumer so you truly get a clear read and they buy where they see the value and it actually encourages the consumer mom to trade up versus buy OPP, buy at the entry level price point, gives them a clear reason to move up.

And our final question comes from the line of [David Jenney] with Morehead Capital.

Great quarter. A lot of my questions have been answered. I did want to just touch briefly on the SG&A again. The SG&A jumped up a lot this quarter and you kind of gave that in your outline the basic reasons for it but I was wondering if we could get just a little more color on where those increases were mostly in, like how did it break down between the variable and the fixed and what were the costs specifically around promotion and the acquiring new shelf space?

There's a -- well, there's a variable component that usually runs about 14% of sales I don't know if you're comparing quarter one to quarter two or quarter two this year versus quarter two last year. What is your most relevant comparison?

I'm mostly looking year-over-year, just that SG&A ran up a lot more than sales did year-over-year so that's kind of mostly what I'm interested in is did that come from the acquiring shelf space or was it just you guys were financing promotions for the retailers a lot more? I was just wondering where that came from.

So you've got a variable component. If you're looking at Q2 versus Q2 our sales were up $11 million this Q2 versus Q2 so that's going to be -- that number times 14% approximately is going to be some element of your SG&A increase. And really kind of in the back half of 2009 we made some pretty significant investments in some key players to beef up our international operations. We hired a Chief Operating Officer. We hired a VP of IT. That all happened in the back half of '09 so it wouldn't be in the Q2 numbers from last year but it would be in our numbers now.

And then this year really we focused pretty extensively on product development investment this year, hired some people really to go after these incredible market opportunities that have been presented to us, so those are some of the I guess bigger buckets involved with our SG&A.

Okay I don't want to take up too much of your time, just one more quick question on the shelf space. Can you give me a rough idea of what that cost was? I am assuming that rang through SG&A and not through cost of goods, like when you have to buy out the old inventory on the shelf.

Some of that goes into net sales so markdowns is one of the elements that takes you from gross sales to net sales so you've got a piece of it would be up there and a piece of it, the promotional costs related to new items would be in SG&A.

Okay, okay so the promotional cost is that promotion on the other people's inventory that you're kind of buying out from the retailer, right?

Promotions of our product once we put a product on the shelf that typically you have some kind of initial activity around that new item so that you can kind of get it off to a good start once it hits the store level. So that promotional activity on our product, that goes into SG&A. The marking down of somebody else's product to clear up the shelf space is really an element of our net sales number.

If I was to -- if I could jump in, I would also say that the SG&A portion, meaning the promotional portion, is probably then the more aggressive part of our overall first and second quarters. The markdowns have been significant but not at the same level or pace as the promotional activity.

That's everything I had. Thanks a lot, guys.

Thank you. I would now like to turn the conference back over to management for any closing statements.

Well, thank you everybody for the questions. It really stimulated a lot of good conversation. I'd just like to thank our shareholders, thank our customers, thank our employees for continuing to support what we do and making it all kind of possible. So I do appreciate it all and I think our management team is very excited about the future.

I also look forward to speaking to everybody on the third quarter call and look forward to a continued success moving forward. Thank you.

Ladies and gentlemen, this concludes the Summer Infant second quarter fiscal 2010 earnings conference call. Thank you for your participation and you may now disconnect.