Summer Infant, Inc. (SUMR) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant third-quarter fiscal 2011 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 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 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, 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. 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. Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects, and similar references to the future.

Examples of forward-looking statements include, but are not limited to, statements we make regarding our future financial performance, including guidance for 2011, business prospects, and operating strategies. There many factors that could 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, 2010, filed on March 22, 2011, and subsequent filings with the Securities and Exchange Commission. Should one or more of these 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 made in today's release or call. And with that, I would like to turn the call over to Mr. Jason Macari. Please go ahead, sir.

Thank you. Thank you, everyone, for joining us today. With me on the call is Joe Driscoll, our CFO. The third quarter was another period of strong revenue growth for the Company. The combination of innovative new product introductions across our major categories and a greater retail presence, compared to year ago, drove sales higher by 27%. We have continued to leverage the performance of our historically strong categories, such as monitors and bath, in order to gain increased shelf space in relatively newer categories, such as furniture and nursery. We are continuing to see the benefits of supplying products in a broad number of categories to our retail customers, as we have become a larger and more important supplier in the recent past. This has helped us increase overall demand for the Summer brand and further reduce our customer concentration year over year.

To achieve 20% sales growth for the seventh consecutive quarter, particularly in this challenging environment, was very rewarding. We also continued to grow our business outside of the US during the third quarter by over 20%, which did contribute our overall performance. Our investments in expanding our presence overseas are paying off, as consumer demand for the Summer Infant brand and product lines in western Europe, Canada, and several other countries has continued to improve. The foreign markets represent a large, untapped growth opportunity for our Company, and our recent success gives us a heightened degree of optimism about our long-term prospects abroad.

Unfortunately, we are not immune to the cost pressures facing our industry, specifically higher commodity costs, labor rates, and currency valuation in China. We have been able to mitigate a portion of these pressures by reworking and reengineering existing products to reduce costs without sacrificing quality, selectively raising prices, and consolidating our US distribution centers. While these measures have helped gross margins improve sequentially, it hasn't been to the extent we anticipated earlier in the year, due to the challenging retail environment, which has impacted our earnings growth. At the moment, we don't see this operating environment improving dramatically in the near term. Against this back drop, we remain focused on driving our business forward by expanding our top line and leveraging our expense base, and trying to generate increased gross margin by continuing to innovate. Our six product development teams, each have exciting initiatives in place for next year, and this is reflected in the commitments we have received from retailers for 2012.

I want to touch on a few highlights in regards to new product development. We are very excited about the relaunch of the BornFree line. Our newly formed feeding team has spent the past six months completing an overhaul of the brand and product line. The response from retailers has been very positive, and it resulted in improved placement for next year. Beginning in January, consumers will find the entire BornFree line displayed in new packaging, with new messaging and many new products. We believe this will improve overall demand and help accelerate our market share gains in this very significant category.

We recently shipped our eagerly anticipated Prodigy travel system. Shortly after its retail debut in late September, the product was selected out of 120 competitors to win the coveted Juvenile Product Manufacturing Award -- Innovation Award, I should say, at the All Baby and Child Expo this past September. This was extremely gratifying, given the many years of hard work and extensive testing that went into developing this unique system that features our proprietary Smart Screen installation technology, SafeGuard and 1-Adjust harness and belt-tightening system. There are various marketing initiatives underway, which will highlight the innovative features of this product in the months to come.

Summer Infant is probably best known for its leading position in baby monitors. Every year, we continue to push the category forward with new technologies that make it easier and more convenient for parents to monitor their babies from a remote location nearby. In 2012, we will be introducing a new technology to this category with the introduction of our new proprietary monitoring system called Peek, which will allow parents to see their children anywhere in the world, via an encrypted internet feed through a secure portal through www.summerinfant.com. We also have many exciting initiatives in the nursery, furniture, and play teams, which have been very well received by retailers and which should drive growth in each category in 2012.

In summary, we continue to function very well in a less than ideal operating environment. The restructuring of our product development teams has elevated the performance of our new products, which in turn has strengthened our relationships and leverage with retailers. We are very pleased with the commitments we have received for 2012, and we are more optimistic than ever about the long-term opportunities for sustained growth, in terms of categories, customers, and geographies. We believe the combination of solid top-line expansion and continued operating expense leverage will help us achieve our long-term annual target of at least 15% to 20% EPS growth in the years ahead. Joe will now walk us through the financials.

Thanks, Jason. Net revenues in the third quarter of 2011 increased 27%, to $63.3 million from $49.8 million in the third quarter of 2010. The increase in revenue was primarily the result of our expanded product offering at existing customers and penetration into a larger number of stores within existing customers' networks. The increase was also driven by higher demand for several key categories, as we continue to successfully diversify our product line, including $3.4 million of sales from BornFree products, which would have not been in the prior-year number. Gross profit in the third quarter of 2011 was $22 million, or 34.7% of net revenues, compared to $17.9 million, or 36% of net revenues, in the prior-year period.

Included in our third-quarter 2011 gross margin are charges of approximately $115,000 related to issues caused by Hurricane Irene in late August. Excluding this charge, adjusted gross margin in the third quarter of 2011 was 34.9%. The decline in gross margin versus the prior year was primarily attributable to higher markdown assistance, higher product costs, and a change in product mix. On a sequential basis, adjusted gross margin increased approximately 70 basis points from Q2 of 2011. SG&A expenses, which exclude depreciation, amortization and non-cash stock-based compensation expenses, were $16.6 million in the third quarter of 2011, compared to $13.2 million in the third quarter of 2010. The increase in SG&A was primarily due to higher variable SG&A, which is the result of the significant increase in revenues in the third quarter.

Included in our third quarter 2011 SG&A are charges of approximately $185,000 related to Hurricane Irene and $482,000 associated with the closing of our warehouse in Rhode Island. As we've previously discussed, we consolidated our US distribution into one centralized facility in California, which we believe will result in a much more efficient cost model going forward. Excluding these charges, third quarter 2011 SG&A improved 130 basis points to 25.2% of net revenues, from the 26.5% in last year's third quarter, due to leveraging of fixed costs on higher revenue.

Adjusted EBITDA, which excludes non-cash stock-based compensation expense and $767,000 associated with the aforementioned charges related to Hurricane Irene and the warehouse closure, increased to $6.1 million in the third quarter of 2011, from $4.8 million in the third quarter of 2010. Adjusted EBITDA margin in the third quarter 2011 was 9.7%, compared with 9.6% in the third quarter of 2010. Net income in the third quarter of 2011 was $2.1 million, or $0.11 per share, compared to $2.1 million or $0.13 per share, in the third quarter of 2010. On a non-GAAP basis, after excluding the $767,000 in pre-tax charges noted previously, adjusted net income was $2.7 million, or $0.15 per diluted share, in the third quarter of 2011.

Looking at the balance sheet, as of September 30, 2011, net debt totaled $61.9 million, which includes $1.9 million in cash, and $63.8 million in debt. The increase in net debt from December 31, 2010, is primarily attributable to the acquisition of BornFree in March, which included a $14 million cash payment as part of the purchase price. Compared to the end of the first and second quarters of this year, total debt has decreased $6.4 million, and $3.6 million, respectively, driven by positive cash flow from operations. We have been able to generate cash through a combination of increased profitability and improved working capital management, and we are continuing to focus on producing positive cash flow going forward. Inventory as of September 30, was $43.8 million, compared with $45.9 million as of December 31 -- which is a very positive trend, given the increase in sales plus the inclusion of several million dollars of BornFree inventory, which was acquired in March 2011.

Turning to our guidance, based on our third-quarter performance and the assumption that our current business trends continue, we now expect full-year 2011 revenue to exceed the high end of our previous range of $240 million to $245 million, and earnings per share to be around the low end of our previous range of $0.55 to $0.61. As Jason mentioned earlier, the retail environment has continued to be promotional. As a result of this, and also due to continued higher cost of goods sold, gross margins will remain under pressure over the remainder of the year. We do expect to experience SG&A operating leverage on higher sales in the fourth quarter, versus the prior year. Year-to-date, our adjusted SG&A as a percent of sales has improved 210 basis points, compared to the same period a year ago.

As we look out to next year, we are excited about our product pipeline and the level of placement we have received from our network of retail partners. We believe 2012 will be another year of solid growth and will be consistent with our long-term goal of having double-digit percentage revenue increases on an annual basis. We expect to again experience meaningful expense leverage, which should help offset ongoing cost pressures which will limit gross margin expansion, sequentially, over the next several quarters. With that, operator, we are now ready to take questions.

(Operator Instructions).

And our first question comes from Sean McGowan with Needham & Company.

Hi, good afternoon.

Hi, Sean.

I'm down the road apiece from you here in Pawtucket, Rhode Island. So, I am enjoying the beautiful weather. (Laughter). A couple of questions, maybe dealing with some housekeeping stuff for you, Joe. Could you remind us of what non-recurring charges were already taken in the first half of this -- or charges that you would categorize as non-recurring?

Sure. We had some BornFree deal fees and transition costs of about $1.4 million. And then for nine months, we are -- we have about $1.8 million of other charges, which are things like costs related to prior year customs issues, some warehouse closures, things like that.

So that 1.8 includes all the stuff that you talked about today?

That's correct.

Okay. And could you characterize how much of the mix shift -- or what kind of an impact the mix shift had on your gross margin percentage in the third quarter?

Versus the prior year?

Yes. Yes, versus the prior year.

Well, third quarter of 2010 was 36%, and this quarter was just shy of 35%. So, it -- probably half of that change is due to mix, and the other half would just be higher costs. I don't know if you recall last year, but the costs actually started going up, in the -- around the third quarter of last year. That's when we started seeing some more significant cost pressures. So, that's started to actually turnaround a little bit and go the other way, as we move forward this year.

Yes, I do remember that, and that's why I wanted to clarify how much of it is mix shift. And you called out an impact from Irene, which was certainly a terrible storm in the Northeast. We also had some freak weather a week ago. Did that have any unusual impact on you?

No.

Okay. And Jason, could you talk a little bit about what you see, as the current picture for overall retail inventories in the category? How much of a headwind is that now, versus what it might have been earlier in the year?

The -- I think retailers throughout the year, have been tightening their inventory. So right now, from our perspective, we don't see a lot of issues, or shouldn't have a lot of issues whether it be this quarter of the next. There is always a natural tightening towards the end of the year, but I think we've accounted for it. And I think right now, everybody's keeping it tight.

Okay. And can you comment on what kind of international sales growth you saw, outside of North America?

Yes, it was in the same range as the overall growth rate. We grew about 27% year-over-year, and the international was sort of in line with the North America growth.

Okay, thanks. And then final question, any early comments on how Prodigy looks? And particularly, like what does that bode for next year with broader distribution?

Well, I think it's off to a relatively slow start at retail, but it's -- we expected that. We do expect it to gain momentum, as we start putting some dollars against it, from an advertising and PR standpoint. And we -- in that category -- it's probably the most brand-centric category, other than maybe feeding. And we know it's going to take a little time to get our brand out there, and to -- for people to kind of respond to us being in that category. So honestly, next year's forecast doesn't include a lot of dollars from Prodigy, although I think that it will gain momentum throughout the year.

Okay, thank you.

And our next question comes from Matt Bendixon with Craig-Hallum Capital.

Hi, thanks for taking my question.

Sure.

Just quickly, what are you guys [kind of seeing] in the acquisition [market], are you still actively looking at other categories? Are multiples kind of coming in with the market there?

I think what -- we continue to look at acquisitions. We -- a lot of times the trade show kind of opens up new doors, and we establish new relationships and talk to people. So I don't think it's really -- a lot has been talked about lately in multiples. But I think, generally speaking, the vast majority of people are still hunkered down. I mean, they've opened up a little bit, I mean at least there's conversations taking place. But I think, certainly expectations are lower than they were, two or three years ago. But I don't think it's changed dramatically over the last year or two

Okay. That makes sense. And then, could you break down your input costs for me? And then maybe, kind of how do you see those going forward? Do you see those kind of easing a little bit in 2012?

Commodity costs, I don't know that we have an exact percentage break out, but certainly we watch certain commodities in steel, plastic, cotton, lumber. There's other things that we watch, currency because we buy in China in US dollars. We certainly watch currency in our -- the countries that we trade predominantly in, which would be mostly Canada and the UK. And we have seen fuel kind of stabilize, which is good. The fuel surcharge, for instance, on shipping is -- has lowered. So, generally speaking, I think there is stabilization, I guess is the best way I can say it, because some things have gone slightly up, some things have gone slightly down. But I don't see like radical changes, for instance, in cotton, there was a doubling of cost over the last year or two. And that has stabilized back down to -- more than what it was, but a 100%, rather than 200% kind of thing.

And plastics has settled down a little bit. In the recent past, I have seen a little -- some lower prices, although it hasn't been consistently lower prices, we've certainly seen some spot lower prices, I guess, would be the best way to put it. Hopefully, they will stabilize down lower, so that our input costs maybe start dipping down, and we can work on our costs and bring them down slightly. But we're not, again, in our forecast for next year, as we planned our internal budgets, we're not counting on any decreases in costs. We're really focused on increasing sales and leveraging overhead, so it's -- kind of keeping the overhead, still probably ticking up, investing a little bit more in development. And we're doing some other things, advertising-wise, and we're putting in some more stronger infrastructure, specifically IT systems around our warehousing and distribution. But we are not looking at costs decreasing. If they do, that will be a bonus.

Great. That's helpful. Thanks, guys.

Sure.

And from Imperial Capital, we'll go next to Lee Giordano.

Thank you, good afternoon. Can you talk a little bit more about the new proprietary monitoring system that's coming out next year? How that might work, and also what the price point is expected to be?

Sure. The system is called Peek, and it is a basically, an internet-based system that has 3 components to it. It has our standard -- well, it's really not a standard camera -- but it's a camera that you would mount in the baby's room that would -- you would get the video from. That would transmit to 2 receivers, one would be a hand-held, very similar to the rest of our monitors, where you have a hand-held monitor that works in the local environment up to 300 or 400 feet from the camera. And then there is a third component, which is -- it looks kind of like a wireless -- I mean not a wireless router, but a cable modem or a router. And -- but it plugs directly into your wireless system -- actually it doesn't need to go into wireless, it can go right into the internet feed. So depending how your -- one of the things that it does, it accommodates many different set ups.

But it's plug-and-play, basically. You plug it into the internet, and it receives the signal, and broadcasts it encrypted and secure to our servers. Those servers, then in turn, only allow that video feed to go out through a portal. And the portal is accessed by you, off of your SmartPhone, off of your laptop, or any device, tablet or whatever, through the internet, through a secure portal. So you basically -- it will be providing free apps with the system. And you would go on to your, let's say iPhone, tap the app. You would tap in your username and password. And you would then see the feed coming out of your baby's room, or where ever you want to put that camera.

And it's a secure, up to 3 users can use it, so you could have grandma on the phone, or a friend or a wife, or whomever, and you can be -- nothing is fool-proof on the internet, but we feel like security is excellent. And the most -- and when I say fool-proof, what I'm talking about is, you should be able to get it -- the feed from anywhere in the world. We have it currently testing in about three or four continents, and in about half a dozen states in the US. And so beta testing has been very good. We would've come out with it actually, it was planned to come out in the fall, but one of the challenges is the software, dealing with so many different types of internet systems, from cable to dish -- to every cable system is different. So it's -- that's been really the only major challenge is the software that the product uses to handle the digital video feed.

So, but it's an excellent system. I have to say, I've used it, and I've played around with it. And it's the coolest thing to be somewhere else faraway, or close, and to just able to see your baby, or see an image on your camera. I don't have -- my kids are all - my baby is 13. So -- but it's a great system. It really works well. And we're very excited about it. And we think it's the next phase in video monitoring.

That's great. And what is expected price point?

It's going to be at $349, and the expectation is that -- well -- it's not the expectation, it will be a free service. So you will be able to -- there is no monthly charge or anything like that -- it's when you buy the hardware, you get use of the system.

Sounds great. Thanks a lot.

Thank you.

Our next question comes from Liz Pearce with Roth Capital Partners. Caller, your line is open. Please make sure your mute function is turned off.

Hi, can you hear me?

Yes, Liz.

Sorry about that. And what was the impact from Hurricane Irene? What exactly -- can you break it down between G&A and gross margins?

Yes, there was a -- (Multiple Speakers).

What actually happened?

I'm sorry?

I was just curious, what actually happened?

Oh we lost power for about 2.5 to 3 days. There -- it was intermittent power, coming on and going off, coming on going off. So we basically had -- we had various issues that came up, basically people not working for several days. We had some disruptions at our warehouse. We had extra IT costs associated with trying to restart the systems. So basically, we were kind of out of power for several days.

Okay. And then on the mix shift, just can you remind me what products, what that shift was?

Yes, year-over-year, I mean we still -- we still have more furniture sales this year than we did last year. So last year, furniture was a fairly small number for us, and this year it's a more significant piece. So, that's really the primary mix shift, when looking at 2011 versus 2010.

Okay. So when you talk about for next year, just to make sure that I understand you -- I think at the very end Joe, you mentioned some sequential kind of, on the gross margin -- sequential increases we should look at, but very limited?

Yes. I think -- I wouldn't bank on huge gross margin sequential expansion from where we are right now. We're hopeful that it will be higher, and we're working on some plans right now. But I wouldn't model major gross margin increases quarter-over-quarter.

Okay. And is that -- I guess trying to narrow it down -- is it a combination of still having some higher input costs as well as mix shift?

I mean I think if, if you take where we are today, I think the mix will be fairly comparable over the next several quarters. I don't think there will be any real massive mix shift, and also the cost structure seems to have kind of stabilized for the time being.

Okay.

So I don't think you'll see any big swings, in terms of that input cost either. So I guess, we're kind of expecting a continuation of what we experienced in Q3.

Okay. So I guess what I'm trying to figure out is, if you're talking about a double digit increase in revenue, you would think that there'd be a little more leverage then? But is it more on the expense side, than the gross margin side?

Yes, you would -- we would model gross margins being roughly flat, compared to where they are right now. And then, expenses would leverage a little bit as well.

Okay. And Jason, on the Prodigy -- so when I've been in BRU a few times and talking to the people, I mean it's got an end cap placement. And the staff seems fairly well-versed in all the attributes of it, but a couple of the things that I have heard is like about -- and I know this sounds crazy, but on the colors, are you planning to introduce more colors, so there's more kind of selection, versus just the kind of -- I think it's what, two different colors?

No, you are right on. I was hoping you wouldn't ask that but -- (Laughter). No, I'm joking. But it's -- we -- the fashion, truthfully, is not as good as we would like. We are actively working on new fashion for them, and our expectation is to introduce it relatively quickly. So it wouldn't be like end of year thing, it would be more mid year. And we kind of knew that going in, but we couldn't really change it as to -- and still meet delivery dates. So we basically limited our production, and we are going to revamp the fashion, and offer more --

There are actually a couple of other fashions that are going to be online. One is a -- we call it Runway, it's a black and red story. It's very sharp, very metro. And then we have another fashion, called Mademoiselle, which is a -- it's a pink story -- pink and gray, and definitely more -- it's a girl fashion. And then we have the two fashions that are on the floor. But we are working on a host of new fashions beyond that, which would -- probably having said -- the two that I am saying are going to be online would probably continue. And two that are on the shelf, would probably go to online, and we'd introduce new ones on the shelf.

Got it. Okay. And then in terms of the BornFree? A couple weeks ago, I mean I hunted all over at BRU, is it not there anymore?

No, it's there. It's been reduced, though.

Okay.

Earlier this year, they had -- because of the lack of new products, they kind of cut it back a little bit. And it's probably went from -- 3 feet down to 2 feet. But I think the new line in January that you will see, is actually larger, it will have more shelf presence. It's consistent packaging. There are some new items, and also, we'll be introducing a line of Disney BornFree items, so Disney Baby by BornFree, which is exclusive to Babies R Us. So we are excited about that. It's -- its going to be a really -- I think the presentation is going to be excellent.

The support that we're building between the internet and the blogs, and the -- and some advertising, I think will be -- will get us off the ground fairly rapidly. BornFree has a pretty strong following. I think what happened the year before, was they -- BornFree had introduced several lines that I think were a little disconnected from their original messaging. And even the packaging was different colors. Their original packaging was blue, and it had a certain look. And their new packaging was orange and green. And so we've basically revamped all of that, and the new packaging look will be a one specific look.

Okay. And then in terms -- I think it was -- when Sean was asking about retail inventory -- so if I understand what you're trying to say, do you think this kind of major destocking effort is over? I understand there is not a lot of visibility, for everyone keeping a very tight inventory levels, but just in terms of the -- some of the empty bare shelves, that's characterized, I think the entire category for months now.

Well, I certainly don't have a say in how our customers maintain their inventory. We can make suggestions, but we can't buy the product from us. (Laughter). I mean, really right now, I believe, Liz, that the retailers have tightened their inventories. There are occasional shortages of product on the shelf, not just us, but everybody. And that's just the retail environment we're living in, everybody's afraid to commit too much to the dollars that are in the pipeline. So retail inventories are definitely tight. We are doing our very best to make sure that we have the inventory kind of waiting for them, so we don't delay. But it's -- I think it just comes from the economy that we're living in right now, everybody is a little nervous, a little concerned about holding too much. So our job is just to make sure that we're there, when they need it.

Right, great. And then finally, one last question on the monitors. Are there things that are now -- will come out of the product line, as you continue to get more kind of technical upgrades into -- because I looked at the different products right now, for lack of a better one at BRU, are there things that start to drop out?

Well, I think the internet monitoring is a relatively new technology. I mean, although it's been talked about for a while. And we've done an extremely thorough job, scouring the market, and not just infant monitors, but any kind of internet monitoring. And there's a lot of pay -- there is some pay per use -- pay per month kind of products. And there are some decent programs, but not a lot that's plug-and-play and free. And we believe that our technology -- basically, what we're selling is essentially a minicomputer, along with your monitoring system, which the cool thing about that is that you don't need to plug this monitor into a laptop or a PC or any other device. You basically can go right into the internet, and it does it's thing. And that differs greatly from many of the -- most -- well, all of the competition, bar maybe one or two that are outside of our market.

And one of the most important things to us, because we do a tremendous amount of marker research with moms, is Mom doesn't want to take it out of the box, and have to hire an IT expert to hook it up. She wants to plug it in, and she wants to use it. So, our -- the reason it probably has taken so long, is that we're trying to make it plug-and-play. You pull it out of the box, you plug it into the wall, and it works. And your apps are a click away basically, you download them, and you're good to go. And set up is easy, and not a lot of time.

And that's -- I think that's the biggest challenge in this area, that everybody talks about internet viewing, internet video, but it's not so easy to do, when you really get into it. So we've been at it a few years developing this. And I'm just very excited about it. Now I don't think that's all of a sudden -- and immediately going to replace our current video monitors. Or -- I actually think it will be incremental, because I really believe that there's a consumer out there that is tech savvy, that wants something like this. And will maybe, even wasn't buying a video monitor, but was buying -- trying to find something else out there, such as -- one that I know that it offers it, is ADT. But they -- that's a service charge, every month, that's their model. And so -- this is in effect, I believe that this is increasing our market size, not taking away, or stealing from our current sales.

Okay, all right. No, that's what I was getting at. I maybe didn't ask it quite clearly, but yes. So you do expect it to be incremental. So --

Yes. There is a consumer out there, that is looking for this type of product.

All right. That is all I have. Thanks, and best of luck.

Thank you.

And our next question comes from Robert Straus with Gilford Securities.

Good evening, guys. How are you?

Good. How are you doing, Rob?

Good. Just a few follow-up calls. I know we've talked a lot about the Peek monitors this evening. And they seem to be coming into the market in 2012, can you give us an idea of the ramp-up of that introduction? And when you think you will be able to really drive sales, will it take a few months? Will it take the first half of the year? Just give us some more color regarding that.

Well, the product hits the shelves in March. And I believe that it will ramp up relatively quickly. First of all, we're doing a good deal of marketing and PR. But second of all, our -- just our basic experience of the last 10 years in video monitors is that new technology is understood, and accepted very rapidly. So, and I think by being the leader in this category, I think it's a much easier -- there will be a much higher acceptance rate of new technology, and of a new system. So our expectation, is it will ramp up relatively quickly.

And is there any exclusivity regarding anything that you are introducing with Peak?

Yes, there is some.

And is that -- for specific retailers, or can you define the exclusivity, as you may want to discuss on a public call?

Suffice it to say, that there is some exclusivity. It's features and different feature sets, I guess is the best way to say it.

Okay, perfect. And then from a capital structure standpoint, you're obviously paying down some debt, so congratulations with that. Longer term, I guess, if you were to look over the course of the next year or so, year to two, what's is your thought process on the balance of that capital structure, at debt level in particular?

Right now we're fairly comfortable with where we are. I mean it would always be nicer to have less debt. We think we're going to continue to pay down some debt gradually over the next year or so. I think, some of that is a function of how fast we grow next year, because that drives working capital usage. So I think -- I think as long as things stay on track, you will probably see our debt levels a little bit lower, a year from now than they are today. And we're fairly comfortable with that. As long as we can keep our leverage ratios down under 3 times, or something like that, then we're probably okay. If we were to go after more acquisitions and things like that, there's probably a limit as to how much bank debt we can take on. But in lieu of that, we're probably okay, just kind of with the structure we have today. (Multiple Speakers).

Where are you expecting -- I'm sorry, go ahead, Jason.

That's okay. I would just add to that, that I believe that our real focus is driving profitability. So if we can increase our profitability, obviously, the leverage goes down, simply by the nature of improved profitability.

On capital spending, Joe, where do you think that comes in for the year?

This year, it should be around $6 million.

Okay.

Which -- (Multiple Speakers). -- last year, correct?

Yes. And then just remind me, on the Prodigy system, is that going to be under an exclusive offering for a certain number of months?

Yes I think I spoke to that last time, I -- Rob -- I think it's -- believe it was a one-year exclusive arrangement.

Okay. And when you sign an exclusive arrangement like that, what is covered product-wise -- is like the different color not good enough to put into another retailer or channel? Is it an absolute, where you can't introduce any other Prodigy product in another retailer, or can you if you have a slightly different design product introduction?

I guess the easy answer is every single deal is different. I mean, it really depends on the retailer and what they're looking to accomplish. We certainly are -- we are aware that they have their own needs, and what they're trying to accomplish, so we simply try to partner with them. And in this particular situation --

And what is the situation, with Prodigy?

Yes, with Prodigy, it's the product.

It's the product, okay. And then last question, regarding the international markets, you've talked about what you think is a great opportunity there. I thought I would give you a little bit more of an opportunity, at a high-level to talk, where you think that's going? And to maybe discuss sort of the infrastructure, especially as you expand into different countries?

Sure. I -- my -- our goal, Summer's goal, is really to see international sales grow faster than domestic sales. So it would become, over time, a larger percentage of the overall business. Having said that, we don't want to certainly -- we're not willing to -- we're still going to grow as fast as we possibly can domestically. So -- but I think -- so I personally have been getting involved a bit with it with this. And I believe where, we have changed some of our strategies, is that we've targeted specific markets to actually sell direct in, and which is different from our previous strategy of focusing just on distributors. We still have some really good, solid relationships with distributors and their markets, that's clearly, that's the best way to go for us. But, there are also markets that we think that we can operate independently and directly. And that's really, I think, where the true growth will come from.

Okay, thank you very much. Good luck next quarter.

Thanks, Rob.

And we'll go next to James Fronda with Sidoti & Company.

Hi, how are you?

Good, how are you doing?

Pretty good. I mean, all my questions were pretty much answered. I guess maybe, tax rate going forward, I mean with the help of your international business? Can we forecast, I don't know, mid 22%? Is that okay?

Yes, it should be around 22.5% for Q4, and somewhere in that range for 2012.

All right, great. Thanks, that's all I had.

Thanks.

And we will go next to Sean McGowan with Needham & Company.

Quick follow-up question to -- the one prior to the last one about the international distribution, where you are going to go direct in some markets. So will that have an adverse impact on your ability to leverage SG&A expenses over the next couple years? Or is that baked into your expectation that you'll get leverage?

Yes, I think it's baked into our expectation. I don't think were going to go head long, Sean. We're - it's a measured growth approach. And the nice thing is, in certain markets when you're not really doing a lot of dollars, when you go into them, you can leverage your overhead very rapidly. So if -- we've kind of come up with a business model that says, that we do certain things first. And then when we get to a certain size, we do -- kind of go to the next level. And I think one of the things that we are looking at, is trying to leverage our relationships with our major customers that are multi-national. So customers like Toys R Us, Wal-Mart, Mothercare, and others, to try to leverage those relationships where we can.

But is it wrong to think -- and I would expect that. And I see that in a lot of other businesses, and generally, it's a great thing. You get to a level where you can support your own organization, and not pay somebody else. But is it wrong to think that, maybe in that initial year, when you go from getting a low gross margin, but no other expenses from a distributor, to now having a whole organization, and maybe in that first year, there might be some deleveraging?

Yes. I mean -- I don't think the markets that we're going into we have enough business currently, to say that were going to incur these extra costs for a period of time. If we were going in to these markets -- and right now we're targeting two or three for 2012 -- if we were going into those markets, and we were going to hire a significant staff or try to operate our own distribution or customer service, I would say, yes. But our intent right now is to go in, a little lower budget, going with the sales person, direct sales person, and leverage our international infrastructure in Hong Kong, and in the US, and basically, service them from current location. So it wouldn't necessarily mean, that we put a whole infrastructure in place day one.

Would you -- okay, great. That's very helpful. Would you continue to sell them in dollars?

Most of the situations we've discussed already, are in local currency.

So, they are already?

Yes.

Oh, great. Thank you.

And our final question comes from Nelson Obus with Wynnefield Capital.

Hi, Jason. Just a general question, there's a lot of discussion in different parts of the apparel industry about the ultimate demise of private label. Certainly, at -- for a certain economic level buyers, and I'm just wondering how you see brands playing out in the infant and juvenile arena? And sort of what your philosophy is, in regard to building brand, versus going after private label business?

Certainly, we're focused on building our in-house brands. But I would tell you, that a number of major retailers are -- have their -- have their strategy around differentiations, and owning their own brands, whether it's their brand or a sub brand, or whether it's something -- something that some --everybody else doesn't have. And personally, I have a strong feeling on that, is that --yes, of course, we are trying to build our Summer brand, but I also want to support my customer. So if, we're approached for private label, or if we're approached for -- to help someone build something that is outside of our owned brand -- we certainly would support that. And I believe that, every retailer is different. I would tell you that there are some mass merchants that are currently not doing a lot in private label, and don't want to do a lot. And then there others, that it's top of their list. So -- everyone -- every situation is different. And our primary job is to support our customer, and our retail partner. And everyone -- I honestly can say, today, that those relationships have a tendency to be very different.

Okay. So it's you're basically all over -- all over the ballpark, which would make some sense, because you're selling -- you're not selling to one economic level.

Yes, Nelson, I think that -- I think we have -- we do business with almost every major retailer in the US. And they recognize I think, the strength of our brand, and multiple brands, including our licensed brands. And there's a place for that, and I think there's also place for private label or owned brands. And our challenge there is to find that strategy, that differentiates that from -- either us or a competitor to help that retailer with what their goals are. And typically, it's a differentiated offering that has the unique feature set that allows the ultimate guest, the ultimate consumer, to choose that product on their shelves. So it's a challenge, for sure. But I think that, I think again, I would reemphasize our commitment to our retail partners. And we basically are in it for them. And through that, we know that we will grow, and do well.

All right. That's fair.

And Mr. Macari, that does conclude the Q&A session for today. I will turn the call back to you for any additional or closing remarks.

Well, I would -- I would just like to thank our customers, our retailers, our employees, suppliers, and other stakeholders, and of course, our shareholders, for the continued support and partnership everyone has given to us. We just hope to continue to earn your trust and support. And we would like to do that for many years to come. So I thank you, for everybody joining us today.

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.