Summer Infant, Inc. (SUMR) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Summer Infant first quarter fiscal 2012 earnings conference call. On the call for the Company we have Mr. Jason Macari, Chief Executive Officer; and Mr. Ed Schwartz, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out today at approximately 4.00 PM Eastern Time. If you have not received the release, it is available on the Investor Relations portion of the Summer Infant's website at www.summerinfant.com, or on the www.SEC.gov website. 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 that management may make additional forward-looking statements in response to your questions. 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, or similar references to the future. Examples of forward-looking statements include, but are not limited to, statements we make regarding our future financial performance, business prospects, or operating strategies.

There are many factors that can result in actual performance differing from projections and forward-looking statements. We refer all of you to the risk factors detailed in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011 filed on February 29, 2012, and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual results may vary materially from those described in the 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 the Company's business contained in its 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.

Thank you, operator. Thank you, everyone, for being with us today. We experienced solid sell-in to our customers to start the year. We are encouraged by our retailers' and consumers' response to our 2012 product lines. However, we are disappointed with full-price sell-in or sell-through wasn't stronger as we progressed through the quarter. The selling environment has proven to be more challenging than expected, as consumers displayed a reluctance to spend without, in many cases, a promotional reason to do so. This posturing by the consumer resulted in higher promotional activity with many of our retail partners.

Despite total sales being below plan, and most of our sales increase due to the Born Free acquisition, we were successful in increasing our shelf space with our existing retail partners, and have made headway expanding into new distribution channels. While competition has increased in several categories, healthy sell-in is reinforcing our position as a preferred vendor in the juvenile space. We continue to distinguish ourselves from other competitors in the industry by continually bringing to market innovative, safe, and compelling products, which now extend across six major categories -- safety, nursery, furniture, gear, play, and feeding. Through a continued focus on product development, our product pipeline remains robust, and features some new and exciting offerings in all six categories.

We are still on track this Fall to relaunch our award-winning Prodigy Travel System. The new Prodigy Travel System includes a completely redesigned stroller and new styling, which we believe will stand out in this very competitive space. The Prodigy system, one of only a few such systems that received five stars across the board by NHTSA, will be available at retailers this Fall. In addition to improved styling, consumers will have their choice between two models, each at a different price point, enabling us to reach a wider range of target consumers.

In addition, we will launch our innovative Peek Monitor System in July, which will allow parents to view their children from anywhere in the world through an encrypted Internet feed. We expect that the launch of this and other key monitor products will contribute meaningfully to our sales in the back half of 2012. Finally, we will introduce new line extensions to the Born Free line of feeding products. This line continues to have positive sales trends, and the brand is resonating with a higher-end consumer base.

Turning to the international markets, we experienced positive first-quarter sales trends across much of the world, including Canada, Europe, Asia-Pacific, and Latin America. Revenue from these markets increased 16.7% year-over-year, approximately 10% excluding Born Free. We view international expansion as key to our future organic growth strategy. International markets continue to be a source of opportunity, and we are investing in these markets.

From a margin standpoint, we face ongoing pressure for certain direct product costs, particularly fuel, plastic and wood. Freight costs have also increased significantly in recent months. These cost pressures, combined with high levels of promotional activity by retailers, had a negative impact on our margins in the first quarter. We are proactively addressing ways to improve gross margins, including increasing prices and additional product cost savings. We are also in the process of placing tighter controls on promotional activity at retail, which will improve margins as well.

Despite the ongoing challenges, both at retail and on the cost side, we continue to function well in our space, driving top line expansion and operational efficiencies. While we still face challenges in the second quarter, we anticipate the pending new product launches, our proactive cost containment initiatives, and selective pricing actions with retailers will improve gross margin performance and profits in the back half of the year.

The results we are sharing with you today, and the information contained in our 10-Q filing, reflect that our Q1 financial performance resulted in the Company missing certain financial covenants required in our loan agreement. We have worked with our lenders over the past few weeks, and have successfully negotiated an amendment to our current loan agreements. The amendment resets certain financial covenants, and at the same time, extends the maturity date of our loan, which was previously set to mature June 30, 2013, to December 31, 2013. This amendment provides the Company the necessary access to working capital to support our business model, and added time to reach a longer-term financing agreement with our lenders.

With that, I would like to turn the call over to Ed, who will review our first quarter financial performance.

Thanks, Jason. Hello, everyone. Net revenues in the first quarter of 2012 increased 7.8% year-over-year to $63 million, primarily driven by the addition of Born Free sales in Q1. We did expect better sell-through in our core product lines. However, retailers continued to reduce inventory levels, and experienced lower sell-throughs.

Gross profit increased 7.1% to $21.1 million, or 33.5% of net revenues, from $19.7 million, or 33.7% of net revenues in the prior-year period. The gross margin decline is a result of a combination of issues. Mix wasn't as favorable as we had anticipated. In addition, customer markdown activity was significantly higher than Q1 2011, thereby further reducing margins.

Selling, general, and administrative expenses were $16.6 million, or 26.4% of revenues in the first quarter, compared to $16.1 million, or 27.5% of revenues in the first quarter of last year. SG&A decreased by 110 basis points as a percentage of net sales. We recorded a tax expense of $500,000 in the first quarter of 2012 that reflects an increase in our effective tax rate to 29% from 24% in the previous year. The change in our tax rate can be primarily attributed to our projecting higher profits this year versus 2012, the suspension of the federal R&D tax credit, and a more limited tax shift benefit associated with our permanent reinvestment in our Asian operations.

We reported net income of $1.3 million, or $0.07 per diluted share, compared to income of $1.2 million, or $0.07 per diluted share in the first quarter of 2011. Net income performance was somewhat flat due to gross margin pressures, and an increase in our tax rate. As of March 31, the Company had approximately $1.7 million in cash, and $69.3 million of debt, for a net debt balance of $67.6 million, compared to $62 million as of December 31, 2011. The $5.6 million increase resulted from the need for working capital to support the inventory build for product received in December and January, anticipating the mid-first-quarter shutdown of our Asian supplier base. While inventory decreased by approximately $2 million from year-end, the sell-through of that inventory [billed] earlier in the quarter resulted in an increase in accounts receivable of about $10 million, tying up working capital, therefore, requiring our need to borrow.

We expect the second quarter to be challenging. However, we are encouraged by the increased level of placement we have received from our current retail partners in recent months and expect this trend to continue. Furthermore, we believe our new product launches in the back half of the year will carry improved margins. These new products supported by our cost containment initiatives, reflect the price increases and anticipated more favorable sales mix, favorably impacted by new product introductions, should all contribute toward improving financial performance in the back half of the year.

With that, I will turn the call back to Jason for his closing comments.

Thank you, Ed. Based on the soft retail environment in the juvenile products industry we are currently experiencing, we expect we will continue -- that will continue through the second quarter. We are revising our outlook for 2012. We now expect revenues to increase in the high single-digit range over 2011, compared to our previous guidance of double-digit growth, with the increase weighted to the back half of the year. As a result of the heightened promotional activity in the first half of the year, and its impact on margins, combined with a higher forecasted tax rate of approximately 29%, we now expect 2012 diluted earnings per share to be more in line with 2011's adjusted EPS of $0.45.

Operator, we are now ready to take questions.

(Operator Instructions). Nelson Obus, Wynnefield Capital.

There seems, at least in my mind, a slight disconnect between your comments about the difficulty of the retail market and the sell through, and all that other stuff. And some apparent level of confidence that you can expand gross margins in the second half of 2012 to get the price increases. You also mentioned product cost improvements. I don't want to give away all of your secrets, but in general, what's going to make that happen?

One of the things that's going on, Nelson, we have what I would call a bit of a gap between new placements and existing products. The sell-through -- the new placements at most major retailers, for whatever reason, ended up stretching out to the second half of the year. Many of them are mid-year placements that are going on and shipments that will take place maybe late second quarter, but more likely third quarter and fourth quarter.

There are a lot of lot of new listings basically that we have for the second half of the year that don't seem to be like they are going to impact the second quarter. First quarter, I thought promotional activity was high. Second quarter, I think we'll be in the same boat as first quarter, but I really think the second half should improve with the new shipments of new products and new placement.

The tough thing is, what I see going on, the placement -- we're getting good placement and we have very similar, if not more shelf space to last year. Retail is soft right now and I think it's being exacerbated by the inventory reductions that we're seeing. I think we're still very looking forward to actually the numbers for second half. I think this first half just seems to be challenged.

The covenant and the -- with your banks and so on and so forth, to deconstruct the press release, when you say that the changes will now provide the Company with the necessary access to working capital to support your growth plans, you are really talking about -- this is precluding acquisitions? It's reflecting the fact the accounts receivable -- some of this is rear view mirror is really what I'm saying here?

Yes, absolutely. We did rework all the important covenants to reflect our -- what we believe will be our performance for the balance of 2012 and 2013. We really wanted to change it once rather than change it throughout that period of time. We really went back to the banks and said let's do this once and accommodate everything going forward between now and the end of 2013. We certainly expect to be at the table with them towards the end of the year, probably fourth quarter.

A good BornFree walked in the door, you wouldn't necessarily have to throw them out, right?

(Operator Instructions). It appears there are no further questions in our queue at this time. Mr. Macari, I'll turn the conference back over to you for any additional closing remarks.

Thank you all for your continued support and confidence in Summer Infant. We look forward to our new product introductions the balance of 2012 and them hitting retail. Again, we're very excited about the new product introductions in the second half and we appreciate everyone's support, our employees, our retail partners and our shareholders. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.