Summer Infant, Inc. (SUMR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Summer Infant's second-quarter 2013 financial results conference call.

Today's call will be recorded.

At this time all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks.

(Operator Instructions)

I will now turn the call over to Mr. David Calusdian, from Sharon Merrill, for opening remarks and introductions. Please go ahead, sir.

Good afternoon.

On the call for the Company are Mr. Jason Macari, Chief Executive Officer, and Mr. Paul Francese, Chief Financial Officer. By now everyone should have access to the Q2 news 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 Summer Infant's website at summerinfant.com. This call is being recorded and webcasted and a 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 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 management makes regarding the Company's future financial performance, business prospects and operating strategies.

There are many factors that can result in actual performance differing from projections and forward-looking statements. Please refer to the risk factors detailed in the Company's annual report on its Form 10-K for the most recent fiscal year, 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 the forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information. The Company does not expect to update forward-looking statements or information continually as conditions change.

During the call, management will make reference to EBITDA and adjusted EBITDA. These metrics are non-GAAP financial measures, which the Company believes helps investors to gain meaningful understanding of changes in Summer Infant's operations. For more formation on non-GAAP financial measures, please see the table for a reconciliation of GAAP results to non-GAAP measures included in today's financial news release.

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

Thank you, David.

Good afternoon, and thank you, everyone, for joining us today. As I'm sure you all know, we are executing on a new strategy to improve operations and enhance profitability. I will start the call today by providing an update on our progress with that initiative, and then discuss how we plan to grow revenues going forward.

Three quarters into our profitability improvement initiative, we are on track, and our efforts are being reflected in our Q2 results, as we reported higher adjusted EBITDA year over year on lower revenue. As part of this initiative, we have taken aggressive steps to lower our cost structure. And this has resulted in 28% and 15% year-over-year reductions of selling and G&A expenses, respectively, for Q2.

In addition, we are proving profitability by rationalizing licensed and certain unprofitable or low margin products. We are now focused on investing in our own core brands, Summer and BornFree. As of today, we no longer have Disney products in inventory. And we expect Carter's inventory will be gone by the end of the year or Q1 '14. Both Disney and Carter's are solid brands, but we have determined it would be more profitable to selectively invest in brand marketing and advertising, with a goal of generating greater awareness and sales of our higher-margin core Summer and BornFree branded products.

We have discussed our efforts to reduce SKU count on past calls. And we made additional reductions across all product categories in Q2. When we return to the ABC Kids Expo in Las Vegas in October, we will be presenting a leaner, more focused product line.

Revenues were down 13% year over year as a result of lower sales to a large customer, but also to the lower SKU count and elimination of the low-margin licensed product. Most product category sales were flat to slightly down during the quarter, with the exception of our core safety category, which increased from the second quarter of 2012. We had previously discussed the negative but temporary effect that some of our bottom-line improvement initiatives would have on the top line.

Let me talk for a few minutes about what we're doing to increase the top line as we go forward. The mass merchants we sell to continue to be our largest customers, and we're working collaboratively with them to grow sales. We also are working hard to further diversify our customer base and expand distribution of key products. In Q2, sales to small and mid-sized specialty customers, as well as alternative channels, including home centers, increased 28.5% year over year. There is significant opportunity for growth in these channels, so we are investing in our sales force in order to build new customer relationships.

A key component of our customer diversification strategy is to increase our international presence. We have a pretty solid footprint in the US, UK and Canada, but we are currently targeting new markets with untapped potential. Another future area of growth for us is the Internet. The ease of shopping online has become a very important part of the overall juvenile market, and our relationships with the major players in that space have become increasingly important to our success.

Since more than 20% of our total business today is Internet-based, we are very focused on leveraging the e-comm space. We have partnered with all of our customers that sell online to promote our products. It has become a significant objective for us to better understand how to leverage our products in a more robust way, and to try to maximize our sales online. You may have noticed we launched a new e-commerce website in the past few months. This also serves as a key tool to make it easier for our e-commerce partners to get information and images of our products during the sales process, as well as to support our marketing efforts.

Ultimately, delivering innovative products that delight our customers -- moms, dads and caregivers -- is what drives our business. Our development teams are working hard to drive product differentiation and bring new products to categories where we already have a strong presence. We also will consider acquisitions of existing innovative products that we believe will contribute to both our top and bottom lines.

For example, in June we acquired the assets of Little Looster, a designer and manufacturer of the award-winning Little Looster potty training stepstool. Little Looster is a high-rated, mom-invented product that broadens our safety category. We are confident that through the wider reach of our distribution channel, we can bring this product into significantly more homes around the world.

We are now focused on a more narrow group of product categories within a streamlined organization. The categories include monitors, feeding, safety, gear, furniture and nursery. We have a number of new products coming out across all categories, starting in the second half of 2013 and into 2014. We're seeing a lot of excitement in the markets surrounding the launch of our Peek Wi-Fi monitors, which are expected to start shipping in September. The new Wi-Fi monitors are less expensive than the legacy monitor, and have more functions, including allowing parents to access their camera anywhere in the world through any smartphone, tablet or computer.

In addition, we are launching several other upgraded monitors at lower price points. In October we are returning to the ABC Kids Expo in Las Vegas where we plan to make a splash by introducing many other exciting new products. We hope to see some of you there, as well.

Before I turn the call over to Paul for the financial review, I will conclude by saying that we are on track with our profitability improvement initiatives, and that progress is reflected in our financial results this quarter. On the top line, the elimination of licensed products and the reduction in SKU count is having a negative effect on our revenues, and we have a few quarters to go before our new products really ramp up and contribute in a meaningful way to sales. In addition, we expect that a major promotion that we are partnering on with a large customer in September will have a short-term drag on gross margin in the third quarter. We expect that this promotion, however, will yield positive top- and bottom-line results in 2014. This is in line with our strategy to focus only on promotions where we expect to see tangible results in both revenue and profitability.

I will now turn the call over to Paul for a review of our second-quarter financial performance. Paul?

Thank you, Jason, and good afternoon, everyone.

Details of our results are available in our press release that was issued this evening after the market closed, and our Form 10-Q filing with the SEC. I encourage you to review these documents.

Net revenues for the three months ended June 30, 2013 decreased 13% to $53.8 million, from $61.7 million for the same period a year ago. As Jason mentioned, the decline was attributable to sales of discontinued and low-margin product SKUs throughout our product categories. In addition, we saw a decline in sales to a large customer.

Gross profit for the second quarter of 2013 decreased to $17 million from $20.8 million a year ago. Gross profit as a percent of net sales decreased to 31.6% in Q2 2013 from 33.7% in Q2 2012. The decline in gross profit dollars is attributable to the decline in sales and the mix of products sold. It was a result of the product SKU reductions, and activities related to the discontinuation of certain licensing agreements. In the second quarter of 2012, gross profit included the benefit of $628,000 of a supplier volume rebate credit, which did not repeat in 2013.

General and administrative expenses decreased to $9.3 million in Q2 2013, compared to $10.9 million in Q2 2012. This 15% decrease in G&A is attributable to the cost reductions we initiated in 2012 and in the first quarter 2013. Selling expenses decreased by 28% to $5.6 million in the second quarter of 2013. The decrease was due primarily to lower sales, as well as additional cost controls implemented over retail program costs, such as promotions, consumer advertising, cooperative advertising, as well as lower royalty costs.

Depreciation and amortization decreased 10% year over year to $1.6 million for the second quarter of 2013. The decrease is due to a reduction in capital investment as a result of disciplined capital expenditure management. It was partially offset by higher amortization on newly-defined finite life intangible assets established in the fourth quarter of 2012.

Interest expense for Q2 2013 of $0.9 million was up 3% from the same quarter a year ago as a result of higher interest rates. We expect interest expense attributable to our new credit facilities to be lower than our current loan agreement on similar debt levels going forward. For the second quarter of 2013, we recorded a $0.2 million tax benefit compared with a $0.1 million tax benefit a year ago. We reported a net loss of $0.3 million, or $0.02 per share, in the second quarter of 2013, compared with a net loss of $0.4 million, or $0.02 per share in the second quarter of 2012. Excluding committed add-back charges and special items in the 2013 period, adjusted net income was $0.2 million, or $0.01 per diluted share in the second quarter of 2013. There were no adjustments to net income for the second quarter of 2012.

Non-GAAP adjusted EBITDA for the second quarter of 2013 was $3.3 million, compared to $2.5 million in non-GAAP adjusted EBITDA in the second quarter 2012. Adjusted EBITDA for the second quarter of 2013 includes $0.8 million in bank committed add-back charges.

Now turning to our balance sheet. As of June 30, 2013, the Company had $3.5 million of cash and $49 million of debt. This compares to $3.1 million of cash and $65.5 million of debt at year end 2012. This represents a $16.5 million reduction in our debt balance. The reduction of our debt has been a key focus of our Company. And since September 30, 2012 we have reduced our debt level, net of cash, by approximately $20 million. And our current borrowing availability at the end of the quarter was over $20 million.

The management of the Company's working capital has been a key focus. Inventory as of the end of Q2 2013 was $41.7 million compared to $47.3 million a year ago. The inventory reduction is a result of our efforts to transition some category sales to direct-to-import, improved forecasting capabilities, and a reduction in SKUs. Trade receivables as of June 30, 2013 was $38.5 million compared to $56.6 million as of June 30, 2012. The accounts receivable reduction is a result of improved payment terms with our customers, and centralizing the collections function into our corporate office.

Accounts payable and accrued expenses as of June 30, 2013 was $38.5 million, compared with $39.2 million as of June 30, 2012. Our Company purchases its inventory on credit terms and its current practice is to submit payments weekly. These working capital improvements reduced the Company's investment and working capital by $23 million year over year. Going into the second half of 2013, we will continue to focus on improving working capital management as we strengthen our partnerships with our suppliers and customers. We are already seeing the benefits of our initiatives to drive profitable growth. And we look forward to updating you on our progress as we finish the year and move into 2014.

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

Thanks, Paul.

Looking ahead, we will continue to seek opportunities to improve margins and drive profitability by further streamlining operations. In addition, we are investing in our own Summer and BornFree brands, focusing on core product categories and developing innovative new products to drive growth. We are excited by the new products that we will be introducing in the second half of the year. We have a strong position in the market and we believe our strategy will result in a return to sustainable profitable growth, ultimately translating into improved cash flow and long-term shareholder value.

With that, Paul and I will take your questions.

(Operator Instructions)

Stephanie Wissink, Piper Jaffray.

Congratulations on the progress, first and foremost. We have a few questions, if we may. The first question is generally to talk about, if you could, the tone of your retail partners in terms of how they're looking at their current rate of business, how they're planning into the second half? If you could give us any insights into what you are hearing broadly across retail from some of your key big box and specialty partners, that would be helpful.

Sure. I think most retailers are planning some pretty significant promotional activity in the back half of the year to try to drive sales. I think there is a very conservative feeling that things might be getting a little better. But Baby, as you know, has been hit relatively hard this year. But I do think there is some optimism. I have been to all of our major customers, I'd say, in the last three months or so. And I believe there's a bit of optimism going into the fourth quarter. And, of course, September is typically baby safety month, so most major retailers will try to drive some business through that and through advertising and promoting, and try to drive some store traffic. So, I think there is conservative optimism that things are going to finally start turning around.

That's encouraging. Thank you. And then one here for you, Paul. Is it possible to quantify that hiccup in sales tied to the large customer in the quarter? Is that business that you pick up in the third quarter? Or is that, at this point, simply water under the bridge?

We believe that there will be a pick up with that large customer in the back end of the year as we introduce some of our newer products.

To add on to that, I think that, as we move away from Disney -- we are out of Disney now -- and as we move away from Carter's, those did represent some significant dollars in specific categories like gear and furniture. As we announced that we were moving out of those licensed brands, I think that the retailers reacted probably faster than we anticipated, and started moving out of those brands quicker. In turn, I think that there's a little bit more of a gap than we would like, quite honestly, between -- I think on the last call we said that we felt like we would be able to replace roughly 60% of those listings. And I think we will, it's just taking more time than we thought, and they got out of those listings faster than we thought. But I do think that towards fourth quarter and first quarter we will start seeing some improved listings in those categories, as well as others. Like bath, for instance, where we were pretty heavy in Disney, and boosters where we were heavy in Disney.

Okay. Just the last one for us. On the direct import program, it sounds like this is an intriguing initiative. I'm curious if you could give us a sense of the percentage of your product mix that that program touches, or what categories you might be emphasizing specifically with the direct import?

It was primarily furniture to start with. And I think that it has spread of little bit more towards some of the private label business that we have been doing. And in general furniture and gear -- the bigger, bulkier items that certainly -- higher cube, less units per container. It is easier to go direct to a retailer, especially the major retailers, with that equation. Whereas the smaller stuff we really need to bring into our warehouse and distribute from there. It's in the bigger, bulkier products and in private label where direct import makes a lot of sense.

All right, guys. Thank you very much. Good luck.

Dave King, ROTH Capital.

First off, on the outlook for revenues for the back half, it sounds like, from your comments, and then also from the release, that you do expect some pretty good growth there, still. And in terms of that, I was curious, is that going to be more on a sequential basis, on a year-over-year basis? How should we think about that? And then, with the new products that are coming out, it sounds like those are more slated for September or October. So, should we think about that as being more back-end loaded or not, over the course of the second half? And then how much traction are you seeing so far in the third quarter, as we are about halfway through now?

I would say that third and fourth quarter are going to be -- personally, I think that they're going to be somewhat flat to where we've been. But towards the end of fourth quarter, I think that we are going to start picking up because that's -- most of the major retailers, when they reset, it is not for -- you do get some resets for September because of baby safety month, but January is really when you are shipping. So, it's like you are shipping in November/December for our January sets. I wouldn't say that we're going to get large lifts in third and fourth quarter. In fact, we still may be dampened by the Carter's situation where we are exiting some of those categories and what-not. But I do think that our cost control will stay where it's at.

I think our selling costs, other than the one big promo I mentioned, I think will be intact. And we're definitely managing to a leaner way of working. And it does feel good in the sense that we're not trying to apply gas to a fire that just is not burning. We are putting gas where it belongs. We also are circling the wagons around our best products. And some of these bigger categories, like furniture, for instance, there were some listings that just weren't producing any profit. So those we're exiting. And that is a lot of the Carter's business, quite frankly. There's, I think, some real good positive things happening, but I also don't want to oversell it because I really think that there are some things that we are doing that will be dampening our efforts in third and fourth quarter. But the good news is it is getting back to our core, which I think is the right thing to do right now.

Absolutely, that's fair. And that actually touches on my next question a bit. On the expense side, I do think that progress is extremely encouraging. Is it fair, then, to still assume $16 million in annual EBITDA run rate by the fourth quarter? Or is the thought that maybe that is going to be more first quarter, given the Disney, Carter's stuff that you mentioned on the top line?

I think we're still -- our forecasts are still basically saying that we're going to get there. But I think both Paul and I feel better about the first quarter than we do about third and fourth, just simply because of some of the -- in second quarter we had to sell some Disney stock at pretty heavily discounted rates. And it is right now unknown how much of that we will have to do with Carter's, and a few other lines that we are getting out of. So, there might be some dampening effect in trying to move through some of the discontinued lines.

Okay. That's very helpful. And great improvement on the working capital front, as well. Thank you.

(Operator Instructions)

James Fronda, Sidoti & Company.

In terms of investing your sales force for international growth, do you think that might negatively affect some of the savings that you're achieving right now? Or, if it does, it might not affect you until 2014?

I think that's a good question because we have been -- because we are operating very cautiously, trying to make sure that every dollar is spent in the right way. I would tell you that I don't think it will affect us negatively because we still have a little bit of a tail on some certain costs that we have discontinued. As those taper off, I think that -- and we're not talking about huge resources, we're probably talking about two to four individuals that we want to apply to certain markets and certain segments of the US business.

All right, thanks, guys.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Management for any additional remarks.

I'd just thank everybody for joining us today on today's call. And we look forward to speaking with you next quarter. Thanks very much.

Thank you. Ladies and gentlemen, that concludes our conference call. Thank you for joining us today. You may disconnect your lines at this time.