Summer Infant, Inc. (SUMR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Summer Infant's fourth-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 today are Chief Executive Officer, Carol Bramson; Chief Financial Officer, Paul Francese; and Chief Operating Officer, David Hemendinger.

By now everyone should have access to the Q4 news release which went out today at approximately 4 o'clock 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 webcast and a replay will be available on the Company's website as well.

Before we begin we'd 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 results or events to materially differ from those reflected in the forward-looking statements or information.

Forward-looking statements can be identified by words such as anticipated, intends, plans, believes, estimates, expect, 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 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. The Company does not expect to update forward-looking statements or information continually as conditions change.

During the call management will make references to adjusted EBITDA, adjusted net income and adjusted net earnings per share. These metrics are non-GAAP financial measures which the Company believes helps investors to gain a meaningful understanding of changes in Summer Infant's operations.

For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures including in today's financial results release. And with that I would like to turn the call over to Carol.

Thanks, David. Good afternoon and thank you, everyone, for joining us today. Our financial results for the fourth quarter were in line with the preliminary results we provided in January when we announced our leadership changes. Paul will provide you with detail on these results in just a few minutes. Let me start by providing an overview of where we are going strategically and our expectations for 2014.

I took this position at Summer because of the incredible attributes this Company has and I believe there are significant opportunities for future growth. 2013 was a transitional year for the Company and we now have a strong foundation in place to build upon.

Last year the Board and the executive management team developed a strategy to return the Company to profitable growth. The strategy is focused on leveraging four key strengths- - innovation, partnerships, core brands and operational excellence.

First and foremost we are leveraging our in-depth industry knowledge to deliver high-quality products that demonstrate Summer's superior innovation in the juvenile space. Our product development expertise differentiates us from other companies in this market. The Baby Touch Wi-Fi video monitor and Internet viewing system we launched in December is a perfect example of Summer's innovation.

The feedback on these monitors has been very positive. The multiplatform system is the only monitor that enables in-home continuous and overnight monitoring on a handheld color touch screen monitor, plus away from home viewing on smart phones, tablets and computers with the Summer link Wi-Fi app.

These monitors are great for working parents, out-of-town grandparents and away from home peace of mind. Our developers understand what it is that consumers want and need and strive to integrate new functionality and advanced technology into our products in order to maintain our competitive lead.

We also recently launched the ComfortMe Wearable Blanket. As the fourth stage in our SwaddleMe line of wearable blankets designed for safe sleep, ComfortMe gives babies the comfort and warmth of a traditional blanket with the security of a sleep sack.

Also the stylish Bentwood booster seat is the newest addition to our popular Bentwood collection. The lightweight wood booster seat features three position recline options and folds easily for storage and portability.

In addition, we expanded our 3D Lite Convenience Stroller line which has received great reviews. The new stroller line is very lightweight and adds features and colors while also addressing different price points. We also added several new items under the BornFree brand including a nursing light and nursing scarf.

In 2014 we will continue to apply our good-better-best approach to price points to create products that appeal to different categories of end consumers. Following the reorganization of our management team we have a more entrepreneurial and efficient organizational structure in product development.

Each product area is responsible for product innovation and development and the leader for each team currently reports directly to me with significant input from our new Head of Sales, Ken Price. We also are hiring additional engineering talent as well as an executive to oversee the innovation and product development process.

The second area of focus is strengthening partner relationships and further diversifying our customer base. We have solid relationships with suppliers, retail customers and end-users that we will continue to build to increase our presence in stores and through e-commerce activity.

Internet sales have become an important part of our strategy. Our team is working to ensure that Summer and BornFree branded products are well-positioned on our customers' websites. This means effectively managing the minimum advertised price, increasing the number of items available for purchase and providing thorough product descriptions and appealing product images on customers' e-com websites.

In addition to our existing customers we also are focused on growing our customer base with small and midsize specialty retailers as well as entering new geographic locations. Just recently we launched our B2B website, Retailer Connection, that is specifically designed to service these customers by providing a seamless process to order product. Our e-com and specialty sales both increased 20% for the year.

Another key component of our diversification strategy is to increase our international presence. We have a solid footprint in the US, UK and Canada and are committed to expanding into new markets with untapped potential.

In 2014, in addition to returning to the ABC kids Expo, we plan to attend the tradeshow for kids in Cologne Germany. Last year more than 20,000 trade visitors from 110 countries attended the conference. This tradeshow will be an excellent opportunity for us to establish relationships with partners in new geographies while promoting the Summer brand.

We are fortunate to have Ken Price join our team to lead our sales and marketing initiative. Ken's use of innovation to lead sales teams within the juvenile and toy industry, and the strong relationship he has created with both large and small retailers, will be a great benefit to Summer Infant.

Third, we are building the core Summer brand. Our marketing initiatives are focused on raising awareness for the Summer and BornFree brands. Particularly among first-time prenatal moms. In 2013 we discontinued our major licensing agreements with Disney and Carter's.

Within the juvenile space consumers are very well informed about their purchases, so strong brand reputation is critical. It is essential for Summer to promote its brand directly to customers and end consumers through digital content and social media initiatives.

For example, we now have a presence on Pinterest where our boards are filled with fun ideas for decorating and activities, as well as on Instagram where we provide updates on our latest products, behind the scenes photos and give away contests. These are in addition to our existing Facebook and Twitter accounts and our new summerinfant.com website.

We also want to give back to our consumers. With that in mind our BornFree team is leading an ongoing initiative aimed at educating expectant and new moms about colic, a condition that often confuses and concerns parents.

A recent study found that 80% of moms with colicky babies felt a baby's bottle played a moderate or significant role in helping to ease symptoms of colic. Our BornFree feeding system aids in reducing colic symptoms. As such we have declared March as colic awareness month and started a forum on our website to provide caregivers with support and suggestions to help reduce colic symptoms.

The fourth and final area of focus is executing operational excellence. We have implemented many actions that we expect to enhance top-line growth and improve gross margins in the future. In the area of growth we are committed to a focus on consumer driven innovation and the timely introduction of new products to the marketplace.

We have carefully reviewed our product development areas and have identified opportunities to enhance the structure, process steps, analytical resources and consumer insights necessary to support creativity and execution success. Each of our product category leaders have been instrumental in this process and the plans going forward.

We have also established a new task force comprised of quality assurance, operations and product development which will focus on continuous improvement opportunities in quality and costs associated with our core product offering. We believe these changes will enhance our focus on quality and improve our time-to-market.

Before I turn the call over to Paul I would like to give you an overview of how we see 2014. During the past 12 months we took significant actions to turn around our overall performance. We expect our bottom-line in 2014 to improve over 2013 due to our improved management practices as well as our focus on selling higher-margin products and our restructuring cost reduction efforts.

Our bottom-line performance should improve sequentially as we proceed throughout the year. Looking at the top-line, we do not expect to see year-over-year sales growth until the back half of the year and that sales for 2014 overall will be slightly down from last year. Overall in 2014 we expect to be a smaller but more profitable Company.

We remain committed to the core elements of our strategy including customer driven innovation and strong customer relationships. And we're focused on increasing margins, generating profits and enhancing shareholder value. We also will continue to evaluate additional channels that we believe present growth opportunities that will enable us to get closer to our consumers and improve our relationships with customers and suppliers.

What is most different about Summer is the leadership style displayed by the new senior team and the implications it has on the culture of the organization. The new focus is on elevating strong talent and empowering these individuals with information, tools and resources necessary to make prudent business decisions.

We've seen a renewed energy at the Company and an elevated awareness of how each individual action makes a meaningful impact on the future success of the Company. We've identified specific action plans for operational improvement and have delegated responsibilities and measurable objectives to key individuals on the team.

We have renewed our focus on innovation and enhanced our connection with the consumer. We feel good about the current platform and look forward to the improvements these changes will bring in the future. I will now turn the call over to Paul for a review of our financial performance. Paul?

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

As we discussed in our January announcement, net revenues for Q4 2013 decreased 23.5% to $44.7 million from $58.5 million for the same period a year ago. This decline was due to slower than anticipated sales with a major retailer, product shipment delays and the planned exiting of two major licensing agreements.

Gross profit for the fourth quarter of 2013 decreased to $14.4 million from $18.3 million a year ago. The lower gross profit dollars is attributable to the decline in sales, delay in launching the Wi-Fi monitor and activities related to ending certain licensing agreements.

Gross profit as a percent of net sales increased to 32.3% in the fourth quarter of 2013 from 31.2% in the fourth quarter of 2012. This increase was the result of product cost reductions and the discontinuing of sales of low margin products resulting in a more favorable mix.

General and administrative expenses were $9.8 million for the fourth quarter of 2013 compared to $2 million a year ago. Included in the fourth-quarter 2013 G&A was a restructuring charge totaling $624,000 for the reduction in force implemented during the quarter.

Selling expenses decreased 34.2% to $4.8 million for the fourth quarter 2013 from $7.3 million for the fourth quarter of last year. The decrease in selling expenses was primarily attributable to lower sales and lower royalty costs related to discontinuing certain licensing agreements.

During the fourth quarter, due to the lower sales volume and our expectations that our strategy to enhance profitability and rebuild sales volume was going to take longer than initially expected, we implemented new cost reduction actions. These actions included reduction in global staff of approximately 10%.

Temporary and contracted labor was cut, the professional fees and overall expenses were reviewed and where possible reduced. As a result of these actions we incurred a charge of $624,000 in Q4 2013 and expect to realize annual savings of approximately $4 million in 2014.

In the fourth quarter of 2013 we reported a loss of $1.7 million or $0.09 per share compared with a net loss of $1.5 million or $0.09 per share in the fourth quarter of 2012.

Adjusted EBITDA for the fourth quarter 2013 was $0.9 million compared to $1.7 million in the fourth quarter of 2012. Adjusted EBITDA for the fourth quarter 2013 includes $0.9 million in permitted add back charges compared with $0.6 million for fourth quarter 2012.

Looking at our full year 2013 results net revenues were $208.2 million compared with $247.2 million for the 12 months ended December 31, 2012. Gross profit for 2013 was $65 million compared with $79.8 million in 2012. Gross profit as a percent of net sales was 31.2% for 2013 compared with 32.3% in 2012.

Selling expenses decreased 28.2% to $20.8 million for 2013 compared with $29 million for 2012. The decrease was primarily attributable to the same reasons that drove the decline in selling expenses during the fourth quarter.

General and administrative expenses decreased 8.8% from $41.7 million for the year ended December 31, 2012 to $38 million for the year ended December 31, 2013. The decline in G&A expenses is attributable to cost reductions initiated in 2012 in the first quarter of 2013.

As reported, we reported a net loss of $3.8 million or $0.16 per share for 2013 compared with a net loss of $65.7 million or $3.68 per share which included a pretax of $69.8 million goodwill and an intangible impairment charge for 2012.

Adjusted EBITDA for 2013 was $9.7 million compared with $10.6 million in 2012. Adjusted EBITDA for 2013 includes $2.6 million of committed add-back charges compared with $0.6 million in 2012.

Now turning to the balance sheet, as of December 31, 2013 we had $1.6 million of cash and $49.7 million of debt compared with $3.1 million of cash and $65.5 million of debt on December 31, 2012. Since completing the restructuring of our debt in Q1 2013, we have been focused on reducing debt and since December 31, 2012 with reduced our debt level by $15.8 million. Our current borrowing availability at the end of 2013 was $12.8 million.

We are also focused on managing working capital. Inventory at December 31, 2013 was $38.4 million compared with $49.8 million at December 31, 2012. The inventory reduction is a result of our efforts to manage inventory to service lower sales volumes as well as to transition some category sales direct import, improve inventory forecasting capabilities and SKU count reduction.

Trade receivables as of December 31, 2013 was $34.6 million compared to $45.3 million a year earlier. The accounts receivable reduction is a result of lower sales as well as our efforts to improve payment terms with customers and centralizing the collections effort into our corporate office.

Accounts payable accrued expenses as well -- as of December 31, 2013 was $31.7 million compared to $37.1 million a year ago. We procure inventory on credit terms and our current policy is to submit payments weekly. These working capital improvements reduce Summer's investment in working capital by $16.8 million year over year.

As Carol said, Summer Infant today is a much leaner and more streamlined organization than it was a year ago. We are focused on delivering more innovative and higher-margin products that represent our core brands. We will strive to more efficiently manage our internal and external expenses to drive future profitability.

We expect the mix of sales in 2014 will be more favorable which will drive higher gross profits. We have more control over our program costs and the ability to better manage expenses. And we anticipate realizing the full benefit of our cost reduction initiatives in 2014.

While 2013 was a transitional year for Summer we expect to begin to realize the long-term benefits of our actions in 2014. With that I will turn the call over to the operator and Carol, Dave and I will take your questions.

(Operator Instructions). Steph Wissink, Piper Jaffray.

Welcome, Carol, officially. I wanted to just ask a couple of questions if I could. It seems like we've now gone through a phase of kind of baselining sales, managing down the cost structure. But, Carol, can you give us some visibility into how you are thinking about the business just structurally over time as you think about margin balance?

Are there additional cost savings that you are looking for whether it is through margin mix or just through overall natural costs or are we now at a place where you feel like it is a sales rebuild and there may actually be some cost increases over time, not necessarily in 2014 but over time as you reallocate and realign with future revenue opportunities?

Thanks, Stephanie, thanks for the greeting. I do think that the Company is leaner today and a very good platform from which to pursue future growth. We don't have any existing current plans to make any major cost reductions on the organization, that has occurred a great deal in 2013.

We have actually done some hiring recently, as I indicated, in our product development area. And further improvement in profitability is likely to come from our gross margin line and above.

And then can you give us some sense -- I think your outlook calls for maybe a bit of a sales contraction in the first half, sales are rebounding and growing again in the second half. Is that based on visibility through bookings or how are you kind of thinking about the visibility into that recovery trend line?

Hi, Stephanie, this is Paul. Two things, one is that we still have some overhang from last year as we exited the two licensing agreements. And so we will still have, when we do year-over-year comparisons, particularly in the first half of the year will still have that overhang that we would have to be measured against.

But we do have a number of new products, some that are recently launched in December and first quarter that we expect to see some very nice sales in the third and fourth quarters of this year. And some of those new products have actually been selling very well.

But we believe that we have gone through a lot of cost restructurings last year and we are to the point now there will be some selective adding of resources, some of which we have already started particularly in the area of product development because we truly believe.

And it is part of our culture to be the innovators in our industry and so we do realize that in places we will have to add back and prudently do that and that will drive additional sales and new products in the future.

Thanks, that is helpful. If I could just ask -- it sounds like if you net away that licensing business being down year over year, the core underlying business is actually planned to be up for the full year, is that a correct assessment?

Yes. What is really interesting, Stephanie, is when you factor out that -- those licensing sales that we had for part of last year, Disney, as you know, ended in June and Carter's will end this month. The health of the core brands in the business is very good. And we do expect the growth in those areas.

Okay. And then just a last question. I think, Carol, you mentioned that specialty and e-commerce sales were up over 20%. I am just curious if you would give us some detail into the mix of that business, specialty versus e-com and then maybe how you think about the profitability of that segment, specialty and e-com, versus your core kind of legacy distribution point.

I mean clearly specialty and e-com in particular represent great future growth opportunities for Summer. Our market penetration in those areas is relatively light and the consumer on the e-com side has definitely been making more frequent purchase decisions there.

So we have been aligning with our large retail partners as well as some new line retailers to better position ourselves in that segment. And have also added some additional focused resources in-house to address the opportunities available to some of the smaller retailers out in the marketplace.

Okay. Are you willing to quantify size just so we can have a relative idea of scale within the organization?

When you look at our specialty accounts, Steph, which has actually been a focus of ours, when we look at 2013 they represent about 5% of our sales. But the growth in specialty last year was far in excess of 20%. We had very good success in growing that segment of our business, but it is still a small piece of our business at 5% of our sales overall.

E-com is actually growing very nicely as well. Last year it grew by 20% which is probably to be expected because most sales are going in that direction and we are expecting, we have actually budgeted additional robust sales improvements in e-com this year as well.

Thanks a lot, Paul. Best of luck, everyone.

Thank you, Steph.

Thank you.

James Fronda, Sidoti & Company.

I guess can you just talk a little more about specific initiatives that you are undertaking to help rebuild the Summer brand?

In terms of rebuilding the Summer brand we have done a great deal in order to improve our presence online and to track our success rate at different strategies using online. We have recently hired some additional outside resources to assist us in that area.

And we recognize that consumers in the juvenile category like to do a lot of research before making a purchase decision. So we have initiated programs to improve upon that on our website as well to aid in that decision process.

Okay. And I guess could you just I guess talk a little more about the overall environment in the juvenile industry? Do things seem to be turning around a little bit?

One of the things that we have actually been seeing is -- and this is some of the research we've been reading, James, is that the birthrate actually has stabilized and actually starting to show some improvement. So that is reassuring to us.

Secondly, what the surveys and reports are showing us is that women are having children later, which means they have more disposable income. So there are two positive trends happening that I believe that will be part of that taking advantage of that later on this year.

Right, okay. All right, thanks, guys.

Thank you.

(Operator Instructions). It appears there are no further questions at this time. I would like to turn the floor back to management for any closing comments.

Thank you all for joining us for today's call. We look forward to speaking to you next quarter. Take care.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.