Summer Infant, Inc. (SUMR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Summer Infant Q1 2014 earnings call. Today's call will be recorded. (Operator Instructions) I'll now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and instructions. Please go ahead, sir.

Good afternoon, and welcome to Summer Infant's first-quarter 2014 conference call. 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 Q1 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 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 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 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 adjusted EBITDA. This metric is a non-GAAP financial measure 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 included in today's financial release.

And with that, I would like to turn the call over to Carol.

Thank you, David. Good afternoon, everyone, and thank you for joining us today. I am pleased to have the opportunity to share with you the first-quarter financial results and operations update for Summer. We have seen improving trends in our revenues and earnings performance for the first quarter and are happy to report positive net income for the period. We are excited by the order activity we are seeing from our retail partners, and consumer demand appears to be improving, both in-store and online.

As you will see in the Q1 report, sales increased 14% from Q4 2013. We also improved gross profit, as margins increased 94 basis points and selling expenses decreased by 21% when compared with last year. We achieved this through an improved mix in the products sold, which is in line with our objective to focus on higher-margin branded products. In addition, our increased oversight and focus on cost containment, particularly in the areas of cost of goods sold and selling expenses, helped support improving trends in earnings. We expect this sequential improvement to continue in both revenues and earnings for the remaining quarters of the year.

We are committed to our mission of providing consumers with safe and innovative products to best serve their childcare needs. With this important value principle in mind, on April 23, we issued a voluntary recall of rechargeable batteries found in select video monitors. We had received notice of some consumer incidents involving overheated batteries and experienced an increased rate of occurrence in March of this year. Given our concern for the consumer, and with an abundance of caution, we contacted the CPSC and hired a third-party investigative firm to identify the cause of the incident. The investigative firm carefully reviewed all monitors, batteries, and charging devices involved in the recent incidents. In each case, the batteries were found to have an internal defect and were determined to be responsible for the overheating incidents. The monitors, charging circuitry, and power cords were all found to be working properly.

Included in our financial report for Q1 is an accrual of $300,000 to cover expenditures associated with the recall. We are working with our monitor supplier and the battery manufacturer regarding the situation. And we'll seek reimbursement for all costs incurred by Summer in addressing this issue. We are pleased to report that we have received positive support from both parties and will continue to work closely with them throughout this process.

To better serve the consumer, we have added resources to our customer relations department and extended our hours of service. We will continue to implement processes and mobilize resources as necessary to improve the experience for consumers whenever they contact Summer with service needs or questions.

As I indicated in my opening remarks, we are seeing improving trends in the market demand for our products. The primary areas of growth include: one, our nursery segment, led by our popular SwaddleMe brand of products; two, continued strength from our core safety segment; three, positive market acceptance of our new Wi-Fi video monitors; and four, continued strong demand and retail acceptance of our 3D lite stroller platform.

From a retail channel perspective, we saw an increase in sales in Q1 to many of our large retail partners including significant sales growth with select online retailers. During the past couple of months, we've enjoyed the opportunity to welcome a number of these retailers to our Rhode Island showroom. During these visits, our product development teams were able to share detailed information regarding exciting new product ideas and samples.

Summer has a strong history of new product development. We have a reputation for delivering innovative new products, and nurturing a culture focus on innovation is critical to our success. It starts with the people, and we are fortunate to have a strong, creative team led by our product group leaders Mark (inaudible), Darrell Vincent, Mark Sousa, and Mike Fusco. We also recently hired a new vice president of innovation in Jim Cartabiano, who brings a wealth of experience and creativity to help drive our new product development process.

I'm encouraged by the depth and strength of Summer's product development team and look forward to the many positive ideas and product solutions resulting from the new energy and enthusiasm displayed at the Company.

We believe that one of the best ways to deliver products that consumers want and need is to engage directly with them, to listen to them. We strive to better understand the interests and needs of moms and caregivers, and do so in a variety of ways. First, we tap into our consumer database and social media outlets to get a feel for the conversation among parents. We also attend a number of mom group events such as Bump Club, MetroMoms, and just a few weeks ago we attended New York's Big City Moms event. I enjoyed the opportunity to interact with moms and dads and to better understand their needs and reactions to other options in the marketplace. Having participated in this event, we learned so much about caregivers' interests in products and features as well as their sensitivities and information needs regarding safety and care.

In addition to getting closer to the consumer, we are also focused on improving our relationships with our retail partners in an effort to increase our in-store and online presence. During Q1, we began to expand our footprint at certain major retailers, where demand for our new products has been strong.

We are also increasing our focus on the specialty segment of the juvenile marketplace. We recently assigned responsibility for this segment to one of our most experienced sales executives. We believe that this segment offers attractive growth potential for Summer as well as the opportunity to become closer to the end consumer and seek input on new product ideas and concepts. We intend to expand our distribution network in this sector and have launched our B2B retailer connection website to make it easier for small and midsized specialty retailers to do business with Summer.

With the growing importance of Internet sales, we are improving the online presence of our Summer and Born Free branded products. Our e-commerce sales increased 11% in Q1 compared with prior year. To keep up with this shift in the way today's consumer shops, we have been consistently increasing the number of products available for purchase through online retailers as well as on our own website.

This dovetails nicely into our marketing strategy focused on raising awareness of our core Summer and Born Free brands. A significant portion of our marketing strategy is dedicated to digital initiatives. We have engaged an outside firm to help support our search engine optimization and to improve our standings on search result pages of popular engines like Google, Yahoo, and Bing. More importantly, we are building an online community of Summer supporters. Our website serves as a hub for consumers to get information on our products, safety and nurturing tips, trends in childcare, contests and giveaways, as well as to interact with other caregivers and childcare experts.

Traffic on our website continues to grow and is primarily driven by our social media channel. We are engaging directly with consumers through our Facebook page, Twitter, Instagram, Pinterest, YouTube, and Summer and Born Free Circle newsletters. And our following is on the rise.

Traditional marketing efforts also continue to add value, particularly those that promote word-of-mouth product referrals and raise awareness of our brands. As I mentioned, we attended the Big City Moms event in New York and LA last month, and we are expecting to attend additional events this spring. We also participated in Operation Shower, where we gave away 40 Baby Zoom Wi-Fi monitors to expecting military families. And our Wi-Fi monitor was recently featured on the Ellen show as part of a Mother's Day special.

Our final area of focus is executing operational excellence. We have implemented many actions that we expect to enhance performance going forward. With improved demand and retailer support for many of our products, we experienced some limitations in our inventory situation, particularly related to the strong demand for our new Wi-Fi video monitors. As a result, we are in the process of improving our forecasting ordering and inventory management system to better support demand and direct market feedback. We seek to support our retail partners with timely delivery of products while maintaining close management of our working capital and inventory mix.

We continue to maintain a diligent focus on our cost position and the fixed and variable costs associated with operations. During Q1, our general and administrative expenses declined year over year. And with the exception of a couple of necessary additions in our product development area, our headcount has remained at target. During the quarter, we instituted a number of key performance objectives focused on improving our gross to net revenue performance, gross profit margins, and targeted reductions in selling expense. I am very pleased to report that we are making strong progress in these areas and look forward to the positive effect on earnings in future periods.

We are off to a good start, and we are seeing improved results. We are confident in our strategy to turn around our overall performance and return to consistent profitability going forward. With our renewed focus on innovation and enhancing our connection with the consumer, we remain committed to the core elements of our strategy and look forward to profitable growth and increasing long-term shareholder value.

I'll now turn the call over to Paul for a review of our financial results. Paul?

Thank you, Carol, and good afternoon, everyone. Details of our results are available on our press release that was issued 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 first quarter of 2014 were $50.8 million, up 13.6% compared with $44.7 million in the sequential fourth quarter of 2013 and down 14% compared with $59.1 million in the year-ago quarter. The sequential increase was due to growth in certain customer accounts and in our core branded product offerings, particularly in our nursery, monitor, gear, and safety product categories. The year-over-year decline in revenue was primarily attributable to exiting our licensing arrangements with Carter's and Disney to focus on building our own Summer and Born Free branded products, a decline in monitor sales, and phasing out of low-margin furniture items. As of the end of Q1 2014, we no longer have any Carter's or Disney products in our inventory.

Gross profit for the first quarter of 2014 was $16.4 million compared with $14.4 million in the fourth quarter of 2013 and $18.6 million in the first quarter of 2013. The sequential improvement in gross profit dollars is attributable to the mix of products sold primarily driven by the nursery and monitor product categories. The year-over-year decline in gross profit dollars is attributable to lower sales volume driven by exiting Disney and Carter's and reducing furniture sales to less than 5% of total sales.

Gross profit as a percent of net sales was 32.4% for the first quarter of 2014 compared with 32.3% in the fourth quarter of 2013 and 31.4% in the first quarter of 2013. The year-over-year improvement was the result of a favorable mix of higher-margin products and improvement in product margins resulting from product cost reductions, actions taken in 2013. General and administrative expenses were $9.5 million in the first quarter of 2014 compared with $9.8 million in the fourth quarter and $9.6 million a year ago. Excluding one-time charges associated with our leadership change and other restructuring charges totaling $747,000 in the first quarter of 2014, general and administrative expenses declined by 9%, which was attributable to the cost reductions initiated in 2013.

Selling expenses were $4.4 million for the first quarter of 2014 compared with $4.8 million in the fourth quarter of 2013 and $5.6 million for the first quarter of 2013. The sequential and year-over-year decrease was primarily attributable to reduced sales and lower royalty costs due to our strategy to discontinue certain licensing agreements. Royalties declined by $510,000 year over year, and we expect royalty expenses will be down by about $2 million for the full year. We also improved control over co-op advertising spends, which was down $635,000 in the quarter. We reported net income of $0.2 million, or $0.01 per diluted share, in the first quarter of 2014 compared with a net loss of $1.7 million, or $0.09 per share, in the fourth quarter of 2013, a net income of $0.4 million, or $0.02 per diluted share, in the first quarter of 2013.

Our net income included a reserve of $300,000 related to the voluntary recall of batteries manufactured in 2010 through 2012 in certain of our video monitors. This expense is related to the battery, postage, shipping, customer care resources, certain professional fees, and reflects the shared expense from our monitor supplier.

Adjusted EBITDA for the first quarter of 2014 was $3.8 million compared to $0.9 million in the fourth quarter of 2013 and $3.9 million in the first quarter of 2013. Adjusted EBITDA for the first quarter of 2014 includes $1 million of committed add-back charges compared with $0.9 million in the fourth quarter of 2013 and $0.4 million in the first quarter of 2013. Now, turning to the balance sheet.

As of March 31, 2014, we had $2.6 million of cash and $49.5 million of debt compared with $1.6 million of cash and $49.7 million of debt on December 31, 2013. Since completing the restructuring of our debt in Q1 of 2013, we have been focused on reducing debt and have decreased our debt level by $14.2 million in the past 12 months. Our current borrowing availability at March 31, 2014 was $10.6 million.

We were also focused on managing working capital. Inventory at March 31, 2014 was $33.7 million compared with $38.4 million at December 31, 2013. Due to the higher sales in the first quarter, we consumed safety inventory to satisfy customer orders. Some replenishment of safety stock will occur in the second quarter. Inventory turns improved to 4.2 turns in March 2014 compared with 3.3 turns at the end of December 2013.

Trade receivables as of March 31, 2014 was $36.9 million compared with $34.6 million as of December 31, 2013. Days sales outstanding improved to 61 days at the end of March compared with 63 days at the end of December 2013.

Accounts payable and accrued expenses as of March 31, 2014 was $29.8 million compared with $31.7 million as of December 31, 2013. We procured inventory on credit terms, and our current practice is to submit payments weekly. These working capital improvements reduce the Company's year-over-year investment in working capital by $15 million.

To sum up, we are operating with a much leaner and more streamlined organization today than we were just a year ago. Our strategy is to return to consistent, profitable growth; improve margins; enhance shareholder value. We are doing this through a continued focus on leading innovation, strengthening partnerships, promoting core brands, and delivering operational excellence.

With that, I turn the call over to the operator. Carol and I are ready to take your questions.

Steph Wissink, Piper Jaffray.

Carol -- just to start with a couple of questions for you, Carol. I think congratulations first and foremost on the sequential improvement. Great to see. But I noticed in your comments that it sounds like you have really gained some ground in reestablishing a strategy to kind of rebuild a practice around consumer insight. So I'm wondering if you can talk a little bit about kind of the philosophy of the Company and if that was lost or something that you brought back in terms of the insighting process. And then some of the insights that you might have gained from some of these events, how quickly can you react to changes in marketing plans or product development to really respond to some of those insights?

Well, I believe that incorporating consumer insights into our innovation activity has always been a part of Summer's strategy. Recognizing that we want to be closer to the consumer going forward and enhance upon that in today's digital world, we are leveraging our online capabilities as well as the participation in these events to really learn as much as possible about the trends. And let's face it, today's mom is different than she was even a few years ago; and particularly in the way that she shops and the types of information that she needs and information resources she seeks in order to make decisions. So we are utilizing all of our various factors in order to try and gain as much information as possible.

We've also re-energized our research capability within Summer where we are doing targeted research studies in select areas, particularly aligned with our product grouping to better understand what mom is looking for, how she's making decisions, and what type of information resources she has. In addition, we continue to invite moms and babies into our Rhode Island showroom to get direct feedback from them as well as testing of new products, which is hugely beneficial.

In today's world, we are fortunate to have the opportunity to react in real-time as we learn this new information, whether it's from one of the events that we are attending or feedback we are getting from some of these survey informations, and we are incorporating that into our product development teams.

That's really helpful. In terms of a follow-up to that, it was nice to see the gross margin improvement, and I think some of that was from mix. But can you talk a little bit about the pricing strategy year over year as you concentrate on these kind of core business or teller businesses for the Summer brand?

Yes, we definitely have seen improvement in gross margin associated with our product mix and a reduction in closeout sales volume that we experienced last year. We are carefully reviewing our pricing options relative to our more innovative new products and doing what we can to value price them in the marketplace today. We are also very sensitive to our cost position and identifying ways to maintain quality but also focus on cost savings opportunities where available.

Thanks. And then just one for you, Paul. I think we talked about this in the past, but, looking at a run rate of revenues, is the cost structure an appropriate level now? Or as we start to see the sequential improvements in revenues, are you looking to invest as the sales rebuild? And what would be those areas of investment if you were to deploy some capital?

Sure, Steph. Our focus has been to look at our Company and only grow in areas that we can make a reasonable margin and profit. We reduced the cost structure to a level that we feel comfortable right now. We will, though, add resources where we need to, and we have already done that. We brought in new talent in our product development area, new talent in our sales organization. So we are going to be very strategic when we do add cost to the organization. But we are going to be very prudent and very diligent in making sure that the cost structure is maintained and controlled, and it's only going to be in selective areas.

All right. Thanks guys. Best of luck.

Dave King, ROTH Capital Partners.

This is actually Joe Bess for Dave. I guess my first question is regarding the online business. And what percentage of your SKUs right now are offered online, and where do you think that could be as we look out this year and maybe into next?

A large percentage of our SKUs are offered online today, and it's a good reason for part of the growth that we are seeing. We continue to add SKU proliferation across different online retailers where available, including with some of our brick-and-mortar retailers as well on their dot com sites.

Okay. Great. And then as we move closer to the back half of the year and we look at the top-line growth, it sounds like you guys have been seeing some positive trends in nursery and the Wi-Fi monitors. Can you give a little bit more color into what you see as really driving growth? Is it continued positive trends in those categories or new products as well?

It's a combination of new products. Clearly we've seen some strong demand and market acceptance of our new monitor launch, and we are expecting to continue to see that throughout the year. We've also expanded our footprint, particularly in our nursery segment, with select retailers where we have much broader offerings to provide, including signage, regarding that category. And we are also seeing some additional retailers picking up some of our new innovation, particularly in our 3D lite stroller area.

Okay. Great. And then I guess just lastly, as we kind of look at you guys' SG&A and with the kind of -- with the growth you're seeing on the top line, just trying to get a sense of what sort of operating leverage we should be seeing in the back half as you guys keep SG&A stabilized. Is there any sort of color you can give around that?

Joe, one thing to keep in mind is that if you're doing year-over-year comparison, in 2013 we had approximately $18 million of sales and branded products. Disney and Carter's that are not going to be in our numbers again this year. So we are not anticipating sales growth because we are seeing some headwinds because of that year-over-year comparison. We are going to grow our business in our core categories using our own brands, Summer and Born Free. And we are planning on leveraging our SG&A as we grow the business in the future. So I don't see a lot of leveraging this year because of the year-over-year comparison I just mentioned.

Okay, great. So thank you.

(Operator Instructions) James Fronda, Sidoti & Company.

Are you guys seeing any benefit at all from weather right now?

That's interesting. We certainly see -- we've seen some increase in our order activity, as we commented earlier. Clearly, it's stroller season, and we're noticing the volume there. We also have a very attractive new Playard gate that we are offering, and we are seeing strong demand from our retailers in terms of interest in putting that in their stores this summer.

Okay. And Paul, the decline in the D&A for the quarter, what was that in relation to?

Well, one of the things -- if you remember back in 2012 and 2013, we started to limit our investment in new CapEx projects. So what you're seeing is that because we hadn't invested heavily in those two years that our D&A is actually being reduced this year.

Okay. And is there any chance I guess with the new product development teams that you guys venture away at all from the core products and introduce a new category or something?

You know, our focus is on our core categories today and demonstrating the strength that we have there and continuing to develop our brands and the reputation for quality products in those categories. So we are very much focused on where we are winning and SKU extension and product additions that enhance that positioning.

Okay. Thank you, guys.

(Operator Instructions) Robert Straus, Gilford Securities.

I have a few questions. The first one is what percentage of your first-quarter revenue was generated by new product introductions?

It all depends, Robert, how you measure that. The way that we've measured it is if it's a new item number in the last six months, then the sales in the first quarter was about $8 million.

Okay. And the inventory limitations that you discussed earlier in the call, was that only in Wi-Fi monitors or also other products?

It was in Wi-Fi monitors definitely but also in some of our other more popular products.

Okay. Have you estimated how much that shortage of inventory hurt sales in the quarter?

You know, we have begun to do some of our own calculations and haven't really zeroed in on the exact number on that. But it would've been a meaningful contribution to the quarter.

Okay. Where we are today, where is the demand-supply ratio for those products that you saw limitations in the first quarter? Are we in line now or are we still catching up?

So we are anticipating being pretty much in line by mid to late May, with most all of those products and the very strong demand we are seeing from our Wi-Fi product offering. We'll continue to experience some limitations just as we are trying to catch up with that demand.

Okay. And then just to stick with revenues also for a second. If we were to think about the small business customer that you have -- specialty online retailer, what percent of revenues did they generate in the first quarter?

When you look at our specialty accounts, they are still a smarter smaller part of our business, about 5%. But if you want to look at some of the real growth areas, Robert, we look at international. And a segment of our international business called APLA, Asia-Pacific-Latin America, grew by 25% in the first quarter. So we've had very nice growth in those areas, and they've been almost untouched by us in previous years. So we expect that growth to continue.

Also, our e-comm sales, as Carol mentioned earlier, grew by 11%. But if you dig deeper into that number, our largest e-comm retailer grew by 19%. So I think there is tremendous growth in our e-commerce business, and we expect that to accelerate in the year.

And what percent of sales was international and then separately, e-commerce?

International was normally about 15% of our business. And e-comm in the first quarter was 15% of our overall business. And that was actually up by 4% year over year, so we are (multiple speakers) --

Did you say both of them were -- did you say both of them were 15%?

That's correct.

Okay, last question from me. Regarding gross profit margin, I see that increased year over year to 32.4%. Just give us some guidance, what do you think will occur going forward over the remainder of this year. I think Carol had said that revenues and earnings will improve sequentially. Is that same trend expected on the gross profit margin line?

It is expected on the gross profit margin line. Definitely. We are forecasting improvements above the 32.4% which we have reported for this quarter.

Okay. That's all from me. Good luck with your current quarter.

(Operator Instructions) Thank you. There are no further questions at this time. I would like to turn the floor back over to Ms. Carol Bramson for closing comments.

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

Thank you. That concludes our conference call. Thank you for joining us today.