Summer Infant, Inc. (SUMR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Summer Infant fourth-quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, March 4, 2015. I would now like to turn the conference over to our moderator, Chris Witty. Please go ahead.

Hello and welcome to the Summer Infant 2014 fourth-quarter conference call. With me today is Carol Bramson, Chief Executive Officer and Bill Mote, Chief Financial Officer. I would now like to provide a brief Safe Harbor statement. This call may include forward-looking statements related to Summer Infant's outlook for 2015 and beyond. These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the Company's Annual Report on Form 10-K for the year ended January 3, 2015 and any risk factors set forth in our other filings with the Securities and Exchange Commission.

During the call, management will make references to adjusted EBITDA, adjusted net income and adjusted earnings per share. These metrics are non-GAAP financial measures, which the Company believes helps investors 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 earnings release. With that, I would like to turn over the call to Carol.

Thank you, Chris and good morning, everyone. Welcome to the 2014 fourth-quarter conference call. Today, I will review our operations and outlook, after which Bill will discuss our financial results in detail. Let me begin by saying that we just closed on a crucial, but exciting year at Summer Infant and I believe we are taking the necessary steps to position the Company for further top-line growth and improved financial performance going forward. Revenue for the year, excluding the impact of our exit from certain licensing agreements, rose 5.3% to $205.4 million and revenue growth in the fourth quarter was even better, up 14% year-over-year.

In addition, 2014's gross margin expanded 140 basis points versus 2013 and adjusted EBITDA rose to $12.7 million from $9.7 million last year and this is before adjustment for nonrecurring items such as the recall. Bill will provide additional details on our financial results in a moment, but suffice it to say that we are seeing traction in our strategies and realignment efforts, as well as our commitment to improved bottom-line results.

Our efforts have included the exit of certain business lines and licensing agreements, including furniture. We have also invested in management across the board and committed to penetrating new channels and markets while focusing on our core products in key growth categories. We have done all this while maintaining a focus on top-line growth, expanding margins and streamlining our operations. We remain committed to improving our credit facilities and making meaningful progress to this end with the goal of reducing interest expense going forward and increasing flexibility. All of this is meant to make Summer Infant a more nimble, consumer-focused and shareholder-driven company and we are well on our way to getting there.

We also announced this morning the appointment of Bob Stebenne as President and Chief Operating Officer. As our investors know, Bob has been a member of Summer's Board for over seven years and he will bring valuable experience to this new role. I look forward to working with Bob as we take Summer Infant to the next stage of our development.

Now let me go into some detail about the current market and our thoughts on 2015. Let me begin by talking about our brands, which we have obviously been focused on as a way to build loyalty and awareness. Under our core Summer brand, we expanded our offering in our 3D Lite stroller line and in the safety category, including our Pop 'n Play portable playyard, both to resounding success.

Last year, in support of our core safety category, we introduced Home Safe by Summer, a broader line of safety products. Under SwaddleMe, we announced a cobranding license agreement with Little Me, a premier newborn and infant clothing brand to help grow our popular SwaddleMe line and further penetrate higher-end department stores and specialty retailers. We have also engaged in a rebranding effort for SwaddleMe and are excited to launch the new positioning later in 2015.

Overall, we saw several great trends last year. Gear products rose 51% over 2013 due in part to our successful 3D Lite convenience strollers. Safety product revenue grew 5% driven by the new Pop 'n Play playyard. Monitors were up 4% thanks in part to our newest Wi-Fi product and in nursery, SwaddleMe revenue increased over 10%. So we are clearly seeing traction on a number of fronts across our core product categories.

Since the end of 2014, we are excited about new product launches, including the HD video monitor and the continued expansion of our 3D stroller line. These items offer the type of unique, ease-of-use functionality and purpose that we feel is particularly suited to our brands. We also launched Bottle Genius in January, an innovative new product under our Born Free brand and it's off to a great start. We continue to invest in consumer-driven product innovation across our most popular categories -- monitors, safety and nursery -- while also looking to drive growth in gear and feeding. We remain focused on a core set of products where we believe we can stand out while building brand loyalty.

In terms of channel development, we are very pleased with our relationships with our core retail partners and are also looking to grow in new markets, both to diversify our customer base and take advantage of rapidly changing consumer trends. We are already seeing progress in this regard as sales to our top seven customers in aggregate were approximately 74% of total revenue in fiscal 2014 versus 78% in 2013.

In addition, our focus on e-commerce enabled us to grow this part of our business by 40% year-over-year. At the same time, we are working to improve the consumer experience on our own website with goals of enabling e-commerce on the Born Free site and improving mobile capabilities on SummerInfant.com.

Another important priority is to work closely with some of our large retail partners to enhance our presence on their online environment as well. Internationally, in 2014, we posted solid growth within our Asia-Pacific and Latin America regions while the more mature Canadian and UK markets were flat. Sales continue to rise in key international markets such as Latin America and will remain a key part of our growth strategy going forward.

The bottom line is that Summer Infant remains extremely focused on solidifying its brand and creating unique consumer-driven products that can be differentiated by parents and relied upon for both performance and value. These products must also provide appropriate returns for the Company and target the markets and channels we serve. We believe there are a number of opportunities to grow our core categories of monitors, safety and nursery and to further penetrate opportunity areas in gear and feeding. At the same time, we will continue to phase out those products that are not profitable or core to our business. We will continue to enhance our relationship with the consumer and our delivery of innovative products that support parenting needs.

Before turning the call over to Bill, let me add that beyond the strategic decisions being made to improve our operations and make our brands more meaningful to consumers, we are also taking steps to bolster the Company's balance sheet and financial performance. While focusing on working capital, including inventory and cash flow generation, we are, as I mentioned earlier, also dedicated to reducing our debt burden as rapidly as possible.

In that vein, we are making meaningful progress toward improving our credit structure with the goal of lowering interest expense going forward and increasing flexibility. We will keep our investors informed on our progress here in the coming months. Overall, we believe Summer Infant is in much better shape than a year ago and well-positioned for stronger top-line growth and higher margins in 2015 and beyond.

While we clearly have more work to do, we have successfully focused the business, brought in key management talent and made strategic decisions to realign our product portfolio. At the same time, we have made Summer Infant into a more streamlined consumer-driven organization. We are committed to building our brand, supporting our core categories and focusing on growth opportunities in new product development. By doing this and strengthening our balance sheet, we believe we are well on our way to delivering higher returns for our shareholders. Now Bill will go over the fourth-quarter financial results reported this morning. Bill.

Thanks, Carol and good morning, everyone. Our 10-K and related press release were issued this morning. In addition to listening to this call, I encourage you to review our filings. I first wanted to emphasize three core points. Full-year gross margin as a percent of net sales rose 140 basis points versus 2013, an increase of 32.6%, while adjusted EBITDA rose 31.7% or $12.7 million. Inventory ended the year at $44 million. This was down sequentially from Q3 by 9.7%, but up 15% year-over-year, which correlates to our year-end debt balance of $58.7 million, which is an increase of 18.1%. Lowering inventory, debt, the cost of our debt and increasing the flexibility within our credit facility are my top priorities for 2015.

Now turning to the fourth quarter. Net sales for the quarter increased 13.9% to $51 million from $44.7 million in the same period a year ago. The higher revenue was driven primarily by our safety, nursery and gear categories. Gross profit for the fourth quarter of 2014 increased $2 million to $16.4 million versus $14.4 million a year ago. Higher sales drove the gross profit dollars. Gross profit as a percent of net sales was flat year-over-year. General and administrative expenses were $10.8 million for the fourth quarter of 2014 compared to $9.8 million a year ago, up 9.6%. The primary drivers of the increase were salaries, legal claims, temporary labor and travel expense. Selling expense decreased 1.9% to $4.7 million for the fourth quarter versus $4.8 million in the fourth quarter of last year. The decline in selling expense was primarily attributable to lower royalty costs related to the discontinuation of certain licensing agreements and reflects improved customer program terms implemented in 2014.

In the fourth quarter of 2014, we reported a net loss of $0.6 million or $0.03 per share compared with a net loss of $1.7 million or $0.09 per share in the fourth quarter of 2013. Adjusted EBITDA for the fourth quarter of 2014 was $2 million compared to $0.9 million in the fourth quarter of 2013. Adjusted EBITDA for the fourth quarter of 2014 includes $0.8 million in permitted addback charges compared with $1 million of permitted addbacks for the fourth quarter of 2013.

Looking at our full-year 2014 results, net sales were $205.4 million compared with $208.2 million for the 12 months ended December 31, 2013. Adjusted for licensing arrangements exited in 2014, net revenues were up 5.3% year-over-year. Gross profit for 2014 was $66.9 million compared with $65 million in 2013. Gross profit as a percent of net sales was 32.6% for 2014 compared with 31.2% in 2013, a 140 basis point improvement.

Selling expenses decreased 11.5% to $18.4 million for 2014 compared with $20.8 million for 2013. The decline was primarily attributable to the cost controls implemented over retailer programs such as cooperative advertising and lower royalty costs due to discontinued licensing arrangements. General and administrative expenses increased 5.9% to $40.3 million in 2014 from $38 million in 2013 and G&A as a percent of sales was 19.6% or 134 basis points higher than fiscal 2013. Excluding charges of $2.2 million associated with leadership changes in fiscal 2014, general and administrative expenses were $38.1 million or 18.5% of sales.

We reported a net loss of $0.2 million or $0.01 per share for fiscal 2014 compared with a net loss of $2.8 million or $0.16 per share in fiscal 2013. Adjusted EBITDA for 2014 was $12.7 million compared with $9.7 million in 2013 or a 31.7% increase. Adjusted EBITDA for 2014 includes $3.3 million of bank-permitted addbacks compared with $2.6 million in 2013. Adjusted EBITDA does not include the $1.1 million one-time impact of the voluntary battery recall in fiscal 2014. This item needs to be considered when modeling Summer's P&L on a go-forward basis.

Now turning to the balance sheet, as of January 3, 2015, we had $1.3 million of cash and $58.7 million of debt compared with $1.6 million of cash and $49.7 million of debt at December 31, 2013. The increase in debt primarily reflects our inventory build done to avoid lost sales during the anticipated port strike. Inventory at January 3, 2015 was $44 million compared with $38.4 million as of December 31, 2013. However, we reduced inventory nearly 10% sequentially in Q4 versus Q3.

Regarding our debt and as mentioned before, we have had meaningful conversations with our lenders to reduce the overall costs going forward. Trade receivables as of January 3, 2015 were $38.8 million compared to $34.6 million a year earlier. The increase was driven by higher sales.

In closing, we believe that Summer Infant has taken the right steps to exit low-margin business and improve our revenue outlook through customer diversification and e-commerce initiatives. In the upcoming quarters, we will be focused on delivering solid sales and margin growth and reducing our interest expense, as well as lowering our overall debt via inventory reduction. Overall, we believe the Company is on sound footing for better returns in the quarters to come. With that, I will turn the call over to the operator and Carol and I will take your questions.

(Operator Instructions). Dave King, ROTH Capital.

Good morning, Carol and Bill. So congrats on a lot of the improvements you have made over the past year. I think that is extremely encouraging. I guess my first question has to do with the expenses in the period. It looks like it was about ???- or they were up about $650,000 if you back out some of the charges on a year-over-year basis. I guess can you talk a bit about how much of that is due to some of the new hires you've made, how much of that is recurring stuff? It seems like most of it is and so more importantly what I'm thinking about is how should we be looking at the year ahead, particularly in the context of I think, Bill, you commented on the battery recall obviously that we need to take into account when we are doing our models. I guess what's sort of a good run rate on expenses and how should we be thinking about that?

Overall expenses for 2015, we are shooting for 18% of net sales as a percentage.

Okay. And then -- okay, I will follow up online on that. And then in terms of gross margin in the period, so that was fairly flat year-over-year. Was there any impact from air freighting or having to ship to alternate ports or anything along those lines from what's happening here on the West Coast and then any other major puts and takes there in terms of how that trended?

Right, margins primarily there was not a material amount of air shipments. There was some clearance of furniture inventory that occurred during the year and that had a bit of a negative effect on margins overall as primarily related to that. We had a little bit of prior year post-audit adjustments that came in from retailers that were not accrued. That was about $500,000; $478,000 to be exact. Those are the big things that were kind of unique in the margins for 2014.

Okay, that helps. Carol, maybe turning to new products, it sounds like you have a ton launching for this year and I think several of them I think in baby bottles. I think you touched on one of them for January, but then also monitors and some other things I think are launching here near term and then there's some others that are towards the back half. Can you just give us an update in terms of how you are thinking about the timing of those new products and then in terms of the ones that are more near term in nature, any initial color on how to be thinking about sell-in and how that's proceeding with some of your retail partners? Thanks.

So with regard to some of the new launches, we have launched with our HD video monitor and we are very pleased with the results we're beginning to see in getting that out into the marketplace. We have also launched on our Bottle Genius under the Born Free brand and we are rolling that out as well and have received a fair amount of social media attention and registry activity associated with that, so we are encouraged by that.

With the spring season coming up soon, we are going to be rolling out our expanded 3D Lite stroller line, which includes new SKUs, as well as new channel distribution, so we are looking forward to that. And as I mentioned in the call, we are launching some rebranding activity under SwaddleMe. That'll begin to hit shelves a little later this year and we're also working on some innovation and rebranding efforts in our Born Free feeding systems. That will be later towards the end of the year.

Okay. I'll step back. Congrats -- or excuse me -- good luck with the rest of the year.

Thank you.

Steph Wissink, Piper Jaffray.

Hi, thank you. Good morning, everyone. We have a few questions as well. Just maybe starting on a follow-up to Dave's earlier question. Carol, could you just help us conceptualize the changes in the mix from a product development standpoint, how you are thinking about 2015 versus 2014? I know in 2014 there was some carryover product from the prior management structure that you had to work through. So just maybe give us some perspective on as you are talking with your retailers how those bookings are looking in terms of composition of new product versus some of the legacy.

Well, we are carefully looking at opportunities for innovation and particularly in our core areas, which include monitors and safety and nursery, as well as some of the exciting expansion opportunities that we've already begun to experience in our gear category, particularly with 3D Lite and what we see as good growth potential in our Born Free brand through innovation and rebranding of that Born Free line. So we are very much focused on those top three core areas with some additional growth opportunities in the other two and as we begin to expand our distribution and open up into new channels, we are looking to enforce a more channel strategy approach to how we are rolling out these new items, as well as working with our core product offering.

Thank you. And then, Bill, just a follow-up too. I think your response to Dave's question regarding the G&A expense line, right around 18% of net sales. Is that a run rate that you plan to exit the year or should we be thinking about the full-year balance being at 18% because I think that would be quite a stark difference from where you ended 2014?

Yes, it will be overall run rate for the year, more exiting than the beginning, just simply due to the ramp in terms of how sales are scheduled to be sold out.

Okay.

Stephanie, I would just add to that. There was a fair amount of activity that occurred in 2014 to rightsize the business, as well as restructure the organization and you see the effects of that running through our 2014 numbers.

Okay, that's helpful. And then just with respect to the selling expense, because on a very strong sales lift in the fourth quarter, you got some nice savings. So can you talk a little bit about some of those improved customer program turns outside of the exit of the royalty agreements, but just the negotiation side of some of your terms at retail?

So our approach to our program terms with our retailers has been with an effort and focus on maximizing the value of the dollars spent in that advertising marketing category. As the marketplace has shifted some in terms of how the consumers respond to advertising and promotional activities, we have worked closely with our retailers to try and adjust some of our program cost spendings to better align those dollars to support the millennial mom. So we are constantly looking at that, working closely with the retailers on that front.

Just last question with respect to channel level inventory, I know you reflected a bit on your own balance sheet inventory, but can you just talk a little bit about the health of the channel, how you are thinking about managing the balance of this year and how you ended the year with respect to the channel versus your own inventory.

Yes, we think the channel is pretty clean in terms of the overall channel inventory structure that is there and in 2015, simply due to some of the port strike things that happened in 2014, some of the items were lower in stock than we wanted them to be. So in 2015, we are looking to help build that back up as we move forward simply because we are seeing the port strike effects mitigate themselves a little bit with the conclusion of negotiations.

Great, thank you, guys. Best of luck this year.

Thanks, Steph.

(Operator Instructions). Danielle McCoy, Wunderlich Securities.

Good morning and I'll add my congratulations on a nice year. I was wondering if you could touch base a little on how we should be thinking about any lingering effects of the port and some of the congestion there and how you guys are viewing that and also anything on FX.

Sure, sure. From a port strike perspective, obviously, in February, the port strike issue was resolved, but for January and February, there were some pretty intense days where things were shut down for about four or five days, so that does have an impact just for January and February for us.

Looking at the other question, I'm sorry, could you say your other question again?

Just some color on FX.

Right. So we modeled, at least for ourselves for FX, we modeled through what we knew about the Canadian currency, which is the biggest impact to us for 2015 and we have embedded that and don't think that changes any guidance that we've given in the past already. We did collect a couple of receivables from November and December in the first part of this year and we took about a $100,000 hit as a result of FX transactions and that was simply due to having receivables at a higher exchange rate when we sold the product versus the exchange rate when we transacted. But as that works its way through, that impact will be less and less because we will be collecting receivables that are at a lower exchange rate.

Okay, great. And in terms of inventories, is there any way to break out what percentage is for the safety stock or what is some of the earlier push-forward shipments that you guys have been doing related to the port issues?

In terms of overall value, you're probably looking at about $5 million of value that we brought in and that has been in our inventory. It renews itself on an ongoing basis, but about $5 million overall. In fact, we brought our inventory levels down from Q3 by about 9.7% and we anticipate in Q1/Q2 to continue to bring down inventories in 2015.

Okay. And then just lastly a housekeeping question, what should we be modeling in terms of tax rate?

Tax rate, effective tax rate I think is around 33% and I would continue on with that effective rate that we are using now.

All right, great. Thanks, guys. Good luck

Thank you.

(Operator Instructions). There are no further questions in queue at this time. I would like to turn the call back over to Carol Bramson for closing comments.

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

Thank you. This does conclude today's teleconference. You may disconnect at this time and have a great day.