Summer Infant, Inc. (SUMR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Summer Infant's First Quarter Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded today, May 4, 2017.

I would now like to turn the conference over to the moderator, Chris Witty.

Hello, and welcome to the Summer Infant 2017 First Quarter Conference Call.

With me on the call today is Summer Infant's CEO, Mark Messner, and CFO, Bill Mote.

I would now like to provide a brief Safe Harbor statement.

This call may include forward-looking statements that relates to Summer Infant's outlook for 2017 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 risk factors contained in the company's annual report on Form 10-K for the year ended January 31, 2016, and in our other filings with the Securities and Exchange Commission.

During the call, management may make references to adjusted EBITDA, constant currency sales, adjusted net income and adjusted earnings per share.

These metrics are non-GAAP financial measures, which the company believes help 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 included in today's financial release.

And with that I would like to now turn the call over to Mark Messner.

Mark?

Thanks, Chris, and good morning everyone.

We appreciate you joining our first quarter conference call.

I'll start by giving an overview of recent developments after which Bill will go through our financial results in detail.

We've had a busy start to 2017 and are generally pleased with how the year is shaping up, revenue in the first quarter was $47.3 million, an improvement over Q4 but was down slightly year-over-year due to general weakness across brick and mortar space with offsetting strength across our e-commerce channels.

As I'll review in a moment, we saw slower sales across some product lines in particular which we are currently working to reinvigorate.

That said, we posted strong gross margins of 32.3% so improving demand trends as the quarter progressed and posted earnings of a penny per share which makes us feel cautiously optimistic about the rest of 2017.

Now, let me review what we've been doing to bolster the company's go-forward growth plan.

First we're taking steps to reorganize how we operate both internally and externally.

With regards to the latter I discussed last quarter how Summer Infant was taking more proactive strategic approach to its customer relationships in terms of building the company's brands and strengthening their appeal across the various points of sale we served.

We're looking at ways to connect with our channel partners in a more productive fashion so that our brands are a win-win for both us and our customers which should result in higher demand and increased margins going forward.

This involves reducing the number of third party wholesalers and taking consumer research more seriously along with revamping how we approach product development, meaning the internal side of this equation.

We've regrouped internal functions to position us for growth including realigning product development, marketing and sales to streamline our go-to-market strategy.

This has meant letting certain people go even as we invest in specific new hires and processes.

In essence, we're moving away from a business category structure and reorganize along functional lines of expertise.

The goal of these internal changes are multifaceted.

We intend to speed the process of bringing new concepts to market, provide the right products to the right customers and hold our client managers accountable throughout the world.

We expect these actions will result in an organization that is both more nimble and customer-focused, and this is just the beginning.

The reality is that a company like us must constantly evolve not only to meet the product needs of the market but also the market changes themselves by which I mean the significant shift currently playing out in terms of purchase behavior.

There have been numerous articles written recently about the accelerating move for online purchasing.

With resulting negative impact hitting brick and mortar stores hard.

Some analysts even see this as an implosion of the retail experience, a sea change that is causing a cascading number of store closures around the globe.

We understand this and are not sitting still.

We know our customers well and we know how to adapt to the challenges going forward.

Each of our brick and mortar partners has different issues they are facing as well as various strategies being undertaken to address them.

So while we're certainly putting more emphasis on e-commerce platforms, we're also working with our retail customers to ensure our products better-match the demographics they serve.

We're looking to broaden our brands and strengthen them by using various product styles and derivatives suited solely to certain channels and specific retail companies.

This reduces product overlap and price sensitivity, builds loyalty with our customers and provides flexibility to address market dynamics.

We have already started making some of these changes and our retail partners have responded well to this innovative strategy.

So I'm excited about the rest of 2017.

As I said earlier, we're taking action both internally to structure our organization and externally in how we approach our channel partners and marketing initiatives.

The end result should be a company that's aligned with its customers, can adapt more rapidly to changes and consumer demand and has strong differentiated brands all resulting in higher top- line growth and margins.

From a product development perspective we're investing in areas that offer the greatest opportunity for additional market penetration.

This includes our tried and true monitor business as well as gear, safety and swaddle areas, and we'll be rolling out product derivatives, as I mentioned earlier, that are focused on specific channels and retail partners we serve.

I think we're off to a good start and I've seen a pickup in demand during the latter part of the first quarter, which we hope is a sign of things to come.

While it's clearly too early to predict how the year will play out, we're cautiously optimistic that we should see sequential sales growth going forward along with continued strong margins.

Higher top line results will still be closely tied to online sales as well as international expansion.

We're adding resources to expand overseas with a particular emphasis on Europe and Asia and expect our shipments to increase this year.

Overall, we are taking nothing for granted given the ever-changing demand dynamics in the retail industry.

We'll continue to make Summer Infant a more responsive customer-focused organization.

And I'm pleased with what we've already accomplished as well as the outlook going forward.

We will constantly evolve to meet the challenges of tomorrow with the never-ending goal of improving the brand with our consumers and returns for our shareholders.

With that I'll turn it over to Bill for our financial results in detail.

Bill?

Thanks, Mark, and good morning, everyone.

Our 10-Q and related press release were issued last night.

In addition to listening to this call, I encourage you to review our filings.

Net sales for the first quarter were $47.3 million versus $49.7 million in the prior year period.

Revenue was down year-over-year primarily due to lower-than-expected sales of our feeding, nursery and monitor products, partially offset by increased safety and gear sales.

Revenue was negatively impacted by a slowdown in brick and mortar demand, as Mark just reviewed, and we are taking proactive steps to address this in our [general] strategy going forward.

Gross profit for the first quarter of 2017 was $15.3 million compared with $15.7 million for the first quarter of 2016.

And gross margin was 32.3% in 2017 versus 31.7% in the prior year period.

The three months ended April 2, 2016, included $300,000 in temporary demurrage charges and $200,000 in foreign exchange losses with no similar items in the current fiscal year period.

We continue to work on improving margins across the company.

Selling expenses were $3.9 million in the first quarter of 2017, essentially flat compared with the first quarter of 2016.

General and administrative expenses were $9.3 million in fiscal 2017 versus $10.8 million in fiscal 2016.

And general and administrative as a percent of sales declined to 19.6% from 21.6% in the prior year period, which included $1.4 million of litigation costs.

The associated litigation was settled in December 2016.

Interest expense was $700,000 in the first quarter 2017 versus $600,000 last year, while depreciation and amortization declined to $1.1 million from $1.2 million last year.

The Company reported net income of $200,000 or $0.01 per share in the first quarter of 2017 compared with a net loss of $300,000 or $0.02 per share in the first quarter of 2016.

The current quarter was the third period of positive net income in the past 12 months, our best performance in many years, and a sign of improving fundamentals.

Adjusted EBITDA for the first quarter was $2.4 million versus $3.2 million for the first quarter of 2016.

Adjusted EBITDA for the first quarter of 2017 includes $200,000 in bank permitted add-back charges compared with $2 million in the prior year period as defined in our February 2017 amended credit facility.

Turning to the balance sheet.

As of March 31, 2017, Summer Infant had approximately $700,000 of cash and $47.9 million of debt compared with $1 million of cash and $46.9 million of debt on December 31, 2016.

Inventory as of April 1, 2017, was $36.8 million compared with $36.1 million as of December 31, 2016.

We continue to manage inventory while still having the highest quality merchandise available for sale.

Trade receivables at the end of the first quarter were $34.4 million compared with $34.1 million as of December 31, 2016.

Accounts payable and accrued expenses were $37.1 million as of April 1, 2017, compared with $38.4 million at the beginning of the fiscal year.

Regarding cash flow, we use $600,000 of cash in operations this quarter versus $6.1 million of cash generation in the prior year period.

Working capital remains in check and is down over 15% from the end of 2015, and we expect cash flow improvement in the quarters to come even as we invest in the product development initiatives Mark discussed.

With that, I'll turn over the call to the operator and open it up for questions.

(Operator Instructions) The first question comes from Eric Beder of Wunderlich.

When you look going forward -- first of all, what was the split now between online and brick and mortar and where do you see it going forward?

Well, I mean, I'm not going to talk specifically about the split, but I mean, we've had serious double-digit growth, over 14% in e-commerce, and obviously, brick and mortar, some of the baby brick and mortar in particular, have had a really slow start to the year.

So we will leverage our e-commerce sales and ship some our marketing programs to leverage sales through that channel, Eric.

Okay.

And in terms of product mix, I know you've talked before about the car seat business, and that's for next year, is that still a major focus for you in terms of 2018 and beyond?

Yes, we hope to make 2018, I mean, car seats aren't a short lead time type item, but you'll definitely see this become more active in gear.

I mean, you know we've been in high chairs and playards and such in the past and maybe haven't put as much attention to those, but I think there is some opportunities there in the innovation pipeline that we're seeing.

Right.

And last question.

When you look -- how should we be thinking about, you put up a lot talk about the -- how you’re going to be more innovative, more responsive.

How should we be thinking about that in terms of product mix going forward looking longer term, how should be we seeing.

Will we be seeing less product categories or more product categories?

How should we be thinking about that?

Yes, I don't see necessarily more product categories, but the categories we participate in, we have a derivative strategy that you hadn't seen from summer in the past where we typically bring out a hero item at one price point and sell it into all the different channels at that price point and they do get out online to see who can go the lowest.

With a new derivative strategy, if you have a product with meaningful separation between price points, and let's say you have a superseded $30, $40, and maybe $50, you can probably have a $30 one that's appropriate for entry level partner and a $50 one for the premium.

So I think a deeper thought process on our derivative strategy will help us become stronger in the categories we participate in.

(Operator Instructions) The next question comes from Dave King of ROTH Capital.

I had to jump on late so forgive me if you already answered some of these, but can you talk a little a bit about what drove the margin expansion in the period?

And then, Bill, how are you thinking about it shaking out for the rest of the year and what are sort of the key drivers there?

Yes, so margin expansion, just compared to last year, last year, we were facing some currency headwinds, so that's a part of it.

The other part of it is that we have a change in mix of products more to some of our safety items that tend to have, in some cases, a little bit higher margin.

We also had a couple of small headwinds this quarter in the margins that drove a little bit of decline.

So it's actually, we sold off a little more close-out inventory than we expected.

It took the margins down by about $200,000 more than we had anticipated.

So overall, even with that hit, we feel real good about the 32.3% and the continue to work on our supply chain to get cost out so that we can get to that at least that 33% level this year that we've been speaking about for some time.

So good progress, not all the way there yet but we're making good progress towards the 33%.

Okay.

That's good color.

And then maybe on the revenue side, encouraging that it was up sequentially.

Is it still reasonable to assume growth on a year-on-year basis in the back half?

And then what are the drivers of that if so?

I think, Mark, maybe we talk to the past about additional shelf space, obviously, there is new products.

And then should we still be assuming further exiting of sort of low-profit accounts, I guess what are sort of puts and takes and how are you thinking about the top line shaping up.

Yes.

I think we're seeing some good positivity here starting the second quarter and some of our initiatives internationally are certainly going to help with top line revenue growth.

Yes, I mean, we're getting incrementality in placement at some of our key retail partners.

So I think that's a very positive sign as well.

Yes, I mean, customers like Kmart, Sears and with the consolidation of our customer base, there's puts and takes there, but it feels like you're squeezing sales from one channel right into the bigger channel.

So I feel good with how that consolidation is going.

So feeling pretty positive.

Okay.

That's great, fantastic.

And then maybe just one more for me.

Maybe for Bill then.

On free cash flow, I think maybe you've talked about how we should be thinking about cash flow from operations at least, what are the sort of thoughts on how that should come in for the year and what are the -- I think I saw debt was down a little bit in the quarter, I guess what are the updated sort of debt pay down plans as we move forward?

That's actually up a little bit, it's about $1 million up from Q1 of last year -- I'm sorry, Q4 of last year.

But we're still targeting mid-single-digit operating cash flow and use that cash flow to pay down debt.

And we kind of had the same path last year but we ended up creating a little more cash flow there at the end of the year.

So right now, what we've said publically and what I still believe is that we'll be in that mid-single-digit operating cash flow and we'll use any excess cash to continue to pay down debt.

I'm targeting debt pay down somewhere in that mid-single-digit range as well for the year.

Okay.

So mid-single-digits in dollar terms, right?

Yes.

(Operator Instructions) This concludes our question-and-answer session.

I would like to turn the conference back over to Mark Messner for any closing remarks.

All right.

Thank you, everybody, for joining us for today's call and we'll look forward to talking with you next quarter.

Have a good afternoon.

The conference has now concluded.

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