Summer Infant, Inc. (SUMR) 2017 Q2 法說會逐字稿

Good morning. Welcome to the Summer Infant Incorporated Fiscal 2017 Second Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to the moderator, Chris Witty. Please go ahead.

Hello, and welcome to the Summer Infant 2017 Second 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 December 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 may 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 turn the call over to Mark Messner. Mark?

Thanks, Chris, and good morning everybody. We appreciate you joining our Second Quarter Conference Call. I'll start by giving an overview of recent developments after which Bill will go through our financial results in detail.

I'm pleased to report that our efforts at streamlining and repositioning the company continue to bear fruit. Revenue for the quarter was $52.6 million, which was an increase both sequentially, and year-over-year as well as our best performance since 2015. Topline growth was driven by higher safety and gear product sales, including seasonal merchandise, partially offset by a decrease in monitor sales. I'll speak to this more in a moment but sufficed to say that I'm pleased our channel management strategy, product development efforts, and brand enhancements are resulting in increased shelf space and higher demand.

At the same time, we posted gross margins of just under 33%, reflecting reduced program costs and reported earnings of $0.03 per share, our best results in years. So we have a lot to be proud about for this quarter, particularly given the ongoing industry upheaval impacting so many of our competitors, as well as retailers in general.

We've kept costs under control, even as we've invested in the business, added appropriate product development, and marketing personnel, and adapted our operating model to meet the changing needs of our channel partners. It's great to see what we've accomplished so far, even as we have a long way to go.

Now, let me review where we stand in terms of our products, markets, and go-forward growth plan. This past quarter, we continued to focus on internal product development and brand extensions, as well as improved channel management across the segments we serve. While bringing in talent to bolster our efforts in these areas, we're seeking additional hires in product development and marketing disciplines to hone our efforts at reaching target customers and maximizing product penetration with the channels we serve.

We're also continuing our effort to eliminate third party wholesalers, which is not always easy, while focusing on ways to innovate and elevate our brands. We're investing in digital assets and social media and in that regard, we'll actually be launching a new corporate website in just a few days on August 8th. Not only will this new site better highlight the company's brands, it will also serve as an improved digital platform to connect with parents and sell certain products directly to consumers, while gathering feedback on purchasing habits and demand trends.

So our priorities from earlier this year remain, to focus on key products, markets, and channels, and at the same time invest in innovation. This past quarter clearly showed the strength of our many offerings from gates, potties, and strollers to our pop branded products. We know some of our performance in Q2 was seasonal in nature and we're working to transform more of our products into items that are in demand year around. I won't go into detail right now for competitive reasons but sufficed to say that we'd like to broaden certain product concepts so they are not considered for outside only. We're looking to change colors, design, portability, and other facets to facilitate ease of transition from outside to inside or from home to car, whatever the weather may hold.

We're also doing a lot of getting products to the market on time, which pleases our retail partners while reducing working capital and we've been successful gaining shelf space to accommodate additional SKUs at certain core brick and mortar locations. Even as the industry is going through an upheaval due to online competition, we're successfully partnering with key customers to bring them the right product at the right price, thus improving our relationship while driving increased demand.

For example, we'll be introducing a new stroller later this year called the 3D Mini at certain establishments representing incremental stroller placement. This speaks volumes to the quality of our product, as well as reputation in the market. Of course, at the same time, we're continuing to leverage various e-commerce platforms for additional growth. All these strategies are having a positive impact on our position in the industry and future growth plans. So while I wouldn't yet say we're firing on all cylinders, we're definitely making progress focusing on the right products and the right channels to drive growth, solidify margins, and build brand recognition.

One area we noticed this weakness this past quarter was in the monitor space. As I mentioned earlier, which was not a phenomenon limited to Summer Infant, we've seen intense price competition in the area of both online and in stores, leading to difficult sales environment, as well as margin compression. So we're using a sensible approach, leveraging market research and innovation to develop new products in the space that meet the requirements of consumers, meaning various levels of technology offerings at different price points.

We should be able to sell to both the non-discriminating parent who wants something simple and inexpensive, as well as the person who wants more video features, apps, connectivity, and an overall higher level of technology and performance. We need to adapt to our markets to stay relevant and that's exactly what we're doing. We expect to have fresh monitor offerings out later this year.

International growth is still a big priority for Infant Summer and we continue to see the opportunity for double-digit expansion in 2017, driven by untapped demand across several overseas markets. We have great distributor relationships and are encouraged by the long-term outlook in many product areas.

Overall, we're optimistic about the back half of the year as we continue to win new product placements, bringing out innovative concepts, and address wholes in our lineup. That said, the retail environment is lumpy and there remains some seasonality in our current product portfolio. So revenue in the second half will be hard to predict with quarterly swings to be expected, but we believe we've turned the corner on the business as a whole and are setting the stage for higher growth in 2018 and beyond.

We'll continue to work on product development, speed to market, and channel management for our key categories, such as safety gear, swaddle, and monitors. Our pop line has a great deal of untapped potential, which we're seeking to leverage in the quarters to come. And as I previously mentioned, we're aggressively overhauling our monitor business to respond to today's competitive environment.

We'll continue to roll out new strollers, gates, and potties, and other new concepts while introducing product derivatives that uniquely address the channels we serve.

Let me close by stating again how proud I am of our transformation thus far, one evidenced by our stronger margins, a solid balance sheet, and greatly improved bottom line results. The team has really come together to address the challenges of the current retail market and bring out innovative, unique products that are building brand loyalty and strengthening our channel partnerships.

We've already made Summer Infant into a company that is better aligned with its customers and more rapidly adapts to changes in consumer demand. Now, it's time to take the company and its brands to the next level, one with higher, more predictable growth, resilient brands, and further improved bottom line results.

We're well on our way to that goal but we'll never stop our relentless pursuit of better performance for our customers, our channel partners, and our shareholders alike. With that, I'll turn it over to Bill to review 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 second quarter were $52.6 million versus $50.6 million in the prior year period. Revenue rose primarily due to higher safety and gear product sales, including seasonal merchandise, partially offset by a decrease in monitor sales due to the reasons Mark discussed.

Gross profit for the second quarter of 2017 was $17.3 million, compared with $16.2 million for the second quarter of 2016. Gross margin was 32.9% in 2017 versus 32% in the prior year period. Current year gross profit and margin levels are the best in recent memory and point to the many measures taken to reduce costs, growth the business, and improve product pricing at Summer Infant.

Selling expenses were $4.2 million in the second quarter of 2017, versus $3.9 million last year, reflecting a slight increase in ad spending. General and administrative expenses were $10.3 million in fiscal 2017 versus $10 million in fiscal 2016. G&A rose year-over-year primarily due to $500,000 of additional compensation expense under the company's annual incentive plan, although G&A as a percent of sales declined to 19.5% from 19.7% last year.

Interest expense was $700,000 in the second quarter 2017 versus $600,000 last year, while depreciation and amortization declined to $1 million from $1.2 million in 2016.

The Company reported net income of $500,000 or $0.03 per share in the second quarter of 2017 compared with net income of $300,000 or $0.01 per share in the second quarter of 2016. This was our best performance in many years and a sign of improving fundamentals. Adjusted EBITDA for the second quarter of 2017 was $3.5 million versus $3.7 million last year. Adjusted EBITDA for the second quarter of 2017 includes $500,000 in bank permitted add-back charges compared with $1.3 million in the prior year period as defined by our amended credit facility.

Turning to the balance sheet, as of July 1, 2017, Summer Infant had approximately $1.4 million of cash and $45.7 million of debt compared with $1 million of cash and $46.9 million of debt on December 31, 2016. Inventory as of July 1, 2017, was $37.6 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 second quarter were $36.6 million compared with $34.1 million as of December 31, 2016. Accounts payable and accrued expenses were $41.1 million as of July 1, 2017, compared with $38.4 million at the beginning of the fiscal year. Regarding cash flow, we generated $2.8 million in cash from operations year to date versus $3m million during the first six months of 2016. 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 Dave King with Roth Capital.

I guess first off, on the revenue growth this quarter, to what extent was that -- I guess what percentage of the growth or what chunk of growth, however you feel like characterizing it, to give us some context, how much of that was seasonal items? And then beyond that, how much of it was increased demand from consumers, i.e. sell-through, whether it's seasonal sell-through or not, versus selling in for new programs. I'm just trying to get a sense of how sustainable the trend you saw in the quarter is. Thanks.

Good question. I'd say, if I'm to characterize it, yes, we have some seasonal items and those are some of our pop items and those sales are quite good. But I'd say that our safety category was probably the biggest area of growth this quarter. So in terms of mix, seasonality versus just core revenue increase, I'd say it's probably a lot slanted towards the safety category doing very well. Does that answer your question?

Yes, that's good to hear. And then in terms of the just sell-through versus sell-in, any context there?

Yes, I'd say there's been channel shift on sell-through but -- and we've sold in incremental placements, which make us feel confident about the second half of the year. I'd say sell through is good. The velocity is good but we see opportunities for continued revenue growth in the second half of the year.

Perfect, great. And then switching gears a bit, maybe on gross margin, so it looks like the improvement there was I think lower program costs. To what extent or what effect did mix have on it and then just what are the thoughts on further or the notion of mix improvement going forward? Thank you.

The mix would be about $300,000 when you look at it just on a pure mix number. But there are improving metrics in, especially the safety category, which is growing. It's also growing in margin because some of the efforts that we've made to reduce some of the manufacturer costs.

So improving within the category and then also improving because of the better --

That's correct, but I'd associate about $300,000 of the improvement with mix.

That helps. I'll take the rest of my questions offline. Nice quarter and good luck with the rest of the year.

(Operator Instructions) The next question comes from Eric Beder with FBR. Please go ahead.

Could we talk a little bit about inventories? You had -- tried to stop selling off the inventories last year. What should we be thinking about for the rest of the year in terms of inventory balances?

So we've been running in the 3.5 to high 3s in terms of inventory turns and a lot of -- our goal has always been right around the four level, but we've definitely invested in some strategic positions in inventory. I think that you can depend on it continuing in this general trend. We are going to take some strategic initiatives in targeting areas where we think we're going to grow.

As we work with the online retailers, they tend to keep less inventory in their channel and they tend to have more variability in their demand depending on what's going on in the marketplace. So it behooves us in some instances to take more inventory position. So you've seen that come through in the numbers, but the good news about our inventory in general is the quality, meaning the items that are under six months old continue to be in the high 80s, low 90s as we work through each week. So we're keeping the inventory clean and trying to avoid any of that, that we had to do a couple of years ago, where we had to move a lot of inventory at a low cost or a loss.

So to wrap that up, Eric, I guess I'd say keep thinking about inventory in terms of turns at about 3.7, 3.8.

In terms of online, we're -- approximately what percentage of your sales right now are online and where should it be going? Where should it go? What is your goal in terms of that?

There's where we are in terms of the numbers that we get. We're probably at about a 35% to 40% but the split at the retailers who do e-commerce, I'd say it's trending higher there. I mean, obviously, you see Amazon did a huge -- is flying high and has had huge hiring in the past week or so. They're winning share and Walmart is gearing up to battle them.

So I think those are probably the two biggest players in the e-commerce arena and they're not slowing down in what they're doing to win share in e-commerce sales. So I think you're going to see more e-commerce sales go to Amazon and Walmart organically.

And last question. On the monitors, this monitor business has become increasingly competitive throughout the years. When you look at it, can it be a sustainable, a, A growth business, and B, a business where you can drive better margin? Because this business has a lot more competition in some respects and it is becoming increasingly, to your point, price driven.

To that, I'd say we have some good strategies to make our brand stand out, Eric. I think there's been a lot of margin compression in the space and I can't speak for my competitors, but there's a couple different ways to win share. You could go lower on price or you can be the go to brand. We'll take the higher road and try to increase our brand equity with our consumers and in my past experience, that seems to be a good plan. I think we have some good tactics to win back share in the space.

And once you start to invest in the brand and visibility through digital assets or whatever, you have consumers going into the store asking for the Summer Infant model with X feature. That's what the goal is and I think it's an achievable goal, and then we'll see some stabilization in that category for our company.

Great, good luck for the rest of the year.

(Operator Instructions) This concludes our question and answer session. I would like to turn the conference back over to Mr. Mark Messner for any closing remarks.

Thank you everybody for joining this quarter's call and we look forward to reporting good news again on next quarter's call. Have a good afternoon.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.