Summer Infant, Inc. (SUMR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Summer Infant, Inc.

Fiscal 2017 Fourth Quarter Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Witty, with Investor Relations.

Please go ahead.

Hello, and welcome to the Summer Infant 2017 Fourth 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 relate to Summer Infant's outlook for 2018 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 December 30, 2017, and in our other filings with the Securities and Exchange Commission.

During the call, management may make references to adjusted EBITDA, 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'd like to turn the call over to Mark Messner.

Mark?

Thanks, Chris, and good morning, everyone.

We appreciate you joining our fourth quarter conference call.

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

First, I'd like to announce that as expected, we saw a rebound in fourth quarter revenue, both versus the third quarter of 2017 as well as the prior year period.

You may recall that Q3 results were negatively impacted by the bankruptcy of a major brick-and-mortar retailer which not only pushed out certain deliverables, but also required us to take a charge for outstanding receivables.

The good news is, that while revenue to this customer fell $6 million last year due to the bankruptcy disruptions as well as generally lower demand, fourth quarter, as anticipated, saw a shipment growth.

We also were able to negotiate payment terms in subsequently reversed part of the Q3 bad debt charges Bill will review in a moment.

The bottom line is that we ended the year with revenue down slightly to $190 million.

As $10.5 million higher safety product sales, including newly introduced boosters and potties, largely offset the impact from this long retail customer as well as sluggish overall monitor demand, which reflected very competitive market dynamics.

We held gross margins to around 32% last year, similar to 2016.

And saw significant reductions to SG&A as we continued our drive to improve operational efficiencies even while investing in innovative products and brand expansions.

And while reported a net loss from the fourth quarter, this was primarily due to nonrecurring cash charges tied to recently enacted Tax Act, which will Bill review momentarily.

I'd say that 2017 was certainly a challenging year for the company due to the reasons I've previously indicated.

A very competitive market environment, the bankruptcy of a major brick-and-mortar retailer and large-scale changes taking place across the consumer landscape in terms of shopping habits.

Obviously, these issues will largely remain in 2018, so we are not sitting still.

We're taking decisive steps to improve operating performance going forward and increase top line growth.

First, we've invested in our international aspirations by hiring industry veteran Kory Pomon to manage our overseas business development initiatives.

Based in Taiwan and Hong Kong, Kory is somebody I've personally known for years as a result-oriented individual with a track record of increasing a company's market presence in a variety of countries and cultures.

He'll be responsible for all international sales, marketing and brand management activity outside North America, across Summer's entire product portfolio.

With extensive experience in incentivizing sales teams, managing distribution channels and partnering with customers, Kory is the right person to expand our nascent positions in China, Europe, South America and elsewhere.

We have a great deal of enthusiasm and the potential for growth overseas with Kory at the helm.

We've also recently reassessed our operations to determine, where we can take additional steps to increase efficiency, drive margin expansion and increase cash flow, building on measures we've taken in the past.

While this is a never-ending process, we've already decided to invest about $1 million in our West Coast distribution center, so that it more effectively handles our merchandise and reduces working capital requirements.

This initiative will enable us to increase asset utilization and make the company more nimble and responsive to both consumer demand and supply chain management issues.

At the same time, we remain upbeat regarding our plans to introduce a variety of new products and brand extension this coming year, while also experiencing growing traction on our own direct-to-consumer Summer Infant website.

Starting from a small base, we see a great deal of potential for the site and are encouraged by the increasing traffic it can accommodate.

This will augment our efforts to continue posting growth through other online retailers and enhance our connectivity with consumers, which we view as critical to cementing all the brand and product innovation initiatives we're talking about.

Through our product perspective, we launched several new monitors during the fourth quarter, including our revolutionary Baby Pixel unit and are expanding our distribution in Q1.

We've already benefited from both positive reviews and have seen growing demand online.

So while it's early days we're off to a good start revamping this segment of our product portfolio.

Another monitor we're launching this quarter is the Glimpse Digital Video unit, which is already at Target and will soon be with other important channel partners.

The Glimpse features excellent picture quality with remote digital zoom, cutting-edge night vision, a voice activated video screen wake up and a soft glow camera night light.

It also is expandable up to 4 cameras, to keep an eye on multiple children on -- in several rooms.

This is just another example of how we're working to rebuild our position in the monitor space using innovation and proprietary technology.

Overall, even within a very competitive market, we're pleased to see incremental placements of gates and other products at Target, more demand from Walmart and generally positive trends across many of our customers.

Our Potty category is still growing strong and we're working on further extensions their as well with strollers, gates and seat positioners.

All areas where we will have a good position in the market and a strong reputation.

For example, our new My Bath Seat meets all current safety requirements, requiring many patents, while being sold at a reasonable price and with solid margins.

It's already available at a few key retailers and it'll be rolled out to other channel partners this quarter.

We continue to invest in R&D to strengthen our position in these key product areas, while looking to expand into car seats and other platforms that can leverage our expertise and benefit from the halo effect of our brand positioning and reputation.

We continue to lay the groundwork for such products this year and next.

At the same time, we're still working diligently on price integrity and margin protection measures.

Managing our channel distribution efforts to ensure the right products are being sold at the right place, at the best price.

This requires constant focus due to the dynamics of the marketplace and price savvy consumers.

But we are making progress and building a portfolio of brands that connect with families and provide growth opportunities for Summer Infant, both domestically and overseas.

Overall, I am proud of our accomplishments in 2017, but realize we need to be steadfast in our drive to reduce cost, invest in R&D and improve our overall product positioning.

The coming year will likely be lumpy in terms of revenue due to the many issues impacting our company and the industry, but we have a clear review of the path forward, we believe can lead to sustained profitability and a higher top line growth.

As always, I'd like to thank our employees for their hard work and loyalty through a rather turbulent period.

There are many opportunities that we can leverage to achieve our goals and we remain optimistic that the steps being taken will provide our shareholders with meaningful returns.

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-K and related press release were issued last night.

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

Fourth quarter net sales were $46.8 million versus $45.5 million in the fourth quarter of 2016, and $43.1 million in the 2017 third quarter.

As anticipated, revenue rose both year-over-year and sequentially due to higher shipments of strollers, gates and potties, more than offsetting lower sales of monitors and feeding products.

As Mark mentioned, we have many new products coming to market and are strengthening our e-commerce platform, while investing in several overseas growth initiatives.

However, I'd like to add that our near-term revenue will be lumpy due to the timing of shipments, reasonable demand trends and the overall impact of a retailer -- customer's bankruptcy.

At this point, we anticipate that Q1 net sales will be down year-over-year due to such issues.

Gross profit for the fourth quarter of 2017 was $14 million compared with $14.3 million in the fourth quarter of 2016, and gross margin was 29.8% in fiscal 2017 versus 31.4% last year.

The fiscal 2017 fourth quarter included approximately $200,000 in losses on the sale of inventory below cost, related to the bankruptcy of a major retailer, which we've discussed in the past.

And results were also impacted by the reduction of certain monitor products at the end of their life cycle.

For the full year, our gross margin remained in the 32% range, similar to 2016, as we continued working towards the target of 33%.

As Mark mentioned earlier, we're taking additional steps this year to further cut costs and improve margins.

As part of our efforts to increase the asset utilization, we will invest over $1 million in our West Coast distribution center, including the installation of new racking system, which is expected to save more than $700,000 a year in operating expense going forward.

Our goal is to continue working to improve our efficiency and enhance profitability.

Selling expenses were $3 million in the fourth quarter of 2017 versus $3.8 million last year, reflecting lower cooperative advertisement cost by nearly due to a higher percent of direct import business this year versus last.

General and administrative expenses were $8.8 million in the fiscal 2017 versus $10.8 million in 2016, with the year-over-year decrease reflecting the company's strategic initiatives to reduce overhead expenses as well as the reversal of a $600,000 bad debt charge taken in the fiscal 2017 third quarter, related to the previously discussed customer bankruptcy.

As you may recall, the total charge was $2.1 million last quarter, but our negotiated outcome on receivables turned out better than anticipated.

G&A as a percent of sales was 18.8% in the 2017 fourth quarter versus 23.8% in 2016.

While interest expense was $800,000 in the fourth quarter's of both fiscal 2017 and 2016.

Depreciation and amortization declined to $1.1 million in Q4, from $1.6 million in the prior year period.

The company reported a net loss of $1.7 million or $0.09 per share in the fourth quarter of 2017 compared with a net loss of $4.5 million or $0.24 a share in the fourth quarter of 2016.

Note that in the 2017 fourth quarter, the company recorded $1.7 million in aggregate of nonrecurring charges related to the recently enacted U.S. Tax Act.

This included a noncash charge of $900,000 on previously unremitted earnings of foreign subsidiaries, a write down of $700,000 related to foreign tax credits and a $100,000 reevaluation of Summer Infant's net deferred tax assets.

In the fourth quarter of the prior year, the company recorded a noncash impairment charge of $3 million related to its Born Free brand.

Adjusted EBITDA for the fourth quarter of 2017 was $1.8 million versus $900,000 in the prior year period.

Adjusted EBITDA in 2017 included $500,000 of bank-permitted add-back credits, reflecting a partial reversal of the Q3 charge, I just mentioned.

In the prior year period, adjusted EBITDA included $1.1 million of add-back charges as defined in the companies and in the credit facility.

Turning to the balance sheet.

As of December 30, 2017, Summer Infant had approximately $700,000 of cash and $48.1 million of debt, compared to $1 million of cash and $46.9 million of debt on December 31, 2016.

Inventory was $34 million as of December 30 compared with $36.1 million at the beginning of the fiscal year.

And we continue to actively reduce inventory as warranted, which will include the disposing of certain items in Q4 related to discontinued products and items that have become obsolete.

Trade receivables at the end of fourth quarter were $36.6 million compared with $34.1 million as of December 31, 2016.

Accounts payable and accrued expenses were $34.5 million as of December 30, 2017, compared with $38.4 million at the beginning of the fiscal year.

Regarding cash flow, we generated $1.2 million in cash from operations in fiscal 2017 versus $8.8 million in 2016.

Overall, we reduced the company's bank leverage ratio to 4.7x the trailing 12 months adjusted EBITDA at year-end versus 5.1x at the beginning of fiscal 2017.

And we are dedicated to reducing this further in the coming year.

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

(Operator Instructions) The first question comes from Dave King with Roth Capital.

So I guess, first off on BRU, trying to understand that a little bit better.

Do you have what the revenue was in the fourth quarter, what percentage of revenue is comprised in the fourth quarter?

I think it was 17% for the year.

And then more importantly, as you think about 2018 from a revenue perspective, it sounds like maybe mainly due to BRU, expect down in the first quarter, but is it reasonable to expect down for the year?

And I guess, just a kind of, different context around how much you think Babies "R" Us contributes going forward -- anticipated store closings, et cetera?

So Dave, the -- this is Bill.

The fourth quarter for BRU was -- for the year it's 17% like you said.

For the fourth quarter it's slightly under that because of the impact of lower sales, obviously.

I don't have the percentage exactly.

But going forward for '18, there is an impact and we've seen a decline in that business on an ongoing basis, and we've mentioned that as we've going through the years, last couple of years.

But obviously, their store closings -- our estimate of the impact of their store closings, where they closed -- the stores that are being closed represent about 20% of our prior year's business with them.

So at a minimum, we expect the year-over-year to be down as a result of that.

We also have some uncertainty in terms of what their inventory balance is as they're rebalancing their inventory.

Their in-channel inventory as we expect will be high because they'll have lower store counts, but a similar amount of inventory.

So we do expect there will be a period of time where they don't uptake on inventory while they're organizing their new store count.

So those are the factors that are leading us to believe that likely in first quarter we'll be down year-over-year.

And we just wanted to provide that guidance upfront.

Okay, that helped.

So good color.

And then, as we think about offsets to that between new products, a new person on the ground in Asia, just kind of head that up, can you talk about how significant are the potential offsets [to these] challenges?

What are some of the new products that you think could be the meaningful contributors to the extent you want talk about it, just some color there would be helpful.

Yes, Dave.

This is Mark.

We're really excited about some of the new product introductions that we have going on.

And I can talk about those more.

But with those new product introductions we are getting incremental listings with other key channel partners.

So that's not a 100% offset, there's going to be some lumpiness in some of the market share grab between retail partners, but we're still excited about the business.

I mean, we're introducing My Bath Seat, which is the only legal bath seat in the U.S. market.

So we've cornered that section of the market with a definite consumer need.

And our indications on an item like that on its early ramp up and a little over a month are quite positive.

There are other products as well, we were well distributed on gates evenly throughout some of our core retail partners, we're significantly increasing our presence in the gate category to even out our distribution with key channel partners.

The international business, we're excited to get Kory onboard.

There are some things we started in his first 60 days with restructuring our international business, increasing our chances of success there.

I mean, again, we're highly underpenetrated internationally and we realize we need to do some things to restructure to accommodate those international sales and are doing so.

So in terms of offset, I think, we're at least putting really good product into the marketplace and coming up with good marketing strategies to drive those products, that coupled with the operational improvements that we've talked about, increase our profitability, and the increased focus in our international markets, I think will help offset some of the lumpiness in the market.

Okay.

And then maybe along the lines of the -- getting the improved profitability.

That $700,000 in annual savings you expect, did I hear you right Bill that, that's going to be in OpEx?

And then, I guess, just can you talk about other plans that kind of reduce your cost of goods sold?

And then, how -- sort of multipart question, but how should we think about your gross margin and more importantly, maybe even your OpEx as we look forward for the full year, given all the puts and takes on the gross margin side as you recover the cost savings you have on the OpEx side?

Right.

So for operating expense, we definitely, given a lower level of sales, we're going to do everything we can to save operating expense to keep ourselves in the 19% range as OpEx as a percent of overall sales.

The plan in terms of the strategic project for the warehouse, it's broken up into phases and we've already got Phase 1 dialed in and ready to go.

We'll be doing that project, it'll take approximately a year to finish, but -- the all 4 phases, but at the end, it'll save $700,000 on an annualized basis of G&A.

And that's really related to rightsizing the warehouse and being able to partition off a portion of that warehouse and either sublet it or restructure it.

So that's definitely in the cards for late 2018, having that completed.

And there may be upside in terms of overall revenue for us, so as we leverage that smaller G&A amount, that will push right through to the bottom line as well.

Related -- did I hear you ask about margins as well?

Yes, gross margins, just wondering, if there's any cost saving opportunities there?

I would think that there's some pressure is probably going to continue either from BRU and monitors, but I'm wondering what sort of offsets you can have on that front?

Yes.

It's actually relatively positive.

The first quarter is going to be a little rough because there will be some closeouts just related to lower level of sales, if you guys recall, we bring in about 90 days out, we have our orders placed with our Asian vendors.

So there will be some amount of margin degradation in Q1.

But as we -- as our new product mix increases and some of the products that Mark just spoke about, those are -- the gross margin on gross sales level, those are about 40% margins.

So as those mixes come in to '18, we're very positive about margin improvement year-over-year.

Our goal has always been 33% in the short term and we believe that's still a realistic goal.

In fact, if you back out some of the things that happen in monitors last year, we're very close to the 33% on a pro forma basis last year.

So with a new product mix coming in, with some of that incremental gate business that'll hit us back half in 2018, that's very good margin product.

And that will definitely benefit the margin line.

Okay, that's great.

And then, last for me, if you say what you anticipate for a tax rate on an income statement going forward as well on tax reform?

Yes, I think, it's very interesting, and I think everyone on the call should know this onetime impact from tax is really -- it's kind of taking a new account retrospectively everything that's transpired in the tax law.

So it's a large shift to the EPS number.

But going forward, we do expect our federal tax rate to be 22% and the overall tax rate to be less than 30%.

So I think, it's important to know that onetime hit is truly that.

It's a onetime catch up with all the earnings and profit from foreign entities and everything else that we had to do to structure ourselves for the new tax rules.

But going forward, it should be plain vanilla, straight tax rates as far as you know.

(Operator Instructions) The next question comes from Timothy Stavros, who's a private investor.

As you know, I own just under 3% of the company.

I want to give a shout out to you.

I know it's been a difficult year, but I see a company that you're squeezing -- you're working capital reductions -- our working capital reductions and our cost reductions, while still creating a slew of new products, is -- shows that the internal efficiency of the company that you're really, I think, managing it well.

So I'm hopeful for the future and I had few additional questions, but I wanted to first just give some recognition to a year that in certain ways was very good.

First of all, that.

Thank you.

So my questions are this.

Do you see us achieving the holy grail of revenue growth for the year?

I mean, what is your -- and what is the level of new refreshing the line or new products now compared to say, any time in the last decade or whatever you would look at?

I mean, is this a big deal?

Give us a comparison to, you know, past?

Yes, well just talking about product lines we approached in the past.

We have a lot -- we're very wide brand, Tim, so we have to focus on some key win bigger categories -- and of those key win bigger categories are bath, potty, gates, swaddle and new gear intros and we need to stop the decline in the monitoring category.

In those categories, we have -- you hear me mention incremental listings.

And we're achieving significant incremental listings with some key strong retailers in the marketplace.

I'd say, as we get heavier into strollers, that will pave the way for other ancillary gear within a collection strategy, so a fashion strategy.

So we're becoming a bigger player in the stroller category for, let's say, the last 6 years and that's going to continue to happen.

So you're going to see new platforms coming out in strollers, 3D mini, recently set in the marketplace and you'll see the 3D pack coming out in April.

So strollers is a big focus of ours.

We've introduced new platforms in bath and potty and we'll continue to do so.

And categories where we already have very good market share.

And gates is a key category, which I mentioned earlier in the call, significant incremental placements in those categories.

Now with all that said, there's an evening going on in the marketplace with one big retailer falls down, companies like us tend to go elsewhere to try to recoup those sales and one of those big destinations is online.

And that causes some interesting dynamics with retail price compression, with some very hungry competition to pick up incremental sales.

So we're making key strides in those core categories, while not putting as much emphasis on some of our ancillary categories.

And it seems to be bearing fruit, it can never be fast enough.

And let me just say, the products that we are introducing, we have to -- we are putting more of an international eye for those products, so that when we launch them in the United States, very shortly thereafter, we can launch them internationally.

So that's a focus operationally of our company as well.

So it's not a direct answer to your question, I mean, we shifted our focus to core revenue driving categories and we are getting share and share shelf placement, it's just not a quick turnaround.

But items that we do introduce, we want to introduce better and make them stick here in the marketplace, and My Bath Seat, I told you about, we can sell hundreds of thousands of that item and that could be a game changer for our company just in the bath category and give us several million dollars of incremental sales.

So I think, if you check the brand out online, you're going to see we're putting a great commercial effort forward on these product launches, and we're quickly building our review base and all those reviews are mostly positive, which is what consumers want to see.

And I'm pretty proud of the success the team has shown and some of the new product launches we've made.

It's important to note the early indications on the My Bath Seat are very, very positive even though it's not in the full marketplace now, it's select retailers but very positive weekly rates of sale.

Now we were not comfortable though giving guidance, we give some guidance, and I'll talk about that in the second, but not comfortable giving guidance that we'll have revenue growth for the year?

No guidance on revenue growth, correct?

No.

The first quarter, obviously, we want to see what happens there, we've given guidance first quarter being lower and at that point we'll have a better outlook for what goes on throughout the year.

Obviously, we're working through, just as we talked about with that major retail bankruptcy, seeing what comes of that.

So it'd be difficult to know exactly where we are on that to give you a back half understanding what's going to transpire.

Okay.

Just one other thing.

We did give guidance -- you did give guidance on an improved leverage ratio for the year, which I find heartening.

Will that -- and is it your anticipation that, that will be from a combination of not merely working capital improvements, but also an improvement in adjusted EBITDA as well, a combination of the two?

Lower debt and improved operations, if you will?

Right.

I mean we're -- we didn't generate as much cash this year.

We did have that bankruptcy that we had to deal with.

But 2018's cash flow looks decent enough to pay down some debt.

And obviously, there's a factor there with EBITDA.

I'm not saying EBITDA is going to be off the chart better, but it will be able to support the overall paydown and that's what will primarily drive the improvement in the leverage ratio.

I'm sorry, what will primarily improve it?

Sorry.

The cash that we're generating that we're going to dedicate to paying down the debt.

We -- you got to remember last year, we paid down $1.5 million in principal payments alone, but some of that went to the ABL, because we didn't have the cash flow to support it and I think gate team's cash flow looks better to be able to support it (inaudible) to debt paydown.

Okay, very good.

And then, finally, the stock price is neared all-time low.

Obviously, The Street was a bit concerned in the fall about Toys "R" Us.

It seems that you resolved that and got amendments, and you've showed an improved leverage ratio for the year and talked about an improvement for 2018.

And yet, there is an element of, or perception of distress or at least the stock price suggests it.

Can you comment on the bank relationship?

And how you view liquidity?

I mean that second answer is, probably, self evident from what we've been talking about.

The bank relationship and liquidity, and in relation to what the stock price suggests about the company's situation?

Yes, sure.

Look, we've always praised our bank relationship.

We think that's been a key element to us making it through multiple amendments as we went through some difficult times over the course of the last 3 years.

That relationship is still there.

And we will continue to do what we need to do to stay within the levels of the covenants.

Liquidity has been tight since the BRU bankruptcy.

We actually were over advanced for a short period of time there, our banks worked with us in normal fashion to give you that.

So we're very, very encouraged by that relationship.

And we'll continue to build off of that.

Over time, I think, we changed the equity structure, in terms of maybe refinancing a portion of this debt to give us a little more flexibility outside of the covenants, and I think that's an important thing for us to look at in the first part of this year.

So I think, there are some ideas out there that can get us additional liquidity, that can support some strategic projects similar to the racking project that we discussed.

We have a list of other projects that we can do, but they do require strategic capital.

So the idea there is to free up some additional liquidity, that facilitates some strategic projects that can significantly change the outlook of EBITDA.

And if you think about the $700,000 benefit to EBITDA that we can get from this one racking project, we'd need $14 million worth of sales in order to make that happen.

So we're not getting top line growth in certain areas, we're taking the strategic initiative to improve the bottom line results, thus the overall entity value of the company.

And I take it we're not interested in issuing any equity at this level?

You know, that seems like a very dilutive thing to do at this point in time.

We're not leaving that out as an option or anything, but at this point in time it feels that would be a little too dilutive.

(Operator Instructions) There are no other callers on the queue.

This concludes our question-and-answer session.

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

Well, thanks, everybody for attending our conference call.

Challenging year in 2017 for sure, but we're very excited by our new product funnel and what we have coming into the marketplace.

Also very excited about the moves that we're making internationally and their operational improvements.

A lot of good things going on here at Summer.

And we're excited and we're going to set out to do a great job this year in 2018.

So thanks a lot and we'll talk to you next quarter.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.