Summer Infant, Inc. (SUMR) 2018 Q4 法說會逐字稿

Good morning everyone, and welcome to the SUMR Brands' Fiscal 2018 Fourth Quarter Conference Call.

(Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Chris Witty, the moderator.

Sir, please go ahead.

Hello, and welcome to the SUMR Brands' 2018 fourth quarter conference call.

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

I would now like to provide a brief safe harbor statement.

This call may include forward-looking statements that relate to SUMR Brands' outlook for 2019 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 29, 2018 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 SUMR Brands' operations.

For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued yesterday evening.

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 Paul, our new CFO, will go through our financial results in detail.

I'd first like to take a moment to acknowledge and introduce Paul to our listeners.

As some of our long-term shareholders may remember, Paul was our CFO from late 2012 through 2014, prior to his becoming the chief financial officer for Rain Carbon, a global chemical company.

We welcomed him back on November 28 and are pleased by his ability to rapidly provide meaningful contributions even after the many changes that have taken place at the company these past few years.

Paul's extensive experience in operations, corporate strategy, and financial management made him an ideal member to rejoin our executive team at this stage.

It's been great having him on board these last three months.

Just as importantly, as seen in recent press releases, the company will now be known as SUMR Brands going forward.

While this doesn't legally change our name or impact our SEC filings, the move to SUMR Brands allows us to evolve with an ever-changing marketplace.

We have implemented a strategic family-of-brands model that allows for maximum business flexibility and offers a growth multiplier to the total company SUMR Brands.

In the near future, we will have unique websites for each of our consumer-facing brands.

Currently, Summer, Born Free, and SwaddleMe, while a new SUMR Brands website will continue to provide all corporate and investor-related information.

You'll be hearing more about our family-of-brands model and our growth plan.

But now, let me take a step back to review some highlights from the fourth quarter and 2018 as a whole.

As Paul will review in a moment, our net revenue in Q4 declined year-over-year to $40 million, compared with $46.8 million in 2017's fourth quarter.

This largely reflected the impact of the bankruptcy and liquidation of Toys "R" Us, which eliminated roughly $7.2 million of sales, as well as disruptions caused by the recently enacted tariffs on goods from China.

For the full year, we posted net revenue of $173.6 million in fiscal 2018, versus $189 million in 2017, with solid demand across many of our product lines offsetting $22.9 million of lost sales to Toys "R" Us.

Our gross margins remained strong during Q4, as well for the year in total, even as we dealt with tariffs on goods imported from China.

Paul will discuss this more in a moment, but we are optimistic that a trade deal can avert any additional tariffs and are proactively taking steps to reduce the impact of such cost, or pass them along to consumers when appropriate.

With 2018 behind us, I'm pleased to recognize the company's many accomplishments, even in the face of the Toys "R" Us liquidation and the tariffs I just mentioned.

We refinanced the company's debt, streamlined our business, and reduced and refocused our staff to improve our overall operating structure.

These actions support our growth plans with a specific focus on products, brands and distribution.

So while we're not pleased that revenue is down year-over-year, we know we're putting the right strategy in place to drive long-term expansion and margin improvement.

Our confidence is underscored by many aspects of our business that are not always visible on a quarter-to-quarter basis.

For example, while overall revenue fell in Q4, reflecting product shipments to customers, almost all of our core categories grew from a point-of-sales perspective.

This indicates higher demand by end consumers, which should result in greater revenue in future quarters.

We certainly know we need to start delivering more consistent top line growth and superior earnings, but I wanted to provide some perspective on the many aspects of our company that changed for the better last year, reflecting an improved corporate culture and strengthened focus on our customers' and consumer needs.

Now let me talk more about the growth plans that I touched on earlier.

We continue to expand our product offerings across the company's existing categories.

In bathing, our new Clean Rinse bather provides three positions of decline and the opportunity to be used on the counter, in the sink, or in the tub.

And we've already in stores with several color selections.

We're also launching additional colors options to expand on the success of the popular My Bath Seat, which provides parents with a helping hand at bath time.

When it comes to potty training, our original My Size Potty continues to dominate this category and assist parents with the often daunting task of training young children.

In late Q4, we launched a product extension called the My Size Potty Train & Transition, that has everything consumers love about the original, but also includes a removable topper for easy transition to an actual toilet.

In addition, a new Learn-to-Go Potty gives consumers an easy-to-use potty training solution at a lower price point.

In baby monitoring, we've expanded on the popular Baby Pixel platform with two new monitors in the market this quarter, the Baby Pixel Cadet, which offers the consumer-loved SleepZone technology of the original Baby Pixel, but at a more affordable price point; and the Baby Pixel Zoom HD, which provides the same great features, along with a high definition screen for incredible picture quality.

Our gates continue to do well across the board, and we're also preparing to launch a new collection of Pop products as well to expand the number of locations selling our 3Dmini and 3Dlite strollers.

Under the SwaddleMe brand, our collection of specialty blankets continues to be a top choice of consumers, and more innovation is being developed.

I've touched on just a few of the many recent product introductions, and there's plenty more to come.

In regards to branding, I spoke briefly about our family-of-brands model and the reasons for this evolution.

Having multiple consumer brands allows for maximum business flexibility and offers a growth multiplier to the total company, SUMR Brands.

We now have brands that reach varying consumer demographics, retailers, and channels, allowing us to appeal to a broader audience.

Our current consumer facing brands are Summer, Born Free, and SwaddleMe.

This quarter, you'll see the relaunch of our Born Free brand for consumers interested in well-designed essentials that are irresistible by design.

Born Free products will be sold on shopbornfree.com.

Its unique new line will include a baby carrier, combination bouncer-rocker, entertainer, multiple play yards, and a stroller.

The entire collection will be available together and has already received high accolades from many of our channel partners.

We're energized by a clear vision to further build awareness and loyalty of our multiple consumer brands as we expand the product offerings of each as well.

In regard to distribution, we continue to focus on e-commerce destination, direct-to-consumer, and brick-and-mortar opportunities and strategies to pursue additional penetration with leading retailers such as Walmart, Target, buybuy Baby and others.

As noted last quarter, we saw double-digit increases in sales last year across these channel partners and expect such trends to continue.

In Q4 specifically, we saw nice gains across most of our core product lines on a point-of-sales basis as I mentioned earlier, and also racked up double-digit growth on shipments of potties and positioners.

Given our extensive new product rollouts, brand strengthening initiatives, and focus on channel differentiation at key points of distribution, we're upbeat about 2019.

Before turning the call over to Paul, I'd like to thank our employees for the passion and dedication during this transformational change at the company, particularly after coming through a turbulent 2018.

The new SUMR Brands is now positioned for stronger growth and higher operating performance to the benefit of our customers, employees, and shareholders alike.

I'm excited about the future and look forward to talking to you as the year progresses.

We'll also be at the upcoming ROTH Conference in California on March 18, so please look us up if you happen to be there.

With that, I'll turn it over to Paul to review our financial results in detail.

Paul?

Thank you, Mark, and good morning, everyone.

It's great to be back at SUMR Brands, and I'm really looking forward to seeing the company grow and execute on a strategy to improve operating results and build shareholder value.

As a reminder, our 10-K and related press release was issued last night.

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

Fourth quarter net sales were $40 million compared with $46.8 million in the prior year period.

Revenue fell year-over-year primarily due to $7.2 million in lost sales tied to the bankruptcy and liquidation of Toys "R" Us.

As Mark noted, however, we were pleased to again achieve improved distribution at a number of retailers leading to nice double-digit growth across potties and positioners.

While some lumpiness remains in quarter-to-quarter shipments, the impact of ongoing tariffs cannot be understated.

We remain cautiously optimistic about the outlook for 2019, particularly given our growth plans and the company's focus on improving products, branding, and distribution, as Mark discussed.

Gross profit was $12.5 million for the quarter of fiscal year 2018, versus $14 million in the prior year period.

And our gross margin as a percent of sales was 31.3% and 29.8%, respectively.

The company was able to achieve higher gross margin year-over-year on lower sales, even as the fiscal 2018 fourth quarter was slightly impacted by tariff related expenses not transferrable to customers during the period.

The fiscal 2017 fourth quarter, by contrast, included a $0.2 million in losses on the sale of inventory below cost related to Toys "R" Us bankruptcy, and the prior year quarter was also impacted by price reductions of certain monitor products at the end of their lifecycle.

Due to our strategic pricing initiatives, further cost reductions, and new product introductions in 2019, we anticipate gross margins remain solid going forward, notwithstanding any impact on ongoing tariffs on goods from China.

It remains a possibility that such tariffs may increase if a trade deal is not consummated.

In that scenario, margins and revenue could be impacted if we cannot adequately pass along higher prices to consumers.

As mentioned last quarter, we have taken measures to minimize this consequence by modifying our product mix when possible to favor U.S. factories and other non-tariff impacted locations, as well as renegotiating costs with our Chinese supply base.

Selling expense was $3 million in the fourth quarter of both 2018 and 2017.

As a percent of net sales, selling expense was 7.5% in fiscal 2018 versus 6.4% last year, reflecting increased co-op advertising and freight cost as a percent of sales.

General and administrative expenses were $9.3 million in the fourth quarter versus $8.8 million in the prior year period.

While fiscal 2018 benefitted from previously implemented streamlining initiatives, the quarter included $0.4 million of severance and an additional $0.4 million of one-time costs as follows.

First, we incurred $0.3 million of incremental logistics and employee expenses to bring extra inventory into our California facility prior to additional tariffs being implemented.

And second, we booked a $0.1 million bad debt reserve due to a small retail customer bankruptcy.

Conversely, the fourth quarter of fiscal 2017 included the reversal of $0.6 million bad debt charge originally taken in the third quarter of that year related to Toys "R" Us bankruptcy.

Including the impact of all such items, G&A as a percent of sales was 23.2% in 2018 fourth quarter, versus 18.8% in 2017.

We believe G&A should generally trend below 20% of net revenue during 2019.

Interest expense was $1.1 million in fiscal 2018 versus $0.8 million last year, with year-over-year increase primarily due to the company's refinancing of its bank agreements.

Our cash interest expense was approximately $0.8 million in Q4, and we made our first $219,000 quarterly payment on the term loan in December.

The company reported a net loss of $2 million, or $0.10 per share in the fourth quarter of 2018, compared to a net loss of $1.7 million, or $0.09 per share in 2017.

Adjusted EBITDA for the fourth quarter of 2018 was $0.8 million versus $1.8 million for the fourth quarter of 2017.

Adjusted EBITDA in 2018 included $0.5 million in bank permitted add-back charges compared to $0.5 million of deducted credits in the prior year period, primarily reflecting the year-over-year changes in bad debt expense and other one-time items I discussed.

Adjusted EBITDA as a percent of net sales is 2.1% in fiscal 2018, versus 3.8% last year.

Now turning to the balance sheet.

As of December 29, 2018 Summer Infant had approximately $0.7 million of cash and $47.9 million of bank debt, compared to $0.7 million of cash and $48.1 million of bank debt as of December 30, 2017.

Inventory as of December 29, 2018 was $36.1 million compared to $34 million as of December 30, 2017, with the increase both sequentially and year-over-year reflecting our efforts to build inventory before Chinese tariffs went into effect.

We entered the year with inventory turns of approximately 3.1, which is unusually low, primarily due to this issue, and we anticipate it will return to normal levels of 4 or above as the year progresses.

Trade receivables at the end of the year was $31.2 million compared to $36.6 million at the end of fiscal 2017.

Accounts payable and accrued expenses were $37.1 million as of December 29, 2018, compared to $34.5 million at the beginning of the fiscal year.

The company generated $5.5 million in cash from operations during fiscal 2018, compared to $1.2 million in 2017.

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

Thank you.

(Operator Instructions) Our first question today comes from Dave King from Roth Capital.

Well, I guess first off, just trying to get a better sense of the revenue puts and takes.

So obviously BRU was a big piece of the decline, or pretty much all of it.

If I back that out, that implies flattish revenues, maybe up a little bit.

But then, Mark, you talked about double-digit increases across some of your key channel partners.

I guess I'm just trying to get a sense of what the offset might have been to those double-digit increases and just trying to get a sense of some of the other things that might be weighing on revenue.

Thank you.

Yes.

Thanks, Dave.

Yes, again, we've had double-digit increases across many of the channel partners that I mentioned previously.

They haven't totally offset the BRU impact.

I will say rates of sale through the register on our core categories are up, but we lost some sales on other categories that were impulse purchases at a Babies "R" Us, and you don't just replace those impulse purchases with the all -- other accounts.

So that's a negative.

And I would say that you do lose a big presence in certain categories.

And we had 16 feet of SwaddleMe branded specialty blankets in Babies "R" Us, and we actually comp that with BRU going out of business.

You don't comp every category when a big retailer like that goes out of business.

So that kind of gives you a little bit of a picture of the puts and takes.

Okay.

So as we talked in the past, then, I think there was a hope that some of your other key customers were giving you incremental placements to pick up some of that BRU products, customer, or what have you.

Did that occur at all in the fourth quarter or is that still coming or is there something else?

Yes.

Glad you brought that up.

The incremental placements are real, and we continue to get those at the channel partners that were mentioned, and we'll introduce over 35 new items in the online environment.

So I'm proud of our product development team and marketing teams for continuing to pump out the innovation and the brand enhancements.

So, yes, the incremental placements will happen and we'll start to comp the half-year placements on things like our gate program at Target, incremental sales on a gate program at Lowe's, incremental sales in booster seats that started in the tail end of 2018, and other categories -- the like.

There is incrementality there, so we feel that there will continue to be double-digit growth with those key channel partners.

Okay, thanks for that.

And then I guess one more just on the tariffs, more still on the revenue side.

I think you'd talked a bit about some negative impact there.

Just to try to better understand that, is that -- with your customers delaying or holding off on purchasing, is that them -- you trying to pass along the impact of the tariffs and then them just holding off as a result of that, or is it general uncertainty resulting from the tariffs?

And then I guess just how material of a dollar impact did that have on revenue in the quarter and how much of it do expect to recoup, if any, in Q1?

Thank you.

Yes.

The tariff impacts did cause disruption in ordering for sure.

When you're passing price increases along or changing out units just because it's a different price point, that sort of thing, those are real impacts to the business.

And if I was a big box retailer at the end of the year, I would have loaded up on higher retail item goods than lower retail item goods, so you see a mix of ordering patterns that, let's just say, weren't expected to the degree that they occurred.

But we feel like we've rejiggered our merchandising as we need to, and we're re-shoring or sourcing items from non-tariff-affected manufacturers to get ahead of that tariff issue in the future.

(Operator Instructions) Our next question comes from Timothy Stabosz, who is a private investor.

I own about 4% of the company.

So, let's see, here.

I didn't hear, and I haven't looked at the K yet.

I guess it's out already.

Are we giving any guidance on revenue, or are we giving any guidance on, say, a year-end 2019 debt level?

Any kind of guidance, or no?

We don't give guidance typically, Tim.

We're looking to grow in 2019.

Pointing back to what we talked about with some of our key channel partners and opening up new points of distribution, we will get back to growth.

Yes.

Timothy, answering your question on debt level, we have seen an increase in our inventory position in Q4, and our inventory turns are lower than we would like them to be.

We are projecting that we will get back to our normal level of 4 or above turns in inventory, which will free up some cash.

Now, we purposely increased our inventory in the fourth quarter for several reasons.

Number 1 is that we wanted to get ahead of the curve of a potential additional 15% tariff that was actually scheduled to go into place at the end of the year, so we did bring in products that would be associated with that additional 15%.

And we also brought in inventory to support some of our customers.

We had found ourselves being too low on inventory in the third quarter and was not able to fill all of our orders completely.

So at this point, we probably have inventory -- we're over inventoried by about probably $6 million that we will be bleeding off over the next couple of months.

So I believe that by year-end, not that we're paying back principal, mind you, but our asset-based loan will probably be lower by several million dollars.

Thank you for the color.

Can you say a bit more about TRU product that's still in the pipeline, as far as wholesalers and jobbers or whatever you call them, that bought stuff and now we're seeing it online?

Did that hurt us more than we thought -- obviously I guess that's hard to measure -- in the quarter?

And do we have a way of measuring, when the whole pipeline is cleared out, that discounted product?

Yes.

I would say, just looking at the tail of that, that was a major distribution point for the whole baby and juvenile industry.

I mean, you read about it in toy.

I think toy was down 2% through NPD data.

So it creates a lot of messiness in people who had backed up inventories.

I'd say from a backed up inventory perspective, we were actually in a decent situation where we didn't need to just unload goods.

But I would say a lot of competitors and just players in the space continue to unload product and causing retail compression within the space as well.

Online compression has been intense, and I'm just looking at some higher retail items like travel systems out there, and they are typically over $300, are just breaking $200 retail price points.

So there's a lot of messiness in the market still.

I think you'll see 2019 as a step in the normalization of the market, but there is a lot of compression now.

I can't give you how much effect is still left, other than we monitor the price compression in the categories, and it is definitely compressed.

And as far as our channel partners, the big channel partners, the big discounters, if there's any particular products that are being affected with this on -- and in particular, we're not losing -- they're not pulling our stuff off the shelves or anything.

They understand that this is a temporary phenomena.

Do we have any issues with their sales of this or that product are disappointing to them, and because of the TRU issues, and we're losing shelf space in some areas or anything like that?

Yes.

I wouldn't say we're losing shelf space.

We had taken good steps to become retail price integrity strong and made significant steps on our channel strategy.

So, no, we can still talk to incremental doors or placements with our key channel partners.

Yes, there's some fall-off, but I'd say the incrementality outweighs any SKU placement falloff.

(inaudible)…

Okay.

I have one final question, here.

Sorry about that.

I have one final question, here.

Paul, I was wondering if you could address -- I think this is important -- I think the quarter was disappointing for some.

Not taking you out here to the cleaners, Mark, but the reference was that we expect [a good one] in the quarter.

And so the reason I'm bringing that up is not to give you a hard time but to make a point about something that you guys did that was really important last year, and that was the refinance.

So some people out there are worried that, oh, it's a tough quarter here in Q4 and that there's liquidity problems or something, which -- and I just want you to walk us through if you can, or at least clarify what you did, how much borrowability we have, where we were a year ago in February, where we are now in the significance of a quarter here that was a hiccup, and not a quarter anyone liked, obviously, but where we stand on liquidity, where we stand on balance sheet strength, because I think it's important.

Yes, no, very good question.

And when I look at our year-end availability is rather strong at $12 million.

And as you know, we have 2 layers of debt.

One is a term loan with Pathlight, and the other one is an ABL with Bank of America.

We did end our year with more inventory as we would like, but for the right reasons.

We will continue to have some inventory coming in to get us through Chinese New Year.

So we will see some use of the availability that we ended the year with to pay our vendors and actually turn that into cash when we sell it.

So I feel comfortable with our position today.

I will say that we are looking at getting our inventory turns back up to 4 or more, where actually our goal is to get it up to 4, and by year-end, 4.2 turns.

Our receivables are solid.

I will say that our collections are going very well with DSO at 70, which is pretty typical for us.

We can do a little bit better, I believe.

But our focus this year is going to continue to be working capital management, and that means across all of the three big ones -- AP, AR, and inventory, and how do we better manage working capital to minimize the amount of ABL borrowing that we need to do.

So right now, we feel pretty comfortable, but I will say that, because we brought in inventory, there will be a decline in availability until we push through that inventory later on in the second quarter.

But this is, as you know, Tim, this is a seasonal business somewhat.

And bringing up inventory in the first quarter to offset Chinese New Year deliveries is pretty typical for our type of business.

Okay.

And the other important point I would just conclude with is that this new facility you got back in mid-year last year is very covenant light compared to the old one, so we have no concerns with covenants.

Correct?

It is very covenant light.

I would say that when they put it in place last year, it was a good -- it was a very good loan agreement that we have for our company in giving us some flexibility.

Okay.

Thank you very much.

I look forward to the launch of Born Free.

Thank you.

(Operator Instructions)

All right.

Well, we thank everybody for joining the call, and I just want to put a thanks out to the SUMR employees who have worked hard to continue to deliver great brands and products and continue to do so.

Look forward to following up with our investors as the quarter goes on, and look forward to a positive 2019.

Ladies and gentlemen, that does conclude today's conference call.

We do thank you for joining today's presentation.

You may now disconnect your lines.