Summer Infant, Inc. (SUMR) 2019 Q1 法說會逐字稿

Good morning, and welcome to the SUMR Brands' Fiscal 2019 First Quarter Conference Call.

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

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

Please go ahead.

Hello, and welcome to the SUMR Brands' 2019 First Quarter Conference Call.

With me on the call today is the company'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, as quarterly reports on Form 10-Q 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, may 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 now turn the call over to Mark Messner.

Mark?

Thanks, Chris, and good morning, everyone.

We appreciate you joining our first quarter conference call today.

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

We reported net sales of $42.5 million for the quarter, up slightly year-over-year and higher sequentially from the fourth quarter.

These results were in line with our expectations and reflect improving demand trends that more than make up for the $3 million of lost revenue from last year's Toys "R" Us liquidation.

Strong sales across a number of product categories, including gates, potties, bathers, positioners and strollers to name a few have offset the ongoing negative impact from 10% tariffs imposed on goods imported from China.

These tariffs have affected price points, disrupted the flow of merchandise and caused delays in certain product categories being stocked during the quarter.

So we're pleased that in spite of such issues and the Toys "R" Us impact, we were able to post modest top line growth.

In addition, point-of-sale data is indicating a strong sell-through of products, pointing to further revenue expansion going forward.

I'll speak to this more in a minute, but I'm cautiously optimistic about the revenue outlook for the quarters to come.

We took further steps in Q1 to also enhance our cost structure and improve bottom line results.

As Paul will discuss momentarily, we reduced SUMR Brands' workforce by about 7% during the period.

Surgically, rightsizing our overhead to better align the team with the company's growth strategy or core capabilities.

Even while investing in product development, branding and a channel optimization, we took steps to focus the company and reduce overhead inefficiencies.

At the same time, we finalized cost-related supply chain initiatives in the quarter, which we expect to positively impact results during the remainder of 2019.

Overall, we anticipate our efforts will lead to higher top line performance, while the company benefits from an improved growth trajectory.

Now let me discuss some product trends in detail, beginning with our new Born Free brand.

Launched in late March, this is an exciting addition to our company's portfolio of innovative consumer-centric offerings.

After many months of product development, the Born Free brand brings together a versatile suite of juvenile gear that we call irresistible by design.

Initial products under this umbrella include a compact stroller, baby rocker bouncer, stationary activity center, 2 play yards and a carrier, which are currently being sold on our own shop bornfree.com website, along with Amazon and Select Specialty retailers.

While still early in the launch period, feedback by customers has been very positive.

This is another example of how we're developing brands and products to address specific consumer needs and stimulate demands across a variety of price points, ultimately leading to market share capture through the breadth and depth of our offerings.

We'll continue to leverage our portfolio of brands and develop their future potential with a goal of accelerating growth, enticing new consumers and enhancing long-term margins.

I'm proud of our initial Born Free suite of products and believe they offer a new consumer audience in many wonderful ways to connect with their child.

During the quarter, we saw strong demand across many core product categories, as I mentioned earlier, and we're pleased by point-of-sale trends, which normally serve as a predictor for future orders.

The second quarter POS figures also look favorable with the demand for many products up double digits across our major channel partners, who have effectively taken up the void left by the Toys "R" Us liquidation.

I'm pleased with year-over-year sales growth that we continue to see for gates, potties, bathers, soothers, strollers and certain other products in our portfolio.

In addition, revenue across our top 4 customers, rose solidly in double digits year-over-year, that's a major accomplishment indicative of stronger channel management that has led to retail price integrity, new product introductions and better brand positioning in the marketplace.

Our innovative concepts are connecting with consumers, further enhancing our brand equity.

Our one bigger or core categories continue to resonate with parents, and we plan further investment to bring new products to market this year.

We're focused on category expansion, reinvigorating certain existing lines, successfully moving consumers up for innovative applications and developing unique intellectual property for new solutions and larger baby care.

We've recently launched a new Pop of products that's doing well right out of the gate, and I have also introduced a new style bathing to the market with our Clean Rinse bather, expanding the bathing category just like we did with our full line of potties and other areas where we have depth.

We're constantly working to move consumers up with enhanced product solutions within our core categories while looking into expand appeal to a wider audience at the same time.

We're also continuously thinking about ways to broaden, refresh and reinvigorate all of our focus categories.

One such example is under our SwaddleMe brand.

The innovative solutions our team have designed in the specialty blanket category are really resonating with consumers.

This has enabled us to gain incremental shelf placement at all our major retail partners as we can -- have continued to delight customers and consumers alike.

Overall, we have a large swath of new offerings in the pipeline, and it comes down to execution and make sure they succeed in the marketplace.

I'd like to add that SUMR Brands recently hired Scott Doerstling, as Senior Vice President of North American sales.

Scott comes to us with over 20 years of experience in the juvenile industry across many premier customer product companies and will spearhead efforts to increase market penetration and better manage our channel relationships.

He brings a disciplined approach and is committed to driving higher sales and improved overall results.

Scott has worked for such well-known brands within the baby sector as Diono, Britax and Newell Brands, and we're excited to have him on the team.

While I'm pleased with the positive trends in Q1 and the outlook for Q2, we must remain cautious as we face challenges due to our higher-than-desired debt level and the need to optimize our established infrastructure by driving higher sales volumes.

Our focus is on steady, responsible top line growth, while maintaining tight control over expenses.

We will continue to make prudent investments to stimulate revenue expansion, such as growing our third-party logistics center in China dedicated to international markets and driving innovative product development across categories -- core categories as well as expanding into baby gear, which we expect to launch in the first quarter of 2020.

Before turning the call over to Paul, I'd like to take a moment to address the recent comment made by the current administration regarding the risk of an additional 15% tariff on goods sourced from China.

While we were previously optimistic that the additional tariff would not become effective due to ongoing trade negotiations, we have continued to take steps to mitigate the cost of such an action where it to occur.

We have negotiated cost decreases from many of our suppliers, moved production for some affected items to tariff-exempt regions and shared cost increases with retail partners to name a few of the steps we've already taken.

We will continue to work with our customers and suppliers and accelerate efforts to resource products to nonaffected areas when appropriate to offset the cost of any additional tariffs.

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

Paul?

Thanks, Mark, and good morning, everyone.

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

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

First quarter net sales were $42.5 million compared with $42.1 million in the prior year period.

The company saw growth across core product categories such as gates, potties, bathers and positioners, more than offsetting the negative impact from the 10% tariff on goods imported from China and approximately $3 million of lost sales due to the liquidation of Toys "R" Us.

At this point, we remain cautiously optimistic that the second quarter should benefit from improving demand trends along with seasonal factors.

Gross profit was $13.5 million for the first quarter of fiscal 2019 versus $13.6 million in 2018.

And our gross margin as percent of sales was 31.6% in 2019 versus 32.3% last year.

The margin decline year-over-year was primarily due to product mix and the impact from tariffs on goods imported from China, which reduced gross profit by approximately $300,000 due to additional freight and warehousing cost tied to the buildup of inventory.

As I mentioned last quarter, we've preordered certain products to get ahead of the anticipated higher tariffs and this impacted the level of inventory and associated cost, in both the first and fourth quarters.

Going forward, assuming no additional change in tariffs, we expect inventory levels to come down to more normal levels.

Selling expense was $3.4 million in the first quarter of 2019 versus $2.7 million last year.

As a percent of net sales, selling expense was $7.9 million (sic) [7.9%] in fiscal 2019 versus $6.4 million (sic) [6.4%] in 2018, reflecting higher cooperative advertising cost and freight expense, both related to customer mix.

The prior period, by contrast, included large component of direct import sales.

General and administrative expenses were $9.4 million in the first quarter versus $12.6 million in the prior year period.

Note that the first quarter of 2019 included approximately $0.6 million of severance costs related to a 7% reduction in the company's workforce.

While this action was taken near the end of Q1, cost savings are expected to positively impact future quarters.

The first quarter of 2018 conversely included a $2.3 million bad debt charge related to the Toys "R" Us bankruptcy and a $0.4 million of severance cost associated with prior cost-reduction initiatives.

G&A as a percent of sales was 22% in 2019 first quarter versus 29.9% in 2018.

And as mentioned last quarter, we believe G&A should generally trend lower going forward due to steps taken to streamline the company.

Interest expense was $1.2 million in fiscal 2019 versus $0.8 million last year, with the year-over-year increase primarily due to the company's refinancing of its bank agreements, an increase in debt levels and higher interest rates.

The company reported a net loss of $1.4 million, or $0.07 per share in the first quarter of 2019 compared with a net loss of $2.7 million or $0.15 per share in 2018.

Adjusted EBITDA for the first quarter of 2019 was $1.5 million versus $1.4 million for the first quarter of 2018.

Adjusted EBITDA in 2019 included $0.7 million in bank permitted add-back charges comparing with $2.9 million in the prior year period, primarily reflecting the year-over-year changes in bad debt expense and other items I discussed.

Adjusted EBITDA as a percent of net sales was 3.4% in fiscal 2019 versus 3.2% last year.

Now turning to the balance sheet.

As of March 30, 2019, Summer Infant had approximately $0.9 million of cash and $56.6 million of bank debt, compared with $0.7 million of cash and $47.9 million of bank debt as of December 29, 2018.

The higher debt level this year generally reflects the levels of inventory related to tariff planning, as I discussed last quarter and timing of customers receivable collections as well as a reduction in outstanding vendor payments.

Inventory as of March 30, 2019 was $32 million -- excuse me, was $34 million compared to $36.1 million as of December 29, 2018, with both periods higher than normal due to a build-up in inventory related to the Chinese tariffs.

Our goal is to reduce inventory levels to around $30 million and achieve inventory turns of 4 or better by the end of Q3.

Trade receivables at the end of March was $34.6 million compared with $31.2 million at the end of fiscal 2018.

Days sales outstanding or DSO are tracking well to our goal of 70.

Although the year-over-year trade receivables comparison reflects write-down of all remaining Toys "R" Us balances in 2018.

Accounts payable and accrued expenses were $30.9 million in -- on March 30, 2019 compared to $37.1 million at the beginning of the fiscal year.

Accounts payable have returned to more normal levels as inventories in Q1 and Q4 have been paid.

The company used approximately $7.5 million of cash from operations during the 3 months ended March 30, 2019, reflecting the changes in working capital that I discussed, compared to generating $3.7 million in the prior year period.

At the end of the first quarter, we had approximately $6.5 million of availability under our line of credit.

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

Over to you, operator.

(Operator Instructions) And it appears that there are no questions at this time.

This concludes our question-and-answer session.

I'm sorry, we -- let me see, I think we may have gotten a question.

(Operator Instructions) The question is from [Ed Reese], a private investor.

Mark, congratulations on the quarter.

It appears that you guys [know].

So when you look at the pickup in -- that you guys cited in terms of demand and overall better sales across some of your other categories or other retailers that are kind of picking up from the Toys "R" Us as Toys "R" Us has gone up.

What do you attribute that pickup?

Has it just been something that has taken some time for some of these channels to eventually pick up that slack?

Or do you think your products are coming out?

What you think it's [attributable to]?

I think it's attributable to a couple of things.

Yes, the dilution of Babies "R" Us, some of these retail partners are winning a lot bigger so there is growth there.

But certainly, the introduction of new products and just Summer being accepted by these retailers as a growth partner also is a big contributor to the growth.

So those trends continue to be positive, and we're going to continue to ride that wave.

Okay.

And just maybe one for Paul.

In terms of -- I was trying to understand the change that kind of happened late in the quarter on some of your agreements.

You mentioned a -- something in terms of a change in amounts or account with Target.

And I was just trying to understand what that was exactly?

Yes, Ed.

Target has been one of our real growth customers for us, and we've done very well placing new products with them, and conversely what we see is that our customer receivable with them is actually growing very nicely because of those higher sales with them.

One of the things that we actually found when looking at our loan agreements is that the customer concentration for receivables for that customer happened to be too low.

It was positioned at 25%, which was actually limiting our ability to use those receivables as available collateral to borrow on the ABL.

So we -- as we went back to our bank partners and both Bank of America and Pathlight have been excellent supporters and partners with us.

They've allowed us to increase their concentration percent to 35%, allowing us to get full benefit of the growth with Target.

Okay.

Okay.

I appreciate it.

And guys, again, congratulations on the quarter, and good luck in the next quarters.

Appreciated.

There appear to be no further questions in the question queue.

This will conclude our question-and-answer session.

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

Thank you all for joining us on for today's call, and thank you to the Summer team.

We look forward to speaking to you next time.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.