Summer Infant, Inc. (SUMR) 2019 Q2 法說會逐字稿

Good day, and welcome to the SUMR Brands' Fiscal 2019 Second Quarter Conference Call and Webcast.

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

I would like to now turn the conference over to Mr. Chris Witty, Vice President, Investor Relations.

Please go ahead.

Hello, and welcome to the SUMR Brands' 2019 Second 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, its 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 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 a 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 second 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 $46.4 million, up 9.1% over the first quarter, reflecting seasonal factors and overall higher demand.

We benefited from positive sales trends year-over-year across a number of key product categories, including potties, gates, strollers, bathers, positioners and monitors.

Notably, this marks the first time in many quarters that monitors posted growth, underscoring our new product development initiatives and the hard work that's taken place to make up for the lost sales at Babies "R" Us.

I'm pleased with this turnaround, and I'm cautiously optimistic about the overall demand dynamics across our product portfolio heading into the second half of 2019.

We saw a nice year-over-year growth across our top three customers, even as total revenue was off 2.6% versus 2018, reflecting lower sales across our mid-tier and specialty challenged partners as well as the ongoing impact from tariffs on Chinese goods now at 25%.

As we said in previous quarters, we're attacking this issue head-on and continue to manage costs, resource away from China when appropriate and negotiate new pricing with our customers.

Been a challenging time to be sure but our results reflect focused management and the dedication of our entire organization.

In addition, during the second quarter, we hired Brian Hultz as Director of Sales to drive new business development, particularly across mid-tier and specialty accounts, where our performance has lagged this year.

Brian brings over 20 years’ experience in the juvenile space, including positions at Graco and other well-known organizations and was most recently at BabyTrend, a leader in car seats, strollers and many traditional gear related products.

We look forward to him focusing his efforts on expanding distribution with certain retail customers, new business development and improved channel management.

Aside from our top line results, we also marked several other accomplishments this quarter.

As Paul will review further in a moment, we posted significantly better bottom line numbers versus the first quarter, reduced G&A by 9.1% year-over-year, generated $2.4 million of cash, paid down debt and increased inventory turns.

These achievements speak to our ongoing efforts to reduce working capital, streamline our operations and accelerate growth.

I'm pleased with the progress we've made these past 2 quarters, which position us for better performance going forward, even in the face of an uncertain tariff environment.

Now let me discuss some product and marketing trends in detail.

First, let me just emphasize how favorably our core channel partners are viewing our products this year: Walmart, Target, Amazon and buybuy Baby, to name a few, are telling us they appreciate our innovation and look at us as a growth vendor.

They're accepting more of our innovative concepts, we're gaining shelf space, and together, we're benefiting from solid margins on many products within our key categories.

We just found out that another of our strollers will be picked up by Walmart and our Lowe's business has literally exploded, up 27% year-to-date since introducing new products there earlier this year.

We expanded the placement of potties, strollers and bathers across the board with more to come.

Make no mistake, the competition for shelf space has been fierce as the real estate and brick-and-mortar is smaller, which makes our success that much more impressive.

At the same time, as discussed last quarter, with our new Born Free line, we continue to emphasize online introductions for a variety of new products.

We pumped out many new innovative concepts that automatically get placement at Amazon, so we focus on connecting with consumers through our own social channels and websites.

In a very busy time with many successes, but we know we need to improve domestically with new channel partners, mid-tier and specialty accounts, while at the same time, increasing our international presence.

To that end, our distribution center in China became fully operational during the quarter, targeting overseas markets outside of the U.K. We also recently participated in the Children Baby Maternity Expo or CBME in Shanghai, China, which has rapidly become a respected trade show for juvenile and infant products.

We will likewise be attending the Kind + Jugend show in Cologne, Germany during September.

We're seeing a lot of positive interests in our product portfolios to ramp up line reviews for orders later this year, and the accolades are numerous.

Some commentary we've heard include statements such as you guys have really got it together with regard to the innovation we bring into the market.

There'll be an incremental product placements at brick-and-mortar stores this year, but the number of items we'll be introducing online is much -- a much bigger SKU count.

As can be seen this quarter, we've invested heavily in marketing and advertising to drive our e-commerce sales, and will continue to do so, given our success to date.

Our Born Free brand is ramping nicely and getting good reviews.

So we feel optimistic about this new concept, along with our other brands going forward.

We remain focused on taking steps to accelerate growth, reduce costs and strengthen the balance sheet.

We're on the right path to profitability and will continue to work towards decreasing our debt load and delevering the company.

In the near term, to mitigate the ongoing tariffs on goods from China, we're working hand-in-hand with our channel partners and suppliers to resource where appropriate, raise prices and adjust distribution channels for individual products.

We've been doing that since last year and have become adept at rapidly responding to the situation in a way that safeguards our retail customers, minimizes the impact to the end consumer and insulates margins as much as possible.

We continue to resource to tariff exempt areas as part of our ongoing business practice, and we'll look for manufacturing efficiencies as a regular course of business.

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 were issued last night.

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

Second quarter, net sales were $46.4 million, up 9.1% compared with $42.5 million for the 3 quarters -- for the 3 months ended March 31, 2019, but down 2.6% from 2018 fiscal second quarter.

The company saw a year-over-year growth across core product categories, including gates, potties, strollers, monitors, bathers and positioners, but sales were negatively impacted by the 25% tariff on goods imported into the U.S. from China by lower revenues from overseas and across mid-tier and specialty accounts and the impact of foreign exchange.

We remain cautiously optimistic about growth for the remainder of 2019, although the second quarter normally benefits from seasonal purchasing trends.

As Mark mentioned, we are investing in e-commerce advertising as we focus our resources on growing this channel.

We recently opened an international distribution center in China to fuel overseas expansion and now have dedicated personnel to reverse the declining trends in specialty and mature accounts.

Gross profit was $14.8 million for the second quarter of fiscal 2019 versus $15.4 million in 2018, and our gross margin as a percent of sales was 32% 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, including additional freight and warehousing cost.

As Mark mentioned, we are actively working on mitigating the impact of the tariffs, which have risen to 25%, and we are actively managing our inventory levels and expect them to be reduced further going forward.

However, tariffs may have a greater impact on margins in Q3 and Q4 than the first half of the year.

Given that the additional increase took effect on May 10, it will take time for the price adjustments to flow through to our channel partners and customers.

Selling expense was $4 million in the second quarter of 2019 versus $3.1 million last year.

As a percent of net sales, selling expense was 8.7% in fiscal 2019 versus 6.5% in 2018, reflecting higher advertising costs this year, primarily tied to product launches and online marketing initiatives.

The second quarter of 2018 by comparison had a large share of direct import sales, which have no program costs.

General and administrative expenses were $8.5 million in the second quarter versus $9.4 million in the prior year period.

And G&A as a percent of sales was $18.4 million (sic) [18.4%] last year versus $19.7 million (sic) [19.7%] in 2018.

This year-over-year decline reflects lower labor cost and other expenses due to the company's many streamlining initiatives undertaken over the past year.

Interest expense was $1.3 million in fiscal 2019 versus $1.4 million last year.

Note that the 3 months ended June 30, 2018, included a write-off of $0.5 million of previously unamortized finance fees associated with the repayment of debt tied to the company's June 2018 refinancing.

The company reported a net loss of $0.2 million or $0.01 per share in the second quarter of 2019 compared to net income of $0.3 million or $0.02 per share in 2018.

Adjusted EBITDA for the second quarter of 2019 was $2.4 million versus $3.3 million for the second quarter of 2018.

Adjusted EBITDA in 2019 included $0.1 million in bank permitted add-back charges compared with $0.2 million in the prior year period.

And adjusted EBITDA as a percent of net sales was 5.3% in fiscal 2019 versus 7% last year.

Now turning to the balance sheet.

As of June 29, 2019, Summer Infant had approximately $0.6 million of cash and $54.6 million of bank debt, compared with $0.7 million of cash and $47.9 million of bank debt as of December 29, 2018.

Debt was reduced versus the first quarter of fiscal 2019 as the company generated approximately $2.4 million of cash from operations during the period ended June 29, 2019.

We will continue to use cash flow to delever the balance sheet going forward.

And we do not anticipate large outlays of capital spending for the remainder of this year.

We are partnering with our suppliers that share in the cost of new product development, as we take a hard look of improving return on capital going forward.

Inventory at the end of the second quarter was $32.6 million compared with $36.1 million as of December 29, 2018, reflecting ongoing working capital management and inventory turns improving to 3.9x.

Our goal remains to reduce inventory level to around $30 million going forward.

Trade receivables at the end of June was $36 million compared with $31.2 million at the beginning of the fiscal year, reflecting higher product shipments.

Days sales outstanding or DSO was 70, which is our current goal.

Accounts payable and accrued expenses were $32.4 million as of June 29, 2019 compared with $37.1 million at the beginning of the fiscal year.

Working capital management remains an important factor in improving operating cash flow, and we will continue to focus on increasing inventory turns and reducing DSO in the future.

The company generated approximately $2.4 million in cash from operations during the quarter compared to $3.5 million in the prior year period.

At the end of the second quarter, we had approximately $8.1 million of availability under our line of credit.

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

Over to you, operator.

(Operator Instructions) The first question comes from Eric Beder with Small Cap Consumer Research.

Congratulations for the quarter.

Could you talk a little bit, I know you had -- the only tariffs in a number of your home ways.

How has your ability been to pass-through pricing to consumers?

And how has the acceptance of that been?

Yes.

We have certainly worked hard to pass on increases to our retail partners and reposition products where needed, Eric.

And we've gotten most of the increases through to customers, and they've accepted our remerchandising options.

So we actively participate with our customers regularly to swap out items and replace at different price points.

Great.

And looking at the monitor business, I noticed that, I believe, in the queue, you talked about how it's starting to increase.

What is driving, kind of, your share gains in monitors?

Yes.

Well, we have some new entries in our Baby Pixel line of monitors, and they're doing very well, both in brick-and-mortar and online.

So the new innovations there are being widely accepted by consumers.

So we're excited about that range and the improvement that we've made there.

And we've also improved margins on our monitor line at the same time.

And when you look out to the rest of this year and I guess, early next, what should we be thinking about in terms of potential new product introductions in terms of categories?

And what are you kind of focusing on to kind of drive the next level here?

Yes.

Well, we're investing heavily in online distribution in general.

So you'll see our marketing expense is going to be focused towards online expansion, both on our own D2C and our B2C -- I'm sorry, e-commerce destination like Amazon, Target, walmart.com.

So we're making good investment there.

We're also making heavy investment in our SwaddleMe brand products.

And so you're going to see a lot of work in -- on SwaddleMe.

You'll see a new website beginning in the new year.

And you're going to see a lot of new products with -- under the new SwaddleMe brand -- is one area for growth.

Another area that you'll see -- you're going to see some pipeline fills in Q4 for new products, like I mentioned, just one big, one was a stroller at Walmart, but you'll also see our new travel system in Q1 of next year.

So a lot of new pipeline fill on new items, both in brick-and-mortar and e-commerce.

Yes.

Eric, just going back to your question on tariffs.

I think it's important to note that we've actually taken several approaches to mitigate the impact of tariffs.

Obviously, with about 35% of our product being under the 25% tariff, we've had to take numerous, I think approaches.

Some of them have been very successful.

We have a very supportive supply base that we've had gone back to them and asking for cost concessions on those items.

We've actually actively pursued resourcing some of our products into nontariff countries, and we're already actively doing that in Mexico, the U.S. and we're considering Vietnam.

We're taking advantage of the Chinese currency being devalued against the U.S. dollar so we -- we're going to be taking advantage of that because of its recent rise above 7%.

And obviously, one of the things is going to our retailers, trying to pass along higher prices.

That's probably the most difficult of all the ones I've mentioned, but we're aggressively pursuing that as well.

And that's probably the one that takes the longest time to implement because there is normally a waiting period once you ask for that price increase.

And there's a certain amount of negotiations going on as well.

But overall, when we're looking at all of those actions we've taken, I think we've been pretty successful, but the ultimate impact of mitigating will take some time as all of them get implemented.

Okay.

And last question.

So what is the size of your business out internationally?

And where do you think longer term, that can go?

Because I know you guys have done a lot with China and the U.K., where do you think that international business should be, again, looking out longer term?

When you look at our international business, and I'll include Canada in that number, it's about 16% of our business.

We do expect it to grow.

Now that we've put in place a warehouse in China that will help us service our international customers more efficiently, we do expect it to grow.

We will -- and we have actually seen some benefit of that warehouse already.

But right now, it's -- if you look at Canada, Canada is about 8% of our international business with the Rest of the World being another 8%.

The next question comes from [Greg Johnson] with Devon Capital.

Looks like it was a really solid quarter.

Made a lot of progress on some of your key efforts there.

I wanted to ask just a couple of questions.

The first one being, what further steps were you looking at in ways that you might be able to continue to strengthen your balance sheet and improve our structure there?

Yes.

We are -- we have 2 primary focuses here at SUMR Brands.

One is obviously growing the top line.

The second focus, equally as important, is strengthening our balance sheet.

And we're looking at it in several fronts.

[Greg], obviously, we've already made some good inroads in better controlling our inventory.

Our goal is to get it down to about $30 million by the end of the third quarter.

And we expect our turns to be 4x or better.

We need to better utilize our inventory and we need to better forecast what we're buying.

And we have weekly meetings and -- to help us do that.

I would say on our receivables, right now, 70 days is our goal.

We already have payment terms agreed to with our retailers.

So it's difficult to really move the needle on that.

So our focus is going to be really to aggressively challenge any invalid charge backs and that will drive an additional cash.

AP, we have -- as I mentioned before, we have a very supportive supply base.

They've been with us for a number of years.

They work with us as far as payment terms and in some paid places, we've got an agreed to for the payment terms.

So we're hitting all the right levers in the net working capital area.

And also, we're taking a hard look at capital with some of our suppliers actually absorbing the cost of new tooling when we introduce new products.

Obviously, the best way of improving your balance sheet is improving the top line.

And that's obviously the #2 focus that we have as a company.

So I think that as we move ahead into the year, we will see a gradual reduction in our debt levels.

I say gradual because at the same time, we have to realize that we want to grow the business as well.

So I feel good about having a gradual reduction in the debt level going forward.

Okay.

Okay, excellent.

It sounds like a lot of good actions there, be excited to see the progress if it develops.

And then I had a quick follow-up or two.

You talked a lot about resources on e-commerce and you're increasing focus there.

Could you give us a little more color or maybe just elaborate on some of the actions that you're taking in the e-commerce area specifically?

And how that fits into driving your growth plans?

Yes.

We're basically investing heavily in driving eyeballs to some of our key items that are margin drivers in the e-commerce world in general, not just on our own website but on other websites as well.

I'll go back to SwaddleMe.

You're going to see some big work on a branded website for SwaddleMe, and you're going to see a lot of product expansion within the SwaddleMe brand as we try to keep those consumers with us longer on those SwaddleMe items.

We're with consumers on a short time period and our view right now, we feel like we can keep them with us longer and under SwaddleMe branded products and specialty blankets.

So -- and you've seen a new branded website with Born Free, and we're just connecting with different consumers and different demographics through these different brands.

And we'll accentuate that with new product launches under those brands.

So obviously, a lot of sales are transferring from brick-and-mortar to e-commerce, and we're getting ahead of that curve by investing in the e-commerce world and those websites and our social channels.

(Operator Instructions) There are no further questions in the queue so I'll turn it back to Mr. Messner for any closing remarks.

Thank you, everybody, for joining our conference call.

We look forward to talking to you next quarter.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.