Summer Infant, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Mar 2021

[Operator:]

Good day and welcome to the SUMR Brands Fiscal Year 2020 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. . After today’s presentation there will be an opportunity to ask questions. . Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

[Chris Witty:]

Hello and welcome to the SUMR Brands’ 2020 fourth quarter conference call. With me on the call today is the company's CEO, Stuart Noyes; and CFO, Ed Schwartz. 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 2021 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, its quarterly report on Form 10-Q and in our other filings with the Securities and Exchange Commission.

[Stuart Noyes:]

Thanks Chris and good morning everyone. We appreciate you joining our fourth quarter conference call today. I'll start by providing an overview of recent developments after which Ed will go through our financial results in detail. As we disclosed last quarter we saw several challenges impacting our ability to grow top line results as we approach the end of fiscal 2020. Foremost among these were logistics constraints and associated supply chain issues that hampered us in getting product to market. This situation was exacerbated by the resurgence of COVID-19 leading to a slower than anticipated recovery of our mid-tier brick and mortar customers in the delayed re-opening of international businesses. In addition our year-over-year revenue variance reflects the fact that 2019's fourth quarter included significant closeout sales which was not the case this past year. Such top-line headwinds coupled with some extraordinary charges recorded in the quarter resulted in adjusted EBITDA coming in lower. Ed will review this further in a moment but suffice it to say that the quarter was more challenging than expected. That said the company had a good year in 2020. We are pleased to have weathered the storm as well as we did all things considered in this quarter. And this was due to the hard work and dedication from our associates throughout the organization. We ended this year with just under $31 million of debt, and saw a substantial reduction in year-over-year SG&A expenses. Fourth quarter gross margins notably were higher than last year when adjusted for the 2019 retroactive tariff exclusions testimony to an improving overall product mix. The strategies we put in place these past 18 months to become an leaner, streamlined organization have resulted in higher margins and improved customer responsiveness even in the midst of a pandemic. We've also cut our debt levels dramatically and reduced interest expense in tandem, significantly strengthening the balance sheet and our overall financial flexibility.

[Ed Schwartz:]

Thanks Stuart. And good morning, everyone. As a reminder, our 10-K and related press release were issued yesterday. In addition to listening to this conference call I encourage you to review our filings. It's been a great pleasure to be part of the company and to have worked with you Stuart in this dedicated management group this past year, through some extraordinary times. Thank you for your well wishes, and I wish you, the team, and the company all the best going forward. Now to the results. Fourth quarter net sales were $36.0 million compared with $42.7 million in the fourth quarter of fiscal 2019. As Stuart mentioned, the decline in revenue year-over-year was largely due to the negative impacts from supply chain constraints and lower demand related to COVID-19 restrictions, particularly with regard to our mid-tier specialty accounts, and international sales. We believe that for 2021, while, currently dealing with many of the same headwinds, things are likely to improve as market conditions stabilize, helped by economic stimulus measures as well as a general easing of pandemic related restrictions and supply chain bottlenecks. At this point, we are cautiously optimistic about prospects for top line growth later this year, while the first half of 2021 will remain challenging. Gross profit was $10.8 million for the fourth quarter of fiscal 2020 versus $14.0 million in 2019. And our gross margin as a percentage of sales was 30.0% versus 32.8% last year. The 2019 results included a $1.5 million benefit to cost of goods sold related to retroactive tariff exclusions without which adjusted gross profit was $4.5 million with a gross margin of 29.3%. As Stuart mentioned, the 2020 fourth quarter benefited from improved product mix, and a higher percentage of direct import sales along with fewer close outs. We will continue to focus on maintaining gross margins that are in line with achieving our financial objectives and as much as possible, effectively managed supply chain costs. Selling expense was $2.6 million in the fourth quarter, versus $3.6 million in the prior year period. And as a percentage of net sales was 7.2% this year, versus 8.3% in 2019. The decrease year-over-year and as a percentage of sales was primarily due to lower program costs with our major customers.

[Operator:]

We will now begin the question and answer session. And the first question comes from Eric Beder with SCC Research. Please go ahead.

[Eric Beder:]

Good morning. Congratulations on navigating through a very difficult and crazy year.

[Stuart Noyes:]

Thank you Eric.

[Eric Beder:]

Great. Could you talk a little bit about when you look at the product mix for 2021 what are you seeing as some of the opportunities here? I know that logistics is an issue. But when you look at the products, what are you excited about for this year?

[Stuart Noyes:]

So we're excited about a couple of things. One is what I will call new distribution for penetration we're making conservative headway I think in Canada with some of the retail and .com up there, as well as the discount channel. And trying to manage through what a product mix might look a little bit different in that channel that would enhance the company as well as just basic opening up of Europe. Although we've had a little setback, as I think we've all heard on the vaccine over there in the last week. But the opening up of that because that was a start and stop two or three times this year. So just distribution wise, as well as we've got new items and party etc that are getting set in store. And then I would say the last thing is we are looking at what I'll call consistent with what we manufacture today or contract manufacture is new categories that actually align very well with our product mix and are easily transferable and one of those is the pet category that we're looking at and making a push there. So more to come on that in a future.

[Eric Beder:]

And when you look and I know the business has become much more online driven in terms of both reviews and in terms of sales there. How are you guys managing that spend given the focus on kind of being as lean as you could be here? Kind of how should we think about that spend going forward?

[Stuart Noyes:]

Yes. That's actually a great question Eric. So we've created a team within the organization that's focused specifically on that, whether it be Amazon spend or the other .coms, Wal-Mart, Target, and actually even more .com players that we are in the midst of penetrating and/or having meetings with. So analytically, we look at that. We look at that spend. We measure that spend, and I think it's taken us probably six or eight months to put that all together, but I feel that teams functioning very well right now. And we actually even split that out in our budgeting process going into 2021. So the team has their own budget and we can monitor that monthly on how that's being done and what we're actually getting from it because the future is that and we've got to be on the forefront of that. I think we reacted in a timely manner to put that team together.

[Eric Beder:]

Okay, and finally, you did a great job of paying down the debt. Do you have a specific debt or coverage ratio that you are focusing on going forward and where do you want it?

[Stuart Noyes:]

I'd like the debt to be zero Eric, look it's a balance, right? Because we've got to, if we get into some of those growth categories or even those channels that will increase the depth but I would say in a good way but at the end of the day we want to generate cash to pay that down even in growth mode. So I don't probably have a great target number at it but we're going to continue to pay that down as we generate cash in the business and manage our working capital effectively.

[Eric Beder:]

Great and good luck for the rest of the year.

[Stuart Noyes:]

Thank you.

[Operator:]

The next question comes from who is a private investor. Please go ahead.

[Unidentified Analyst:]

Hey guys. How you doing?

[Stuart Noyes:]

Good. Thanks.

[Unidentified Analyst:]

Hey, my first question is when you look at the issues that started in the supply chain, I guess started if this is right I would say like maybe October of last year and you alluded to on the call, the last call that you were looking at ways to get around that maybe move some stuff to Mexico. It seems like that what you're seeing today that maybe six months later it really hasn't, the picture hasn't changed. Is that fair to say?

[Stuart Noyes:]

Yes. I mean it's fair to say and may even have become a little worse, I'll call it the perfect storm, I mean I don't have to tell you, I mean you're on top of this but you watch the financial news early in the morning and I mean 8 of 10 lead stories I think over the last 10 days has been all about logistics and supply chain and I mean everybody from retail to manufacturing etc and the stories about the ports and all that. So I think something that we thought would have worked its way through. I wish I had a crystal ball. It's still working itself through and got worse before it actually became better and I wish that wasn't the case but those are the facts at this point.

[Unidentified Analyst:]

Okay. I mean given that situation that you're kind of in the middle of this right now Stuart, you also talked on the last call about the fact that the company was in the middle of their budgeting process for 2021 and that you really couldn't, you were in the middle of it, you really could not kind of give us an idea about where you thought things would play out in ‘21. I mean can you share with us today where you think your EBITDA will come, will be at for full year 2021?

[Stuart Noyes:]

Well, I can't share that but I can tell you look we had a, what I'll call a very good year for the company in 2020 based on prior years and all the different items whether it be the streamlining the costs or managing the working capital. I can tell you that, look we are about trying to grow and trying to make more money in the future and as these things come at us, I don't look at this any different than I would any business. Look we all have these challenges and there's always going to be challenges. This has been quite a year in a different year with the whole pandemic and then hopefully starting to get that behind us but it's caused some different what I'll call disruptions. I haven't seen this in the supply chain Ed and I don't know if I've ever seen it quite honestly in my career in this state but look what you do is you say what does that mean to us, what does that hurdle now I've got to figure out different things to do to get to make that up if that add some cost to it or can I -- is that cost going to come flush back out of the system when things get back to normal on the back half. So every day we wake up and do that week to week, month to month on, if I've got something hit me here well where are my levers I can pull the gain in another area of the business. So we continually look at that and we see even I look at the gas pump right now and commodity prices changing, etc. But I think those are just normal business challenges. This one being a little bit more but look our goal is to get to try to grow that top line. I think the stimulus is going to have a positive effect on us. We've seen it in the past and now that's starting to get into people's hands. So it's to grow the business and to grow our bottom line.

[Unidentified Analyst:]

When you are going back the last thing I will kind of question I have, when you look at this supply chain situation and I know maybe there's a lot of factors that are going into it but from your perspective is, I'm just looking at how does it improve? Is it a matter of the fact that they, we need more ships? Is it the fact that we need more the COVID kind of cut back on the amount of handlers at long beach to take product off the ships? Is it a factor of that the whole supply chain got surprised by the level of demand that came back in the U.S.? What do you see as the major issue that needs to get solved so the supply chain loosens up?

[Stuart Noyes:]

Yes. Well, look I actually think it's all the above you're hitting on four or five different elements that why I called it kind of the perfect storm right, whether it was shortage of containers, shipping lanes that were upside down or backwards we had assets and places where you needed assets in a different place. So this is a tough one to answer but I think time is going to help kind of straight break this out as the freight forwarders and the docks get their arms around everything. Unfortunately we're not in total control of all that much like any either retail or a wholesaler is but look we talk daily, weekly with our freight folks to get updates on that and they do publish some things internally for their customers. So we've got a bead on it but and there's some different views out there on when they think it's going to be straightened out. So I wouldn't dare you know estimate but I think it's right now we're at a point where it's just time is going to have to work its way through the system here to really straighten this out and look there are people saying that could be June or whatever -- what the sooner the better for everybody not just SUMR Infant.

[Unidentified Analyst:]

All right. I appreciate it guys and good luck this year.

[Stuart Noyes:]

Thank you very much Ed.

[Operator:]

The queue is still currently open for questions. It appears we have nobody else joining the question queue. So this concludes our question-and-answer session. I would now like to turn the conference back over to Stuart Noyes for any closing remarks.

[Stuart Noyes:]

Great. Thank you. Thank you all for joining us for today's call. We do look forward to speaking with you next quarter. Have a nice day.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.