Summer Infant, Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good morning, and welcome to Summer Infant First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like to turn the call over to Chris Witty, Investor Relations. Please go ahead, sir.

[Chris Witty:]

Hello, and welcome to the Summer Infant 2016 first quarter conference call. With me on the call today is Summer Infant's CEO, Bob Stebenne; 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 2016 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 the Form 10-K, for the year-ended January 2, 2016, and in our other filings with the Securities and Exchange Commission. During the call, management will make references to adjusted EBITDA, constant currency sales, 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 a 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 Bob Stebenne. Bob?

[Bob Stebenne:]

Thanks, Chris, and good morning, everyone. We had a solid stop in 2016 with a pace of product rollouts, strengthening our balance sheet once again by paying down debt and so improved gross margins. While revenue declined year-over-year reflecting the timing of certain roll outs and a transition from older models, we reacted rapidly to consumer demand dynamics which as I'll explain in a moment to position the company for improved growth going forward. We also saw a G&A decline by nearly 9% versus 2015, net of litigation expense, evidence of our ongoing focus on cost controls, while generating over $6 million of operating cash flow. We believe the coming quarters will benefit from additional new product introductions and seasonal demand leading to overall improved operating results. Now let me get into some specifics about the quarter starting with sales. Our revenue fell to just under $50 million from $53 million in last year and core brand revenue was down approximately 5.3%, excluding foreign exchange. We certainly not happy with this performance and again some of the product specifics momentary, but suffice it to say that our strong selling in several areas such as strollers and new My Size Potty were overshadowed by lower consumer demand across some brick and mortar stores along with the lane rollouts and certain new products and slower sales of some older items on the transition. While working through these challenges, we continue to pay down debt and posted gross margins of 32.6%, excluding the merge and foreign exchange. Our selling, general and administration costs were also lower year-over-year and would have been down $1.4 million without ongoing litigation expenses, which we are managing to the best of our ability. In fact, how by lower interest expense, the company would had posted positive net income this quarter, where not full litigation cost; testimony to our strong operating performance even on lower sales. We will continue to maintain a focus on expense management, new product introduction and cash flow going forward. Now let me provide a bit more color on our current operation and outlook, after which Bill will review the financial results in detail. As I mentioned, we had some issues that impacted our top-line growth this past quarter and I want it to be straight forward as possible and providing color to our investors. The good news is that certain products like My Size Potty continue to sell like hot cakes. We've update our tutoring to do better, to better meet higher levels of demand. Our 3-D Lite Strollers similarly are selling well and as they are expected to post higher growth in spring and summer due to seasonal demand. We're also on track to bring out new Stroller products in the upcoming quarters, including the [indiscernible] model and a Stroller designed for European market as I've discussed in prior earnings calls. But the areas of feeding and monitors, we face new challenges, a few challenges primarily related to manufacturing and packaging, which delay the rollout process. In monitors, we are transitioning from old models to the new Babble Band wearable and LifeCam portable monitor, and both are now in stores. However, each is a unique technology in the market and as such involved a retooling of our supplier production lines to accommodate the complexity involved. This slow the introduction process, although the unit have been highly rated by consumers. We have aggressively revamped our marketing strategies and made some slight model changes and add a clear direction all to increase consumer adoption and drive higher demand. We have no doubt, there will be winners in the market and should overtime, help offset the decline of our old monitors until exciting new Summer Smart Connected Nursery product come out later this year. We feel very upbeat about our role in monitors and have taken actions to address what we view as a soft first quarter. In the feeding area, on new Born Free bottle at the market in the first quarter and more recently has begun shipping to China. However, here again, we face some delays caused by new technology, using manufacturers such advanced product. We also found that a small percentage of consumers had difficulty adjusting to the bottles new more realistic top. Our bottle is more sensitive and reactive to baby and this is causing slight confusion in the marketplace. So again, along with addressing certain manufacturing issues, we acted rapidly to consumer acceptance as well and improving instructions in the packaging more clearly marketing the product benefits and forming retailers to the bottles unique attributes. We believe Born Free will be successful this quarter both in North America and China. So we're optimistic about the impact on revenue going forward. While this will be our first product in China, we're actually very pleased with indications and initial demand. So while some of our product watch issues were clearly unforeseen. We have taken appropriate steps to address the problem as quickly as possible. We also introduced Baby My Bay massage line in Q1 and have seen nice demand for all in one tub already. In addition, we are hosting more marketing events such as in-store infant massage demonstrations and believe we can educate our consumers of the benefit and build momentum. The brand is already well-received by end users and we expect growth to take off in the months to come. The rest of our product portfolio performed as expected. Including our expanded top line affordable gear, which continues to see good demand even as we expect sales to grow heading into spring and summer. Our Kiddopotamus brand is also gaining traction. We will be extending the line to play here such as entertainers, playmates, positioners all going forward. All-in-all, we are pleased with the POS demand across our brands and so our exceptional growth within certain tales [ph] channels. This includes further ecommerce expansion, while sales at some - brick and mortar stores rose double-digits. We also expect international revenue to accelerate going forward based on concerted efforts in China, Europe and elsewhere. We expect Summer Infant to see a stronger back half in 2016 as I recently introduced product to improve consumer acceptance and many of our brands benefit from seasonal uptick and demand. In addition, we remain on track to further product launches, including our award winning Summer Smart Connected Nursery, which I have spoken about in the past. So while we were not pleased with first quarter’s revenue due to product transitioning, we have aggressively work to understand and address the issues and we’ll continue to do so. We believe we are bringing significant enhancements to the family through exciting product innovation, but in certain cases we need to more educate consumers about the new technology and the benefits to the baby. At the same time as I mentioned, our operational focus on cost control and working capital management resulted in improved margins, a stronger balance sheet, lower interest expense and a much better bottom-line. Our results clearly indicate that Summer Infant is on track for higher returns going forward. Before turning the call over to Bill, let me just take a moment and thank Daniel Almagor, our Executive Chairman and Derial Sanders another one of our Directors for their many years of service to Summer Infant. Both have decided not to stand for reelection at our upcoming Annual Meeting and will retire to pursue other interest. They’ve been a great asset to the company helping us define and implement our go forward gross strategy. So we wish them all the best. The board of Summer Infant has already begun a search for their replacement. Now Bill, will review our financial results in detail. Bill?

[William Mote:]

Thanks, Bob, and good morning, everyone. Our 10-Q and related press release were issued last night. In addition to listening to this call, I encourage you to review our fillings. Net sales for the first quarter were $49.7 million, down from $53 million in the same period a year ago. Excluding $500,000 of unfavorable foreign exchange on a constant currency basis, core banded sales declined 5.3% year-over-year. Due to the reasons Bob mentioned, regarding our transition to new products and certain launch delays. Gross profit for the first quarter of 2016 was $15.7 million compared with $17 million a year ago, and our gross margin was 31.7% in Q1 2016 versus 32% last year. Decline in gross profit margin was primarily due to $200,000 of unfavorable foreign exchange on a constant currency basis and $300,000 in temporary demerge. Excluding the impact of these issues, gross margin would have been 32.6% for the first quarter of 2016. We continue to target gross margins in the 33% range going forward. Selling expenses fell nearly 20% to $3.9 million in the first quarter of 2016 from $4.9 million in the first quarter of 2015, reflecting lower sales, customer mix changes, and lower royalty cost. General and administrative expenses were $10.8 million in the first quarter of 2016 versus $10.3 million in 2015. In addition, fiscal first quarter of 2016 included $1.4 million of legal expenses in connection with ongoing litigation. Excluding such costs, G&A would have been $9.4 million, down nearly 9% from the prior year period. This is in lined with our state of goal of reducing G&A by $4 million on an annualized basis. Interest expense decreased 24% to $600,000 in the first quarter 2016 from $800,000 last year, reflecting both reduced debt levels and the lower interest rates on our revised credit facility versus the first quarter of 2015. Depreciation and amortization decreased 13% to $1.2 million from $1.3 million last year due to lower capital expenditures. The company reported a net loss of $300,000 or $0.02 per share in the first quarter of 2016 compared with a net loss of $200,000 or $0.01 per share in the first quarter of 2015. The year-over-year decline reflects the impact of lower sales and higher G&A expenses. Excluding bank add-backs primarily litigation cost, the company would have posted net income of $0.5 million or $0.03 per share for the first quarter. Summer Infant continues to actively seek an appropriate resolution to that litigation. Adjusted EBITDA for the first quarter of 2016 was $3.1 million compared with $2.6 million for the first quarter of 2015, a 20% increase. Adjusted EBITDA for the first quarter of 2016 includes $1.9 million in bank permitted add-back charges compared with $600,000 in the first quarter of 2015, $1.4 million of those add-backs were related to the litigation. Turning to the balance sheet as of April 2, 2016, the company had approximately $400,000 of cash and $47.4 million of debt compared with $900,000 of cash and $53.6 million of debt on January 2, 2016. This represents over 11% reduction in debt since the beginning of the year. We continue to focus on debt reduction to strengthen the company's balance sheet. Inventory as of April 2, 2016 was $37.6 million compared with $36.8 million as of January 2, 2016. Trade receivables at the end of the first quarter were $36.5 million compared with $40.5 million as of January 2, 2016. Accounts payable and accrued expenses were $41.1 million as of April 2, 2016 compared with $39.1 million at the beginning in the fiscal year. Regarding cash flow, we generated $6.1 million in cash from operations this quarter versus $4.5 million in the prior year's comparable period. This is a 36% increase in cash from operations versus prior year. With that, I'll turn the call over to the operator and open it up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question will come from Eric Beder of Wunderlich Securities. Please go ahead.

[Eric Beder:]

Good morning.

[Bob Stebenne:]

Good morning.

[William Mote:]

Hi, Eric.

[Eric Beder:]

Hi, I guess, could you talk a little bit about the overall market, I know you talked about some delays in shipping and other pieces and some of these things I guess were just natural adjustments after new product launches. But how is the overall market right now in terms of your partners, in terms of how much inventory they were taking, how much risk they wanted to do?

[William Mote:]

So a couple of things, Eric. First of all, let me just stop by saying we - some much how we look at the business is POS, right? Our POS continues to be steady, continues to be strong, having said that there obviously is a change in the market, as we look at our business. There is no magic to this, ecommerce and the Amazon’s of the world and so and so forth are really start to really take hold and in some cases that your certain brick and mortars are having a little bit of a difficult time. So the dynamic is changing, but the consumers are the same and like I said we look at this POS and from our perspective our POS is strong and that’s how we look at the business and that’s probably our biggest indicator.

[Eric Beder:]

Okay. In terms of the [indiscernible] system that’s going to come out in September, what are you hearing for initially from the retailers or the excitement about it and how do you look at - it’s interesting you did the new technology for the bottle and you had to kind of roll it through do you kind of see that kind of break in for that business also?

[William Mote:]

Eric, I'm sorry I missed that first part of your question.

[Eric Beder:]

The new - after the launch, what is, it’s going to launch about four months, what are you seeing in terms of - how is the response, the people you share and the retailers you've shown it to and I guess how did you make the technology so it kind of has a smooth rollout?

[Bob Stebenne:]

Are you referring to the Born Free? Is that what you’re referring to in that question? Okay, I'm sorry. So, Born Free as you guys know is the new bottled, it is new technology, it’s as we discussed many times the two piece set and system if you will very simple from the standpoint simple to use, but complicated to make. And the bottom-line is we did it, we rolled it out for the most part we have it, it’s our initial launch was at Bye Bye Baby and like I said the reaction to it from consumer standpoint has been good, we had some problems to be real frank with you even with all the pre-testing we did we never really know until it’s out there and mom’s really use it. We realized that in some cases the very top of the bottle, the nipple part of the bottle was a soft [indiscernible] than what we really wanted. But we made some slight changes to this and these are the things that we do on an ongoing basis, just to make the product a better product as we move forward. But so far it’s early, it’s early in the status of consumer acceptance or reaction to it, but so far we’re very happy what we’re looking at.

[Eric Beder:]

Okay. All right. Thank you and good luck for the rest of the year.

[Bob Stebenne:]

Thank you.

[Eric Beder:]

Thank you -.

[Operator:]

[Operator Instructions] Your next question will be from Steph Wissink of Piper Jaffray. Please go ahead.

[Stephanie Wissink:]

Thanks. Good morning, everyone. We have a couple of questions first Bob and Bill if you could just talk collectively about visibility into the revenue trajectory maybe give us some insight into the bookings trends or how you’re thinking about that comment that you expect business to accelerate into the back half of the year? And then secondly just with respect to margin composition I'm curious if you can help us bridge the gap between kind of 32.5% margins and your targeted goal to get up into that 33 to 33.5 range on a product basis? Thank you.

[William Mote:]

Sure, so Steph just on revenue trajectory revenues are really predicated on new product launches. We’ve had like we said a little bit of delays in Q1, but we have a whole slate of new products coming out throughout the year going forward here, so that’s where they comment on revenue increases going forward came from. So we feel really good about it in a lot of categories and we'll continue to ramp up the bottle shipments exiting Q1. We’ll continue to launch monitors as we go into the back half of the year so those things will start to help pick up. My Size Potty which is a pretty good performer for us actually a very good performer, we’ve built another tool and that will kick in in the back half as well, because we’re currently at the max of our tool that we have today. So that’s actually very positive in terms of the revenue. So that’s kind of where the revenue side of it is looking. On the margin side actually we’re at 32.6 when you adjust for currency and demerge that we had it's in Q1. Demerge is going away for the most part, it's immaterial now. FX seems to be subsiding on the Canadian currency, it's down about 12% from its peak at the middle of January of this year. So, the new products that are launching have a higher margin percentage than older products. But we're also doing projects throughout the lineup of running line products, where if we have a low margin or high volume product we'll make sure margin improve that as well. And that can range from change in vendors if we have to, if we can get a better cost, by reengineering the product in its current state so that we can cost engineer it. So all of those things look, we're about 40 basis points away and looking at the numbers, we're very happy with that increase in margin that we've seen. And we continue to look to be at the 33 to 33.5 throughout the year based on things I just talked about.

[Bob Stebenne:]

And Steph this is Bob let me just add one thing to Bill's comment here as well. Our mix is changing as a company right. So when you take a look at some of the categories that we're in right now to Stroller business, which is really shaping up to be a nice piece of business for us. Along with what we called the pop, the outdoor product line that we have. More seasonal more second half, if you will. And that's kind of like a little bit of change in our business and the mix of our product as well. So you asked the question about second half, we're feeling positive about the second half of the year as well. Hopefully that helps.

[Stephanie Wissink:]

Yeah, it does help Bob, I guess to your comment on seasonality, I would have expected that the Stroller business and the outdoor pop business would be more of first half shipping, the summer months in terms of consumption. As I am thinking about that incorrectly, is that more of a second half shipping window.? As just kind of how was appreciating that modulation through the year.

[Bob Stebenne:]

Yeah, so much - Stroller business is to be little frank with you is April, May, June and even to part of July. And that's one product that's being purchased and our business as you well know is a business of buying it and then reordering and continuing on. So even though the initial pipe probably came out in the March period of time. The real - my honest take at the end of the day, the real sense will be in the reorder piece of business, which will be more on the second half, that’s the way we look at it. Hopefully that helps.

[Stephanie Wissink:]

It does help. Thank you. And then just last question on the debt pay down really nice to see some and this is on lowering the leverage burden. Can you just help us think about from a cash flow perspective, how you think about allocation of cash and what percentage or what priority is going to be placed on debt pay down going forward.

[William Mote:]

A very large percentage obviously we've stated our stated goal is to be at 3.5 leverage ratio. Right now in this quarter, we're at 4.6, which is a significant improvement over previous quarters. And I just I'll step back for a minute I don't like add-backs a lot, but if you take out the cash payments we've made for legal expenses, which have inhibited our ability to pay down debt. But if you remove that which is about $6 million at this point in time. We would be right at $40 million and we'd be below for leverage, which is very close to where we wanted to be and what our stated goal has been. So we'll continue to allocate a large portion of our cash to debt pay down. And we're very pleased with the 11%, almost 11.5% reduction in debt just in Q1. The cash we generated this quarter is about 75% of what we generated full year last year. So that's a meaningful improvement in the cash flow.

[Stephanie Wissink:]

Great Bob. And then just one final one for you. I don't know what you can say on the litigation but if you can help us appreciate where it is in the stages of the process. Maybe give us some sense and when you might expectation that we can put that behind us. Thank you.

[Bob Stebenne:]

I really can't shade a lot of light on that other than to say it's in all of our best interest to bring this to closures quickly as we possibly can and that's what we're trying to do.

[Stephanie Wissink:]

Fair enough. Thank you, guys.

[Bob Stebenne:]

Yes.

[William Mote:]

Thanks, Steph.

[Operator:]

[Operator Instructions] And I'm showing no additional questions at this time, we will conclude the question-and-answer session. I would like to hand the conference back to Bob Stebenne for his closing remarks.

[Bob Stebenne:]

Thank you all for joining us today on today's call. We look forward to speaking with you in the next quarter and thanks for your time, folks.

[William Mote:]

Thank you, guys.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.