Summer Infant, Inc.
Q4 2016 Earnings Call Transcript

Published: 25 Feb 2017

[Operator:]

Good day and welcome to the Summer Infant Fourth Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to your moderator, Chris Witty. Please go ahead.

[Chris Witty:]

Hello, and welcome to the Summer Infant 2016 fourth quarter conference call. With me on the call today is Summer Infant’s CEO, Mark Messner; 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 2017 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 31, 2016, and in our other filings with the Securities and Exchange Commission. During the call, management may make references to certain non-GAAP financial measures including adjusted EBITDA, constant currency sales, adjusted gross margin, adjusted net income on loss, and adjusted earnings on a loss per share. The Company believes these non-GAAP metrics 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 now turn the call over to Mr. Mark Messner. Please go ahead, Mark?

[Mark Messner:]

Thanks, Chris, and good morning, everyone. We appreciate you joining on our fourth quarter conference call. As it is normal for this time a year, we'd like to look back and assess our overall accomplishments during the past 12-months, and then solidify our focus areas for the coming quarters. I'm pleased to say that 2016 was clearly another year of progress for Summer Infant, even as we still have farther to go. Across many metrics of our operations and balance sheet, we ended 2016 in a stronger position than we began. We posted a net loss of 4.3 million or $0.23 per share versus a net loss of 8.7 million or $0.47 per share in the prior year period, and excluding a non-cash impairment charge, that Bill will review in a moment. Our adjusted net loss per share was $0.11 for the fiscal 2016. We reduced total G&A expenses to 41.3 million from 46.1 million in 2015; a decline of over 10% with legal expenses cuts to 2.4 million from 6.6 million. On this issue, we were very happy to report that the litigation is now behind us, which should positively impact bottom line results going forward. We also generated 8.8 million in operating cash last year and our debt was further reduced to 46.9 million. Adjusted EBITDA rose to 10.6 million versus 9.7 million in 2015. Our net leverage improved to 5.1 and our inventory levels are now stable healthy levels. In fact, our working capital is down 30% from two years ago, and roughly 90% of our inventory is under six months old versus around 70% two years ago, so we've made great progress. Sales in 2016 however were negatively impacted by lower than expected results certain segments and product roll outs, as we've discussed in the past. And so the team and I worked aggressively to reposition the Company prior to the start 2017. We took strategic measures in the fourth quarter to focus the Company's product portfolio after a thorough review of our brands and consumer trends. Such actions which had a negative impact on both revenue and bottom line results were appropriate given our new emphasis on more profitable products, stronger retail partnerships and improved channel management. Some other steps taken in Q4 included an asset impairment charge related to market for our Born Free brand where we're now seeing niche applications for products such as the Breeze bottle and some additional cost related to refocusing our Summer Smart technology. Bill will review these items further in a moment, but suffice to say that we want to start 2017 with a fresh approach to our brand strategy and a vision that leads to growth and profitability. As I indicated last quarter, we're focusing on reducing the number of third party wholesalers, revamping our product portfolio across key growth areas and strengthening our channel partner relationships. I'm happy to say that we're making good progress across the Board. Our product portfolio was previously not focused to leverage our brand and areas of expertise, and our R&D efforts were quite frankly spread too thin over too many disparate initiatives. We’re now targeting new product development initiatives in core areas like monitors, gear and brand expansions where we see higher demand dynamics and in tandem greater profit potential, and let's not forget our channel partners. We want to bring more market products their retailers want to promote. One, the build store traffic and provide meaningful returns. This is true for brick-and-mortar, customers as we as our e-commerce customers. The bottom line is that we have a more focused R&D strategy and build on strengths of our brands, we can focus our marketing spend better and become player with our key channel partners. We want a win-win relationship that improves our bottom line, drives growth and enhances our retail relationships, all while making products, they are essential to today's millennial moms and dads. We continue to work on product rollouts and enhancements that leverage our existing capabilities. Our My Size Potty was a tremendous hit last year, so we’re working on brand expansions to that. Using the halo effect to launch other My Size products that either broadened the category like our Travel Potty are features to increase sales like our pink My Size Potty. And we're also ramping up several new monitored lines, focusing on innovative RF applications, easy to use accessories and better design. We've got a lot of new cool features in the works for our monitors that from initial consumer research are expected to be well received by parents and drive higher demand. We're using market research to validate our initiatives, guide product development and improve our industrial, institutional knowledge about parents wants some needs. We’re also dedicated to doing a better job with our product launches and for the many new monitors we're already introduced, I'm pleased to say we're delivered 100% on time. We're ramping up many new products within our safety category as well, including some innovative gates as I mentioned last quarter, and excited by the potential of this area in 2017. We're also looking at ways to grow our top line of affordable accessories, they already include there Pop n Play, Pop n Sit and Pop n Jump products. At the same time, our gear category continues to perform well. We saw revenue rise over 12% here last year led by increased store sales merely 36%. We're excited by the potential for this entire business and are already off to a good start in 2017 with consumer reports naming our 3D Lite, our best buy. Our Swaddle brand continues to be a leader in the field, and we're also seeing expanded store count for our innovative smoother products. Internationally, our drive for growth remains and our team is up and running focused on channel expansion opportunities in key areas like Europe and China. The products we sold overseas vary by market depending on demand, and we're pleased there are initial Born Free approach to China has led to other introductions such as SwaddleMe. Across Europe, the UK and South America and China were aiming for double-digit growth this year. Overall, we'll be providing more structure and discipline to our brand strategy and product development both on the backend in terms of where we focus our R&D resources and the frontend and how we market the price to retailers and e-commerce like-for-like. Our goal is to elevate the Summer brands and improve our growth and profitability; and then the same time provide better margins to our channel partners as well. Nobody wants the raise to the where discount sales and competitive pricing means unattractive returns for everyone. We believe the steps we are taking should improve the Company's growth outlook going forward particularly in the second half of 2017. They will take time to implement the strategies we have in place and roll out some terrific new products, so I want to be cautious in terms of expectations for our investors. But we're building the means for hired growth in the quarters to come and have a lean strong organization in place to implement the brand vision we see. And I'll be remised during this trend this transition, if I didn’t mentioned, the great addition of our peers to Summer Infant, who joined the Company as our Chief Product Officer in December. Art has over 20 years of experience in product development, operations, marketing and branding, having worked at such great organizations as Nuna Baby Essentials and Graco. His skills in building brand awareness and creating innovative products have already been a tremendous asset to the Company. I would also like to mention two upcoming events announced this morning will be ringing the closing bells to NASDAQ market segment, Times Square this Monday February 27th, and will also be presenting at the Roth Conference at Dana Point, California on Monday March 13th. We invite our investors to watch this events live via webcast on summeinfant.com. In closing, we remain very optimistic about the changes taking place at Summer Infant, which leverage our many accomplishments over the past two years, with our management teams squarely focused on improving our brand positioning, strengthening financial results and increasing our returns for our shareholders, I look forward to the quarters to come. Now, Bill, will review our quarterly financial results in detail. Bill?

[Bill Mote:]

Thanks, Mark, and good morning, everyone. Our 10-K 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 fourth quarter were 45.5 million versus 50.8 million in the prior year period. Revenue was down year-over-year primarily due to lower than expected sales of our Born Free bottles and Summer monitors partially offset by increased sales of gear products and safety products. The three months ended December 31, 2016, also included $0.5 million of unfavorable foreign exchange on a constant currency basis, primarily due to the decline in the value of the British pound. Gross profit for the fourth quarter of 2016 was 14.3 million compared with 15.6 million for the fourth quarter of 2015, and gross margin was 31.4% in 2016 versus 30.7% in the prior year period. The three months ended December 31, 2016, included 300,000 of unfavorable foreign exchange on a constant currency basis. For fiscal 2015 fourth quarter included 100,000 in losses on the sale of inventory below cost related to our inventory reduction plan, and 400,000 in temporary cost related to our West Coast distribution center. We continue to work on improving margins across the Company. Selling expenses were 3.8 million in the fourth quarter of 2016 compared with 4.5 million in the fourth quarter of 2015, reflecting customer mix and lower royalty cost. General and administrative expenses were 10.8 million in 2016 down slightly from last year. Note that the fourth quarter of 2016 included 200,000 of litigation cost versus 1 million of litigation cost in the fourth quarter of 2015. As Mark mentioned, the litigation was settled in 2016 and we expect no further cost going forward. Interest expense was 800,000 in the fourth quarter of 2016, compared with 600,000 in the prior year period, while depreciation and amortization declined to 1.6 million from 2.9 million last year due to lower capital expenses and the impact of accelerated depreciation taken in 2015. The Company also undertook an intangible asset impairment analysis in Q4 and subsequently recorded a non-cash impairment charge of 3 million, related to our Born Free brand. This reflects an assessment of the niche market potential for Born Free Breeze bottles and the new product growth strategy that Mark reviewed just a moment ago. The Company reported net loss of 4.5 million or $0.24 per share in the fourth quarter of 2016, compared with a net loss of 3.1 million or $0.17 per share in the prior year period. Adjusted EBITDA for the fourth quarter of 2016 was 900,000 million versus 1.8 million for the fourth quarter of 2015. Adjusted EBITDA in 2016 includes 1.1 million in bank permitted add-back charges compared with 1.5 million in the prior year period, as defined by our credit facility. With regard to our credit facility, last week we entered into an amendment that provides the Company with greater flexibility in 2017 regarding certain covenants and expenses, as further detailed in our fillings. We're appreciative of our lenders continued support in our underlying financial position by allowing some near-term flexibility in our reporting requirements and operations. Turning to the balance sheet, as of December 31, 2016, Summer Infant had approximately $1 million of cash and 46.9 million of debt compared with 900,000 of cash and 53.6 million of debt as of January 2, 2016. The Company’s bank leverage ratio was 5.1 times to the trailing 12 months adjusted EBITDA at quarter end as compared with 5.5 times at the beginning at the fiscal year. Inventory as of December 31, 2016 was 36.1 million, compared to 36.8 million as of January 2, 2016. We continue to manage inventory while still having highest quality of merchandise available for sale. Trade receivables at the end of the year were 34.1 million compared with 40.5 million at the beginning of the fiscal 2016. Accounts payable and accrued expenses were 38.4 million as of December 31, 2016 compared with 39.1 million on January 2nd of last year. Regarding cash flow, we generated 3.4 million in cash from operations this quarter and 8.8 million for the prior versus 800,000 and 9.3 million respectively in the prior year. With that, I’ll turn over the call to the operator and open it up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Dave King of ROTH Capital. Please go ahead.

[Dave King:]

I guess first off I've got a question sort of on your outlook. It sounds like revenue might be under pressure still cannot through the first half and then you are hopeful, but some of the things you start to take hold and help with the second half. I guess more importantly I'm curious about, how we should be thinking about the ability to garner profits and that sort of environment. What you're doing to maybe started to drive try to drive further gross margin improvement? Are there any cost savings opportunities still as we look forward, and some color on some of those things I think would be helpful? Thank you.

[Mark Messner:]

Yes, we're always striving for cost efficiencies Dave, and we're working closely with our agent operations to leverage our manufacturing partners, and I think there is opportunities for margin improvement in 2017. And velocity wise, I mean sales velocity wise, the fourth quarter slowed up a little bit, I think you read a lot of about our retail partners struggling with sales, but we're starting to seeing a slight uptick and pretty excited about some of the new product introductions we have with new monitors setting on the shelves, some incremental placements there, incremental placements and gates and potty as well. So, I hope that answers your question.

[Dave King:]

That definitely helps, Mark. Bill, I know in the past you shared like a gross margin target for the year or like the G&A kind of target. I know that was because of this part of initiative to get G&A down to certain level. Do you guys have targets like that for 2017 that you care to share? Or is it still kind of too early to share that I guess, what are the thoughts there?

[Bill Mote:]

What we've said in the past I think margin is still the targets 33% on a gross margin or net sales basis. And we will probably see it uptick in G&A by about a 100 basis points this year only because we are investing in certain areas like marketing and some additional efforts in the headcount areas, not raising headcount overall, but just overall changes, just to make sure we are addressing all the needs of the Company in terms of trying to grow. So, a slight tweet there, we are expecting that 33 come through pretty strong this year. And we've been challenged a bit. In the fourth quarter, we're about 32.1 once you make adjustments on GAAP 31.4. So, those adjustments for some over it are on the Born Free development and on currency. So, we're still targeting the 33 and feel confident we can get very close to that number this year and still continue to target G&A in that 19% level, we were trying to target 18 last year and came relatively close, but we're still above 18. So we think it's wise to adjust that to 19, this year and we will do everything we can to keep it lower than that.

[Dave King:]

That’s great color guys. And then, in terms of maybe switching gears one more for me. In terms of leverage, you guys have some pretty good success and being able to reduce that and that’s why you paid down some more debt this quarter, so good job there. I guess what are the -- what sort of the capacity ability, what you have to further reduce that? and then how should we be thinking about interest expense in our kind go forward basis?

[Mark Messner:]

So, interest expense is obviously we're LIBOR base, so that could pick up as the LIBOR rates increase. But I'm not expecting a huge increase there during the year, so I would model and the last revision to our credit agreement, which we just indicated in our call we done last week. And that’s going to be slight increase there in interest but nothing major. In terms of reducing leverage, we're continuing to target pay down. We use the vast majority of the cash we generated this year, we use to pay down debt and we will continue to do so this year. We’re still targeting about a mid single digit operating cash flow and we will use all of that money to pay down debt during the year. So we continue to deliver and we will continue to make that a key priority for the Company.

[Operator:]

[Operator Instructions] Our next question will come from Eric Beder of Wunderlich. Please go ahead.

[Eric Beder:]

Could you talk a little bit about some of the innovations going forward? What categories you see as kind of the key drivers in 2017, and more importantly I guess 18, it is why the revenue upside in terms of the broader categories?

[Mark Messner:]

Yes, sure. As I mentioned a little bit earlier, we gain back some space in our monitor listings with key retailers. So, we should see although that very competitive category, gaining back that space puts us in a position for growth there. And in the Potty category, we see opportunities for growth there, and My Size is getting increased channel distribution and there are ideas for derivatives for further growth in that category. And safety gates with our home décor designs on those were really setting where I would say, the standard for what gate in should be American households bringing fashion into gates, where before you might have seen more like a commodity product in bath we're introducing a bath seat that is truly one of its kind on the market and will revolutionize the category there were some bad products out there in the past but we put a lot of thought process into how to provide a solution for parents to bathe their children's safely, and we have what we feel as a super innovative product with our new capacity. So, those are some of the areas. We also have a wire bed sleeper which is a new item for us at and about $99 price point to a $130, and we see trends in the marketplace where that segment is growing rapidly, and we've gain that space in our Swaddle business as well introducing some new gift sets which will be perfect for registry purchases. So, I think we have some good innovation to drive revenue this year. There is good opportunity there.

[Eric Beder:]

How you look at the competitive environment here? And how aggressive are you? Is there opportunity out there with your competitors? How aggressive is the competitive environment right now?

[Mark Messner:]

It depends by category I would say, the monitor categories probably, the most competitive segment that we participate in. But we feel like we're poised to winning the category and we're going to have 27% market share in that category, and we're going to book it out and do what we can to win in that category.

[Eric Beder:]

Okay, and Bill what is the longer-term goal for debt where? Do you want to have the ratios?

[Bill Mote:]

I've stated aspirationally, we wanted to be between 3 and 3.5. And you guys all know just on the call everybody is listening over the course of the last two years we spend about almost $10 million on the litigation, had that $10 million not been spent we would be right at that 3.5 leverage ratio at this point in time. So, the only reason, I say that I don’t mean to bring at the source bars but that's truly the operational performance of the business has delivered that level of performance to that level unfortunately we had litigation that kept us away from that, probably delayed us about 18 months in terms of hitting that goal.

[Operator:]

[Operator Instructions]

[Mark Messner:]

All right. Well, thank you everybody for joining today’s call. Hope to see you at the ROTH Conference in March, and if not there, look forward to seeing you next quarter. Thanks again.

[Operator:]

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