Summer Infant, Inc.
Q1 2013 Earnings Call Transcript

Published: 14 May 2013

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant's First Quarter 2013 Financial Results Conference Call. Today's call will be recorded. [Operator Instructions] I'll now turn the call over to Mr. David Calusdian, from Sharon Merrill, for opening remarks and introductions. Please go ahead, sir.

[David C. Calusdian:]

Good afternoon, and welcome to Summer Infant's First Quarter 2013 Conference Call. On the call for the company are Mr. Jason Macari, Chief Executive Officer; Mr. David Hemendinger, Chief Operating Officer; and Mr. Paul Francese, Chief Financial Officer. By now, everyone should have access to the Q1 news release, which went out today at approximately 4

[Jason P. Macari:]

Thank you, David. Good afternoon, and thank you, everyone, for joining us today. On -- our Q1 performance was in line with our expectations, as we made good progress on our strategy to improve revenue and profitability. Revenue and gross margin were both up on a sequential basis, and we succeeded in lowering selling and G&A expenses on both a sequential and year-over-year basis, as we exceeded expense reduction targets. Last year, we launched an initiative to reduce certain promotional activities and other selling expenses that do not have a direct and positive effect on our ability to drive sales growth. In Q1, selling expenses were down about 7% from the prior year and about 23% from the sequential fourth quarter. We believe that there is still room for improvement and we will continue to analyze the effectiveness of our promotional activities and their contribution to our bottom line. At the same time, we are selectively investing in brand marketing and advertising to drive awareness and sales of our higher margin products. In doing so, we are focusing on our own Summer and Born Free branded products. We are now seeing the financial improvements resulting from our operational excellence actions, which were initiated in Q3 2012 and will continue into 2013. Actions have included product cost reductions, improved management of working capital, global staff reductions, adjustment of our product offering and efficiency gains in SG&A. G&A was down approximately 10% year-over-year and 4% from the sequential quarter. Operational excellence has become part of our company culture as we strive for continuous improvement. Lower revenues on a year-over-year basis was primarily due to previously-announced discontinuation of several unprofitable or low margin product SKUs, as well as lower sales from Disney and Carter's license products, as we exit those license agreements. As a result of these actions to improve profitability, most product category sales were flat to slightly down during the quarter. Higher sales from Safety, Nursery and Play somewhat offset the overall year-over-year decline in revenue. In Safety, our Lil' Luxuries Whirpool, Bubbling Spa & Shower and new Wood and Metal Expansion Gates generated solid sales during the quarter. In Nursery, our SwaddleMe product line continue to do very well into Q1. Looking ahead, we are encouraged by the sales potential in the Nursery category being created by our development team. We are expanding the SwaddleMe line, introducing new changing pad designs, classic bedding designs, travel accessories and soothers. We have made fashion and standard changes to the By Your Side Sleeper and Resting Up Napper. We'll also be leveraging the Born Free brand, following the successful Born Free line of feeding and mom pillows and covers. In the Play category, our Island Giggle SuperSeat was a top-seller during Q1. This product offers 360 degrees of floor-time activity fun and booster in one. It's a secure and comfortable area for a growing infant to learn to sit up and interact with the environment around them. We have leveraged our top-selling SuperSeat platform, offering differentiated better and best products plus a girl-specific version. On our fourth quarter call in March, I outlined our strategy to return to profitable growth while generating enhanced shareholder value. In 2013, we are exploring new opportunities and leaving behind those elements of our prior strategy that are not contributing to profitable growth. I'd like to take a few minutes to give you an update of how we've progressed during the past 2 months. First and foremost, we continue to develop innovative juvenile products that delight our customers. Our development team has been working hard to bring exciting new products to market and incorporate the latest technology and really meet the needs of our customers. In Q1, we launched 2 new Baby Touch Digital Video Monitors and also relaunched the Prodigy Infant Car Seat and Travel Systems, as well as strollers, all of which have had positive initial sales. We'll be launching a number of exciting new products during the second half of 2013 and beyond, including Peek WiFi and a variety of other upgraded monitors. We are particularly excited about the WiFi lineup of monitors, which allow parents to access their cameras anywhere in the world through any smartphone, tablet or computer. In addition, parents can adjust the angle of the camera and even zoom in or talk back from their device, giving them peace of mind, knowing their child is safe. We also have plans to launch several new Born Free feeding products, including an innovative line of sippy cups. We began to eliminate Disney-branded products in the quarter and by midyear, we expect to have a 100% Born Free branded products in this category and on the shelves of our retail customers. We have initiated a marketing and promotional campaign around the Born Free brand that includes increased print and digital advertising, as well as celebrity endorsements. The media campaign launched in February and we've seen positive improvements in sales as a result, with sales increasing for Born Free feeding items by 14% at point-of-sale compared to the prior quarter. Given the high relative margins and recurring purchase characteristics of this product category, we are encouraged by these efforts. As I mentioned, although we are more closely managing our selling expenses, we are aggressively building awareness for our core brands, Summer and Born Free. In Q1, we made progress in phasing out our licensing agreements with Disney and Carter's, both of which will be concluded by the year end. We determined that it was in our best interest to develop products under our own brands and reduce the royalty expenses we're incurring, as a result of these license agreements. Based on our brand strength and conversations with our customers, we expect to recoup approximately 60% of all formerly-licensed sales by the end of 2013. Our own brands have gained very good recognition and acceptance in the marketplace and we are investing in that strength. Another element of our strategy is to further diversify our customer base. And in 2013, one of ways we plan to further this strategy is by expanding our global footprint. We are on track to grow international sales to 20% of revenues by 2015, up from 15% in 2012. In the first quarter, international sales grew 16.6% year-over-year and represented 16% of overall sales. We plan to continue to leverage our current retail relationships and distributors in Canada, the U.K. and Australia, while targeting new customers in other attractive international markets. Another key strategic focus is -- in our diversification strategy is to continue to grow the number of small to midsize customers in the U.S. We grew sales to these specialty retailers by 29% during Q1 and we are targeting overall year-over-year growth of 20% in 2013. To penetrate these new customers, we've developed products that skew to the high end of the category that can do very well in this channel, such as our new stroller, car seat and high-end monitors. We also have sales reps out in the market that are focused on improving sales through this channel. Finally, we remain committed to operational excellence. During the past 3 quarters, we have taken several actions to improve margins and profitability. First, we continue to work toward improving the profitability of our low-margin products or eliminating underperforming items from our offering. For example, we've already made progress in lowering cost through the rationalization of SKUs. Our current SKU count is approximately 960, which is down from 1,100 at the end of fiscal 2012 and from 2,400 at the end of fiscal 2011. That's a 60% decrease in just over a year. We anticipate reducing our overall SKU count by about 20% to 25% in 2013 which will provide us with a much more efficient SKU base. In addition, we are evaluating all products to see where we can use reengineering to reduce import costs. Through these actions, we're on track to save approximately $1 million in 2013 and $2 million annualized on the product side in 2013. Another cost-savings measure is the expansion of our direct import program, which started last quarter and has already been implemented with 50% of our eligible customers. We expect direct import will be used by all of our largest customers by year end. Through this program, we ship product directly from the manufacturing site to the customer, bypassing our warehouses. We're using the direct import program in certain categories, primarily furniture and private label. As a result of the program, we've been able to reduce warehouse space, reduce cost and contribute to the company, achieving positive cash flow from operations of over $2 million in the quarter. We expect to complete the consolidation of our overflow warehouse in California into our main warehouse and close our warehouse in France, by the end of the current quarter. On our last call, we also outlined a number of overhead cost reductions that we were taking to reduce G&A expenses by 10% year-over-year. All of these cuts have been implemented and we're on track for our targeted savings. Taken together, we expect that the successful execution of our strategy will result in a return to sustainable profitability, returning to a higher pattern of growth in the years to come and improved cash flow for the company. I'll now turn the call over to Paul for a review of our first quarter financial performance.

[Paul Francese:]

Thank you, Jason and good afternoon, everyone. Details of our results are available in our press release that was issued this evening after the market closed and our Form 10-Q filing with the SEC will be available tomorrow. I encourage you to review these documents. We continue to execute on the key strategies that Jason has discussed. While these strategies all focused on returning Summer Infant to profitability and enhancing shareholder value, adherence to these strategies will mean a short-term reduction in year-over-year revenue as we continue the sale of licensed products, rationalize our product offering and remove lower margin SKUs from active inventory, but it also means a return to profitability and a stronger company going forward, as demonstrated in this quarter's financial results. Net revenues for the 3 months ended March 31, 2013, decreased 6% to $59.1 million from $63 million from the same period a year ago. The decline was attributable to the discontinuance of nonprofitable and low margin product SKUs throughout all our product offering and the phasing out of licensing arrangements with Disney and Carter's. Because of these factors, most product categories were flat or declined with the exception of Safety, Play and Nursery. Gross profit for the first quarter of 2013 decreased to $18.6 million from $21.1 million a year ago. Gross profit as a percent of net sales decreased to 31.4% in Q1 2013 from 33.5% in Q1 2012. The decline in gross profit dollars is attributable to lower revenues, as well as an increase in closeout sales in the first quarter of 2013, relative to the sale of discontinued inventory from reduction of price SKUs, the discontinuance of licensing agreements, the participation and retail promotional programs to sell through current product to enhance positioning of new products, the increase and direct import selling at lower gross margins than domestic selling and a lower mix of sales in higher gross margin categories. We expect similar effect on gross margins for Q2. However, we anticipate an improvement in the second half of the year and further improvement in 2014, as we complete the transition of our inventory and see the results of product cost reductions in new product launches in 2013. As Jason discussed, our operational excellent strategy that we started to execute in 2012 have begun to show favorable results. General and administrative expenses decreased to $9.6 million in Q1 2013, compared to $10.6 million in Q1 2012. The $1 million reduction in G&A represents approximately 10% reduction year-over-year. The decrease in G&A was driven largely by reductions in worldwide headcount, temporary labor, lower outside services expenses and to a lesser extent, by lower air freight costs, as well as a reduction in incentive compensation expense. The decrease in G&A expenses were offset in part by $0.3 million in higher professional fees incurred, in connection with the amendments regarding the refinancing of the company's Senior Credit Facility, as well as a $0.1 million in severance expenses. The majority of the professional fees and severance expenses are bank-allowed add backs or are debt-covenant EBITDA calculations. Selling expenses decreased by 7% to $5.6 million in the first quarter of 2013, compared to $6 million in the first quarter of 2012. The decrease was primarily attributable to $0.2 million in lower program costs, as a result of the tighter controls we've implemented; a $0.2 million reduction in consumer advertising promotions; and a $0.1 million reduction in royalty expenses. Depreciation and amortization decreased 5% from $1.9 million in the quarter ended March 31, 2012, to $1.8 million for the quarter ended March 31, 2013. The decrease is attributable to a reduction in capital expenditures in the second half of 2012, partially offset by an increase in amortization of intangibles. Interest expense for the 3 months ended March 31, 2013, was $1.3 million compared to $0.7 million a year ago. The increase in first quarter 2013 interest expense was due to higher interest rates and the write-off of unamortized bank fees related to the retirement of our 2010 Credit Agreement on February 28, 2013. The write-off of the unamortized bank fees totaled $0.3 million. For the quarter ended March 31, 2012, we recorded a $0.5 million provision for income taxes, on a $1.9 million pretax income, resulting in a 29% tax rate. For the quarter ended March 31, 2013, we recorded a $0.1 million tax benefit on a $0.3 million pretax income. The tax benefit in 2013 is primarily attributable to the reinstatement of the federal R&D tax credit for 2012. We reported net income of $0.4 million or $0.02 per diluted share in the first quarter of 2013 compared with net income of $1.3 million or $0.07 per diluted share in the first quarter of 2012. Excluding permitted add back charges and other special items in the 2013 period, adjusted net income was $1 million or $0.06 per diluted share in the first quarter of 2013. There were no adjustments to net income for the first quarter of 2012. Non-GAAP adjusted EBITDA for the first quarter of 2013 was $3.9 million compared with $4.7 million in non-GAAP adjusted EBITDA for the first quarter of 2012. Adjusted EBITDA for the first quarter of 2013 includes $0.4 million in bank-committed add back charges. While first quarter 2013 EBITDA was lower than the first quarter of 2012, we have shown sequential improvement compared with $1.6 million in the third quarter and $1.7 million in the fourth quarter of 2012. Now, turning to the balance sheet. As of March 31, 2013, the company has $2.6 million of cash and $63.7 million of debt. This compares to $3.1 million of cash and $65.5 million of debt in December 31, 2012. This represents a $1.8 million reduction in debt balance. The reduction of our debt has been a key focus of our company and since September 30, 2012, we have reduced our debt level, net of cash, by $4.5 million. As discussed in our last call, we reached a major milestone at the end of February when we entered into a new fully-underwritten loan and security agreement with Bank of America. The agreement expires in 2018 and provides for $80 million asset-base revolving credit facility. As of March 31, 2013, the borrowing availability of the Bank of America loan totaled $13.5 million. We expect that as a result of refinancing, our interest expense will be reduced by approximately $1 million annually from the previous credit facility. The management of the company's working capital has been a key focus. Inventory as of March 31, 2013 was $40.2 million compared to $47.9 million as of March 31, 2012. The inventory reduction is the result of our efforts to transition some category sales to direct import, improved forecasting capabilities and the reduction in SKUs. Trade receivables as of March 31, 2013 was $47.5 million compared to $57.8 million, as of March 31, 2012. The accounts receivable reduction is a result of improved payment terms with our customers and centralizing the collections function into our corporate office. Accounts payable and accrued expenses as of March 31, 2013, was $31.9 million compared to $40.6 million as of March 31, 2012. Our company purchases its inventory on credit terms. It is current practice -- is to submit payments weekly. These working capital improvements reduce the company's investment in working capital by $9.3 million year-over-year with inventory turns improving from 3.7 to 4.1 turns. In closing, while we recognize there is a lot of work still to accomplish, we believe that we have made progress in transitioning back to profitability. With that, I would like to turn the call back to Jason for closing comments.

[Jason P. Macari:]

Thank you, Paul. On our fourth quarter call, we outlined a number of strategic initiatives to improve Summer Infant's sales and profitability. During Q1, we made good progress in executing our strategy and ended the quarter with a lower cost structure that provides us with greater operating leverage, refinanced our debt, strengthened our balance sheet and improved working capital performance. We also continue to innovate our product suite across a number of core categories and we're looking forward to new product launches as we proceed throughout the year. We will continue to execute our strategy and are encouraged that the success that we have demonstrated, so far this year, foretells improved results in the second half of this year and for the long-term. With that, Paul, Dave and I will take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of James Fronda with Sidoti & Company.

[James Fronda:]

I guess the growth that you're going to see in the second half of the year, do you think that's more -- I guess due to the discontinuance of the licensed brands that you're going to make up with newer products under your own brand? Or is it just less promotional activity? Or is it going to be both?

[Jason P. Macari:]

Yes, as we've been discontinuing certain products and kind of exiting certain -- the licensing agreements, we've been presenting new products, of course, under our brands to those same slots, as well as new ones. The third quarter has a number of new product introductions hitting at a number of major retailers, as well as other retailers, smaller or midsized retailers. And so I think the majority of third quarter is going to be new products. However, there is definitely some replacement business going on, kind of moving in and out of items that we're moving away from, especially the licensing agreements.

[James Fronda:]

Right. But you think it's enough to offset, I guess the discontinuance from the licensed brands? Will you be able to see revenue growth in that quarter or not?

[Jason P. Macari:]

I think on a sequential basis, yes. I didn't really prepare for a year-over-year but I could take a look at that.

[James Fronda:]

All right, okay. And I guess the last call, you guys talked about things improving starting in this quarter. Is that still the case in your eyes?

[James Fronda:]

Yes. I mean, one of the things we try to communicate in the call and on the release is that, although we're happy with where we are, I think we felt like it was a good quarter recovery from a couple of negative quarters and a tough 2012, quite frankly. The second quarter, I think, we'll still be in kind of the same mode as we are today, kind of cleaning up things, and our hope is the third and fourth quarter, we start seeing some uptick on the top line and the rest of the P&L.

[James Fronda:]

Okay. I guess the SG&A for the quarter, is that a good run rate to use going forward?

[Jason P. Macari:]

Yes, I think so. There are still probably cost improvements that are kicking in, but those might be offset a little bit by some investments that we're making as well, into areas that we think that can help our overall performance.

[Paul Francese:]

James, I think in time, some of the professional fees that we had experienced in Q1 will no longer be with us. They were pertaining to the refinancing of our debt and some of the severance costs we're currently incurring will also tail off as well, in the second quarter.

[Jason P. Macari:]

I would also say, James, just for the sake of our employees, I would say that we're done with all the headcount reductions. We're very happy with where we're at today, from a staffing standpoint.

[Operator:]

[Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

[Jason P. Macari:]

Yes, I know that a couple of our analysts were out traveling today, so for Sean McGowan of Needham and Rob Strauss from Gilford, feel free to call later on and we can answer any questions, as well as anyone else that's listening that has questions. We do appreciate everyone for joining us today on the call and we look forward to speaking with you next quarter. Thank you.

[Operator:]

And that concludes our conference call. Thank you for joining us today.