Summer Infant, Inc.
Q3 2013 Earnings Call Transcript

Published: 15 Nov 2013

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant's Third 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:]

Thank you. On the call for the company are Mr. Jason Macari, Chief Executive Officer; Mr. Paul Francese, Chief Financial Officer; and Mr. David Hemendinger, Chief Operating Officer. By now, everyone should have access to the Q3 news release, which went out today at approximately 4

[Jason P. Macari:]

Thanks, David. Good afternoon, and thank you, everyone, for joining us today. During the quarter, we continued to execute on our strategy to improve profitability. This strategy includes ending 2 major licensing agreements to focus on building the Summer and Born Free brands, significantly reducing our presence in the furniture category and implementing operational excellence initiatives. As a result of our efforts, we generated efficiency gains and reduced selling and G&A expenses by 22% year-over-year in Q3. We were also able to reduce debt by $27.9 million from the third quarter a year ago, and by $16 million from year end, while we expect that these initiatives will lead to long-term profitability improvement, SKU rationalization, and the exiting of licensing agreements are contributing to a near-term drag on revenues. In addition, during the third quarter, we experienced lower sales due to inventory contraction with several large retailers and lower monitor sales. The lower monitor sales were the result of competition and the repositioning of our monitor offering to new WiFi monitor and a fully updated monitor line to be launched in early 2014. We've been discussing for some time the need to expand our customer base and our plan to do so. An important component of this plan is to grow our sales to small and mid-sized specialty customers, as well as alternative channels. We made good progress on an initiative in Q3, as sales to these customers grew by 14% over year. Of course, we continue to partner with our large retailers and have positive momentum, as we have gained new listings in 2014. Internet sales are an increasingly important alternative sales channel, as you all know. We believe this is a significant opportunity for growth and we are focusing additional resources on expanding our e-comm business. Our team is working to ensure that the Summer and Born Free-branded products are well positioned on our customer websites. This means establishing the minimum advertised pricing or map pricing, increasing the number of items available for purchase and providing thorough product descriptions and appealing product images on customer's e-comm websites. We have also developed many short videos that show our products in use, which really helps customers understand how the products can meet their needs. To generate revenue growth in the infant and juvenile space, we need to consistently deliver innovative products that delight our consumer and retail partners. Parents and caregivers today are more tech-savvy and design-conscious. They want products that keep them connected with their children at all times, and they want to look good using their baby accessories. We have a great team in place to keep our products ahead of these trends and we expect to launch several new and exciting projects in the coming months, starting with our WiFi Monitors expected in December. The market for baby monitors has become very competitive, and our WiFi monitor is the first in a series of new monitors that we'll be introducing to meet the needs of the market. We believe our new WiFi monitors, which allow parents to access their camera anywhere in the world through smartphones, tablets or desktops, will be among the most advanced monitors to hit the market. We initially anticipated the launch of this WiFi monitor by the end of the summer, but the development and testing process took longer than anticipated due to the complexity of the product. We expect to have a first-rate product out on the market shortly. The WiFi monitors were a hit at the ABC Kids Expo last month, where we exhibited a number of our new products. Traffic at our booth was heavy and there was a great sense of excitement from our customers about the products we had on display. Attendees received a first-hand look at new stroller designs, an innovative walk-through gate and a unique potty training step stool. We also unveiled new cribs equipped with JPMA award-winning one-of-a-kind Simple Adjust technology, which enables easy crib adjustments as the child grows. Our relaunch Prodigy Infant Car Seat and Travel Systems, as well as the recently released 3D Lite Convenient Stroller received a lot of attention at the Expo. The 3D Lite Stroller is a perfect example of how we are improving technology and fashion in our products to keep ahead of our consumer needs. The 3D Lite Stroller offers even more on trend color options, boasts an extra-large storage basket, has large wheels that allow it to glide over most surfaces, and is the first in its category without an x frame, making it comfortable for baby and very easy to fold. All that, and it's only 12 pounds. We also showcased our newly expanded SwaddleMe blankets; historically, one of our most successful product lines. The class-leading SwaddleMe collection now includes the WrapSack and ComfortMe wearable blankets, which are safer alternatives to loose blankets in the crib. We've spent considerable time and resources in 2013 on our product development efforts, and we expect to see the payoff in terms of revenue growth over the long term from these investments. In the next several months, we also expect to launch new products in a variety of categories, including additional models and fashion in the Gear line, a new line of Born Free and Summer sippy cups, expanded travel accessories and a new classic bedding line. In addition to generating sales growth, our profit improvement strategy also includes aggressive cost-reduction efforts. We are focused on streamlining the operation and reducing certain promotional activities and other selling expenses that do not have a direct and positive effect on our ability to drive sales growth. In addition, operational excellence has become part of our company culture as we strive for continuous improvement. As a result, we reported a 22% decrease in Q3 SG&A expenses from a year ago. Even with this progress, given the lower sales in Q3 and the sluggish consumer market environment, we need to do more. Replacing the revenue from our lowest SKU count, the licensing deals we eliminated and our significantly lower furniture sales will take more time than we expected. When we do replace this revenue, we expect it to be at higher margins, which is one of our key financial objectives. Until that happens, we need to focus diligently on cost controls. For that reason, during the fourth quarter of 2013, we are implementing new cost-reduction actions that will further simplify our organizational structure and result in annualized savings of approximately $5 million from a combination of global staff reductions, reductions to temporary and contracted labor, reduction in professional fees and overall expenses. The staff reductions are taking place across the board. We have a talented and dedicated staff across the organization. So I'm very disappointed, both personally and from a business perspective, that we needed to take this aggressive action. I'll now turn the call over to Paul, for a review of our third quarter financial performance. Paul?

[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. I encourage you to review these documents. Before I review our Q3 financial results, I'd like to provide some information in our recent amendment to our existing loan agreements with Bank of America and Salus Capital Partners. As a result of these amendments, our lenders agreed to accelerate the transition from a monthly EBITDA covenant to a monthly fixed charge coverage ratio; and in the case of our term loan, a monthly senior leverage ratio. Under the amendments, the monthly EBITDA covenant that was originally scheduled to continue through February of 2014 no longer applies to periods ending after September 30, 2013. And beginning September 30, 2013 we are required to maintain a trailing 12-month fixed charge coverage ratio of no less than 1

[Jason P. Macari:]

Thanks, Paul. We believe that our strategy to increase margins and return to sustainable profitable growth positions us to improve cash flow generation and shareholder value over the long term. The road to get to those results appears to be longer than we initially anticipated. However, we believe the actions we have taken set us on the right path to achieve our strategic goals. As we approach the end of the year, we will continue to develop innovative new products, build brand awareness in our core product categories and drive improved profitability with our increasingly streamlined operations. With that, Paul, Dave and I will take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Steph Wissink from Piper Jaffray.

[Stephanie S. Wissink:]

Jason, if you could just help us maybe see through some of the noise in the top line. You're down 21% in the quarter. If you were to strip out some of the businesses that you're exiting and really look at what you see as your core go-forward business, can you give us an insight into how that business is shaping up? Is it still down year-over-year? Is it down significantly? Maybe just tell us the trendline of that business relative to what we're seeing optically in the reported revenue numbers?

[Jason P. Macari:]

Sure. That's a really good question and it's one that we kind of are agonizing over, quite frankly. The core of our business actually is in very good shape. Many of our categories were actually up year-over-year. The one that seems to be the trouble right now is the Monitor category. And aside from the increased competition, which about 1.5 years, 2 years ago, we had 75 -- roughly 70%, 75% of the market share, and that's been eaten into. But what's really going on isn't -- we're actually significantly lower than what our forecast should say because of the delay in the new products. We have a gap going on, which is really kind of punishing our top line because we were going to introduce some of these new items in third quarter. And what's actually happening is they're introducing, being introduced in late fourth quarter, and that's creating kind of stress on the top line in that particular category. I mean, the truth is that, in the Monitor category, we have our best assortment on the shelf next year, I think, than we've ever had. Certainly, there is increased competition. So I'm not expecting to be back in that high market share range, but I do think that we will regain some of our market share by putting these new products on the shelf, especially the higher tech stuff with the WiFi series of monitors. But we also have a good, really excellent offering at the low and mid-priced points as well. So that's, I think, putting some stress on things. The areas that we are truly stripping away, and I think a couple of quarters ago, we talked about as we exit these license agreements replacing a percentage, I think we said actually 60% of our sales, we'd be able to replace with some of our branded product. I think that's proven to be tougher to replace some of that, especially in the furniture category where there's been some aggressive selling by our competition, which has driven the margins even lower than they had been in the past, which we've chosen not to follow. And simply, we do maintain a presence in that category, but it's pretty small at this point. And the margin pressure is -- just make it not able to. And that's a big part of the Carter's program, was the furniture. So by really staying out of that fray, it also has put stress on the top line, because we expected to convert some of that over to the Summer brand, quite frankly.

[Stephanie S. Wissink:]

Okay. If I could just ask a couple of follow-ups. Just as we look at the fourth quarter now, it sounds like the Monitor category may not benefit necessarily in this current quarter until we get into the early part of next year. But the balance of the business, should we still expect that to be down double-digits, or how should we think about the fourth quarter? And then as a follow-up to that, sounds like there were also some elevated product development costs in 2013 which you'll start to leverage in 2014. Can you just give us some sense of the order of magnitude of that incremental expense so we can start thinking about kind of the SG&A line and some of the growth -- gross margin assumptions for 2014.

[Jason P. Macari:]

Sure. Well, in the Monitor category, we've invested pretty heavily between the outside development of some software, hardware development over in the Far East, as well as our team here in Rhode Island. And it's not that -- we will continue to invest in that category, just not at the elevated level that we have been over the last 12 to 18 months. With regards to the strength of the rest of the categories, I think our core categories are actually doing well and in good shape, namely in Safety, in our Nursery categories and in our, again, the Monitor category being a little stressed. And the Gear and feeding are holding their own. Actually, Gear, I think, is going to be a positive for next year. I think we're going to see some improvements in that category, both from a margin perspective and from a sales perspective. So that's kind of something that I see relatively soon. At the show, we had a very good reception to many of those new introductions, and I think that we'll see some positive pickups there. But the stress really is coming from the 2 categories. One being furniture, and more importantly, the Monitor category.

[Operator:]

[Operator Instructions] Our next question comes from Dave King from Roth Capital Partners.

[Isela Soto:]

This is actually Isela Soto on for Dave King. I guess, first off, we were just wondering when in 2014 you plan to launch the new monitor line? And then just what gives you confidence that they will be ready by then?

[Jason P. Macari:]

Well, actually, the WiFi monitor is the first and toughest launch, and that's taking place. We start actually shipping the product in December, and we ship it through the first quarter and obviously for the balance of the year. And the balance of the line, I think, is more of our bread and butter, things that we are technically -- we're not stretching it. Whereas WiFi, I think, is really technically something that not a lot of people are doing out there. Even the big firms aren't really doing what we're trying to accomplish. And the beta testing has gone very well. We're very happy with the WiFi product. The features are really, really cool. We can't wait to see -- the in-field testing that we've done with moms and with certainly staff and our QA staff and whatnot. But we've gone around the country. We've actually done it, spread it out even beyond there in other countries. And it's performing very well.

[Paul Francese:]

And the reception at the show was great.

[Jason P. Macari:]

Yes. And the reception at the show was fantastic. But the other monitors, I think, in our wheelhouse, and I'm not concerned about the deliveries of those. I've signed up at least on 3 or 4 new models in the last 30 days, and those are going into production. We'll be shipping in first quarter to various retail customers.

[Isela Soto:]

Okay, that's helpful. And then, I guess, just more generally on the retail environment and the industry as a whole, are you seeing any signs of list [ph] Improvement out there? Maybe just more color around that would be helpful.

[Jason P. Macari:]

Well, our third quarter in August, we had some inventory contraction where several retailers actually cut orders, which wasn't expected, quite frankly. I think that there's an overall anticipated weak fourth quarter, at least in our categories, in our industry. However, I have seen point of sale start picking up. I don't know if it's Christmas shopping or just some shifted demand, but I have seen recent positive trends with our POS, with our point-of-sale data from the top retailers. So I mean, I'm encouraged by what I see, but we have a gap. We have some stress on the top line. But we do believe it'll start bouncing back in the first quarter, and a lot of that will come through new shipments of monitors as well as many other products.

[Operator:]

[Operator Instructions] We appear to have no further questions. I will turn the call back over to Jason Macari for closing comments.

[Jason P. Macari:]

Thank you, everyone, for joining us on today's call. We look forward to speaking with you in the next quarter. Thanks very much.

[Operator:]

At this time, the call has concluded. Thank you for joining today. You may disconnect your lines at this time.