Summer Infant, Inc.
Q2 2014 Earnings Call Transcript

Published: 15 Aug 2014

[Operator:]

Good day, ladies and gentlemen. Welcome to Summer Infant’s Second Quarter 2014 Financial Results Conference Call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. I'll now like to turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

[David Calusdian:]

Good afternoon, ladies and gentlemen, and welcome to Summer Infant's second quarter 2014 conference call. On the call today are Chief Executive Officer; Carol Bramson; and Chief Financial Officer, Paul Francese. By now, everyone should have access to the 2Q news release, which went out today at approximately 4 o'clock Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Summer Infant's website at summerinfant.com. This call is being recorded and webcasted and a replay will be available on the company's website as well. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and that management may make additional forward-looking statements in response to your questions. Forward-looking statements or information are based on a number of estimates and assumptions and are subject to a variety of risks and uncertainties, which could cause actual results or events to materially differ from those reflected in the forward-looking statements or information. Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects or similar references to the future. Examples of forward-looking statements include but not limited to, statements management makes regarding the company's future financial performance, business prospects and operating strategies. There are many factors that can result in actual performance differing from projections and forward-looking statements. Please refer to the risk factors detailed on the company's Annual Report on its Form 10-K for the most recent fiscal year and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or should underlying estimates or assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information. The company does not expect to update forward-looking statements or information continually as conditions change. During the call, management will make references to adjusted EBITDA. This metric is a non-GAAP financial measure, which the company believes helps investors to gain more meaningful understanding of changes in Summer Infant's operations. For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP to non-GAAP measures including in today's financial results release. And with that, I'd turn the call over to Carol.

[Carol Bramson:]

Thank you, David. Good afternoon everyone and thanks so much for joining us today. I am really pleased to be reporting to you our second quarter results and operations update for Summer. We performed well in Q2, building on the success of Q1 with revenues and earnings per share growth in line with our plan. This was accomplished while we worked through the recall which is now largely complete. Our team worked really well together and took care of our consumers and retail customers. Our earnings would have been even higher had the recall not occurred. Net sales were up 3.4% from Q1. We are seeing good demand for our products, both in-store and online and we are capitalizing on positive trends with innovative new products. We are also making good progress on our profit objective. Our gross margins improved to 33.2%, 80 basis points above Q1 and 160 basis points above Q2 a year ago. Our new innovative products have resulted in both great market acceptance as well as higher margins for the Company. We also made significant progress in executing our turnaround plan, especially in the area of talent acquisition. The first element of our strategy was to focus on investing in highly talented people. We wanted to create a more entrepreneurial culture with a sharp focus on operational excellence. We have accomplished this with the hiring of three key executives. We started with the hiring of Ken Price, who came on board to head global sales and marketing. During the past seven months, Ken has done a terrific job. He has brought new talent to Summer in support of our sales goals and better positioned the company for expansion in select channels like international. Ken has carefully reviewed our promotional spending and had modified our activities to focus on areas where we see strong returns in sales performance. Many of these strategies are digital and we are seeing explosive growth in our online community. As a result, our top line performance is improving and new point of sale data is supporting our products and consumer connection. As we announced in Q1, we hired Jim Cartabiano as head of Innovation, and the energy and creativity that’s coming out of our product development area is truly inspiring. We have a strong new product pipeline and the skill set of our design team and engineers is exciting. The product development teams have implemented a new process focused on stage gates, teamwork and alignment of goals, particularly profit objectives, a topic of utmost importance to our entire leadership. And our most recent hire is Ken Ward, our SVP of Sales and Operations Planning. Ken is making sure that all these wonderful new products make it to the store shelf on a timely basis. Ken is focused on matching supply with demand. In this process, he is working closely with our sales team to track point of sale information and better match our ordering process and inventory management with consumer demand. Already, Ken has made a significant difference at Summer. He is streamlining our execution and bringing our various operations together as a coordinated team. The tremendous support and camaraderie that has developed as a result of his leadership has been wonderful. We still have room for improvement. Our expenses year-to-date have been higher than expected and the team is focused on improving the efficiencies of our fulfillment process. With Ken's experience and his team approach, I am looking forward to the effect that his efforts have on the future. The second element of our strategy is focused on new products. Two products that have done especially well in the second quarter include

[Paul Francese:]

Thank you, Carol 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. Net revenues for the second quarter of 2014 were $52.5 million, up 3.4% compared with $50.8 million in the sequential quarter and down only 2.3% compared with $53.8 million in the year-ago quarter. The sequential increase was due to growth in certain customer accounts and in our core product offerings, particularly in our gates, monitors and stroller categories. The year-over-year decline in revenue was attributable to exiting our licensing arrangements with Carter's and Disney to focus on building our own Summer and Born Free branded products and phasing out low-margin furniture items. When you adjust for the elimination of these licensing agreements and the impact of the battery recall, we would have grown 10% year over year in the quarter. Gross profit for the second quarter of 2014 was $ 17.4 million compared with $ 16.4 million in the prior quarter and $ 17 million in the second quarter of 2013. The sequential year-over-year increase in gross profit dollars is attributable to the mix of products sold, primarily driven by the nursery and monitor product categories and fewer closeout sales. Gross profit as a percent of net sales was 33.2% for the second quarter of 2014 compared with 32.4% in the prior quarter and 31.6% in the second quarter of 2013. General and administrative expenses were $ 9.9 million for the second quarter of 2014 compared with $ 9.2 million in the prior quarter and $ 9.3 million a year ago. The increase in the year over year G&A is primarily attributable to talent acquisition, increases of insurance and benefit cost, warehousing expenses and increased product development, particularly in our new WiFi video monitors. Included in the second quarter G&A expenses were extraordinary items totaling $ 400,000 which included professional fees, claim settlements, warehouse and tooling expenses. Selling expenses were $4.9 million for the second quarter of 2014 compared with $ 4.4 million in the prior quarter and $5.6 million for the second quarter of 2013. The year-over-year decrease was primarily attributable to reduced sales and lower royalty costs due to our strategy to discontinue certain licensing agreements. Selling expenses were up from the prior quarter as a result of higher sales and an increase in consumer advertising. We reported net income of $0.3 million or $ 0.02 per diluted share, compared with $0.2 million or $0.01 per diluted share, in the prior quarter and a net loss of $ 0.3 million, or $ 0.02 per share, in the second quarter of 2013. Adjusted EBITDA for the second quarter of 2014 was $3.4 million compared with $3.7 million in the prior quarter and $3.3 million in the second quarter of 2013. Adjusted EBITDA for the second quarter of 2014 includes $0.4 million in permitted add back charges compared with $1.0 million in the first quarter 2014 and $0.8 million in the second quarter of 2013. Now turning to our balance sheet. As of June 30, 2014, we had approximately $1.6 million of cash and $49.5 million of debt compared with $1.6 million of cash and $49.7 million of debt on December 31, 2013. Since completing the restructuring of our debt in Q1 2013, we have been focused on reducing debt and maintaining a credit facility that would satisfy the long-term needs of the business including future growth. Our current borrowing availability at the end of the quarter remained in a very comfortable range based on available assets. We ended the quarter with $46.1 million in inventory compared with $38.4 million at December 31, 2013. The inventory turns declined to 3.0 turns at June 30 compared with 3.27 turns at the end of December 2013. The inventory levels are up primarily for two reasons. First, we replenished safety stock that we had reduced during the first quarter. And second, we had accelerated inventory shipments in the event of a port strike in order to mitigate risk and to continue to service customers. With these issues behind us, we can begin to bring inventory levels down but we do expect inventory levels in Q3 to be higher than desired as we are adjust to increasing sales and new product launches. This temporary increase in inventory is projected to result in a temporary increase in our debt levels. Earlier in the call, Carol mentioned that one of Ken Ward's areas of focus will be to implement inventory management processes that better and more efficiently support demand. Trade receivables as of June 30, 2014 were $41.4 million compared to $34.6 million as of December 31, 2013. Days Sales Outstanding increased to 66 days at the end of June 2014, compared to 63 days at the end of December 2013. Accounts Payable and Accrued Expenses as of June 30, 2014 was $43.8 million compared with $31.7 million as of December 31, 2013. We procure inventory on credit terms and our current practice to submit payments weekly. To summarize, we continue to expect that we will report revenue and earnings growth on a sequential basis and we are on solid financial footing with a balance sheet that allows us to finance future growth of the company. With that I would turn the call over to the operator. Carol and I are ready to take your questions.

[Operator:]

(Operator Instructions) Our first question comes from Dave King from ROTH Capital Partners.

[Joe Bess:]

This is Joe Bess on for Dave. My first question is, we have heard some in the industry talking about retailers having positive point of sales trends that are kind of maintaining a bit tighter inventory controls. Just trying to get a sense for, if you guys are seeing any sort of impact from that as well or if your guys sell through or selling continue to be strong going into Q3.

[Carol Bramson:]

Hi, Joe. This is Carol. We are seeing strong sell through in our products. Actually in many respects at higher levels than we originally anticipated earlier in the year. And the order entry pace and fulfillment and reordering is strong and in line or above our expectations.

[Joe Bess:]

Okay. Great. And then thinking about gross margin a bit going forward. I know that seasonality, you had a little bit of an impact last Q3. Just trying to get a sense for, if you see gross margins at this level kind of continuing going forward.

[Carol Bramson:]

We do anticipate that gross margins will continue at this level and get better as we move forward into the year. We are seeing stronger product performance from some of our newer products and as I mentioned in the script, that some of these products were just recently introduced.

[Joe Bess:]

Okay. So is it safe to say that most of the newer products that you guys have, that you have recently launched, come in at a higher margin than we have seen so for?

[Carol Bramson:]

Yes. That’s correct.

[Joe Bess:]

On a blended basis?

[Carol Bramson:]

Yes.

[Joe Bess:]

Okay. Great. And then thinking about 28% from new products as kind of a target for total revenue. I was just curious as to how you guys are classifying that, as is that kind of on a rolling one-year basis or how should we think about that.

[Carol Bramson:]

The way we have defined our new product sales is if a SKU had its first sale within the last 12-months, then we included in that and we are actually exceeding that 20% target year-to-date.

[Operator:]

Thank you. Our next question comes from Steph Wissink from Piper Jaffray.

[Steph Wissink:]

A couple of questions from us as well. Carol, I just want to come back to this comment that you made on the pipeline process with the Stage-Gate and some improvements to the design cycle. Can you give us some insight into how that’s different from what used to happen in terms of new product development and how your customer insights are factoring into some of those new product initiatives. And then for Paul, a couple for you. One on the inventory. I fully appreciate the taking inventory really give the risk of the port strike, but can you help us understand the horizon for when you expect that to reconcile to sales? Should we look for that by year-end to be back in tandem with the sales growth projections? And then I think Carol had mentioned a higher level of cost than you had originally planned in Q2, maybe Paul, if you could just give us some insight into the G&A here for the balance of the year. How should we think about that in terms of our percentage of sales?

[Carol Bramson:]

Steph, thanks for joining us. With regard to the product development process, it is truly a Stage-Gate process where we are beginning with the original concept phase and having the expanded teams, both the senior leadership team as well as others in operations, packaging, quality, becoming more involved in the process early on and measuring specific thresholds and benchmark targets as we move through the development. And one key component that’s different from prior year, is that we are carefully evaluating both market acceptance capabilities for certain products as well as costing and profit levels associated with different retailer distribution options. So we are very much focused on contribution margins and where we believe the demand might be for select products, we are working with the sales team in order to get really strong insights in that regard. All of this new product development is starting from some market insights and we have increased our research activities at Summer to incorporate additional analytical as well as behavioral research factors into our development process.

[Steph Wissink:]

Great. That’s really helpful. Paul, could I have you just comment on the inventory and the SG&A?

[Carol Bramson:]

Stephanie, let me take that for you. I am not sure, Paul's line might have gone off for some reason. With regard to the inventory, we are expecting to bring inventory levels down to near where they were last year. We are expecting to be in the range of 38 million to 40 million by year-end. The specific amount of that we brought in association with the potential port strike was, in that order (indiscernible) about $ 5 million. Paul, is that you?

[Paul Francese:]

Hello, I am back on the line now. Okay, I am sorry, let me just elaborate on the inventory is well. There are actually three pieces that would contribute to the inventory growth that we did see in Q2. One was obviously the port strike that we wanted to mitigate any risk of not being able to service our customers. And that probably brought in about $ 5 million of inventory but also we needed to replenish some of our safety stocks that we had depleted in Q1. If you go back to Q1, Steph, we did have some items on allocation which probably caused us to miss several million dollars of sales. And also we are gearing up in Q2 for some of the new products and new programs with our customers that we are anticipating in Q3 and Q4. We do believe that by year-end we will have our inventory levels back into normal levels, which is anywhere between $ 38 million and $ 39 million. And we are pretty confident we will meet that number. Our ultimate goal is to get the business back to a four inventory turns number. I am sorry if I missed some of that, some of the answers, my phone must have gone on mute for a minute. But as far as G&A run rate, we did see an increase in G&A spending in Q3. I would consider some of that in investment in the company. We have been strategic in our investment in people. If you notice, many of our new talent are in the areas of sales and marketing which will drive our future growth in revenue. Also, we have actually invested more in product development which there again is an investment in the future. We do believe that our G&A will come down slightly. We think that we will probably level of in the range of between $9 million and $.2 million a quarter.

[Operator:]

(Operator Instructions) Our next question comes from James Fronda from Sidoti & Company.

[James Fronda:]

Most of my questions were answered, but just on the, I guess the product going forward. Is a lot of the sales going to come from those Wi-Fi baby monitors that you talked about?

[Carol Bramson:]

Well, we are...

[James Fronda:]

Is that going to be a continued trend?

[Carol Bramson:]

Yes. We are seeing continued strong performance from the launch of the Wi-Fi video monitors and expect that to continue into the year. But we have also seen tremendous growth from our 3-D Lite stroller platform and we are expanding that line and launching new additional versions into different retail channels later this year. We have also recently introduced the Pop'n Play Portable Playard, and that has received exceptional market acceptance as well. We expect that to continue and we are developing other products around all these categories.

[Operator:]

Thank you. Our next question comes from Robert Straus from Gilford Securities.

[Robert Straus:]

Nice job on the quarter. I just have a few questions. First, during your remarks you stated that monitors were 30% of sales. What percent of monitors were accounted for by the new Wi-Fi product?

[Carol Bramson:]

Paul, do you have that?

[Paul Francese:]

Sure do. More than half of our sales in the first half were from our new Wi-Fi monitor products. As a matter of fact those sales would even have been greater. We had some of those models on allocation in the first quarter. We have seen very good acceptance in the marketplace and good PoS indicators that the Wi-Fi monitor will continue to be a very good sell out for us into the third and fourth quarters.

[Robert Straus:]

Good. That sounds good. Paul, just a quick question. On your revolver, what's your availability at the end of the quarter?

[Paul Francese:]

It was unusually high because of our asset base at that time, it was actually $ 23 million. When I say, I would like to keep it in a very comfortable range between $ 13 million and $ 16 million, which is really where it nearly runs.

[Robert Straus:]

Okay. And that's the level that you expect to get to by the end of the year, I suspect?

[Paul Francese:]

Yes. I expect it to continue to actually be in that range between $ 13 million and $ 16 million.

[Robert Straus:]

Okay. There was a question earlier in the call regarding G&A in the percentage of sales going forward. I guess my question was a little bit different. They statement during the call was regarding expenses higher than expected. If anywhere, where and what do you think the opportunity is there? You know is there any special items there that you are still kind of working on from a turnaround mode perspective?

[Carol Bramson:]

Well, on that. Our temporary labor costs at our West Coast distribution center were higher than expected and we do believe that there is opportunity to improve our operations process out there and our fulfillment. And we are closely working on that right now. With regard to some of the other expenses such as the additional development cost associated with the Wi-Fi monitor that ran a little higher, those are largely complete. In addition, we may have had a little bit of offset between bringing some of the new talent and some of the other individuals who are no longer are with Summer, that overlapped. So that won't happen going forward. And we also incurred some consulting fees associated with the former CEO whose agreement ran through the end of July.

[Robert Straus:]

Okay. Thank you for that detail. The 9 million to 9.2 million per quarter, that number that was given just a little bit earlier in the call. Will that we achieved in the third quarter or should we think about that being achieved more in the fourth quarter?

[Paul Francese:]

That's our anticipated run rate for the back half of the year. Looking at Q2, G&A expenses, about $400,000 of those were extraordinary expenses that we don't believe will reoccur.

[Robert Straus:]

Okay. Just a question on the environment itself. What do you see going on from a promotional standpoint?

[Carol Bramson:]

In terms of promotional spending?

[Robert Straus:]

In terms of promotional spending at the retail level?

[Carol Bramson:]

Well, I will say that, as you can see from our financial results, our selling expenses have come down some. And part of that has been a concerted effort on our part to better manage our promotional dollars and to allocate them in a way that we are truly, kind of performance driven. And with that we have seen, we have been pursuing online and digital strategies that have been very effective and many of those can be less expensive than some of the other promotional spending that had occurred in the past.

[Robert Straus:]

Just a final question. On e-commerce and international sales, would you be able to give the percentage of sales for each of those and if possible the growth rates for each of those.

[Carol Bramson:]

Sure. Interestingly, international sales year-to-date are 17% of our total and our e-com sales year-to-date are 17% our total. However on the Internet sales, we do not have perfect data from all of our retailers so our actual run rate in terms of e-com sales are definitely higher than that. We have seen growth online to the tune of 44% per quarter, same period last year. And we have seen terrific growth in our international sales, in particular Asia-Pacific, Latin America where we have grown 25%.

[Robert Straus:]

And is that 25% number just for Asia-Pacific or is it for the total international category?

[Carol Bramson:]

It's just for the Asia-Pacific, Latin America.

[Robert Straus:]

What is the total category if you may?

[Carol Bramson:]

Paul, do you have that handy?

[Paul Francese:]

Yes, if you look at the categories, international sales for just (indiscernible), which is Asia-Pacific, Latin America, is 3% of our sales. That grew in the second quarter year-over-year by 25%.

[Operator:]

Thank you. (Operator Instructions) We appear to have no further questions at this time. I will turn the floor back over to Ms. Carol Bramson for closing comments.

[Carol Bramson:]

Thank you all for joining us for today's call. We look forward to speaking with you next quarter. Take care.

[Operator:]

Thank you. This does conclude today's teleconference. Thank you for joining today.