Summer Infant, Inc.
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Hello and welcome to the Summer Infant 2015 First Quarter Conference Call. With me on the call today is Summer Infant's Chairman of the Board, Dan Almagor; the company's new 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 related to Summer Infant's outlook for 2015 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 January 3, 2015, and in our other filings with the Securities and Exchange Commission. During the call, management will make references to adjusted EBITDA, adjusted net income, and adjusted earnings per share. These metrics are non-GAAP financial measures, which the company believes helps 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 reconciliation of GAAP results to non-GAAP measures, included in today's financial release. And with that, I'd now like to turn the call over to Dan Almagor. Dan?

[Dan Almagor:]

Good morning and thank you for dialing in today. I'm joining you this morning for an exciting announcement. As you most likely saw in our news release yesterday, we have announced the appointment of Bob Stebenne, as our new Chief Executive Officer. Bob has been a Summer Infant Board member since 2007 and was named President & COO in March. Bob has 30 years of juvenile product marketing experience, including 20 years in positions of increasing responsibility at Hasbro Industries. At this point, we are at an very important crossroad, and Bob, has the right combination of scale to move our company forward. First, he has a deep understanding of Summer Infant, the market that we serve, and our customers. Second, he has a successful experience in developing new products, brands, and market with leading juvenile company. And third, he has proven operational excellence experience which will be very critical as we focus on transforming our bottom-line performance. Taking together these skills will enable Bob to take Summer Infant to the next level as we expand our markets; capitalize on exciting growth opportunities, and drive stable long-term profitable growth. We are very thrilled to have Bob now also take the helm of the CEO. Now in addition to the CEO succession, we are delighted to welcome Alan Mustacchi to Summer Infant Board of Directors. Alan would be replacing Jason Macari, our former CEO and Founder who resigned -- who will resign in August 1, 2016, in accordance with his separation agreement with the company. Alan offers significant financial expertise with particular focus on retail and consumer product market. We have made an excellent progress executing our turnaround strategy, and we believe that we are well-positioned going forward. With the changes at the board and management level, we believe that now we are even better positioned and prepare to capitalize on the opportunities we see before us. With that, I'd like to turn the call over to Bob. Bob?

[Bob Stebenne:]

Thank you, Dan. I am very excited to be taking over the leadership of Summer Infant. From my knowledge of Summer, based both on my tenure on the board, and since becoming President & COO, as well as my long experience in the juvenile product industry, I believe that we have an excellent opportunity here at Summer. I am excited to help capitalize on those opportunity and transform Summer Infant into a stable, profitable company that we believe it can be. As Dan said, we are indeed at a crossroad here at Summer. And I'm excited to have this opportunity to make a meaningful difference at our company at a very important time. Over the next few months, I'm looking forward to speaking with many of you. Now let me turn to a review of our operations and outlook, after which, Bill, will discuss our financial results in detail. Q1 review it's only been a couple of months since our fourth quarter call so I'd like to focus on things we've achieved in both the quarter and subsequent to its end. Revenue for Q1 rose slightly over last year to $53 million as did gross profit to $17 million. Revenue for the quarter in our core business however excluding sales related to license, private label, and furniture items, increased by 12.9% year-over-year. Bottom-line results were negatively impacted by high administrative expenses, foreign exchange, and marketing costs, including some expenses related to the West Coast port slowdown, and certain legal fees resulting in a loss for the quarter. While looking to reduce cost, and improve margins going forward, we took an important step after the quarter towards increasing earnings per share by substantially restructuring our debt. Bill, will go into this in specifics in a moment but suffice it to say that our new credit facilities will result in improved financial flexibility for Summer Infant, as well as projected interest savings of $1 million annually or $0.04 per share. By reducing the size of our revolver, we will lower our facility fees, or still having access to incremental availability, if needed, to a $15 million accordion feature and we expect the modify covenants and reporting requirement with a single bank rule to resolve in low administrative costs overall. The facilities will also allow us to focus on several initiatives designed to increase Summer Infant's asset utilization and reduce working capital, as they include a $2 million carve out from EBIT of future inventory disposition. The new agreement are indicative of our strengthening outlook and are better suited to the future Summer Infant bolstering our balance sheet and improve our bottom-line. I will talk a little bit about the market. During the quarter, we continued to see a positive reaction to our core product strategy and benefitted from growth across our SwaddleMe, BornFree, and Summer branded products, including sales of our 3D Lite convenient strollers. Non-core sales amounted to less than $2 million in Q1 indicative of the rapid transition that we made to strengthen our brands and differentiated accompanied with consumers. In fact, gear products rose to 60% over 2014, safety product revenue grew 21% year over year, and SwaddleMe revenue increased 7% over 2014. We also made further progress this quarter selling across new channels and markets with Ecommerce sales up 50% year-over-year. Going forward, we will invest in our core brands and market diversification strategies to strengthen demand for our differentiated product and in doing so increase margin. We are pleased with the progress we made in this regard thus far, but realize we need to continue executing our vision for the company. We are introducing innovative product line extensions that build upon our existing portfolio and create brand loyalty from millennium moms and their children. We are also diversifying our products across many parts of the nursery, as well as in the active outdoor life of toddlers and parents on the go. This is why we've seen such success with our 3D Lite strollers and Pop 'n Play Portable Playard. We are filling a niche for moms who want the convenience, as well as quality, and by placing more of our product online and across multiple retail channels, we are making it easier for parents to buy our products no matter where they are or how busy their lifestyle. Overall we are excited about the outlook for our core categories of monitors, safety, and nursery, as well as gear and feeding. And we will continue to build these areas while phasing out unattractive or poorly performing products and categories. At the same time, we are committed to reducing inventory, and improving working capital, as rapidly as possible now that our debt restructuring is behind us. Just to wrap up. Before turning the call over to Bill, let me once again stop say how pleased we are to have our new credit facility in place which we've been working out for quite some time. These agreements will allow both financial flexibility as well as positively impact our bottom-line and obvious benefits to both Summer Infant and our shareholders. And as I mentioned earlier, we can now focus on inventory reductions along with building our brands. The management team has made significant headways these past few quarters, and we believe Summer Infant is very well-positioned for growth going forward. We remain committed to being the company we know it can be with loyal customers, solid cash flow, higher margins, and appropriate returns for shareholders. I want to thank our employees and our stockholders for their interest in our future as we take Summer Infant to the next level. Now Bill, will go forward with the first quarter financial results reporting this morning. Bill?

[Bill Mote:]

Thanks, Bob, and good morning everyone. Our 10-Q and related press release were issued this morning. In addition to listening to this call, I encourage you to review our filings. Net sales for the quarter increased 4% to $53 million from $50.8 million in the same period a year ago. The higher revenue was driven primarily by our safety and gear categories. Revenue rose 12.9% year-over-year excluding sales related to license, private label, and furniture items, which are non-core and being phased out. Gross profit for the first quarter 2015 increased to $17 million versus $16.4 million a year ago. Higher sales drove the gross profit dollars. Gross profit as a percent of net sales was nearly flat year-over-year. The 2015 results were negatively impacted by a $0.3 million of currency translation due to the declining value of the Canadian dollar and by $0.3 million tied to the sale of $1.2 million of inventory costs below cost. Net of these items, gross margin would have been 33.3% in the first quarter of 2015 versus 32.4% in the prior-year period. General and administrative expenses were $10.3 million for the first quarter of 2015 compared with $9.5 million a year ago. The increase in G&A was attributable to additional costs incurred in the first quarter of 2015 to manage operations through the West Coast port slowdown, and legal costs incurred in connection with an employee termination. In addition, we made important ongoing investments in marketing and new product development. Selling expense rose modestly to $4.9 million for the first quarter versus $4.4 million in the first quarter of last year. This increase was primarily due to the higher cooperative advertisement cost on higher sales volume. In the first quarter of 2015 we reported a net loss of $0.2 million or $0.01 per share compared with a net income of $0.2 million or $0.01 per share in the first quarter of 2014. Adjusted EBITDA for the first quarter 2015 was $2.6 million compared to $3.8 million in the first quarter in 2014. Adjusted EBITDA for the first quarter of 2015 includes $0.6 million in permitted add-back charges compared with $1 million of permitted add-back charges for the first quarter of 2014. Turning to the balance sheet, as of April 4, 2015, we have $1.6 million of cash and $56.3 million of debt compared to $1.3 million of cash and $58.7 million of debt at January 3, 2015. Since the end of the quarter we successfully restructured our credit agreement replacing an $80 million revolving credit facility, and $15 million term loan, with $60 million revolving credit facility, a $5 million First In Last Out or FILO facility and a $10 million term loan facility. The asset based revolver will initially bear interest at a rate equal to LIBOR plus 225 basis points and the FILO facility will bear an interest rate equal to LIBOR plus 400 basis points. The new term loan facility will initially bear interest at a rate equal to LIBOR plus 400 basis points compared with the prior term loan interest rate about a 11.25%. Cash expenses of $1.1 million were incurred to consummate these agreements and replace prior facilities. The new debt is expected to save Summer Infant approximately $1 million in interest expense or $0.04 per share annually. Debt at the end of April was $58.8 million. Inventory at April 4, 2015, was $43.6 million compared with $44 million as of January 3, 2015. We continue to look at ways to meaningfully reduce excess inventory going forward. And we have plan to sell between $7 million and $10 million of excess inventory over the next few quarters. Some of the sales will be at below cost. This will negatively impact our income statement by an estimated $2 million and accordingly depress margins for a short period of time. We believe, this is the right course of action, given our drive to reduce working capital, and streamline our operations, and our new credit facility has a $2 million carve out to do this without impacting the bank's calculation of EBITDA. The majority proceeds from the inventory disposition will be used to reduce debt balance. Trade receivables as of April 4, 2015, were $41.1 million compared to $38.8 million at the start of the fiscal year. The increase was driven by higher sales. Regarding operating cash flow, we generated $4.5 million in operating cash flow in Q1 compared with $2.2 million in Q1 2014. In closing, we believe that Summer Infant has made significant headway improving its balance sheet and focusing its product portfolio to increase both revenue and EPS going forward. With that, I will turn the call over to the operator, and Dan, Bob, and I will take your questions.

[Operator:]

Our first question comes from Steph Wissink with Piper Jaffray. Please proceed.

[Steph Wissink:]

I have a series of questions. But the first, Bill, if you could just talk to us about that inventory overheads that you're going to be working through. Is that targeted in certain brands or categories and how should we think about, when that start point may be and how longer it will take you to work through that and how do you plan to work through it, is it off price channel and so online off price or how are you thinking about exiting that inventory?

[Bill Mote:]

Sure. Definitely we will look it all different channels to move the inventory. We're looking to do this in Q2 and in Q3 but preferably we would like to move it sooner rather than later. Under the credit agreement we have through the end of the year to take this add-back. So definitely we will be completing it during 2015. Related to the channels we're definitely looking at E-com as well as secondary and tertiary retail channels to move this product. We have told you on the last call we had about $5 million of excess inventory related to the inventory build in advance to the port strike and we also have on an ongoing basis about $4 million a year of closeout sales that we do, the two together combined is what we're trying to move out quickly in 2015. This helps us to minimize amount on the balance sheet. We have been trying to move inventory out for some time now so this will help us generate cash and pay down debt. Our goal on debt is to be between three and three-and-a-half times levered over the course on the next couple of years and this will make a substantial move towards that.

[Steph Wissink:]

Great. That's really helpful. And then just quickly with respect to the West Coast port slowdown do you see like through the bulk of that impact or should we still expect some impact outside of the inventory that you just referenced kind of as we proceed into Q2 here?

[Bob Stebenne:]

Yes, there is a small amount left. Obviously what we thought last time when we saw February come and go that we would probably be about three to six months out in terms of seeing the final trickledown of the effects. The good news is containers are back to about a five or six day transit from the port down from about 22 at the peak of the issue. And we've gotten the majority of the inventory into the deep sea now and things are flowing on a more normal basis. However there will still be a little bit of a trickledown effect in Q2 just related to some inventory stock out.

[Steph Wissink:]

Okay. And now with respect to the core brand if you look at gear, safety, and the soft lines business how should we think about the relative margins of those three businesses either where you're today in relation to just one another or where do you think just structurally those margins can be over time by segment?

[Bob Stebenne:]

So for nursery, obviously nursery in the soft goods there are goods on the high-end of the margin spectrum for our product. Monitors have always been a solid performer and will continue to be a solid performer margin wise, as well as safety, which is where the bulk of our gate businesses. Going forward we have new product introductions in each one of those categories and as we introduced new products we're looking to get an uplift in margins. So as we increase the percentage of new product introductions, we expect that those margins will incrementally go up accompanying those launches.

[Steph Wissink:]

Great. And then just two final questions. One is with respect to your return on investment in your marketing. I noticed you've been doing a lot more digital, the targeted marketing towards millennium mom, can you just talk about some of the benchmark and the matrix around the return on that incremental investment. And then lastly, Bill, another one for you would be just the run rate G&A that we should be thinking about modeling Q2, Q3, and Q4 this year? Thank you.

[Bob Stebenne:]

So just related to E-com in general and we said it in the conference call script, E-com for us in Q1 was up 51%. So obviously it is an immensely -- it has an immense amount of our focus. We're looking at a lot of matrix but one of the most important matrix at least for us is just the amount of followers that we've had. We've increased to about 250,000 from 25,000 last year just on our overall social media connections. And those connections we believe drive much of our Ecommerce business ultimately because it allows us to directly market to the folks that are connected and those continue to increase as we move through the year.

[Steph Wissink:]

And how about on the G&A?

[Bill Mote:]

G&A I think overall for the full year we last call we said we would be at about a 18% of net sales G&A, and in Q1 we are 19.6%, we still believe as we move through the year as sales increase, and we continue to hold G&A to a flat rate, we're going to see that that G&A percentage come to provision through the end of the year.

[Operator:]

Thank you. Our next question comes from Danielle McCoy with Wunderlich. Please proceed.

[Danielle McCoy:]

Lot of questions have actually been answered. But I was wondering if you can give us a little bit of an update on some of the newer product launches that have hit the market and how has the perception been from both your key partners and consumers? Thank you.

[Bob Stebenne:]

Yes, Danielle, this is Bob. What we are experiencing right now in new product is what we introduced recently 3D Lites, some of the other new products the Pop 'n Play product even our Super C. The POS has been extremely strong. The reaction from customers have been nothing but positive. And as we move forward we're looking to do even more innovative and new products as well as continue to build on our brand the Swaddle brand is still performing well at retail. Our BornFree we had some very new and exciting things happening with BornFree that will be a reintroduction, a relook on the fourth quarter of this year. The Summer brand itself is extremely strongly. The POS on it is still very positive with our tubs, gates and monitors, and such. And we are also have I will call it a brand, a new brand but a new brand called Kiddopotamus which is a toy launch infant toy launch for us that that we are pretty excited about and was vying to show to the trade and reaction of that has been very positive as well. I invite you to the ADC Show and get see the stuff first and foremost and we're feeling really good about our new launches and our brands and things that we got to go and follow it.

[Danielle McCoy:]

Great. And then, just as a follow-up any update if you can give us and may be some work that you have been doing with some of the entrepreneurs and just on innovative ideas?

[Bob Stebenne:]

Yes, one of the things that we're looking to implement here and we started and we actually just brought some new folks in to help us along this line and that is to reach out to I will use the word inventor community, the community that's beyond the four walls that we deal with day in and day out here to reach out to the inventor moms of the world which we're working with several of them right now but we are reaching out, we are looking for new ideas and new concepts and new things to work on because again at the end of the day it’s the new stuff, and its truly is the new stuff that will allow us to be different and allow us to make the modules that we need to make. So we are definitely, definitely, definitely reaching out and going beyond.

[Operator:]

[Operator Instructions]. Our next question comes from Dave King with ROTH Capital. Please proceed.

[Dave King:]

As a follow-up to Steph line of question on gross margin it sounds like you expect those to trend higher over time helped by some of the new products. I guess if you back out the inventory charges that you're expecting over the next two quarters or so, how should we be thinking about gross margins near-term. Do you expect that to be already starting to ex that trending higher or is that more of a longer-term phenomena?

[Bill Mote:]

So margins in Q1 were 32% and that was below what our initial anticipation was. There were couple of factors that led to that especially related to the board straight. I think for full-year we've been focusing on mid 33 as a margin percent. And that's something that we're still focused on. It's going to be a little hard to achieve because of the Q1 32% but we're still focused on getting to that level.

[Dave King:]

Sorry to getting back on to those and then thanks Bill. And then in terms of as you think about new products, going forward, and obviously getting a lot of the revenue from new products, is there a sort of a guideline or internal target for R&D expense, as a percentage of sales et cetera and how has that changed over time and how are you thinking about that going forward. And then lastly sort of a follow-up to that I think you guys commented about some new kind of changes to the BornFree brand which may be so early to talk about the initiatives that have happened, any other color there would be helpful? Thanks.

[Bill Mote:]

So we've not specifically broken out our R&D spend and we're not prepared to do that. But we definitely in our prepared remarks, we did talk a bit about product development and marketing investments that we've made in G&A. So we are applying additional incremental G&A dollars to do that and I'm sorry I missed the last part of your question.

[Dave King:]

Yes, it was on BornFree and I just think there were some changes that Bob talked out may be from kind of incremental differences targeting in fourth quarter or initiatives you have planned?

[Bob Stebenne:]

Yes, Dave its Bob. We are the BornFree relaunch is totally fresh, totally new, from a new bottle to a new nipple in collar and delivery system from that standpoint to new packaging. So when you look at BornFree going forward it will look totally different than it had in the past. And the reaction so far from the retail trade which we showed it to has been extremely positive. And the feeding business as you all know can be done right, can be a wonderful piece of business and we are absolutely looking forward to doing it right with the potential of higher margins and a reap; I will call it a repeat business as we move forward. So it's an important piece of who we are as we move forward and we are looking to a bright future here as well, Dave.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Dan Almagor for closing comments.

[Dan Almagor:]

Thank you, Stacy. To summarize I would like to just repeat some of -- emphasize some of the points that both Bill and Bob spoke about. Starting with the bank refinance that gave us new flexibility at lower cost to manage and grow our business and also important to know that we have had several multiple institutions that were interested to work with us on this refinance and we end up choosing the best partner which was Bank of America to work with. Second, this carve out, the bill was the $2 million carve out, will definitely allow us for the first time in a long time to operationally get through this slow moving inventory or undesired inventory and the immediate results would be to improve our balance sheet and to improve our debt to equity ratio. And lastly, this we have a really robust new pipeline for this new product that some of you are interested to hear to and we want to invite all of you to come and visit us at the ADC Show it's going to be very exciting, you're going to see some products that really make, will make a big difference in the way the parent, the relationship with the baby, and at the same time we're even more excited of how we position for our future. We have an excellent opportunity to build Summer Infant into a company that can sustain solid, long-term profitability, and drive increased shareholder value. And with that I'd like to thank you for joining us this morning. Thank you.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.