Summer Infant, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good morning and welcome to the Summer Infant Incorporated Second Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty. Please go ahead.

[Chris Witty:]

Welcome to the Summer Infant 2015 second quarter conference call. With me on the call today is Summer Infant’s Chairman, Dan Almagor; 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:]

Thank you, Chris and good morning everyone. Thanks for joining our second quarter conference call. I’ll come back for some additional comments later but I just wanted to say first and foremast how proud I am of our team for what they have done these past few months. As Bob and Bill will elaborate, it’s been incredibly focused eventful time at Summer Infant, and our staff and employees have put many hours working on number of strategic initiatives to accelerate top-line growth and differentiate our brands and improve bottom-line results. I also want to thank our investors for their continued patience and interest in the company this year, despite a number of unexpected events. As our shareholders know, many member of our Board and share management team have purchased stock in the company in this past year and we’re a strong believer in its potential. I will comeback at the end of the call for some closing comments before opening it up for questions. Now, let me hand it over to Bob. Bob?

[Bob Stebenne:]

Thanks, Dan. Let me begin by stating that since becoming CEO in May, it’s been a very busy time for me and the entire management team at Summer Infant. We’ve accomplished a great deal in a rather short period of time and are enacting further measures which we believe will strengthen the company going forward about which I will talk in a moment. We haven’t changed our strategy to focus on core brands and on products that differentiate us from competition, but are more driven than ever to right-size our operations and clean up the balance sheet to make us a more nimble, profitable and customer driven organization. Regarding second quarter results, revenue was down slightly to $51.8 million from $52.6 million last year with the difference primarily due to some delayed orders from one of our key customers. We believe such orders will likely take place in fiscal Q3, given normal demand trends. That said revenue and gross margins were also negatively impacted by disposition of roughly $6.5 million of excess inventory most of which was sold at a discount to expedite the working capital reduction initiatives, we spoke about last quarter. Excluding sales related to non-core products such as license, private label and furniture, revenue rose 1.8% year-over-year. This is however still not the growth rate we like to see. And so, we are working on product line expansion as well as new marketing channels to fuel faster top-line expansion going forward. Our gross margin for the quarter was 26.6% of sales versus 33.2% last year, primarily due to the inventory reduction plans I just mentioned. Bill will get into details but suffice it to say that we lost $1.8 million related to selling some inventory below costs. Excluding this as well as chargers taken to complete our exit from furniture category and foreign exchange losses, gross margin for quarter would have been 32.8%. We obviously still have our work cut out for us and we plan to sell or liquidate some remaining excess inventory during the third quarter. One great accomplishment during the quarter as previously announced was the closing of our new credit agreement. These facilities will provide for increased flexibility along with lower interest expense, resulting in projected annual savings of approximately $1 million or $0.04 per share. We are pleased with our current debt structure and we look forward to further reduce our leverage going forward. Now, let me review our market trends and outlook. During the quarter, we continued to see a positive reaction to our core product strategy as year-over-year growth reflected demand for our Summer, Swaddle and BornFree branded products. This is primarily attributable to sales of our 3D Lite convenient strollers, Pop ‘n Play Portable Playards and gates. In total, gear products rose 22.5% over 2015, safety product revenue grew 15.7% year over year, and video monitors increased 5.4% versus 2014. And in terms of channel development, e-commerce revenue rose 11.6% year-over-year. Internationally we also saw continue traction in Asia. So, we’re maintaining our focus on new channels and believe this is just tip of the iceberg, particularly given the massive amount of online purchasing done by parents in the U.S. and overseas. We are evaluating new strategies to increase our web presence, drive traffic and promote brand loyalty, which is key to repeat purchases and higher margin. In terms of product development and marketing, we’ve made some changes at the company to strengthen our position going forward. In July, we announced hiring Ted Kelley as Summer’s Senior Vice President of Sales, bringing with him a tremendous amount of experience in sales, marketing and brand management. Ted is part of the focused strategy we’ve implemented with the goal of significant improving our growth profile and bolstering top line performance. We’ve organized our sales staff in to three area, all reporting to Ted with one focus on the rapidly expanding world of e-commerce, a second focus on traditional North American retail business, and the third on international markets. To the last of these, we’ve also hired a key individual based in the UK who brings very tangible expertise in understanding and developing overseas sales channels. Overall, we believe this new structure is better aligned in terms of both accountability and execution to achieve our goal of accelerated growth. For example, on international side, we’ve already met with any accounts Europe, are adopting some products to those markets and will be represented at the Cologne baby show in Germany this September. So, we have reenergized the sales origination while at the same time focusing our investment in product development. In this regard, let me briefly talk about some great products and concepts we expect to introduce in the fourth quarter, just in time for the holidays. First, we are revamping our SwaddleMe brand and products to highlight their unique characteristics with improved design and packaging. And across our extensive BornFree brand we’ll be introducing products that are easier to use, more convenient for parents, again expected to ship in Q4. In addition, during the same time, we anticipate launching a new innovative stroller that builds upon the 3D Lite success and will bring new monitors to market that are more mobile and adapted to the needs of both child and parents. We’re also introducing a great new toy line under the Kiddopotamus name which we’re really excited about. The key is for us to be innovative, technology forward and differentiated to ensure that millennium parents are getting the most out of their products they buy. This is not only sound brand management but it’s also the key to higher sustainable margins that is also part of continued development of what we call the Summer Smart Connected Nursery which leverages technologies across a variety of products to communicate with each other and with parents thus ensuring safety and comfort for the child as well as convenience for the caregiver. We are developing products that leverage the Internet of Things in a network of software that sensors to build a smart nursery of tomorrow. And we’re very excited about this as a means to drive growth and differentiated Summer Infant. Overall, we’re putting in place the product and brand strategies we believe that will enhance our profile, drive future demands and expand margins. I have more to say about our brand expansions in the quarters to come. Before turning the call over to Bill, let me just touch on a few big picture items regarding Summer Infant. First as we mentioned before, we have a focused top line growth strategy based on core branded product and investment innovative technology and market development. I know we’ve had some bumps in the road lately but we have amazing brand recognition globally in our Summer Swaddle and BornFree products. This strategy is working and we believe that it has enhanced the outlook for the company. At this same time, we’ve taken out several initiatives to drive margin expansion and ultimately bottom line improvement, these include the rationalization and/or exit of core product lines; the implementation of new credit facilities; design to reduce interest expense; and steps taken to lower working capital, particularly with regard to excess inventory to strengthen our balance sheet and free of cash. In addition we plan to right-size the business and streamline operations to expand margins and make us a more nimble, responsive organization. Specifically, we’re working to reduce the overall G&A expenses with a goal of extracting $3 million to $4 million in an annualized cost by the end of this year. We believe this is both necessary to be competitive to position Summer Infant for higher growth and better returns, heading into 2016. Now, Bill will review of our financial results in detail. 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 second quarter were $51.8 million versus $52.6 million in the same period a year ago. The revenue decline year-over-year was primarily due to lower sales of non-core products such as licensed, private label and furniture items and delayed orders from a Summer Infant customer. The company office sold or eliminated approximately $6.5 million of excess inventory during quarter, negatively impacting both sales and margins. As Bob mentioned, revenue was 1.8% year-over-year excluding sales from licensed, private label and furniture items, which are non-core and have been phased out. In addition, we anticipate seeing stronger revenue in Q3 and going forward, including a pick up from the customer with delayed orders. Gross profit for the second quarter 2015 declined to $13.8 million versus $17.4 million a year ago and gross profit as a percent of net sales was 26.6% in 2015 compared to 33.2% last year primarily reflecting lower overall sales, product mix and the impact of the aforementioned inventory reduction initiatives. The company booked $1.8 million in losses on $2.9 million of excess inventory sold below cost related to our inventory reduction plan. In addition, we recorded $700,000 of inventory charges to exit the furniture business and saw $200,000 in foreign exchange losses, primarily due to the decline in the value of the Canadian dollar. Excluding the impact of the above charges that did not occur in the second quarter of 2014, gross margin as a percent of net sales for the second quarter 2015 would have been 32.8%. General and administrative expenses were $12 million for the second quarter of 2015 compared to $9.9 million a year ago, primarily due to $1.7 million of legal cost in connection with a legal complaint filed May 27, 2015 and an employee termination settled during the quarter, and by ongoing investments in marketing and new product development. Selling expense declined $4.3 million for the second quarter versus $4.9 million in the second quarter of last year, reflecting reduced cooperative advertising costs from lower sales volume. In second quarter of 2015, we reported a net loss of $3.5 million or $0.19 per share compared with net income of $300,000 or $0.02 per share in the second quarter of 2014. Excluding charges related to excess inventory reduction exiting the furniture business, foreign exchange losses, charges associated with the new credit agreement and extraordinary legal costs, the company would have broken even for the second quarter of 2015. Adjusted EBITDA for the second quarter of 2015 was $2.2 million compared to $3.4 million for the second quarter in 2014. Adjusted EBITDA for the second quarter of 2015 includes $4.4 million in permitted add-back charges under our credit facility compared with $400,000 of permitted add-back charges for the second quarter of 2014. Turning to the balance sheet, as of July 4, 2015, we had $1.5 million of cash and $55.3 million of debt compared with $1.3 million of cash and $58.7 million of debt at January 3, 2015. As previously mentioned, in the second quarter, we were structured our credit agreements replacing an $80 million revolving credit facility and $15 million term loan with a $60 million revolving credit facility, a $5 million First in Last out or FILO facility and $10 million term loan facility. These new facilities have provided us with increased flexibility as well as much lower interest rates while allowing us to sell or eliminate excess inventory more rapidly, a key goal of the company. As stated previously, cash expenses of $1.1 million were incurred to consummate these agreements and replace the prior facilities. The company wrote-off approximately $700,000 of unamortized financing costs and termination fees associated with the old credit facility during the quarter. Going forward, the new debt is expected to save Summer Infant approximately $1 million in interest expense annually or $0.04 per share. Inventory at July 4, 2015 was $42.9 million compared with $44 million at January 3, 2015. The company sold or eliminated approximately $6.5 million of excess inventory during the quarter, however the company ended the quarter with higher than expected inventory levels due to certain delayed orders from a customer, as Bob mentioned earlier. We have nearly completed our inventory reduction initiative which is an important goal for Summer Infant to reduce working capital and streamlining our operations. As a reminder, our new credit facilities have $2 million carve out with which to do this without impacting the bank’s calculation of EBITDA. We have $200,000 remaining in that carve out. Trade receivables at the end of the second quarter were $40.4 million compared with $38.8 million as of January 3, 2015. Accounts payable and accrued expenses were $38 million as of July 4, 2015, compared with $30.5 million at the end of fiscal 2014. Regarding cash flow, we generated $6 million in cash flow from operations year-to-date versus $1.2 million in last year’s comparable period. Now, I’ll turn the call over to Dan for some closing comments. Dan?

[Dan Almagor:]

Thanks Dave. I just wanted to say again that Bob and his team have really come together these past few months and as he stated, implemented a number of changes that will transform Summer Infant into a stronger company going forward. They’re focused on this with both passion; precision; perseverance and tenacity. As our investors know, we’re currently involved in a legal proceeding about which we cannot really discuss the details, primarily for matters of confidentiality and liability. I appreciate our shareholder understanding in this regard and will put out a statement when appropriate. We are working to resolve this issue as quickly as possible. Also thanks to all those who made it to our Annual Meeting this year. I realized the timing was not perfect right before the earnings and we’ll definitely look to revise this in 2016. But we appreciate those who were able to come and give us feedback about Summer Infant. In closing, I believe that we’ve made a great deal of headway across our organization towards achieving improved financial results but now that we have further to grow to ensure consistent performance high growth and customer and stronger company for the future while delivering the best innovative products to our customers. I assure you that we’ll continue to work to exceed expectations for all our constituents in future. With that, I’ll turn the call over to the operator to open it for question.

[Operator:]

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from the Dave King with ROTH Capital Partners.

[Dave King:]

I guess first off, in terms of the delayed orders from a key customer, I was just looking to better understand that in terms of magnitude or what specifically might have driven the delay to the extent you can talk about it obviously with your customer, and then how to think about it in terms of why we should expect that to then come in the third quarter? I mean have you gotten those orders now back? I guess just some more color there would be greatly appreciated. Thank you.

[Bill Mote:]

The amount of the sales that we missed there is about $4 million. And if you want to read that through from a margin perspective, it’s about 33% on a net margin basis. The read through the bottom line is somewhere in the $1.3 million. POS at that customer is strong. We from what we can ascertain from feedback from the customer, they are going through an inventory management program just to work on their balance sheet and that’s not uncommon in retail as that happens from time to time. So, given the POS volume that we’re seeing, we would anticipate those orders will come back to us in late Q3. So, we’re not overly concerned although it was an impact to Q2.

[Dave King:]

And then in terms of the inventory, so I think you’ve touched on it a little bit but it sounds like there is not much left in terms of the excess, but how much are we thinking at this point is remaining -- obviously $6.5 million moving out is a good chuck, so good job there, but how much is remaining? And then do you think you can move it under $200,000 and carve-out?

[Bill Mote:]

So what’s remaining now is about $3 million once you’ve net out the reserves. We do believe we can move the majority of it under the $200,000. We’ve reserved dollars to help with that. So those reserves came through in Q2 and that’s part of the reason for the lower margins.

[Dave King:]

So that’s what we saw then in 2Q, so it’s not necessarily apples to apples to assume 21% write-down on the $6.5 million and then assume the same $200,000.

[Bill Mote:]

Right. I mean obviously the $6.5 million that we moved that was moved at a profit and some of that was moved at a loss, so there was a mix there. We will continue to sell this product. And we can even put it on our website and move it at a higher margin than we move it going to tertiary or secondary retailer. So, we have some options now that we got it down to more manageable level.

[Dave King:]

And then I’ll take rest of out that off line. One another just quick question in terms of the smart nursery and Internet of Things initiatives, I guess what’s sort of that’s hiding on that, how far long are you in building that business, when we should we start to expect to see some of those products?

[Bob Stebenne:]

We are in a process of building as we speak. We’re actually planning to show the smart nursery in the concept at the upcoming ABC Show in October. So we invite you to come to that show if you are on and take a look at it firsthand.

[Operator:]

Thank you. [Operator Instructions] And we do have a question from Stephanie Wissink from Piper Jaffray.

[Maria Vizuete:]

Hi. Thanks so much for taking the question. It’s actually Maria Vizuete on for Steph. I just had a couple of questions here. Just wondering if you can talk a little bit more about the cost reductions and what buckets you might expect that to come from?

[Bill Mote:]

The cost reductions really, we did use a lot of third-party services for both PR, marketing, outside engineering; we took a hard look at that given the Q2 results. A lot of that’s going to come from reducing those services from outside and taking them inside, internal to the company. We think we found the way to do that with our current infrastructure inside. And it’s a way to save a pretty significant amount of dollars.

[Maria Vizuete:]

And then just looking at margins, how should we be thinking about that line for the second half?

[Bill Mote:]

We’ve talked in the past that of wanting to be in this mid-33 range. Once you back out all of the unique items that have in the margins at this point, we’re at about 32.8. So, we’re still approaching the goal that we set for ourselves.

[Maria Vizuete:]

And then just lastly, can you report a little bit more about some of the merchandising efforts in the second half and beyond even like the new toy line, can you talk a little bit more about that? Thank you.

[Bob Stebenne:]

So, we’re pretty excited about the new part that we have come into market this fourth quarter actually, one being the Kiddopotamus line of toys, again we’ll be shipping in fourth quarter. We have fairly decent placement so far. We’re really excited about what that kind of looks like at retail. So, we’re pretty excited about that. We also have new strollers, EVOLV stroller that’s coming out that has gotten nice reaction from the trade. We have bands, [ph] we have quite a bit of new product of which we’re truly excited about showing it; we’re going to showing it at the ABC and I’d that again come down and take a look at it firsthand.

[Operator:]

Thank you. [Operator Instructions] There are no more questions in the queue. So, I would like to turn the call back over to Mr. Stebenne for any closing comments

[Bob Stebenne:]

This is Bob. I’d like to thank everybody for joining us on today’s call. We look forward to speaking with you the next quarter, seeing you at an upcoming investor event. Thanks again for your time.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.