Summer Infant, Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Summer Infant third quarter conference call. [Operator Instructions] I would now like to turn the conference over to the moderator, Chris Witty.

[Chris Witty:]

Hello, and welcome to the Summer Infant 2015 third quarter conference call. With me on the call today is Summer Infant's 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 that relate 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, constant currency sales, adjusted net income and adjusted earnings per share. These metrics are non-GAAP financial measures, which the company believes help 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 a reconciliation of GAAP results to non-GAAP measures, included in today's financial release. And with that, I'd like to turn the call over to Bob Stebenne. Bob?

[Robert Stebenne:]

Thank you, Chris. Good morning, everyone. I'd like to talk about this quarter and I'm proud of all that is happening at Summer Infant. While core product revenues grew only 2.5% year-over-year and margins were impacted by several non-operating items, including legal expenses, I want to focus my comments today on what we are doing to improve the company going forward and to make it into a consumer powerhouse, known for its strong brand and innovation. Bill will review the financial results in a moment. This quarter we've demonstrated what the company has been focused on somewhat to the past year, and certainly since I became CEO, that is our new product development. Let's face it, no consumer company can grow, sustain margins or for that matter survive or let's say are constantly innovating, evolving, bring out new products and adapting to meet and exceed the needs of its customers. Summer Infant understands it, and recent industry tradeshows have underscored the fact that we are trying to hit some real homeruns. As a reminder, we attended the KinderCare Baby show in Cologne, Germany, this September; and then in mid-October had our largest exhibit over at the ABC Kids Expo in Las Vegas, the premiere juvenile industry event in North America. I'll go over some specific product introductions in a minute, but first let me provide a bit of color on these two trade shows. First, in Cologne, our booth showcased Summer's new product innovation and was very well received. We saw all our major U.S./international customers and built relationships to design the few future sales growth. We also used this opportunity to highlight products adapted for the unique taste and custom for the European market, which is necessary for products to succeed there. We believe the show and our focus on local market requirements should accelerate international sales going forward. And let's face it, we have plenty of room to grow in Europe, Latin America and Asia. At the ABC Kids Show in Las Vegas, our team did an excellent job demonstrating the product depth and innovation of Summer Infant. This year's booth was our largest ever, and displayed new and extended products across all our brands, including Summer Infant, SwaddleMe, Born Free and Kiddopotamus. In addition, we showcased several new sub-brands such as Baby My Baby massage line, the Home Safe line, new 3D Lite and Evolv strollers for joggers, our Pop line portable on-the-go products and the amazing Summer Smart Nursery. We do a great crowd and plenty of compliments from show attendees, including of course all major big box stores, specialty retailers and e-commerce site. From my perspective, we were the best booth at the exhibit hall and interest in Summer's product exceeded our wildest expectation. In fact, we received five awards at the show, more than any other company in attendance, out of approximately 1,700 exhibitors. One product, impacted Babble Band, a wrist monitor, received two. First, a Parent Tested Parent Approved Top Pick award and second an Editor's pick award from The Bump website, which reviews baby products for customers. Our SwaddleMe brand won Best Pick from BabyList online registry based on feedback from 8,000 parent registrants. And our new Born Free Breeze bottle also received an Editor's pick from The Bump and was featured on local CBS News TV segment covering this show. Last, but not least, our Lil' Luxuries Whirlpool, Bubbling Bath & Shower, an item from our baby bath collection received a Parent Tested Parent Approved Top Pick award as well. The bottomline is that our products created the buzz at the show to immense crowds and were featured across news outlets due to the innovative approach to being the lead of today's busy parent. I am proud to say that our product development team is second to none, which is why I'm so excited about the future of this company. Now, let me give you some details about the product that are transforming Summer Infant and will lead to increased shelf space, stronger brands and higher margins. First, we are revamping our SwaddleMe brand with improved packaging and designs for Q4 this year and are extending the brand into other sleeping products that use light and sound, we call it, soothers to help babies rest. In addition, we've already begun shipping our new Kiddopotamus brand products through buybuy BABY, as well as specialty retailers. The Kiddopotamus brand includes seats, bouncers and toys and we have plans to expand this line going forward. It's been very well received to say the least. We also recently introduced the Summer Infant My Size Potty product, which looks like a real toilet, but for kids and with giggles and its already selling very well. Next year in the first quarter, we anticipate rolling out numerous other items highlighted at trade show, including our top line of portable products, a summer sub-brand that will include easily transportable seats, high chairs activity areas and other products. In addition, we'll be rolling out our award-winning Born Free Breeze bottle, which is easier to use and clean with just two pots and much more comfortable and convenient for both mom and baby. We are also launching several new strollers to build upon the success of our 3D Lite line where our brand is now considered one of the top five in the market. We plan to introduce an attractively priced jogger called Evolv, a 3D Lite stroller for two model tailored to the European market expanding our line and building brand recognition at the same time, both here and overseas. In addition, we plan to introduce our new Baby My Baby massage line of product next spring, which we believe is an exciting new sub-brand for us. A bit later next year starting in the second quarter, we'll begin rolling out our advanced connectivity product that created so much buzz at the ABC. This includes our new Babble Band baby monitor, the first wearable audio monitor, as well as our amazing suite of Summer Smart products. Summer Smart will include a Bottle Maker/Formula Dispenser a movement monitor pad and a changing table that measures and record weight and a soother that can help baby sleep and wake them naturally. These products will be work independently or together through a mobile app, which will allow for device additions in future. We're very excited about Summer Smart and what it represents, providing useful connected information to parents, so they can better predict and respond to the children's needs. Everyone who view these products sees how innovative they, and we believe Summer Smart will be a game changer for us strengthening our bond with consumers and driving increased market share, as well as improve operating margins. As I said in the beginning of today's call, Summer Infant has transformed into a company where product development comes first. We know that innovation is the key to everything when it comes to consumer based organizations, and this underlying philosophy is now and still throughout our corporate culture. And that's why I'm confident about what the future holds. Our brand expansions, new products and unique capabilities to drive higher revenue and improved financial results in the quarters to come. Before turning the call over to Bill, let me just touch base on a couple of operational areas where the team has focus outside of product development. Our investors know we replaced our credit facility earlier this year and announced streamline initiative to reduce expenses by $3 million to $4 million annually. We remain on track for these measures to be fully implemented by yearend, along with a renewed focus on product development. The actions we're taking to right size other areas of our organization will make Summer Infant a stronger, faster responding consumer products company, which is what we debate to succeed in today's competitive landscape. We've also made it clear that we want to reduce working capital, including inventory and have seen great progress here as well, eliminating about 85% of what we envision, including nearly all of our remaining lines of product. I commend Bill for his time and his talent in handling many of these issues, which positioned us for increase financial flexibility and higher returns going forward. We've also made changes to how our sales and R&D areas are organized to reward growth and innovation. The fruits of our labor should be evident as our product rollout takes places over the couple of quarters, which will be a very busy time for all of us here at Summer. The new Summer Infant is nimble, consumer-focused, innovative company, dedicated to growing our brands, delighting our customers and rewarding our investors. Now, Bill will review our financial results in detail.

[William Mote:]

Thanks, Bob, and good morning everyone. Our 10-Q and related press release were issued last night. In addition to listening to this call, I encourage you to review our filling. Net sales for the quarter were $50.2 million versus $51 million in the same period a year ago. As Bob mentioned, on a constant currency basis, core revenue rose 2.5% year-over-year. We anticipate future quarters to show stronger growth due to the many new products Bob spoke about. Gross profit for the third quarter of 2015 was $15.6 million versus $16.6 million a year ago. And gross profit as a percent of net sales was 31.1% compared to 32.5% last year. Gross profit was lower this quarter, primarily due to a $100,000 of losses on the sale of aged inventory below cost; $200,000 of inventory charges taken related to exiting the furniture business; $300,000 of temporary additional costs tied to inventory mix changes at our distribution center and $0.5 million of unfavorable foreign exchange, primarily due to the decline of the Canadian dollar. Excluding the impact of these items gross margin would have been 33.8% for the quarter. General and administrative expenses were $13 million compared to $10.1 million a year ago, reflecting $3.7 million of legal cost incurred in connection with ongoing litigation. Selling expense declined to $4.1 million for the quarter versus $4.5 million in the third quarter of last year, reflecting lower sales and improved cost controls. In the third quarter of 2015, we reported a net loss of $1.8 million or $0.10 per share compared with a net loss of $100,000 or $0.01 per share in the third quarter of 2014. Excluding charges related to excess inventory reduction, exiting the furniture business and extraordinary legal cost, the company has posted net income of over $0.5 million or $0.03 per share for the third quarter of 2015. Adjusted EBITDA for the third quarter was $3.1 million compared to $3.6 million for the third quarter of 2014. Adjusted EBITDA for the third quarter of 2015 includes $4.3 million in permitted add-backs under our credit facility compared with $1.1 million of permitted add-backs for the third quarter of 2014. Turning to the balance sheet. As of October 3, 2015, we had $1.1 million of cash and $53.5 million of debt compared with $1.3 million of cash and $58.7 million of debt as of January 3, 2015. In the quarter, we were compliant with all of our loan covenants. The company sold or eliminated approximately $2.2 million of excess inventory during the quarter. And as of October 3, 2015, we had $43.6 million of inventory on hand compared with $44 million as of January 3, 2015. The company's quarter-end inventory reflects new product introductions in line with what Bob spoke about earlier. The company has sold or eliminated approximately $8.9 million of excess inventory during the first nine months of fiscal 2015, including nearly all furniture products. Trade receivables at the end of the third quarter were $36.1 million compared with $38.8 million as of January 3, 2015. Accounts payable and accrued expenses were $36.6 million as of October 3, compared with $30.5 million at the end of fiscal 2014. Regarding cash flow, we generated $8.5 million in cash from operations year-to-date versus a use of $5.1 million in last year's comparable period. So we're very pleased with our accomplishments in this regard and we'll maintain a tight focus on working capital going forward. Before turning the call over for questions, I'm pleased to announce and update on our outstanding legal matters. Earlier this week, the company reached a confidential settlement agreement with principals of Rest Devices Incorporated, a former consultant to the company, as part of its ongoing lawsuit against these individuals and certain former employees of the company. We believe the settlement removes additional risk and the expense of litigation and provides a path for us to move forward with an exciting array for product rollouts, including our Summer Smart environment. The settlement agreement did not resolved any claims against the remaining defendants, and so the company will continue to pursue the matter with respect to such individuals, in court, as necessary, to protect someone's confidential and proprietary information. With that, I'll turn the call over to the operator and open it up for questions.

[Operator:]

[Operator Instructions] The first question comes from Dave King of ROTH Capital.

[Dave King:]

I guess, first off on the revenue side. It looks like, if we back out some of the decline you've had in non-core products like furniture, it looks like revenue was actually up again on an organic basis. I guess can you talk about when we might start to see that kind of turn to the point where it's lapping those declines, we actually see it up on an overall basis? And then I guess, similarly with some of the new product action that looks like you're having, and some of these new products that look great frankly, when you guys expect those to really start contributing to the revenue? It sounds like that's mainly, this quarter, this coming quarter and the following? But do we see any of that in the third quarter, for example, with Kiddopotamus, for example, like I think that we're shipping. Just some more color there would be helpful.

[Robert Stebenne:]

I'll start with the product and introduction piece of it. So you were at the Cologne show, it was good to see you there, and of course, at ABC. We had two great shows, right. So we really, for the first time, showed an array of fresh product, some of which we'll be shipping fourth quarter of this year. And then we're going to be rolling things out first quarter and second quarter next year. And to shed a little light on that, the new Swaddle and new package, of course, we're shipping it as we speak. The Kiddopotamus toy line, if you will, that is also being shipped as we speak. So that's fourth quarter of this year. As I look at first quarter next year, things like the Babble Band will be ready to be shipped. And the Smart Nursery, we're looking at second quarter next year to be shipping that as well. So that's just some of the highlight of some of the new stuff that we work on and ballpark when we'll be shipping it. As far as how it reflects the revenues and all that, I'll turn it over to Bill.

[William Mote:]

The 2.5% growth in core revenue is so on constant currency basis from last year and on a year-to-date basis that's about 6.6% growth. So it's actually stronger year-to-date and it was for the quarter. So there is timing obviously related in the new product launches and what we're doing in Q4 versus the first half of next year. So we expect that year-to-date trends to continue as we start to launch product in the first half of next year. So a lot of these items we just talked about the, Babble Band, the Swaddle, those are all in the core category areas. So those will definitely be leading to continuing growth in the core area.

[Dave King:]

And then switching gears a bit, on the gross margin I think you talked about $300,000 from mix changes at a distribution center. I guess, can you just clarify or help me understand a little bit what that might be?

[William Mote:]

What that is demurrage for containers that have come in and we didn't have the space in that facility to store. So I don't know how familiar everybody is with the situation in the LA basin, but warehousing is 99% utilization. So it's hard to find third-party logistic supplier. And we made a decision to keep these containers demurrage, which cost us about $300,000 for the quarter. And that will move a bit into Q4 as well, so we'll see a charge in Q4 for that as well. We're amortizing this over the turns of inventory, which is about three turns on the inventory.

[Dave King:]

And then, I guess lastly, and I'll step back. In terms of the inventory write downs, it sounds like from Bob's comment, I want to say that you completed 85% of what you had hoped on that front. Does that then imply that, you stood at 15% less that what you expected on that quarter? How are you guys thinking about that on further charts?

[William Mote:]

On a net basis, we have about $1 million of the $10.3 million of inventory that we started with, that's including other reserves that we've taken on this inventory. And now, we're down to a level -- a $10.3 million, it was stifling our ability to ship new product into the distribution center. We're at a level now that we have this older inventory under control. So I'm not anticipating any larger charges going forward, we preserved a good chunk of that the remaining inventory there. On an ongoing basis, we expect between 1% and 2% of sales on an ongoing basis to be what I would consider close out, but the sooner we address it -- this was a build-up over time that we started with $10.3 million. Sooner, we address it and we will going forward, the less hit that we have to take from a margin perspective line.

[Operator:]

The next question comes from [indiscernible] of Wonder Lake Securities.

[Unidentified Analyst:]

Could you talk about a debt levels and where kind of you want that is a longer term? And secondly international sales and has not been as bigger focus. Where do you think that can go and kind of what are you doing in the near longer-term to kind of get to that levels?

[Robert Stebenne:]

The international is a focus for us, as we look at our business, and we're doing a couple of things differently than we had in the past in international business. We have an office in the U.K., a great marketing team, sales team and so on and so forth, and they are working very closely with our product development folks here and developing product for their market. A great example of that was that in Cologne we showed a UV stroller, which is, it's our 3D Lite, but for their market. As we know in European market, different things need to take place on strollers that you don't need to do here from breaking systems and so on and so forth. So we've designed this product range for them, and we're doing more and more, more of that. So we are really looking to go after that international market. And as we all have seen most recently, with the China policy now, it's no longer a one child policy, if you will, that's going to open up the China market, and we're aggressively pursuing that as well. So it's something that we are looking at, something that we are focusing on, and we're looking to rep at all those, specifically those markets in particular. So that's our plans right now. Bill?

[William Mote:]

Yes, and just related to that Eric. We're at $53.5 million as of the end of Q3. We started the year $58.7 million. Obviously, we've had some legal expenses that we didn't necessarily plan on at the beginning of the year. We've paid down debt in exchange by 8.8% year-to-date. Our goal long-term, and we stated this before on public call, is to be in the 3.5x EBITDA range on debt. So that's our long-term goal. And at the end of the year, our credit covenant has us getting to 5x adjusted EBITDA. So in order to stay in compliance, we need to be at that level by end of the year, but long-term, 3.5x.

[Operator:]

The next question comes from Stephanie Wissink of Piper Jaffray.

[Maria Vizuete:]

It's actually Maria Vizuete on for Stephanie. I just had a few question here. Just going back to the new product launches, I was wondering if you can discuss some of the booking trends, as they were late in last year, so just looking at some of the new products going through end of the year compared to the launches in the prior year.

[Robert Stebenne:]

So let me try to address it this way. Fourth quarter this year, as I said already, we'll be shipping the Kiddo product, the Swaddle product we'll be shipping as well. We have something new and exciting that we shipped over the last several weeks, which we are getting a tremendous response from and it's My Size Potty. It's doing quite well, and not surprising by the way, but quite well. So we got a lot of new stuff along those lines that came up fourth quarter of this year. As we look at first quarter next year, a whole revamp of Born Free we'll be introducing and shipping in first quarter next year. As I mentioned, Babble Band, we'll also be shipping. Baby My Baby, a new baby massage line, what we call, white space, that we went after. We got some great reaction to that. It was picked up by many of our major retailers right now. And the portable online product, what we call Pop [indiscernible] what we're sub-branding, if you will. So all this is coming out first quarter of next year. And then of course, as we move forward into the second quarter, Evolv, Summer Smart we'll be shipping second quarter next year. So it's a rolling bit of product, a lot of product actually that we are bringing to market. So hopefully that helps in guiding you a little bit here.

[Maria Vizuete:]

So just thinking about some of the booking trends on those products, would you say they're comparable to prior launches?

[Robert Stebenne:]

I wouldn't really be able to answer that quite frankly. I'll go back and take a look. But right now, I don't have that comparison. I'm sorry.

[Maria Vizuete:]

Maybe we can just move on to the next question. I was just wondering, Bob, that what you're seeing enough pricing in competition perspective, particularly on the monitors and feeding side?

[Robert Stebenne:]

So the monitor side, right, we have the Summers Smart that we're introducing. And there will be other, what we call smart product out there. I feel very strongly that what we're introducing and how we're introducing it, the fact that we're introducing a range of products that's really built for mom and babies, by the baby -- we consider ourselves the baby experts here. I feel so that we have a real tiger by the tail as we start introduce. And speaking to all our major retailers, the reaction to the line has been sensational. So from a pricing perspective, when you have innovation, you try to go forward, not for you making margins and not so you try to get the biggest bank for you buck. And we're looking with this new product that we're introducing, higher margins across the board. And we feel that the market can handle it. So hope that helps.

[Operator:]

There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks. End of Q&A

[Robert Stebenne:]

There are no other remarks that we have. We appreciate everybody joining the call. And we look forward to talking to you next quarter.

[William Mote:]

Thank you all very much. We appreciate it.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.