Summer Infant, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

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

[Chris Witty:]

Hello, and welcome to the Summer Infant 2015 fourth 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 2016 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 2, 2016, 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 other 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?

[Bob Stebenne:]

Thanks, Chris, and good morning, everyone. With 2015 behind us, I’m proud to say it was certainly a year of transition and transformation for Summer Infant. The company was pretty clear about what we needed to accomplish and I think we achieved these goals and more, positioning us a stronger performance going forward. We said we’d refinance our credit facility to reduce interest expense and we did just that, along with lowering indebtedness from $58.7 million at the beginning of the year to $53.6 million at the end, all while providing increased financial flexibility and liquidity to the company. This shows the conviction of our lenders we have our products and our future. We also said we’d eliminate excess inventory and we did that as well to the tune of some $9.3 million. Inventory levels at the end of 2015 stood at $36.8 million, the lowest in years. Almost more importantly the quality of that inventory was much improved representing new products, new innovative concepts and very little franchise [ph] or other non-core items. So, we definitely cleaned up the balance sheet but that wasn’t all. We reduced costs across the board eliminating approximately $4 million from annual operating expense. And we’ll continue to focus on reducing cost as well as working capital going forward. Our initiatives last year resulted in operating cash flow of $9 million, a $15 million improvement over 2014. But most importantly we invested in the future, which is what I get most excited about. As discussed on our last earnings call, Summer Infant brought a number of new products and brand categories to life in 2015, with more to come this year. We won several awards and seen a rebound and interest from retailers both on-ground and online, and some of our new products with healthy margins are selling exceptionally well. So that’s where we find ourselves as we begin 2016. And we feel confident that the company is on sound footing for some exciting times ahead. Now, let me provide a bit more color on our current operation and outlook, after which Bill will review the financial results in detail. To start, I would like to discuss our focus on stronger, more unique product line and how that has impacted topline results. Excluding and licensed, private label, and furniture product our core revenue grew 6.1% last year. While this definitely shows the company is moving in the right direction, we believe higher growth is possible for Summer Infant. On the last earning call, I discussed our recent trade show accolades and new product rollout plans which are already impacting topline results. In the fourth quarter we introduced several new items including the Summer Infant My Size Potty, which looks like a real toilet, it’s priced at a premium and has been outselling our projections from day one. It’s an amazing product with great demand, and we’ve actually had trouble keeping shelves stocked. We’ve also continued to see strong demand for our 3D Lite Strollers, where our brand is well-known, highly valued and priced appropriately. It’s actually quite amazing that we’ve come to be considered one of the top five stroller brands by consumers in only a few short years. Our stroller category grew 58% in 2015 driving our total year segment up 22%. We’re really proud of our accomplishments in this area. I also mentioned last quarter that we’re working on a new jogger type stroller called Evolve, which is still in development and undergoing additional design enhancement. We expect to begin shipping during the second half of 2016 but retailers are already expressing interest. We also previously spoke about 3D Lite model tailored for the European market, and in the near future in our overall upbeat of our international outlook. Summer Infant’s total sales outside North America grew 23% in the fourth quarter, which we believe is the sign of our commitment to grow globally and our focus on products suited to regional taste and interest. Going forward, China will be a big part of this strategy. And while it’s a long process, just getting started, we see significant revenue potential there. Aside from the success of our strollers and recently introduced potties, we’re now shipping the awarding-winning Born Free breeze bottles, which is easier for parents to use and more comfortable for the baby, and proving functionality and acceptance. So far this quarter, we’ve been very pleased with initial retail demand for bottles online and in-stores and we believe that will be a large contributor to our growth in the feeding area this year. Our new Baby My Baby Massage line of product is on track for introduction this quarter. And we’re already shipping many new items in our Pop line of portable products, another Summer sub-brand that includes easily transportable seats, high cheers activity areas and other items for young children. At the same time, our rebranded SwaddleMe product with new packaging, a more distinctive look in strengthening this brand and driving increased traction in the first quarter as well. And our safety segment is another highlight for Summer Infant, where sales rose 13% in 2015. Our strong shipments for Yates Bath and the new My Size Potty I just mentioned. In monitors we’re now shipping the Babble Band, the first wearable audio monitor and plan to introduce the Liv Cam portable monitor early second quarter. This is an area where we are constantly investing in technology to ensure that parents have the utmost functional, portable and easy to use applications. We also believe our Summer Smart Connected Nursery represents incredible growth potential going forward. However, due to design enhancements and the unique technology employed, this suite of products would not begin shipping in the second half of 2016. Aside from a new baby monitor, Summer Smart will also include a Bottle Maker Dispenser, a changing table that records weight and a soother that can waken babies naturally. These products will work independently or together through a mobile app which will allow for device - which will allow for device additions in the future. We believe this family of products represents the launch of an entire new category and net introduction will likely now be done in a coordinated approach. We remain extremely excited by this technology but not too sure that everything is designed and tested for the utmost and usability and reliability. Launching a new category like this must be done carefully and correctly to ensure complete customer satisfaction and adequate supply to meet anticipated demand. Before turning the call over to Bill, I’d also like to mention how pleased we are with our growing internet business across a number of sites and companies. And in fact, our e-commerce business grew 15% both in the fourth quarter and full-year 2015. And we see this accelerating going forward. We have a great relationship with companies such as Amazon and we’re also expanding direct sales on our own branded sites as well. We also have been reviewing all of our brands and sub-brands to ensure that we remain fresh, unique and memorable. This applies to all the brands such as Summer Infant itself as well as newer ones like Kiddopotamus and Born Free. Overall, the management team is pleased with our many accomplishments of 2015 including strengthening balance sheet, improved cost structure and product strategy focused on designed and innovation. As a reminder, we won five awards this last ABC Show more than any other company in attendance. Just to wrap up, our work in 2015 lays the foundation for improved performance in 2016 and beyond. We know we still have a great deal of work ahead of us and remain focused on the fundamentals. Reducing costs where appropriate, improving working capital and cash flow generation, and most importantly continuing to innovate and bring to market unique high-margin products under strong brands. We look forward to launching many new products in 2016 and we’ll keep investing in R&D to ensure we’re on top of trends and demands of tomorrow. With the active parents of today and children constantly adapting to new technology, this strategy would be critical to ensuring Summer’s future growth and providing the return that shareholders’ expect of us. Now Bill, will review our financial results in detail. Bill?

[Bill Mote:]

Thanks Bob and good morning everyone. Our 10-K and related press release were issued last night. In addition to listening to this call, I encourage you to review our fillings. Net sales for the fourth quarter were $50.8 million versus $51 million in the same period a year ago. Revenue rose 4.4% year-over-year excluding $1.4 million and $2.9 million of sales related to non-core business in licensed, private label and furniture sales during the fourth quarters of fiscal 2015 and 2014 respectively, as well as $800,000 in unfavorable foreign exchange effect on a constant currency basis in the fiscal 2015. For the year as Bob mentioned, core branded sales rose 6.1% excluding the impact of foreign exchange. And we believe growth is set to accelerate going forward. Gross profit for the fourth quarter of 2015 declined to $15.6 million versus $16.4 million a year ago. And gross profit as a percent of net sales was 30.7% in 2015 compared with 32.3% last year. Gross profit was lower this quarter, primarily due to a $100,000 of losses on the sale of aged inventory below cost; $400,000 of temporary demurrage costs and $600,000 of unfavorable foreign exchange, primarily due to the decline of the Canadian dollar. Excluding the impact of these items gross margin would have been 32.4% for the fourth quarter of 2015. General and administrative expenses were $10.9 million for the fourth quarter of 2015 compared with $10.8 million a year ago, reflecting $1 million of legal expense tied to an ongoing litigation. Selling expense declined slightly to $4.5 million for the fourth quarter versus $4.7 million in the fourth quarter last year. Interest expense decreased to $600,000 in the fourth quarter of 2015, and $900,000 last year, reflecting reduced debt levels and significantly lower interest rates on the company’s new credit facility. Depreciation and amortization rose to $2.9 million from $1.4 million a year ago, primarily related to accelerated amortization related to earlier technology and the company focused on next generation of monitor devices. In the fourth quarter of 2015, we reported a net loss of $3.1 million, a loss of $0.17 per share, compared with a net loss of $600,000 or $0.03 per share in the fourth quarter of 2014. The year-over-year decline reflects lower gross profit and an increase in depreciation and amortization expenses. However, excluding one-time charges related to an excess inventory reduction, accelerated amortization and litigation cost, the company would have posted a net loss of $1.1 million or negative $0.06 per share for the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter of 2015 was $1.8 million compared with $2 million for the fourth quarter of 2014. Adjusted EBITDA for the fourth quarter of 2015 includes $1.5 million and permitted add-back charges under our credit facility compared with $800,000 of permitted add-backs for the fourth quarter of 2014. Turning to the balance sheet, as of January 2, 2016, we had $900,000 of cash and $53.6 million of debt compared with $1.3 million of cash and $58.7 million of debt at January 3, 2015. The company continues to target debt reduction to strengthen its balance sheet. We are in compliance with all loan covenants during the quarter, but as our investors may have seen also amended credit facilities in November to allow for increased liquidity and flexibility as we execute our growth brands. All of our existing institutions remained in the amended facility and supported the company. Turning to working capital, Summer Infant sold or eliminated approximately $600,000 in excess inventory during the quarter and as of January 2, 2016 had $36.8 million of inventory on hand compared with $44 million as of January 3, 2015. In total the company sold or eliminated approximately $9.4 million of excess inventory during fiscal 2015 including nearly all furniture products. And we believe our current level is appropriate for the business. Trade receivables at the end of the fourth quarter were $40.5 million compared with $38.8 million as of January 3, 2015. Accounts payable and accrued expenses were $31.9 million as of January 2, 2016 compared with $30.5 million at the end of fiscal 2014. Regarding cash flow, as Bob mentioned, we generated $9.3 million in cash from operations last year versus a cash usage of $6.3 million in the prior year’s comparable period. So, we’re very pleased with this positive $15.6 million swing and will continue to focus on working capital management going forward. With that I’ll turn the call over to the operator and open it up for questions.

[Operator:]

[Operator Instructions]. Our first question comes today from Dave King with ROTH Capital Partners. Please go ahead.

[Nick Meyers:]

Good morning guys, this is Nick Meyers on for Dave King.

[Bob Stebenne:]

Good morning, Nick.

[Nick Meyers:]

Yes, so, first off, I just wanted to better understand the accelerated depreciation. I wanted to know what drove it, how long will it persist at these levels and exactly what is the asset base being depreciated?

[Bill Mote:]

Hi Nick, this is Bill. The accelerated depreciation was related to our previous version of our Wi-Fi monitors. It was development cost that we had capitalized primarily software development costs. And in going forward in 2016, as we trial down that version of products, and we come out with our new Summer Smart products that we spoke about, we will not be able to amortize that off. So, we went ahead now on a conservative basis and wrote that off in 2015. So it’s not something that we expect to continue to recur, it’s a one-time write-down of amortization unamortized development cost.

[Nick Meyers:]

Perfect, that helps a lot. All right, also you guys mentioned that you completely are at least are very close to completely exiting the non-core category furniture. What non-core categories still exist and what percentage of sales are these non-core categories? And when do you think you’ll get to a point where the run-off of these non-core categories will no longer weigh on the overall growth rate?

[Bill Mote:]

So, specifically to furniture, we still have a bit of inventory only really related to conversion kits. And that’s to support the clients who purchased our products. So, conversion kits are really Crib conversion kits. And they sell at a pretty high margin. So we’ll continue to sell those on an ongoing basis. Private label there will always be a little bit of private label. We support our retailers with private label from time to time at their request. And that is a minor revenue base but it’s something that we’ll continue just a small level of noise going forward. And related to licensed, we exited licensed products quite some time ago. And that was primarily Carter and Disney. We don’t have any more licensed products at this point in time in any material level.

[Nick Meyers:]

Perfect. And then, do you know what percentage of sales are core versus non-core?

[Bill Mote:]

Core makes up virtually all of our revenue now. There is a very small percentage in non-core that’s out there.

[Nick Meyers:]

Just a few percent?

[Bill Mote:]

Yes.

[Nick Meyers:]

Thank you. And then last one before I step back. Can you update us maybe on the timing of the significant new product launches, I know quite a bit are coming out and talk about the retail response and when they’ll begin to ship? I know you already mentioned the Smart Nursery second half but maybe some others?

[Bob Stebenne:]

Yes, so, Nick, this is Bob. We talked about the Potty and that’s new and that’s out there right now. And that we’re enjoying tremendous success on that. Pretty much where it is, it’s just selling exceptionally well. We got 4.3 stars on the Amazon. It just continues to surprise all of us of how successful that is. But it’s a great story. The Babble Band is new, we just started shipping that. That’s virtually in the stores only for the last several weeks, in that range there. And that also, we’re enjoying our 4.4-star rating on the Amazon. And that’s an important piece for us as well. Things like Liv Cam, that we’ll be shipping, that’s the portable - our portable monitor that we’ll be shipping second quarter of this year. So we’re looking forward to getting that out of doors fairly quickly. Strollers, we’re shipping now and they’re selling exceptionally well. As we discussed already, within a few short years we’re already known as in the top five of consumer recognized brands in strollers which is a great story. And we’re extremely excited about that. Evolve which we talked about that’s a little bit later this year, second half, very interesting product. A challenge from the standpoint of getting to this, what I call is right as ring, because that’s what we need to do to get it out there. And that would be coming out in the second half, so we’re excited about that. Born Free, we just started to ship and that’s out there, that’s hit a few stores right now. That we’re excited about, very early, very early but it looks like consumer acceptance of that is actually pretty good. But it’s too early to call, but it looks really, we’re pretty excited about how that is coming together. It looks great at retail. And as I said, Moms to stop and look at it, and we’ll where it goes. But we’re pretty excited about what we’re looking at so far. Things like the Pop line which we mentioned, which is a little boost to see, we’re just literally getting out there. Its 4.8 stars on Amazon, it’s really doing very well for us. So, we’re excited about that whole Pop line had to play out this past year. We all know how well that did. So we’re expanding that as a sub-brand as well. Baby My Baby, that’s new, we’re shipping that as we speak. That will be in the stores momentarily so we’ll see where that takes us but we’re pretty excited about Baby My Baby Massage, it’s a great line. And the Swaddle new packaging that’s out there now, we’re looking at a new product that looks great at retail. So we’re pretty excited about that. Overall, Nick, I would like to say that our POS across the board which is the number that I look at, that I judge how well we’re doing, year-over-year we’re up about 6% in POS. And that’s a nice number for us. So, we’re pretty excited about a lot of things that we’re working on and a lot of new stuff that we’re bringing to market as we speak.

[Nick Meyers:]

Okay, perfect. That was lot of information. I appreciate that a lot. I’m going to go ahead and step back and let anyone else ask questions. Thank you guys very much. And good luck next year.

[Bob Stebenne:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Eric Beder with Wunderlich. Please go ahead.

[Unidentified Analyst:]

Yes, good morning. This is Bryan [indiscernible] on for Eric.

[Bob Stebenne:]

Hi Bryan.

[Unidentified Analyst:]

Yes, I apologize. So, the first question I had would be if we could take a glance over the balance sheet. Actually you guys have done some amendments to your current debt outstanding and your net debt position is anything lowered from this time last year. But would you be able to provide any clarity in regards to what I support your target debt level is or what you would find to be best suitable for your operations?

[Bill Mote:]

Yes, this is Bill. And Bryan, we’re looking and we’ve stated this multiple times. Our goal is to be about $3.5 million or less in terms of our leverage on adjusted EBITDA. And we ended the year in the mid-$5 million range and obviously there are two factors to that leads us to the EBITDA number and the overall debt number. So, we reduced debt year-over-year last year, we reduced debt about 8.7%, $5.1 million. And we felt pretty good about that because we also had some costs obviously that were more one-time type costs like the legal costs. Had we not had those costs we would have been even further paved down. So, we generated nice cash flow last year. We anticipate continuing to generate cash flow to continue pay down debt to get to that level of $3.5 million leverage. And that’s not just for this year that’s on a longer term basis. But that’s our goal.

[Unidentified Analyst:]

All right, great. And my second question relates to balance sheet, in regards to inventory and reduction program that you guys have been executing. You had made the comment that exiting the year as inventory currently stands you find that those levels are suitable for your operations. Would it be safe to say then or if I’m incorrect just provide any clarity, would you say the reduction program with inventory is rather completed or should we expect to be seeing any sort of costs or margin effects in that regard moving forward?

[Bob Stebenne:]

Yes, so what we’ve said on an ongoing basis going forward is that between, 1% to 2% of our sales will be close-out type sales going forward. So that’s $2 million to $4 million a year that I would expect we would sell. It would be below our common core margin. But we are definitely thoroughly through the inventory reduction, we only have about $900,000 left of that $10.3 million we identified at the beginning of the year that’s in our inventory. So on an ongoing basis, we’ll keep it clean and keeping it clean means about 1% to 2% of closeouts per year.

[Unidentified Analyst:]

Perfect. And then lastly, before I as well get back in the queue. And I apologize you had certainly provided a significant amount of information about your new products rolling out in 2016. But if I could ask to maybe dive in a little deeper as there, one or maybe a handful that you would describe as going to be the key driver really the growth engine in 2016? And then I guess as a corollary to that, if you could provide any clarity on what you’ve been seeing in terms of the competitive landscape whether that’s a matter of price or the technology or product introductions that your competitors have been providing or any sort of force being placed on you by retailers or anything to that effect would be very helpful.

[Bob Stebenne:]

All right, well, this as I mentioned already, Bryan, there are several new products and categories that we’re very much focused on and excited about as we move forward. I’ll start by saying Summer Smart, the new range of monitors and devices that we’re introducing latter part of this year, second half of this year. We’re excited about it is a totally different market out there. The model of business has changed dramatically over the last period of time. It’s gotten extremely competitive. There is some good competition out there. But I feel strongly with what we’re doing and how we’re bringing it to market. And we’re a baby company, we understand moms and that’s really who we are and that’s what I think our point of difference would be at the end of the day. We’ll be bringing product to market with moms in mind and not just for technology sake. So, I feel very comfortable and confident that Summer Smart will be a wonderful product range for us as we move forward. The other categories, that I’m exceptionally excited about is strollers. Like I said, in a few short years, we’ve made a mark and we’ve come up with 3D strollers and our Evolve strollers, our business has grown 58% year-over-year. And I see some nice movement there and wonderful things in our future for the stroller business. As I also mentioned, the feeding area Born Free, again it’s new, we’re just getting it out. We have, I’m close to it so take this for what it’s worth it’s a wonderful product range. It’s truly unique. It’s made with mom and dads in mind and of course made for babies. It’s easy to use, simple, two-piece technology and not six, seven or eight pieces. So it’s a really, I think a very unique product, different shape, wonderful look. And as I said, that’s just getting out there and we’re pretty excited about that as well. So, those are just some of the highlighted items but this, I think asking me to pick my favorite child, there are so many out there that I feel passionate about. But those are the ones that I would say that we look at and we feel very confident that growth will be there.

[Unidentified Analyst:]

All right. Perfect. That was all I had. Thank you very much for the commentary. And best of luck in 2016.

[Bob Stebenne:]

Thank you.

[Bill Mote:]

Thank you.

[Operator:]

[Operator Instructions]. We have no further questions at this time. So, I’d like to turn the conference back over to Mr. Stebenne for any closing remarks.

[Bob Stebenne:]

All right. Thank you all for joining us on today’s call. We appreciate and we look forward to speaking with you in the next quarter. Have a great day everybody. Thank you.

[Operator:]

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