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Edited Transcript of SUMR earnings conference call or presentation 2-Aug-18 1:00pm GMT

Q2 2018 Summer Infant Inc Earnings Call

WOONSOCKET Aug 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Summer Infant Inc earnings conference call or presentation Thursday, August 2, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Witty

* Mark Messner

Summer Infant, Inc. - President, CEO & Director

* William E. Mote

Summer Infant, Inc. - CFO

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Conference Call Participants

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* David Michael King

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Summer Infant Second Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, August 2, 2018.

I would now like to turn the conference over to the moderator, Chris Witty. Please go ahead.

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Chris Witty, [2]

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Hello, and welcome to the Summer Infant 2018 Second Quarter Conference Call. With me on the call today is Summer Infant's CEO Mark Messner; 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 2018 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 December 31, 2017, and in our other filings with the Securities and Exchange Commission.

During the call, management may make references to adjusted EBITDA, 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 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 Mark Messner. Mark?

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [3]

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Thanks, Chris, and good morning, everyone. We appreciate you joining our second quarter conference call. I'll start by giving an overview of recent developments, after which Bill will go through our financial results in detail.

I'm pleased to say that our second quarter performance reflects the many actions taken at Summer Infant over the past year to streamline our operations, reduce costs, improve the company's balance sheet and position us for faster growth. Even while revenue was negatively impacted by the final stages of the Babies "R" Us liquidation, costing us nearly $7 million in sales year-over-year, our top line rose 13% sequentially from the first quarter as we benefited from seasonality and high demand across many of our safety product categories.

Revenue was also, once again, negatively impacted by lower monitor orders. But our new Baby Pixel is now in stock across more channel partners, with additional products planned for roll out this fall.

I'll speak to this further momentarily.

We achieved solid gross margins above 32%, even with the impact of closeout sales due to Babies "R" Us, and posted earnings of $0.02 per share. The bottom line is that the company continues to put the past behind it and is gaining traction, producing reliable improved operating results. And while there will still be variability in quarter-to-quarter top line performance due to seasonality, product introductions and shipment timing, overall growth trends look very positive headed into '19.

In addition, we're ahead of schedule with regard to the previously announced realignment of our California distribution facility, which is expected to result in savings of $700,000 annually. And we remain focused on measures to further increase operating efficiency and drive margin expansion.

At the same time, Bill and his team successfully negotiated and closed on new credit arrangements this quarter, which will provide enhanced liquidity, financial flexibility and lower payment requirements for years to come. These credit facilities are critical to our plans to invest for the future, building on past efforts to effectively manage cash while facing many unforeseen industry events without ever diluting shareholders through an ill-time equity offering. And so I'd like to thank Bill and everyone involved, including our lenders, for their hard work and passion for the company and its future.

With regard to our product development, marketing and distribution strategies, let me provide an update on where we stand and what's in process. As I mentioned earlier, our Baby Pixel monitors are now widely available across all appropriate channel partners and are slowly gaining traction in the face of continued fierce competition. We saw headwinds last quarter in the monitor space related to the Babies "R" Us liquidation as we strive for additional shelf space at retailers like Walmart, Target and buybuy BABY.

The good news is that, in general, across our product portfolio, we've seen a great pickup in demand by other stores on the web as they fill the vacuum caused by this bankruptcy. Product placements are up, but in the monitor space it's taking more time to backfill the substantial presence we had at Babies "R" Us. However, we plan additional variations to our Pixel models in the coming months with different features and price points.

While the monitor category is not nearly as large or important as it was to us a few years ago, we definitely see ways to grow market share and margins concurrently. We've also, as previously mentioned, rolled out gates at Target, a new sales channel for these products. While it's still early days, demand is trending up, and we're getting positive feedback from our first deliveries in May and June.

In addition, we've introduced the 3D mini stroller to Target, which was off to a great start in around 700 stores, and now will be rolled out full chain. And we are also now selling the My Size Potty in pink throughout that chain as well.

During September, we plan to introduce new lower price potty models at Walmart, which will expand our presence in this unique segment of the market. Likewise, we'll be shipping a higher-end transition My Size Potty to Target, buybuy BABY and certain online channels in Q4, which features a removable topper seat that can be used on a real toilet as kids mature.

These are just a few of the product introductions planned for the near future. We also have new boosters and bath seats coming to the market. A 3Dpac stroller that supports nearly any make of car seat and new versions of our 3D lite for buybuy BABY.

Online sales through our website and other e-commerce platforms continue to represent a growing portion of overall shipments. As a matter of fact, we recently racked up sales of $1.1 million wholesale on Amazon Prime Day, a record for the company and up significantly from $400,000 last year.

At the same time, we're taking steps to broaden and strengthen our brand portfolio through various initiatives, from innovative products to brand extensions and a fresh advertising approach.

Earlier this year, we introduced a marketing communications strategy based on what we called The M.O.M. Squad. A fun clever approach that presented moms as superheroes, battling everyday issues for their child. The campaign featured Marvel-styled pregnant women based on real moms, who run baby-related blogs to celebrate the challenges they face and overcome every day.

This series of ads received accolades from The Washington Post and other news outlets nationwide garnering over 100 million impressions on social media. This is a great example of our passion for developing a differentiated, creative marketing approach that strengthens our brands and builds awareness for the company as a whole.

I'd also like to add we've been doing a great deal of research on bringing a variety of new products to the market under the Born Free brand, which would be a premium name within the Summer Infant family. We've been analyzing, modeling and developing all sorts of items from strollers to play yards, bouncers, bouncy seats and other items.

Right now, it's a bit premature to talk about our launch or get into the specifics, but suffice it to say, that we're in conversations with several leading channel partners about this new brand initiative, which may ultimately include exclusivity for certain products or even the entire portfolio.

We're very excited by the potential this concept offers to improve both the company's growth trajectory and margin profile, leveraging a collection of innovative products linked through branding and fashion. At this point, let me just say to our investors, stay tuned for further news on Born Free going forward.

In closing, let me reiterate how proud I am of everything our team has accomplished across all aspects of our company. Summer Infant's balance sheet is stronger than it's been in years, with new credit facilities to support our growth initiatives. Our product development and marketing teams are energized and focused on bringing innovative, differentiated higher-margin brands and products to channel partners who are excited by our concepts. And our underlying operations are efficient and getting more streamlined by the day, underscoring our profit and cash flow objectives.

As I said last quarter, we faced many unusual and unforeseen headwinds these past 3 years but have arrived as a stronger, dynamic enterprise that is shaking up how we interact with our customers and bring new products to market. We will continue to build a company of solid recognizable brands with great book growth potential and improved bottom line performance, all leading to higher returns for our shareholders as we head into 2019.

With that, I'll turn it over to Bill to review our financial results in detail. Bill?

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William E. Mote, Summer Infant, Inc. - CFO [4]

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Thanks, Mark, 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 filings.

Second quarter net sales were $47.7 million compared with $52.6 million in the second quarter of 2017 and $42.1 million in the first quarter of this year.

Revenue grew 13% sequentially from Q1 but was down year-over-year, primarily due to the bankruptcy and liquidation of Toys "R" Us and Babies "R" Us, which negatively impacted sales by $6.7 million versus 2017. This decline and the impact of lower monitor demand was partially offset by growth with alternative channel partners and higher revenue across several safety product categories.

As Mark mentioned, gates has begun selling in Target, and we've expanded our presence in other stores as well. And we've recently booked a record $1.1 million of wholesale orders on Amazon Prime Day after the end of the quarter. That said, second quarter results were helped somewhat by seasonal demand, and there will remain some lumpiness in quarter-to-quarter sales over the near term, even as we're optimistic about the long-term growth trajectory of the business.

Gross profit for the second quarter was $15.4 million compared with $17.3 million last year and $13.6 million in Q1 of 2018. Gross margin as a percent of sales was 32.3% in 2018 versus 32.9% last year, with a slight decline due to higher closeout sales related to inventory associated with the Babies "R" Us liquidation.

As always, we remain focused on improving gross margins long term via brand-management strategies and product-development initiatives that result in stronger consumer demand, differentiation and higher profitability.

Selling expenses were $3.1 million in the second quarter compared with $4.2 million last year, and selling expense as a percent of sales declined to 6.5% from 8% in 2017. This was primarily due to a higher percentage of direct import in closeout sales, which lacked cooperative advertisements as well as generally lower consumer advertising costs.

General and administrative expenses were $9.4 million in fiscal 2018 versus $10.3 million last year. The second quarter of fiscal 2018 benefited from our previously announced cost-control initiatives, including headcount reductions. G&A as a percent of sales was 19.7% in the 2018 second quarter versus 19.5% in 2017.

And the company remains on track to complete the streamlining of its warehouse distribution center before the end of 2018. That restructuring is expected to result in annualized savings of roughly $700,000 per year going forward.

Interest expense was $1.4 million in fiscal 2018 versus $700,000 last year, with the year-over-year increase primarily due to the company's refinancing of its bank agreements. This included a noncash charge write-off of $0.5 million of unamortized prepaid finance costs, resulting from the repayment of the company's prior debt.

As Mark mentioned on our new credit facilities' streamlined covenants, each are substantially lower amortization levels and provide additional long-term liquidity for the company. During June, we entered into a second amended and restated loan and security agreement with Bank of America that provides for a $60 million asset-based revolving credit facility and a $5 million letter of credit sub-line facility, with a scheduled maturity date of 2023.

We also entered into a new $17.5 million term loan with Pathlight Capital. And while the specifics regarding these agreements are on file with the SEC, including interest rates and payment provisions, I'll just note that the first quarterly payment on the term loan in the amount of roughly $200,000 is due in December of this year, a substantial reduction of our principal repayments under the old loan agreement.

As we execute on plans to invigorate our channel strategy and bring new products to market, we saw the need for greater financial flexibility and long-term capital, which these agreements help ensure.

Our cash interest expense is anticipated to be approximately $800,000 in Q3 and Q4, assuming rates don't change, and we'll have a payment in December due on the term loan, as I just mentioned.

We appreciate the support shown by Bank of America and Pathlight Capital that strengthen our outlook for many months, working together on appropriate structure for Summer Infant.

The company reported net income of $300,000 or $0.02 per share in the second quarter of 2018 compared with net income of $0.5 million or $0.03 per share in 2017. On a year-over-year basis, the change in net income reflects lower revenue due to the Babies "R" Us liquidation and the expenses associated with refinancing our bank agreements, as I just mentioned.

Adjusted EBITDA for the second quarter of 2018 was $3.3 million versus $3.5 million for the second quarter of 2017. Adjusted EBITDA in 2018 included $200,000 in bank permitted add-back charges compared with $500,000 in the prior year period as defined in the company's amended credit facility. Notably, adjusted EBITDA as a percent of sales was 7% in the fiscal 2018 versus 6.6% last year.

Turning to the balance sheet. As of June 30, 2018, Summer Infant had approximately $900,000 of cash and $44.9 million of bank debt compared with $700,000 of cash and $48.1 million of bank debt as of December 30, 2017. Our debt was at the lowest level in 5 years. And the company's leverage ratio was 4.7x the trailing 12-months adjusted EBITDA at quarter end.

Inventory, as of June 2018, was $26.7 million compared with $34 million as of December 30, 2017, as we've continued to effectively reduce excess inventory and manage working capital.

Trade receivables at the end of the quarter were $36 million compared with $36.6 million at the end of fiscal 2017. And accounts payable and accrued expenses were $34 million as of June 30, 2018, compared with $34.5 million at the beginning of the fiscal year.

The company generated $7.2 million in cash from operations during the first 6 months of 2018, reflecting much lower inventory levels compared to a $2.8 million cash from operations in the prior year period.

With that, I'll turn over the call to the operator and open it up for questions.

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Operator [5]

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(Operator Instructions) The first question comes from David King with Roth Capital.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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I guess, first on the revenue, with the new product launches you've got going in the back half, but with some of the ongoing monitor challenges, are you still expecting year-on-year growth in the back half? And then similar to last year, is it fair to assume that the Q2 you just reported will be the higher watermark for the year? Is that the right way to think about it?

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [7]

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Yes. I think there's some good opportunity for some sequential growth. We are coming -- I mean, this quarter is usually a seasonally high quarter for us with some more strollers and top items. But with some of the new product introductions in the third and fourth, we'll get some pipeline shipments. So we're optimistic about the next -- the quarters to come.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Okay, great. Great to hear. And then on the monitor category, in particular, it sounds like you've got several things coming there. But it sounds like it's also down as a percentage. I guess, how big is that category for you guys at this point? And then how are the gross margins there versus the company as a whole?

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [9]

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Well, as we introduce new models, always, the focus is on solid gross margin for that product, not just putting product out there to churn dollars. I'd say you'll see several new models of monitors for Summer in the next couple of quarters. You're going to see some pretty big introductions on Amazon. There's been a big shift, obviously, from brick-and-mortar to online for this category, in particular. And we're -- I mean, competition is fierce, no doubt. But I like the merchandising structure the team is putting forth and some of the tactics used to realize better sales. So hey, it's a tough category. It's less meaningful to us, as a company, but still important. And you lose the Babies "R" Us, where you might have 8 to 10 SKU placements. And obviously, you don't just replace that, like, I mean, we're well distributed in the other categories we participate in at our other channel partners. And that's why we've seen a good shift in those categories to other channel partners. But monitors, in particular, you don't replace that level of exposure for those products. So we just have to deal with that.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Understood. And then switching gears maybe on expenses. So the $700,000 you expect in savings from the West Coast DC, is that -- should we start to see that in the fourth quarter? Or is that more of a first quarter '19 benefit? And then similarly, the headcount reduction you had or you announced last quarter, was that fully reflected in the second quarter run rate? Or is there still a little bit more savings to come in, in the third quarter?

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William E. Mote, Summer Infant, Inc. - CFO [11]

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So Dave, this is Bill. The first question was about the warehouse. I think we'll see about a month's worth of savings out of that warehouse in the fourth quarter. So you'll partially see it in fourth quarter as we bring up the facility back up and get it back to its full efficiency. I'm sorry, what was the other question?

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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The headcount, headcount reduction announced last quarter, was that rightfully reflected in the Q2 run rate?

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William E. Mote, Summer Infant, Inc. - CFO [13]

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Yes. You're seeing it fully reflected in the run rate now. And we continue to look for ways to be more efficient. So for now, that's a big savings for us. If you look at the year-over-year delta, it's almost $1 million, I think, this quarter alone. But I think there's other areas we're going to focus to try to get efficiencies for the organization overall, but nothing that's right there today.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay. And then I guess, lastly from me. Congrats on the new credit facility and improved liquidity, lower amortization. I guess, what are your thoughts on that last front, the 4.7x leverage? Do you still expect or hope to try and pay that down at any point? Where would you like to be able to get that in some reasonable time frame?

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William E. Mote, Summer Infant, Inc. - CFO [15]

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Yes. It's important to note that there were fees with the refinancing that totaled almost $1.8 million. So the debt would even be lower if we wouldn't have just refinanced. But we continued to focus on paying debt down. And as we manage our working capital tightly, I think we'll see that continue to pay down. I think we generated $7.2 million year-to-date in operating cash flow. And we'll continue to push to create operating cash flow to pay down debt. So I think as we try to grow though, there will be areas where we're going to use working capital. So I just want to be straightforward with you. That leverage ratio is much less critical now that we don't have a leverage covenant. If you recall, the -- one of the reasons why we wanted to move away from the last structure we had, it was just -- it was way too onerous from a covenant perspective with the covenants. With this loan, we only have one covenant. It's an FCCR test of 1. Right now, our FCCR is above 2. And that's a springing covenant, only if we get within 10% of availability or $5 million of availability, whichever one is higher. So we have -- we're not going to move away from focusing on leverage. But at the same time, it's much less critical from the perspective of trying to manage the company for a credit covenant.

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Operator [16]

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(Operator Instructions) Okay. We have a question from [Ed Reese].

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Unidentified Analyst, [17]

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I just want to tell you, great job in the quarter in terms of managing through the Babies "R" Us liquidation in the quarter, so great job on that. I had 2 questions. What do you -- inventory, obviously, was down pretty significantly. Can you give me an idea about what you think kind of the inventory levels going forward? Is that level you're at, is that something that can be sustainable? And then the second question is, I mean, you indicated that you had some gross margin pressure from the liquidation at Babies "R" Us. The gross margins seemed to hold up though, I thought, fairly well given that. What do you think about gross margins on a go-forward basis?

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William E. Mote, Summer Infant, Inc. - CFO [18]

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So Ed, I'll address your first question. The turns on the current inventory level are somewhere in the 4.7, 4.8 turn range. If you recall, as a company, in the past, we've said we wanted to be at somewhere around 4 turns. So obviously, that's a low inventory number. If you recall, we've indicated we're doing a project in our warehouse in California where we're installing racking, and that will let us be more efficient with the space that we have. But when you do that, you have to clear down the inventory to make space for all the construction equipment and the necessary installation machinery. Though, one of the reasons we're so low at this point, in addition to managing working capital tightly, is also because we're trying to manage through the facility reracking. As that racking gets up and gets approved by the city and the fire code folks, we'll have more space for inventory to put back in. And we'll likely see that number bump up a bit, only because 4.8, we want to make sure that we're facilitating all of our customers' orders.

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [19]

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Yes. Well, just one addition to that. Another focus of ours, Ed, is to do more direct import on items that go directly to customers instead of through our distribution center. So that's going to factor in there a little bit. And then I'm sorry, second question again?

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Unidentified Analyst, [20]

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Yes. What about -- I mean, the gross margins -- I mean, how much did the -- if you can tell us that number. How much did the liquidation -- you haven't -- obviously, you kind of maybe discount some of the product coming out of the Babies "R" Us liquidation. What kind of impact did that have on gross margins?

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [21]

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Yes, well -- go ahead, Bill. Go ahead.

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William E. Mote, Summer Infant, Inc. - CFO [22]

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But it -- so it's only about 60 basis points off from last year, Ed. And the only reason we're calling it out is it's really our goal to be at 33% gross margin. So most of that number is related to closeout sales, which we define closeout as things that are below 10% in margin when we sell them. There's also mix changes that are going on in the marketplace. We have some large retailers that have taken over more business subsequent to the Babies "R" Us shutdown. And those businesses maybe have lower margins but less program terms. So at the bottom line, you can see that even though the margins are slightly lower, adjusted EBITDA is up to 7%. When in the past, we've been as low as 4.5%, 5%. So it's actually playing through the P&L nicely to the bottom line. Although, it creates that margin variance from where our short-term expectation is for our margins, which is 33%.

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Operator [23]

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(Operator Instructions) We have a question from [Scott Epstein] with [Retail].

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Unidentified Analyst, [24]

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So just, I guess, getting back to some of the questions Dave asked regarding seasonality. When I look at the business, I mean, there has been in recent years this drop off from Q2 to Q3. Obviously, last year, it was more pronounced. And I'm guessing that's when the BRU impact really started to hit you. So the impact in Q2 of $6.5 million, $7 million, is that less in Q3 and Q4? I'm just trying to get a sense of what the built-in headwind is to the revenue line.

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William E. Mote, Summer Infant, Inc. - CFO [25]

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Yes. So let's try to break that out. So remember, last year -- and just for everybody on the call, last year, we had a onetime direct import shipment into the Amazon space as well, in addition to some of that seasonality that we saw, both last year and this year. Actually, the Toys "R" Us situation started really late in the third quarter last year. So I think -- and I'm just recalling off the top of my head, I think we did the bulk of that business in Q3 last year with BRU until they fell off in the back part of September, if I'm recalling my facts correctly. So I think that'll still be there for next quarter. But what we saw this year is we still saw the seasonality, but we didn't see that big onetime DI shipments. So we're -- when you look at the comparable year-over-year, you're seeing the fact that the DI didn't happen again and then of course, the BRU situation year-over-year.

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Unidentified Analyst, [26]

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Okay. And then the savings from the warehouse, is that going to show up in the gross margin line? Or is that going to be an SG&A savings?

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William E. Mote, Summer Infant, Inc. - CFO [27]

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That's actually G&A. And that, like I said, will probably show up in the late half of fourth quarter.

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Operator [28]

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Okay. There are no further questioners in the queue. I would like to turn the conference back over to Mr. Mark Messner for any closing remarks.

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [29]

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Well, we thank everybody for joining our conference call, and look forward to catching up with you next time. Have a good day.

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Operator [30]

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