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Edited Transcript of SUMR earnings conference call or presentation 19-Mar-20 1:00pm GMT

·18 min read

Q4 2019 Summer Infant Inc Earnings Call WOONSOCKET Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Summer Infant Inc earnings conference call or presentation Thursday, March 19, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Paul Francese Summer Infant, Inc. - Senior VP & CFO * Stuart Noyes Summer Infant, Inc. - Interim CEO ================================================================================ Conference Call Participants ================================================================================ * Chris Witty Darrow Associates Inc. - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to the Summer Infant, Inc. Fiscal 2019 Fourth Quarter Conference call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Chris Witty with Darrow IR. Please go ahead, sir. -------------------------------------------------------------------------------- Chris Witty, Darrow Associates Inc. - MD [2] -------------------------------------------------------------------------------- Hello, and welcome to the SUMR Brands 2019 Fourth Quarter Conference Call. With me on the call today is the company's interim CEO, Stuart Noyes; and CFO, Paul Francese. I would now like to provide a brief safe harbor statement. This call may include forward-looking statements that relate to SUMR Brands outlook for 2020 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 28, 2019, its quarterly reports on Form 10-Q 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 SUMR Brands operations. For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued yesterday evening. And with that, I'd like to turn the call over to Stuart Noyes. Stuart? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [3] -------------------------------------------------------------------------------- Thanks, Chris, and good morning, everyone. We appreciate you joining our fourth quarter conference call today. I'll start by providing an overview of redevelopments, after which Paul will go through our financial results in detail. Today marks about 3 months since I started in mid-December, and obviously, a great deal has happened in the world and a great deal has happened here at Summer since that time. It's certainly been a very volatile period in the market due in no part -- small part to the coronavirus outbreak. But it has been a period in which the company is taking very active approach to restructuring its operations and improving long-term financial results. At the same time, we completed a reverse stock split to continue trading on the NASDAQ. We reported net sales of $42.7 million for the fourth quarter versus $40 million last year and finished the year at $173.2 million versus $173.6 million in 2018. And these results largely reflect the ongoing impact from tariffs last year, but do mask some successes the company achieved across many of our core categories. In the fourth quarter, several key product lines, including gates, potties, bath products, especially blankets and strollers saw sales rise in the double-digit area over the comparable prior year period. And for 2019, as a whole, we saw double-digit increases within gates, potties and strollers, leading to overall growth across our core categories. Such performance was driven by much higher sales with several of our key channel partners, such as Amazon, Walmart, Target, Lowe's. In addition, we were informed during the fourth quarter that our metal gates were exempt from the tariffs effective immediately. And importantly, the rule was retroactive to September 2018 as a result of refund of $1.8 million as owed SUMR Brands. As Paul will review momentarily, these funds will be paid back over the coming quarters and just as significantly, the 25% tariffs are no longer on some of our best selling products, metal gates, which should positively impact both sales and gross margins moving forward. In addition, the company's monitor, special blankets and certain other products should benefit from the reduced list 4A tariff that became effective in the middle of February. While the above mentioned changes will help bottom line results, we also have enacted a broad swap of restructuring measures to further streamline the company and drive us back to profitability, saving approximately $7.5 million in annualized expenses. In addition to head count savings and supplier cost concessions already implemented, the company expects to sublease a portion of its warehousing facility in Riverside, California, vacate its U.K. distribution center and potentially sublease some of the space here right in our Woonsocket headquarters in Rhode Island. The U.K. closure is on track to be completed by the end of March, after which all international product distribution outside North America will be handled by our existing third-party facility in China. The subleasing of the Riverside warehouse should be concluded in the second quarter. In both courses of action in the U.K. and California designed to both cut costs and improve our operating effectiveness. Of the $7.5 million of anticipated annual savings, approximately $6 million is expected to be in this year, 2020. And the implementation of these plans have, so far, exceeded our expectations. Cash flow and margin expansion will be primary goals for the remainder of 2020. We expect to turn the corner on profitability in the very near future, and we'll use available cash to pay down debt and delever the company. Suffice it to say that we are doing everything possible to improve returns on capital and drive value for our shareholders. From a product perspective, I'm pleased to announce that our new -- for our car seat and travel system, 2 models, are now available at BuyBuyBaby stores as well as on Amazon. While the impact to the third quarter will likely be minimal, the products have been reviewed favorably, and we are optimistic about potential growth for this year. In addition, one noteworthy event in quarter 1 is that we now have a new stroller the [3D Go] in Walmart locations across North America. This is the first time we've had a stroller in actual Walmart stores versus just online, opening up a large market opportunity for the company with strollers and innovative convenient model for the price-conscious consumer. Before turning the call over to Paul, let me comment briefly on the coronavirus epidemic now sweeping the globe. It goes without saying that this pandemic has created unease among consumers and an uncertainty in the financial markets. We clearly hope that the government and scientific resources can address the situation as rapidly as possible to limit the loss of life and bring this epidemic to an end. In the meantime, I'd like to let our investors know that SUMR Brands has already taken steps to mitigate the impact of shipments caused by disruptions in China's supply base. First, we had as an ordinary course of business, already stocked up on inventory in preparation for the Lunar New Year holiday, during which production in China normally grinds to a halt. This is something we do every year, like many folks, and so had goods on hand when suppliers began being impacted by the virus. In addition, our previous efforts to diversify production out of China helped, to some extent, reduce product disruptions. Having said that, our Chinese partners are currently still operating at reduced run rates. Although, they are ramping up production as a situation there comes under control. We get updates from them daily and most are not back at capacity due to shortages of labor or raw materials. We expect such delays to possibly impact our second quarter results. But as I noted earlier, we already had the inventory place to meet first quarter demand. The Chinese government's strong approach to quarantining and testing individuals has resulted in many fewer new cases than just a month ago, and the situation does appear to have stabilized in China. We will watch developments closely, but are cautiously optimistic about production returning to more normal levels in the near future. In closing, I'm pleased to say that the company is benefiting from actions taken across the board as well as from a stable tariff environment, and I am remaining on the -- onboard to ensure continuity as SUMR Brands executes on many strategic initiatives. We expect to net $6 million in cost savings this year on plans already underway and are also upbeat about several recent product introductions. I believe Summer is managing its supplier base effectively during the current coronavirus outbreak. And we are taking all steps necessary to ensure improved profitability, higher cash flow and a stronger balance sheet this year. The company is gaining traction across a number of fronts that set the stage for increased operating performance for 2020 and beyond. With that, I'll turn it over to Paul to review our financial results. Paul? -------------------------------------------------------------------------------- Paul Francese, Summer Infant, Inc. - Senior VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Stuart, and good morning, everyone. As a reminder, our 10-K and related press release was issued last night. In addition to listening to this conference call, I encourage you to review our filings. Fourth quarter net sales were $42.7 million compared with $40 million for the fourth quarter of fiscal 2018. As Stuart mentioned, the company showed strong double-digit growth across many of its key product categories even in the face of ongoing tariffs on goods imported from China. Since the end of 2019, the tariff environment has stabilized. In this February, a 50% reduction in list 4A tariffs were reduced from 15% to 7.5% becoming effective, which will favorably impact our monitors, specialty blankets and certain other products going forward. We are also restructuring our overseas activities, as Stuart discussed, to streamline the distribution process. Gross profit was $14 million for the fourth quarter of fiscal 2019 versus $12.5 million in 2018. And our gross margin as a percent of sales was 32.8% in 2019 versus 31.3% last year. The company was able to largely mitigate the tariff-related negative impact on margins through higher prices, supplier cost concessions and the transfer of production to other countries. In addition, in December 2019, the office of the U.S. trade representative announced the exclusion of tariffs on metal baby gates, retroactive to September 2018. And as a result, the company recorded a $1.5 billion benefit to cost of sales in the fourth quarter. The remaining $0.3 million reduction in cost of sales -- sold will impact first quarter of 2020. Selling expense was $3.6 million in the fourth quarter of 2019 versus $3 million last year. As a percent of net sales, selling expense was 8.3% in fiscal 2019 versus 7.5% in 2018. The increase year-over-year was primarily due to different customer program terms and higher consumer advertising for new product launches as well as a greater online marketing initiatives versus fiscal 2018. General and administrative expenses were $8.6 million in the fourth quarter versus $9.3 million in the prior year period. And G&A as a percent of sales was 20.1% this year versus 23.2% in 2018. The year-over-year change reflects lower labor and other costs due to streamlining actions taken by the company. Interest expense was $1.1 million in the fourth quarter of both 2019 and 2018. The company reported a net loss of $0.9 million or $0.42 per share in the fourth quarter of 2019 compared with a net loss of $2 million or $0.94 per share in the prior year period. The per share amounts reflect the recently completed 1 for 9 reverse stock split. Adjusted EBITDA for the fourth quarter of 2019 was $2.4 million versus $0.8 million for the fourth quarter of 2018. Adjusted EBITDA in 2019 includes a $0.4 million and bank-permitted add back charges compared with $0.5 million in the prior year period. And adjusted EBITDA as a percent of net sales was $5.6 million this fiscal 2019 versus $2.1 million last year. Now turning to the balance sheet. As of December 28, '19 -- as of December 28, 2019, Summer Infant had approximately $0.4 million of cash and $48.6 million of bank debt compared to $0.7 million of cash and $47.9 million of bank debt at the beginning of fiscal 2019. Given the restructuring initiatives now underway, the lower cost structure of the company and tariff refunds, we believe that Summer is in a good position to reduce debt and delever the balance sheet this year. Our new amended credit agreements also provide increased financial flexibility as we execute our strategic turnaround plans this year. Inventory at the end of fourth quarter was $28.1 million compared with $36.1 million as of December 29, 2018, reflecting ongoing working capital management and inventory turns were 4. While inventory levels rose slightly in the first quarter before Lunar New Year, we remain committed to having inventory levels near or below $30 million during 2020. The larger inventory purchases in Q1, a normal seasonal occurrence, actually helped us given the slowdown in China from coronavirus as well as the Lunar New Year holiday. As Stuart mentioned, we believe the situation in China has stabilized, and as production comes back online, we do not currently anticipate any material impact on our import requirements this year. Trade receivables, at the end of December, were $32.8 million compared with $31.2 million at the beginning of fiscal 2019. Days sales outstanding, or DSO were 70, up slightly from 64 at the end of the third quarter. We expect to receive $1.8 million in tariff refunds classified as other asset on the balance sheet over the coming year. Accounts payable and accrued expenses were $32.7 million as of December 28, 2019, compared with $37.1 million at the beginning of the fiscal year. The company generated approximately $1.5 million in cash from operations during the full year. And at the end of December, we had approximately $6.9 million of availability under our line of credit. As I said a moment ago, we expect more robust cash flow in 2020, and currently, a reduction in debt levels going forward. With that, I'll turn the call over to the operator and open it up to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And today's first question comes from [Ed Reese,] a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [2] -------------------------------------------------------------------------------- Yes, Stuart, can you hear me? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [3] -------------------------------------------------------------------------------- Yes, I can, Ed. -------------------------------------------------------------------------------- Unidentified Participant, [4] -------------------------------------------------------------------------------- Yes, Stuart, I got a number of questions. You were brought on to the company, obviously, to enact some -- to restructure the company. And obviously, you've done a good job in terms of some of the cost initiatives that you've undertaken. Is it your intention that you -- can you give me an idea how long you intend to stay with the company? And is the company in a position where they're potentially going to look for a full-time CEO? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [5] -------------------------------------------------------------------------------- Yes, look Ed... -------------------------------------------------------------------------------- Unidentified Participant, [6] -------------------------------------------------------------------------------- If not -- if you're not. -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [7] -------------------------------------------------------------------------------- Yes. Ed, look, we're having discussions with the Board about that now. I think where the Board ended up and was -- we were right in the middle of a lot of these restructuring initiatives, and they wanted to have some continuity for the short term here over the next few months and will revisit it again. But to get some of this behind us, and then obviously, with the turmoil we see out there now with corona and everything that's thrown even another kick in that. So we'll come back to you on that, but for the foreseeable future, right now, just to hold some consistency, the Board, has asked me to stay on. -------------------------------------------------------------------------------- Unidentified Participant, [8] -------------------------------------------------------------------------------- Okay. And in terms of the $6 million in cost savings that you -- that you're talking about for the year, what time -- when I look at the income statement, what line items do you -- is it going to impact the most? And then how do you think it's going to kind of lay out in terms of the impact on the quarters? Is it more first half impactful versus the second half? How is it going to lay out? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [9] -------------------------------------------------------------------------------- Yes. Look, when we put it all together and had the meeting in the first quarter, we went into action on many of these initiatives as early as February. There were some reduction in force, some negotiations with our vendor community, so we're starting to see those benefits now. And then some we are working on -- Paul will -- addressed a little earlier on some of the subleasing and all that, but it will just take a little bit more time. So we think better than 50% of that has already been implemented. It is starting. We're going to see benefits here moving forward. And then the rest, we're chipping at every day. And look, some of that is normal block and tackle that you've got to work on like freight dollars and things like that. That's changing month-to-month that we're keeping a scorecard internally to make sure we're managing to our numbers or like a temp labor number, things like that. -------------------------------------------------------------------------------- Unidentified Participant, [10] -------------------------------------------------------------------------------- Okay. And if I can just ask a couple more. I've been around the company for a number of years, Stuart, and it seems like for years, when they reported a quarter, we're typically in that revenue range of, say, $40 million to $45 million. The company has just been stuck at that level. Maybe in a seasonally better second quarter, maybe they've been able to exceed it slightly. When you look at the prospects for this company going forward, do you think that there is a chance the company can break out of that range on the upside in terms of the revenues? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [11] -------------------------------------------------------------------------------- I do. I think, look, the world's changing as we see brick-and-mortar and dot-com and all that. Of course, our focus initially here was to get a nice, stable, profitable business as well as protect the business we have. So the numbers you're talking about and then start to drive strategically and profitably towards that growth. But we look at that every day. Look, we had a call this morning with all the sales folks and everything, and we're looking at those types of smart decisions that can drive profitable growth. But first, was to get our cost structure and our overhead structure in line so we could eye profitable business. Look, that's a good -- the one way I look at it is, it's a pretty darn stable business, right, that can deliver on and on quarter-after-quarter that bulk of business, which look in a lot of situations I've been in over the years. That is not the case. That fluctuates way up and down, and then you've got other things you got to manage. So... -------------------------------------------------------------------------------- Unidentified Participant, [12] -------------------------------------------------------------------------------- So there hasn't been a lot of calls that I've been on through the years where the CEO is actually at Summer -- actually talked about a chance, an opportunity, I don't know whatever you want to call it, a belief, let's say, that you expressed on the call in your prepared remarks that you think this company can get to profitability. Do you think you can get this company to profitability? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [13] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Unidentified Participant, [14] -------------------------------------------------------------------------------- I mean is it something that you think that you can achieve this year? -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [15] -------------------------------------------------------------------------------- That is the plan, and we've got to stick to the plan and stay the course and continue to do the fundamental things that the management team has been challenged with. But look, besides the marketplace, just turmoil right now, I mean I feel like we're making good strides towards everything you're asking, Ed. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) As no further questions appear to be in queue, I'll turn the call back over to Mr. Noyes for any closing remarks. -------------------------------------------------------------------------------- Stuart Noyes, Summer Infant, Inc. - Interim CEO [17] -------------------------------------------------------------------------------- Thank you very much to everybody. Thank you all for joining us on today's call, and we look forward to speaking with you again in the next quarter. Thank you. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.