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Edited Transcript of SUMR earnings conference call or presentation 3-May-18 12:00pm GMT

Q1 2018 Summer Infant Inc Earnings Call

WOONSOCKET May 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Summer Infant Inc earnings conference call or presentation Thursday, May 3, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Witty

* Mark Messner

Summer Infant, Inc. - CEO, President & 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 morning, and welcome to the Summer Infant, Inc. Fiscal 2018 First Quarter Conference Call. (Operator Instructions) Please note this event is being recorded.

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

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Chris Witty, [2]

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[Hello,] and welcome to the Summer Infant 2018 First Quarter Conference Call. With me on the call today is Summer Infant 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 30, 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. - CEO, President & Director [3]

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

Just like the second half of 2017, a time of rapid change across our industry as well as within Summer Infant, the first quarter was one of many challenges, but we faced them head on. The most obvious issue affecting overall demand continued to be the Toys "R" Us bankruptcy and liquidation, significantly impacting our sales to Babies "R" Us. Gross revenue to this once-important company was down more than $4 million year-over-year, and we anticipate another negative impact on Q2.

After the second quarter, when the liquidation is forecast to be nearly complete, we expect the declining impact on year-over-year comps as other sales channels pick up what would have normally flowed through this customer.

In addition to BRU's near-term top line deterioration we also took a $2.3 million bad debt charge to write off related receivables, as Bill will review in a moment. We're clearing the decks and looking to get this behind us as we're otherwise very optimistic about what the future holds.

First quarter revenue was also negatively impacted by lower monitor sales year-over-year, reflecting shipment timing. But we saw strong growth across potties, bath seats, positioners and our SwaddleMe products.

Importantly, by the end of the first quarter, the new Baby Pixel monitor was in stock with all appropriate channel partners. And given the Pixel strong market acceptance, we expect to turn this tide soon in terms of our performance within this very important segment.

We'll also begin shipping gates to Target in May, which adds an entirely new sales channel to one of our best product categories. We're very excited by the growth we expect to take place over the coming months and anticipate that, sequentially, we will post improved top line performance as the year plays out.

We've also continued to streamline the organization and taken a hard line at reducing costs, investing in product development and increasing margins. During the quarter, improved product mix led to gross margins once again above 32%. And we were able to reduce selling expense due to a higher percentage of direct import business, as Bill will review in a moment. In addition, while G&A cost grows year-over-year, this was primarily due to onetime items, including the $2.3 million bad debt charge I just mentioned, along with approximately $400,000 of severance cost associated with realigning our staff to better respond to today's market dynamics.

We eliminated 23 positions net even while hiring experienced talent across marketing and product development as we revamp our organization into a more consumer-focused, market-driven enterprise with better products, stronger brands and higher margins. I'll speak to this more in a moment, but we expect the staff reductions and other actions we've undertaken will result in savings of approximately $1.6 million annually, which is incremental to the $700,000 anticipated from realigning our California warehouse facility later this year, as we discussed last quarter.

Now let me take a step back and talk about the company in a broader perspective to provide some additional color as to what's taking place to improve our overall outlook in terms of both top line growth and bottom line performance, as spoken in the past about how we've been focused on revamping our go-to-market strategy, primarily due to the shift and demand away from brick-and-mortar retail locations along with, more recently, the impact from the Toys "R" Us bankruptcy. We've transformed our marketing and product development groups to ensure that we're investing in key product categories, where we believe we can lead, grow the market and our position in the market and expand margins.

A great example of recent successful product introduction has been the My Size Potty. When we first developed this, there was nothing like it on the market. Indeed, potties were considered rather low-end, low-margin items to be carried around the house or in the car. Our innovative concept not only brought new life to this category, it expanded the entire line as consumers are now buying more potties in general and drove margins in tandem. We have great market share here and are investing in additional potties, some with more upscale features, to be a solid -- be solid in particular channels suitable for such products.

Likewise, we've expanded our gate portfolio, adding new unique cosmetic features and expanding the stores where certain gates can be found. Again, this is meant to drive both overall volume as well as improved profitability, which is a win-win for both of us and our retail partners.

We're enacting a similar strategy with monitors, bath seats, strollers, swaddles and several other areas. And we'll be leveraging our brands to further strengthen our bond with consumers and direct -- differentiate products across a variety of price points.

I don’t want to get ahead of myself here, suffice it to say we're excited about the steps we've already taken to enact what we're calling a house of brands strategy, a strategy to be leaders in certain categories through the use of innovative product development and effective brand management. It's a time of big change here as we shift into the growth mode, and feed -- the future looks more positive every day. We have a keen understanding of our market segments and sub-segments and are much better due to extensive consumer research. And we also know how to prevent our products from oversaturating certain channels and driving down prices. As I said before, the goal is not just to grow for growth's sake, it's growth combined with expanded margins, and this relies on strong brands within and innovative products. That's where we're taking the company.

Before turning the call over to Bill, let me add a few more comments regarding recent progress here at Summer Infant. I've already discussed our streamlining initiatives; the increased availability of our Baby Pixel monitors across our sales channels and the upcoming placement of gates at Target. Our own Summer Infant direct-to-consumer revenue is also growing nicely without much in the way of promotional discounts. And our e-commerce business is now -- in total, now represents nearly 50% of overall sales.

At the same time, we're winning additional space for our products at several major brick-and-mortar retailers. So I'm pleased with the progress we've seen across the company and the dedication of our hardworking staff to implement the strategies we've outlined.

Summer Infant has been battered by many industry changes these past few years but has evolved into a company that's better focused and positioned to succeed in the retail environment of today. Our margins are sound. We've taken decisive action to cut costs and strengthen our workforce. And we have a vision that is already starting to achieve results in terms of brand recognition, innovative products and an improved margin profile.

I think a year from now, we'll look back and say that Summer Infant rose above many hurdles and successfully transformed the company into a new and exciting leader in innovative children's products. Our employees are energized and our retail channel partners fully engaged. To our investors, who have patiently stuck with us, we appreciate your steadfast support and ask you assess the fundamentals of what we've already accomplished. We're a streamlined, nimble enterprise with great brands, a multitude of new products in the works, a supportive bank group, solid margins and visionary leaders, who are excited about the future even with one of the company's largest customers in bankruptcy. We believe in Summer Infant, and we look forward to seeing the results of our efforts in 2018, '19 and beyond.

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.

First quarter net sales were $42.1 million compared with $47.3 million in the first quarter of 2017. Revenue was down year-over-year, primarily due to the Toys "R" Us bankruptcy and liquidation, as Mark mentioned, where gross sales fell by over $4 million. The timing of the new product shipments and weakness in monitors also negatively impacted the first quarter results even as the company posted growth across several categories, including potties, positioners, SwaddleMe and bath seats. By the end of the first quarter, as Mark discussed, the new Baby Pixel monitor was in stock in a wide variety of channel partners. And during May, gates will begin shipping to Target, opening up a new customer for this product category. Going forward, we expect the impact of new product placements such as these, along with declining impact from the Toys "R" Us bankruptcy, to result in sequential top line growth as the year progresses. Even as there remains some lumpiness due to shipment timing, we are confident that the steps we are taking now to grow revenue are beginning to bear fruit and will be even more impactful on 2019 results.

Gross profit for the first quarter of 2018 was $13.6 million compared with $15.3 million last year. And our gross margin was 32.3% in both years. Margins improved sequentially from the fourth quarter's 29.8% even as revenue decline, which points to our ongoing efforts to control costs and improve the mix of our product portfolio.

We also announced last quarter that to expand margins and increase asset utilization, we will be investing over $1 million in our West Coast distribution center later this year. The realignment of this facility is expected to save over $700,000 annually and further enhance our operating efficiency.

Selling expenses were $2.7 million in the first quarter of 2018 compared with $3.9 million last year due to reduced spending on discretionary advertising as well as lower cooperative advertisement costs, reflecting a higher percentage of direct import business this year. Approximately 7.6% of sales were direct import this quarter versus about 6% of sales in the 2017 first quarter.

General and administrative expenses were $12.6 million in fiscal 2018 Q1 versus $9.3 million last year. Recall that this includes a $2.3 million bad debt charge related to the Toys "R" Us liquidation and over $400,000 of severance costs related -- associated with the company's expense reduction initiatives. This later action is expected to result in savings of $1.6 million annually beginning in the second quarter of 2018, as Mark discussed. These savings are net of any additional staffing hired to strengthen our product development marketing and brand management strategy. G&A as a percent of sales was 29.9% in 2018 first quarter versus 19.6% in 2017, reflecting the items I just mentioned. At this time, we do not foresee any further write-downs with regards to Babies "R" Us receivables. And we expect that a normalized G&A should be around 19% of net sales going forward.

Interest expense of $800,000 in the first quarter versus $700,000 last year. Depreciation and amortization declined $100,000 to $1 million in Q1.

The company reported a net loss of $2.7 million or $0.15 per share in the first quarter of 2018 compared with the net income of $200,000 or $0.01 per share in the prior year period. Our net loss in 2018 reflected the G&A charges and expenses I mentioned, billing approximately $2.8 million, along with the impact from the Toys "R" Us liquidation on revenue and gross margin.

Adjusted EBITDA for the first quarter of 2018 was $1.4 million versus $2.4 million for the first quarter of 2017. Adjusted EBITDA in 2018 included $2.9 million in bank-permitted add-back charges compared with $200,000 in the prior year period, as defined by the company's amended credit facility.

Turning to the balance sheet. As of March 31, 2018, Summer Infant had approximately $800,000 of cash and $45 million of bank debt compared with $700,000 of cash and $48.1 million of bank debt as of December 30, 2017. Note that our debt was at the lowest level it's been in about 5 years. The company's bank leverage ratio was 4.6x the trailing 12-month adjusted EBITDA at the end of the quarter as compared with 4.7x at the beginning of the fiscal year. Inventory as of March 31, 2018, was $28.7 million compared with $34 million as of December 30, 2017, as we continued to effectively manage this part of our balance sheet. Trade receivables at the end of quarter were $29.2 million compared with $36.6 million at the end of fiscal 2017. And accounts payable and accrued expenses were $28.5 million as of March 31, 2018, compared with $34.5 million at the beginning of the fiscal year. The company generated $3.7 million of cash from operations during the first quarter of 2018, reflecting positive changes in working capital that I just noted compared to a usage of cash of $600,000 in the prior year period.

Before turning the call over to questions, let me just add that we appreciate the continued flexibility shown by our bank group, that's led by Bank of America. As we navigate through the Toys "R" Us bankruptcy, we're also exploring other financing options to bolster our long-term streamlining initiatives and go-forward growth plans.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Dave King of Roth Capital.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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So I guess, first, Bill did I hear you right that the BRU contributed $4 million in revenue in the quarter? And then more importantly, how did that compare to Q1 of '17? And then if you have it, what were the contributions in each of the other quarters of '17 from BRU?

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William E. Mote, Summer Infant, Inc. - CFO [3]

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Yes, so last year, in Q1 2017, BRU was about a $7 million customer, but we did sell about $3 million to BRU this year, so about a $4 million decline just related to BRU business. Last year, 2017 full year, BRU U.S. was about a $28 million customer, so about $7 million a quarter is the clip they were at. And obviously, we'll mitigate some of that with migration to other customers, like we talked about in our call.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. Okay. That helps. And then in thinking about the revenue guidance then, it sounds like you're anticipating growth in the back half. I think 2Q last year was also probably the most difficult -- what is the most difficult compare. In terms of the quarterly cadence, do you think that the $42 million you booked this quarter should be the low watermark in terms of revenue for the year? Or should the second quarter be more -- be down from the current level?

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William E. Mote, Summer Infant, Inc. - CFO [5]

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Well, our expectation at this point is that Q1 was kind of the low point for us, and Q2 should be sequentially higher. We definitely look at the second half as being where we work through the rest of the liquidation that's going on in the marketplace because as Babies "R" Us and Toys "R" Us liquidates product at a significant discount, consumers are going there versus other channels. So as they return to the normal channels, we anticipate an uptick in the back half versus this Q1 and Q2 that will be lower than prior years, obviously, simply because of the liquidation and the Toys "R" Us bankruptcy.

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

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Okay. But then still, it's good to hear, right, I guess, that you guys are managing through this probably better than some might have expected. In terms of cost reductions, the $1.6 million, do you expect the full -- that full annual number to be reflected in the Q2 run rate? And then how should we be thinking about those between cost of goods -- that savings between cost of goods sold, selling costs, G&A, et cetera?

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William E. Mote, Summer Infant, Inc. - CFO [7]

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So for -- I'll answer your second question first. It's -- 100% of it is G&A related. And we expect the full quarterly benefit of that $1.6 million to -- starting Q2. We actually made the cuts in mid-March, so they're fully effectuated for the Q2 period. For the full year of 2018, it's about $1.1 million in savings for 2018; and then annualized, in '19, that's about $1.6 million.

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

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Okay. Okay. That helps. So when you said the 19% G&A kind of core, that doesn't -- it sounds like that doesn't reflect that.

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William E. Mote, Summer Infant, Inc. - CFO [9]

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Yes. Yes, it does. So we have -- obviously, the 19% is with the bankruptcy cost adjusted out. So the $2.4 million of write-down of the TRU debt as well as $400,000 of severance costs related to that (inaudible) cuts. Ongoing throughout the year, we're doing other cost-cutting efforts as well and just discretionary. The headcount reduction was just a part of our overall realignment of the entire organization. So it's not the only savings that we're doing to ultimately effectuate that 19% level.

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

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Okay. Got a ton of questions here. I'll just do one more and step back. Maybe we can take the rest offline. Mark, where is -- maybe some of these questions are for Bill. But where does e-com stand as a percentage of the business now for you guys? And when I say e-com, I mean your own kind of direct to consumer, not Amazon. And I guess more importantly, where do you see that going over time? And what are sort of the things you're doing to kind of drive that, particularly given all of the channel issues that are out there, in dealing with bricks and mortar and the consumer shift that's going on?

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [11]

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Yes, we're -- Dave, we're heavily investing in our own D2C business. We -- as you know, the new website came online less than a year ago, but our marketing group is doing a fantastic job of driving people to that website. It's still a very small part of our business, but we're really focusing in this area to really drive growth there. And we're on track to double our sales from last year, and we're doubling those sales without being as promotional as Summer Infant had been in the past. So I'm happy with the work that's been done there. Obviously, we have a long way to go. So that's a very small portion of our business as we're just really starting a holistic D2C business less than a year ago. But I'm really happy with the results we've seen. And the traffic and average order value and conversion of sales, thus far, it's improving month-over-month. And it is going to be an increased focus of ours going forward. Relative to overall e-commerce, obviously, that's growing quickly. Even from probably the last conference we attended, we're trending towards 50% of our overall businesses done online, either in Target.com's, Walmart.com's and Amazon's, so...

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Operator [12]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mark Messner, Chief Executive Officer, for any closing remarks.

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [13]

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Thank you, everybody, for attending our conference call, and we look forward to answering questions on follow-up calls and talking to you next quarter. Have a good day.

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Operator [14]

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