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

Q3 2018 Summer Infant Inc Earnings Call

WOONSOCKET Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Summer Infant Inc earnings conference call or presentation Thursday, November 1, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Witty

Summer Infant, Inc. - VP of IR

* Mark Messner

Summer Infant, Inc. - President, CEO & Director

* William E. Mote

Summer Infant, Inc. - CFO

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Presentation

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Operator [1]

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Good morning and welcome to the Summer Infant Incorporated Fiscal 2018 Third Quarter Conference Call and webcast.

(Operator Instructions)

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

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Chris Witty, Summer Infant, Inc. - VP of IR [2]

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Hello, and welcome to the Summer Infant 2018 third 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 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 may help investors gain a meaningful understanding of changes in Summer Infants 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 will then 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 third quarter conference call. I'll start by giving an overview of recent developments, after which Bill will go through our financial results in detail.

The third quarter of 2018 once again proved that even after losing one of our largest retail customers our products are resilient and our company is back on track. We posted net revenue of $43.8 million in the period, up slightly year-over-year with robust sales across many areas of our product portfolio offsetting the loss of $5.1 million in sales to Babies "R" Us. What we're seeing is the strength of our brands and success of new product innovation, replacing impact from the Toys "R" Us bankruptcy. This really proves that our strategy is working and that Summer Infant is taking the right steps to grow the business even in a very competitive retail environment where customers attitudes change quickly and buying habits needs to be fully understood and appreciated.

As discussed on prior earnings call, we took the loss of Babies "R" Us head on focusing on increased direct-to-consumer opportunities and strategies to pursue additional shelf space with leading brick and mortar retailers, such as Walmart, Target, buybuy Baby and Lowe's. With many of these channel partners we've seen nice double-digit increases in sales this year and expect similar gains going forward.

Even as revenue was down sequentially from Q2, reflecting normal seasonality we saw a strong result across many key product lines, particularly in potty, positioner, swaddleme and gates. Gross margin of 31.1% was lower than last year, but included $0.4 million of expense tied to Amazon Prime Day as well as the impact from trailing close out sales for inventory tied to Toys "R" Us liquidation.

Now I'd like to take a moment to address the issue on tariffs on our margins. As a reminder, 10% tariffs on many Chinese source goods began September 24. So there was not much impact in Q3. However in the fourth quarter, we expect to see additional expense for goods going into the inventory since there is a lag effect between our tariff payments and the subsequent product price increases. We are currently in the final stages of raising prices to channel partners, which they understand and expect given the current geopolitical events. Costs are passed along to consumers, although we clearly preferred such tariffs come to an end as soon as possible. We remain vigilant in planning for such issues and are committed to achieving higher margins going forward as Bill will review in a moment. Notably, we completed ahead of schedule the previously announced realignment of our California distribution facility, which is expected to result in significant savings as well to make the company a more streamlined, nimbler competitor in the Juvenile space. Every step we take to make our operations more efficient and better able to adapt to market conditions strengthens our brands and our customer relationships.

We also recently had a significant presence at the Kind + Jugend trade show in Cologne, Germany, where we saw great -- a great deal of enthusiasm for entire product portfolio. As I mentioned earlier in the year, Summer Infant has been focused on launching a re-branded product offerings in gear around the Born Free brand and we previewed the entire collection in Cologne for the very first time. Without a doubt it proved to be a great success with extremely positive feedback from various retail participants. We've created a unique upscale brand covering several product categories, which we anticipate launching in the first half of 2019.

Born Free will be positioned higher in our portfolio, but an attainable brand marketed through select channel partners. As a matter of fact, we're planning on Born Free having its own website for direct-to-consumer marketing. The bottom line is that while many decisions have yet to be made, we are very pleased with the reaction to the brand and the products it represents. With the correct distribution strategy, this can be a win-win for both us and our channel partners in terms of revenue and margins.

Near term, we are rather upbeat about the outlook for Q4. Our gate products now at Target continue an upward sales trajectory and our potties are headed for another record-breaking year. We're also shipping a host of fresh products this quarter, including new bathers and our new train and transitions My Size Potty, an upscale addition to a category in which we dominate, while closing gates at Lowe's, an incremental placement for them. We're also shipping new strollers and SwaddleMe blankets while gaining additional shelf space across nearly our entire product portfolio, including more potties and [pop skews] at Wal-Mart. Our team has done a tremendous job of using innovation and creativity to bring new products to market, strengthen our brands and win incremental placement in stores. As I said earlier, it's truly amazing that we've achieved enough of a pickup in sales at many brick and mortar stores to blunt the impact from the disappearance of Babies "R" Us this year.

At the same time, we're doing a better job of using our own Summer Infant website for direct-to-consumer marketing. Not only does DTC strategy provide direct access to our end consumers, it ensures price integrity, correct brand imaging and typically strengthens margins. And while overall e-commerce revenue has grown tremendously over the past 5 years, we're working to ensure a greater balance between online sales and those from established brick and mortar retailers. We are taking a focused approach to product distribution to protect pricing, build brand reputation and strengthening our connection with consumers and it's working. As an example, we are now introducing some products directly to customers by using Summer controlled third party fulfillment. Fulfillment by Amazon or FBA allows us to safeguard pricing, get products into the market and control brand imaging while letting Amazon handle all logistics and order processing.

Overall, we feel good about how the year is playing out. Our prior endeavors to strengthen the balance sheet and cut costs are bearing fruit as our initiatives to expand Summer's product lines, improve our branding and manage price integrity. We continue to focus on ways to reduce working capital and increase efficiency and we believe the realignment of our California distribution center will result in both lower cost and faster service. With the upcoming launch of Born Free brand next year and our plethora of new products hitting the market, we're positioned for higher operating performance headed 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.

Third quarter net sales were $43.8 million, compared with $43.1 million in the third quarter of 2017. Revenue grew year-over-year even against the backdrop of $5.1 million in lost sales due to the bankruptcy and liquidation of Toys "R" Us. Revenue was down sequentially versus second quarter, largely due to seasonal factors. We were pleased to again achieve higher placements at a number of leading brick and mortar retailers in Q3, leading to strong double-digit growth across many product segments, more than offsetting the Toys "R" Us impact.

In particular, as Mark noted, we saw nice year-over-year increases within potties, positioners, gates and specialty blankets as well as strollers, highchairs and other products. We remain optimistic about the overall order trends for the company and believe Summer Infant is well-positioned for top line expansion in 2019, particularly with the pending introduction of our new Born Free branded portfolio of premium products.

Gross profit was $13.6 million for the third quarter, both this year last and our gross margin as percent of sales was 31.1% in 2018 versus 31.6% last year. The lower gross margin percentage primarily reflects $400,000 of promotional pricing tied to this year's successful Amazon Prime Day as well as higher closeout sales related to inventory associated with the Toys "R" Us liquidation. We remain committed to increasing gross margins over time through our various product development initiatives, brand enhancement strategy and retail price integrity as Mark mentioned.

In the fourth quarter, we anticipate that due to current tariffs in place on goods imported from China, gross margins may be negatively affected until pricing can be fully absorbed into the market. However, we've already taken decisive steps to partially mitigate the near-term impact of the situation. We have increased wholesale prices to retailers, have modified factory mix to favor U.S. production where appropriate and we are renegotiating costs with our Chinese factory base. We are also re-evaluating production locations globally to minimize the expense and supply chain disruptions due to the hastily implemented tariffs.

Fortunately, we already manufacture approximately 20% of our products in North America and many of our partner factories have additional capacity to assist us going forward. The margin impact of tariffs in Q4 is expected to be approximately $500,000. Selling expenses were $3.7 million in the third quarter of 2018, compared with $3.1 million in 2017. As a percent of net sales, selling expense was 8.3% in fiscal 2018 versus 7.2% last year, reflecting increased cooperative advertisement and freight costs as well as $200,000 in post audit adjustments from a major retailer tied to certain shipments in 2016.

General and administrative expenses were $7.6 million in fiscal 2018 versus $10.5 million last year. The third quarter of fiscal 2018 benefited from our previously implemented cost control initiatives, including headcount reductions and the $500,000 adjustment, the decrease in allowance for bad debt reflecting a partial recovery from the Toys "R" Us bankruptcy administrator. Conversely, the fiscal 2017 third quarter included the original $2.1 million bad debt charge recorded in connection with the Toys "R" Us bankruptcy filing. General and administrative expenses as a percent of sales was 17.4% in the 2018 third quarter versus 24.4% in 2017.

The company has completed ahead of schedule the previously announced streamlining of its warehouse distribution center in California. We are proud of this accomplishment, as Mark noted, which will not only help our bottom line that makes the company nimbler and more responsive to market conditions going forward. Interest expense was $1.1 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.

Our cash interest expense was approximately 800,000 in Q3 and will likely be the same in Q4. In addition, our first quarterly payment on our new term loan in the amount of roughly 200,000 is due in December. The company reported net income of $100,000 or $0.01 per share in the third quarter of 2018, compared with a net loss of $1.2 million or $0.07 per share in 2017. On a year-over-year basis, the change largely reflects the lower G&A that I just spoke about.

Adjusted EBITDA for the third quarter of 2018 was $2 million versus $2.6 million for the third quarter of 2017. Adjusted EBITDA in 2018, included $400,000 in bank permitted add-back credits compared with $2.6 million of charges added back in the prior-year period. Primarily reflecting the year-over-year changes in bad debt expense related to Toys "R" Us bankruptcy as I previously discussed. Adjusted EBITDA as a percent of net sales was 4.6% in fiscal 2018 versus 6.1% last year.

Turning to the balance sheet as of September 29, 2018 Summer Infant had approximately $1.1 million of cash and $47.5 billion of bank debt, compared with $700,000 of cash and $48.1 million of bank debt as of December 30, 2017. The company's leverage ratio was 5.4x the trailing 12 months adjusted EBITDA at quarter end. Inventory as of September 29, 2018 was $27.2 million compared with $34 million as of December 30, 2017 as we continue to effectively manage working capital. Trade receivables at the end of the quarter were $37.3 million, compared with $36.6 million at the end of fiscal 2017. And accounts payable and accrued expenses were $32.9 million as of September 29, 2018, compared with $34.5 million at the beginning of the fiscal year. The company generated $5.4 million in cash from operations during the first 9 months of 2018, reflecting much lower inventory levels compared with $1.2 million use of cash 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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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from [Bernie Williams] with Devon Capital.

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Unidentified Analyst, [2]

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Yes, that was nice revenue growth this quarter given the lack of Toys "R" Us. Can you provide any additional color on the fourth quarter and 2019, particularly with the introduction of Born Free next year?

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

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Yes, Bernie. Good morning. We're feeling pretty bullish about the incremental placements we've gotten. And I think, feel very good about how we squeeze sales from what used to be at Babies "R" Us to our other channel partners we're -- thankfully, we're well positioned in each of our categories just to move those sales over. As we go into 2019 we have a host of new products that are setting in the fourth quarter and feel really positive about those new placements and Born Free will help us introduce a higher gross margin products to our mix. And we're excited to launch Born Free in 2019, along with a host of new innovation as I mentioned that sets in Q4 of '17. So we're pretty optimistic about the innovation we've introduced to the market and excited to see what's in store for us in 2019.

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Unidentified Analyst, [4]

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Very good. Just one more question about tariffs you spoke about tariffs slightly impacting the fourth quarter. What can you say about next year, are you making any preparations in case tariffs remain or go higher?

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Mark Messner, Summer Infant, Inc. - President, CEO & Director [5]

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I'd like to say I'm proud of how quickly the teams reacted to these initial tariffs and we've been very proactive in raising prices to our customers and you'll see that bleed through to the P&L. In terms of 2019 if the additional 15% go into play, we -- I think we're well positioned from a derivative point of view in the win bigger categories we participate in to be able to move skews around to adjust to the different price point repositioning that's going to have to happen in the marketplace. So right now in the near term, you will see retails go up slightly on some products, if that additional 15% goes into place you're going to -- I mean it's going to cause ripple effects through the whole economy. But I think we're well positioned with the product portfolio at different $5, $10 increments that we'll be able to adjust our product line accordingly to meet the key price points that we need to hit. That coupled with a diverse manufacturing base if we need to move certain products to domestic manufacturer, we're already pursuing that.

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Operator [6]

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(Operator Instructions) There appear to be no further questions in the queue, I would like to turn the conference back over to Mark Messner for any closing remarks.

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

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Well, thanks everybody for attending the call and we look forward to reconnecting with you in the fourth quarter and look forward to a good one. Talk to you then.

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Operator [8]

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