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Edited Transcript of SUMR earnings conference call or presentation 2-Nov-17 1:00pm GMT

Q3 2017 Summer Infant Inc Earnings Call

WOONSOCKET Nov 8, 2017 (Thomson StreetEvents) -- Edited Transcript of Summer Infant Inc earnings conference call or presentation Thursday, November 2, 2017 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. - 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

* Eric Martin Beder

FBR Capital Markets & Co., Research Division - 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 2017 Third Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn this 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 2017 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 2017 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, 2016, 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 helps investors getting meaningful understanding of changes in Summer Infant's operations. For more information on non-GAAP financial measures, please see the table for a reconciliation of GAAP results to non-GAAP measures included in today's financial release.

And with that, I will return the call over to Mr. 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 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 most important thing to make note of this quarter is the impact of Summer Infant from the September bankruptcy filings of Toys "R" Us which includes our customer Babies "R" Us. As Bill will review in a few moment, this development affected our quarterly results from both an income statement and balance sheet perspective.

Looking at our top line performance, revenue was down $5.5 million year-over-year with about $2.3 million of this related to lower sales to Babies "R" Us, as orders were curtailed. We also continue to face a very competitive monitor landscape. However, we anticipate that restocking and new product introductions will result in higher revenue for Q4. I'll speak more to these areas in a minute.

With regard to Toys "R" Us, we determined it was necessary to take a $2.1 million charge this quarter to write down certain receivables, which were outstanding prior to the bankruptcy filing. We do not anticipate fourth quarter counts to be impacted, and we are now shipping product to this customer under the same terms and conditions as before. We're also actively managing our inventory to rapidly turnover older, obsolete items and clear the deck for some new and exciting products with the goal of increasing product sales and reducing working capital.

So we believe Summer Infant has implemented and continues to implement direct measures to handle the fallout from the Toys "R" Us bankruptcy and serve this customer appropriately, going forward.

Now let me talk about some other highlights this quarter, starting with our product portfolio. We continued to see strong demand across several important categories, including double-digit growth for potties, strollers, boosters and sleep aids. However, these gains were not enough to offset the shipment delays related to Babies "R" Us or stiff competition and heavy discounting encountered within the monitor market.

I'll be blunt. This has been an extremely tough area for us this quarter and year. As I've said on prior calls, there are many entrants in the monitor space selling too many products at too many price points. While we were pioneers in this category, we have lost both market share and our brand positioning in recent years. However, through ongoing product innovation and a refocused channel strategy, one that does not use third-party wholesalers, we remain optimistic about the quarters to come. We believe monitor pricing has finally stabilized, and we're beginning to roll out some new products this quarter, including a revolutionary baby pixel monitor with virtual boundary detection, moonlight night vision boost and 360-tilt camera sphere. These features will provide parents with peace of mind by being able to see more and stay alert of activities such as crib jumping. We believe products such as these will result in incremental sales given their design and simplicity as well as appropriate channel targeting.

In addition, we'll be introducing new potties, tubs, a 3D mini stroller and super seats this quarter, which should all bolster our market presence heading into 2018. We also expect to see an uptick in revenue in Q4 compared to Q3 due to simple restocking and demand trends look for more positive for the remainder of 2017.

We also continue to post double-digit growth across e-commerce channels and remain bullish about the growth potential in this area. Notably, we have completed refreshed -- completely refreshed our own website this quarter, making it much more consumer friendly. Now when potential customer visit summerinfant.com, they can easily review our innovative products, compare features and shop online. The site was completely overhauled with parents in mind, and we began tracking shopping habits to ensure maximum ease of use, no matter what time of day or what type of device is used. We believe this site will help strengthen our brands and accelerate topline growth.

In closing, we do not believe third quarter results are indicative of the progress we've made in streamlining our operations, bolstering the balance sheet, refocusing our channel strategy and investing for growth these past 2 years. Revenue and bottom line performance were largely impacted by the Toys "R" Us bankruptcy, and measures taken to move inventory and write-off receivables.

Our biggest disappointment was within the monitor space, where we are working hard to bring out new products, refocus on appropriate channels and retailers and grow margins. We believe the steps we've taken in this area will lead to better operating results in the quarters to come, and we have a number of new product additions already on deck for 2018.

Make no mistake. The third quarter was a tough one, particularly given our strong performance in Q2, but we're not backing off our plans for higher growth and improved margins even as we maintain overall cost discipline and manage working capital aggressively. We are upbeat about the fourth quarter due to order trends and new product introductions, which should position us well for improved performance in 2018. I'd like to, again, to thank our investors for the patients, as we make Summer Infant into an organization known for strong brands and innovative products.

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.

Net sales for the third quarter were $43.1 million versus $48.6 million for the third quarter of 2016. Revenue declined approximately $2.3 million due to the impact of the Toys "R" Us bankruptcy and related order delays, as Mark discussed. It was also negatively impacted by sluggish monitor sales. However, looking to the fourth quarter, initial order activity seems to indicate more normal levels of sales activity as well as growth across certain product categories. We'll be rolling out many new items this quarter, as Mark mentioned, and are optimistic about the general outlook.

Gross profit for the third quarter of 2017 was $13.6 million compared with $15.5 million for the third quarter of 2016, and gross margin was 31.6% in fiscal 2017 versus 32% last year. The decline in margin was primarily due to higher inventory obsolescence and demurrage costs. The near-term impact on gross profit this quarter is not indicative of recent trends, including the fact that margins in Q2 approached our target 33% range, thanks to the many measures taken to reduce costs and improve product pricing and positioning over the past 2 years.

Selling expenses were $3.1 million in the third quarter of 2017 versus $3.7 million last year, reflecting lower sales and the impact of customer mix within cooperative advertising.

General and administrative expenses were $10.5 million in fiscal 2017 versus $9.7 million in 2016 with a year-over-year increase reflecting the $2.1 million bad debt charge as we recorded as a result of the Toys "R" Us bankruptcy filing, partially offset by a $0.5 million reversal in compensation expense for the company's incentive plan, which we previously recorded during the fiscal second quarter.

G&A as a percentage of sales rose to 24.4% from 20.1% in the prior period, primarily due to lower revenue and the $2.1 million bad debt charge I just mentioned.

Interest expense was $700,000 in the third quarter of 2017 versus $600,000 last year, while depreciation and amortization declined to $1 million from $1.1 million in 2016.

The company reported a net loss of $1.2 million or $0.07 per share in the third quarter of 2017 compared with net income of $200,000 or $0.01 per share in the third quarter of 2016.

Adjusted EBITDA for the third quarter of 2017 was $2.6 million versus $2.8 million for the third quarter of 2016. Adjusted EBITDA included $2.6 million in bank permitted add-back charges this quarter compared with $0.5 million for the third quarter of 2016, as defined by our amended credit facility.

As noted, in a press release dated October 20, Summer Infant amended its existing credit facility to provide near-term financial flexibility as a result of the Toys "R" Us bankruptcy. As part of this amendment, Summer Infant's lenders waived any loan violations that may have occurred due to over advances made after certain receivables were no longer deemed eligible accounts for purposes of the revolver borrowing base. The amended also included provisions to provide additional flexibility to the company, including permitting post-bankruptcy filing receivables to qualify as eligible accounts. We once again appreciate the steadfast support of our lenders to help us deal with an adverse situation.

Turning to the balance sheet. As of September 30, 2017, Summer Infant had approximately $800,000 of cash and $49.5 million of debt compared with $1 million of cash and $46.9 million of debt on December 31, 2016. Inventory, as of September 30, 2017 about was $37.3 million compared with $36.1 million as of December 31, 2016. We continue to actively manage our inventory, while maintaining the highest quality of merchandise available for sale.

Trade receivables at the end of the third quarter were $31.2 million compared with $34.1 million as of December 31, 2016.

Accounts payable and accrued expenses were $31.8 million as of September 30, 2017, compared with $38.4 million at the beginning of the fiscal year.

Regarding cash flow, we used $1.2 million in cash from operations year-to-date versus $5.4 million generated during the first 9 months of 2016. We expect cash flow improvement in quarters to come, even as we invest in product development initiatives previously discussed.

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) Our first question comes from Dave King with Roth Capital.

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

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I guess, first off, maybe, can you talk a little bit about the revenue impact from Toys "R" Us a bit? Obviously, the -- I think there was $2.3 million, I want to say, of shipment delays. Did those -- have those since -- shipments, have those since resumed? What sort of revenue do you expect from them going forward? And then, I guess, just bigger picture, and perhaps, more importantly, Babies "R" Us is an important customer for you guys. Given the current plans that they've got, how are you thinking about managing that revenue exposure over time? Do you expect any shift in consumer demand away from them to other retailers? How are you prepping for that, if at all, I guess, what are some of the high-level thoughts?

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

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Yes. I mean, we're back to normal operating shipments with Toys "R" Us. And yes, that was a big hit and undoubtedly, we hope the $3 billion-plus that they've gotten in restructuring that they are able to do some things that they haven't been doing, Dave. So while all other customers are over-indexing with e-commerce, sales, they have some catch up to do. So I think with some of these restructuring that they're going to undoubtedly do, they should be able to catch up as the baby specialty authority. In terms of -- if there would be shift between customers, Dave, we're tightly aligned with all of our key customers, and we'll stay close to them. And as shifts occur, we're nimble enough to deal with those shifts. So yes, we're all rooting for them. That's a good -- They're a good partner, that's healthy. And let's hope that this restructuring enables them to get healthier and do some of the core fundamentals to drive their business.

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

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Fair enough. And then maybe switching gear a little bit to the monitor category. The declines that you experienced in the quarter, where those primarily ASP driven, or was that also lower volumes? And then how much of your business is now monitors? When would no longer -- when you think it would no longer be weighing, given some of the new strategy or some of your new strategy at plant for the fourth quarter? Could it actually be up on a year-on-year basis for the fourth quarter? I guess, how should we be thinking about that business, and how important is that business to you still as a percentage?

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

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Yes, the business is still very important to us. I'd say, there's been a heavy shift of that business to online from brick-and-mortar. It's very messy. There are a lot of new brand -- unbranded entrants that are just making that space very messy. So I bragged about the baby pixel a little bit earlier. We have headline reviews with major retailers, and we've been told that it's the most innovative item they've seen in the video monitoring category. So what are we going to do? We're not going to mix it up with the bottom feeders. We're going to try and rise above it with some true innovation, and we're going to shout from the trees about that innovation, some trademark and protected features that our -- hopefully our competition can't copy as quickly as they have in the past. And we're going to make a difference just through true innovation and have people go on in the stores asking for our item versus going in and counting bullet points against one another. They're going to want to one with moonlight night vision booths. They're going to want the one with boundary detection. So they're going to go into the stores asking for it. That's the goal there. But hey, it's a messy category, I admit. And luckily, we've had other categories overdrive to make up for the loss in the monitor sales. But I mean, it's going to continue to be a struggle through the fourth quarter, but then we're shipping baby pixel and some other new items and hope to stop the bleeding in that category.

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

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That helps. And then, I mean, one for Bill. In terms of the expenses in the quarter, it looks like there was a $500,000 reduction in comp? Was that a one-time reversal? And then apart from that, if I back out the bad debt charge, it looks like core SG&A was down, selling expenses even down as a percentage of sales, I guess, can you talk about what's driving those trends? How much more room do you have for expenses to come down? Or is this sort of the right run rate?

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

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Yes, the incentive accrual reversal is really related to our -- no, we're judged on an EBITDA basis for our incentive. And with that $2.1 million hit, it comes straight out of our EBITDA, obviously. So from an accrual perspective, we needed to reverse that $500,000. On an adjusted basis, adjusting out the $2.1 million reserve for the bad debt and for that accrual reversal, G&A was at $7.9 million for the quarter. Last year, on an adjusted basis for last year, it was at 8.6%. So it's about an 8.7% decline, which is good progress. We've managed our headcount, we've managed down on all of our variable expenses, where we have control, especially during this quarter because of the impending bankruptcy that was happening during the quarter. So it actually did happen at the end of the quarter, but there was a lot of rumors before that. So we managed G&A well. I would say, that's a little bit below what a normal run rate would be, just simply because we were trying to manage it hard. But -- year for the year, we are up in G&A on a year-to-date basis. But that's those investments that we've discussed for a period of time. We are making in marketing and advertising spend about 100 basis points up from last year, simply because of that. So overall, I think, I'd stick with that same guidance that I gave at the beginning of the year on a percentage basis for G&A. We just managed in the quarter, simply because of the acute issue related to BRU.

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Operator [8]

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(Operator Instructions) The next question comes from Eric Beder with B. Riley FBR.

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Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [9]

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Could you talk a little bit about where you are in the third-party distribution resetting? And what are the gains that you have been seeing from better segmentation in terms of pricing for your products?

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [10]

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Yes. We've walked away from over 250 customers in the past year and trying to focus on our core partners. Those results, and we've come -- we've been able to improve retail price integrity through those moves, so people like Amazon or other customers, their margins are moving up as a -- just because of retail price integrity is better. So from our perspective, that's good, because those customers are going to want to do more with us, because their margins are moving in that proper direction and they don't have to be discounting as much on Summer-branded goods. So I think there's been really good progress there. At least, that's what we're noticing.

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Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [11]

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And how is -- did you take out -- or is the rest -- what are some of the bigger accounts that are working with you right now? How is Amazon doing?

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [12]

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Yes. Amazon's doing really well. Walmart, Target, all up. So Bye Bye Baby little challenging. But we're showing good moment with those top 3.

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Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [13]

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Okay. And in terms of things like -- how is the actually -- how is the gating doing in that category?

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [14]

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Yes, gates, we anticipate channel expansion in '18. We're strong player in gates, but there's opportunity for channel expansion in gates, and we're pretty confident of that for '18.

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Eric Martin Beder, FBR Capital Markets & Co., Research Division - Research Analyst [15]

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Okay. And last question, the baby pixel product that is out already? When you expect that product to hit the stores?

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [16]

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You'll start seeing that in another month, just hit the water.

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Operator [17]

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(Operator Instructions) Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Messner, for any closing remarks.

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Mark Messner, Summer Infant, Inc. - CEO, President & Director [18]

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All right, everybody. Thanks for joining the call. While it was a tough quarter. We remain optimistic for a turnaround in the fourth, and we look forward to staying in touch with you. Talk to you next quarter.

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Operator [19]

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