Summer Infant, Inc. (NASDAQ:SUMR)
Q4 2013 Earnings Conference Call
March 11, 2014 05:00 PM ET
David Calusdian - Sharon Merrill
Carol Bramson - President and CEO
Paul Francese - CFO
Steph Wissink - Piper Jaffray
James Fronda - Sidoti & Company
Good day, ladies and gentlemen. Welcome to Summer Infant's Fourth Quarter 2013 Financial Results Conference Call. Today's call will be recorded. At this time all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions) I'll now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please go ahead, sir.
Good afternoon. On the call today are Chief Executive Officer; Carol Bramson; Chief Financial Officer, Paul Francese, and Chief Operating Officer, David Hemendinger. By now, everyone should have access to the Q4 news release, which went out today at approximately 4:00 o’clock Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Summer Infant's website at summerinfant.com. This call is being recorded and webcasted and a replay will be available on the Company's website as well.
Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and that management may make additional forward-looking statements in response to your questions. Forward-looking statements or information are based on a number of estimates and assumptions and are subject to a variety of risks and uncertainties, which could cause actual results or events to materially differ from those reflected in the forward-looking statements or information. Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects or similar references to the future. Examples of forward-looking statements include, but are not limited to, statements management makes regarding the Company's future financial performance, business prospects and operating strategies.
There are many factors that can result in actual performance differing from projections and forward-looking statements. Please refer to the risk factors detailed on the Company's Annual Report on its Form 10-K for the most recent fiscal year and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information. The Company does not expect to update forward-looking statements or information continually as conditions change.
During the call, management will 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 to 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 including in today's financial results release. And with that, I'd like to turn the call over to Carol.
Thanks, David. Good afternoon and thank you everyone for joining us today. Our financial results for the fourth quarter were in line with the preliminary results we provided in January when we announced our leadership changes. Paul will provide you with detail on these results in just a few minutes. Let me start by providing an overview of where we're going strategically and our expectations for 2014. I took this position at Summer because of the incredible attributes this company has and I believe there are significant opportunities for future growth.
2013 was a transitional year for the company and we now have a strong foundation in place to build upon. Last year the Board and executive management team developed a strategy to return the Company to profitable growth. The strategy is focused on leveraging four key strengths; innovation, partnerships, core brands and operational excellence.
First and foremost, we are leveraging our in-depth industry knowledge to deliver high quality products that demonstrate Summer’s superior innovation in the juvenile space. Our product development expertise differentiates us from other companies in this market.
The Baby Touch WiFi video monitor and Internet viewing system we launched in December is a perfect example of Summer’s innovation. The feedback on these monitors has been very positive. The multi-platform system is the only monitor that enables in-home continuous and overnight monitoring on a handheld color touch screen monitor plus away-from-home viewing on smart phones, tablets and computers with the Summer Link WiFi app. These monitors are great for working parents, out of town grandparents and away-from-home peace of mind. Our developers understand what it is that consumers want and need and strive to integrate new functionality and advanced technology into our products in order to maintain our competitive lead.
We also recently launched the ComfortMe wearable blanket. That’s the fourth stage in our SwaddleMe line of wearable blankets designed for safe sleep. ComfortMe gives baby the comfort and warmth of a traditional blanket with a security of a sleep sack. Also the stylish Bentwood Booster Seat is the newest addition to our popular Bentwood collection. The lightweight wood booster seat features three position recline options and folds easily for storage and portability.
In addition, we expanded our 3D Lite Convenience Stroller line which has received great reviews. The new stroller line is very lightweight and adds features and colors while also addressing different price points. We also added several new items under the Born Free brand including a nursing light and nursing scarf. In 2014, we will continue to apply our good-better-best approach to price points to create products that appeal to different categories of end consumers.
Following the reorganization of our management team, we have a more entrepreneurial and efficient organizational structure in product development. Each product area is responsible for product innovation and development and the leader for each team currently reports directly to me with significant input from our new Head of Sales, Ken Price. We also are hiring additional engineering talent, as well as an executive to oversee the innovation and product development process.
The second area of focus is strengthening partner relationships and further diversifying our customer base. We have solid relationships with suppliers, retail customers and end users that we will continue to build to increase our presence in stores and through e-commerce activities.
Internet sales has become an important part of our strategy, our team is working to ensure that Summer and Born Free branded products are well positioned on our customers' website. This means effectively managing the minimum advertise price, increasing the number of items available for purchase and providing thorough product descriptions and appealing product images on customers’ e-com websites.
In addition to our existing customers, we also are focused on growing our customer base for small and mid-sized specialty retailers as well as entering new geographic locations. Just recently we launched our B2B website retailer connection that is specifically designed to service these customers by providing a seamless process to order product. Our e-com and specialty sales both increased 20% for the year.
Another key component of our diversification strategy is to increase our international presence. We have a solid footprint in the U.S., UK and Canada and are committed to expanding into new markets with untapped potential. In 2014, in addition to returning to the ABC Kids Expo, we plan to attend the trade show for kids in Cologne, Germany. Last year more than 20,000 trade visitors from 110 countries attended the conference.
This trade show will be an excellent opportunity for us to establish relationships with partners in new geographies while promoting the Summer brand. We’re fortunate to have Ken Price join our team to lead our sales and marketing initiatives. Ken’s use of innovation to lead sales teams within the juvenile and toy industry and the strong relationships he has created with both large and small retailers will be a great benefit to Summer Infant.
Third we’re building the core Summer brand. Our marketing initiatives are focused on raising awareness for the Summer and Born Free brands, particularly among first time prenatal moms. In 2013 we discontinued our major licensing agreements with Disney and Carters.
Within the juvenile space, consumers are very well informed about their purchases. So strong brand reputation is critical. It is essential for Summer to promote its brand directly to customers and end consumers through digital content and social media initiatives.
For example we now have a presence on Pinterest, where our boards are filled with fun ideas for decorating and activities, as well as on Instagram, where we provide updates on our latest products behind the scenes photos and give away contests. These are in addition to our existing Facebook and Twitter accounts and our new summerinfant.com website.
We also want to give back to our consumers. With that in mind our Born Free team is leading an ongoing initiative aimed at educating expectant and new moms about Colic, a condition that often confuses and concerns parents. A recent study found that 80% of moms with Colic babies felt the baby’s bottle played a moderate or significant role in helping to ease symptoms of Colic. Our Born Free feeding system aids in reducing Colic symptoms. As such we have declared March as Colic awareness month and started a forum on our website to provide caregivers support and suggestions to help reduce Colic symptoms.
The fourth and final area of focus is executing operational excellence. We have implemented many actions that we expect to enhance top line growth and improve gross margins in the future. In the area of growth, we are committed to have focus on consumer driven innovation and the timely introduction of new products to the marketplace. We have carefully reviewed our product development areas and have identified opportunities to enhance the structure, process steps, analytical resources and consumer insights necessary to support creativity and execution success. Each of our product category leaders have been instrumental in this process and the plans going forward.
We have also established a new taskforce, comprised of quality assurance, operations and product development but we’re focused on continuous improvement opportunities in quality and costs associated with our core product offering. We believe these changes will enhance our focus on quality and improve our time to market.
Before I turn the call over to Paul, I’d like to give you an overview of how we see 2014. During the past 12 months, we took significant actions to turnaround our overall performance. We expect our bottom line in 2014 to improve over 2013 due to our improved management practices, as well as our focus on selling higher margin products and our restructuring cost reduction efforts.
Our bottom line performance should improve sequentially as we proceed throughout the year. Looking at the top line, we do not expect to see year-over-year sales growth until the back half of the year and as sales for 2014 overall will be slightly down from last year. Overall in 2014 we expect to be a smaller but more profitable company. We remain committed to the core elements of our strategy, including customer driven innovation and strong customer relationships and we are focused on increasing margins, generating profits and enhancing shareholder value.
We also will continue to evaluate additional channels that we believe present growth opportunities that will enable us to get closer to our consumers and improve our relationships with customers and suppliers. What is most different about Summer is a leadership style displayed by the new senior team and the implications it has on the culture of the organization.
The new focus is on elevating strong talent and empowering these individuals with information tools and resources necessary to make prudent business decisions. We’ve seen a renewed energy at the Company and elevated awareness of how each individual action makes a meaningful impact on the future success of the company.
We’ve identified specific action plans for operational improvement and have delegated responsibility and measurable objectives to key individuals on the team. We’ve renewed our focus on innovation and enhanced our connection with the consumer. We feel good about the current platform and look forward to the improvement these changes will bring in the future.
I’ll now turn the call over to Paul for review of our financial performance. Paul?
Thank you Carol and good afternoon everyone. Details of our results are available on our press release that was issued this evening after the market closed and our Form 10-K filing with the SEC. I encourage you to review these documents.
As we discussed in our January announcements, net revenues for Q4 2013 decreased 23.5% to $44.7 million, from $58.5 million for the same period a year ago. This decline was due to slower than anticipated sales with a major retailer, product shipment delays and the planned exiting of two major licensing agreements.
Gross profit for the fourth quarter of 2013 decreased to $14.4 million from $18.3 million a year ago. The lower gross profit dollars is attributable to the decline in sales, delay in lunching the WiFi monitor and the activities related to ending certain licensing agreements. Gross profit as a percent of net sales increased to 32.3% in the fourth quarter of 2013 from 31.2% in the fourth quarter of 2012. This increase was the result of product cost reductions and the discontinuing of sales of low margin products resulting in a more favorable mix.
General and administrative expenses were $9.8 million for the fourth quarter of 2013 compared to $2 million a year ago. Included in the fourth quarter 2013 G&A was a restructuring charge totaling $624,000 for the reduction in force implemented during the quarter. Selling expenses decreased 34.2% to $4.8 million for the fourth quarter of 2013 from $7.3 million for the fourth quarter of last year. The decrease in selling expenses was primarily attributable to lower sales and lower royalty cost related to discontinuing certain licensing agreements.
During the fourth quarter due to the lower sales volume and our expectations that our strategy to enhance profitability and rebuild sales volume was going to take longer than initially expected, we implemented new cost reduction actions. These actions included reduction in global staff of approximately 10%. Temporary and contract labor was cut, the professional fees and overall expenses were reviewed and where possible, reduced. As a result of these actions, we incurred a charge of $624,000 in Q4 2013 and expect to realize annual savings of approximately $4 million in 2014.
In the fourth quarter of 2013 we reported a loss of $1.7 million or $0.09 per share, compared with a net loss of $1.5 million or $0.09 in the fourth quarter of 2012. Adjusted EBITDA for the fourth quarter 2013 was $0.9 million, compared to $1.7 million in the fourth quarter in 2012. Adjusted EBITDA for the fourth quarter of 2013 includes $0.9 million in permitted add back charges, compared with $0.6 million for fourth quarter of 2012.
Looking at our full year 2013 results, net revenues were $208.2 million, compared with $247.2 million for the 12 months ended December 31, 2012. Gross profit for 2013 was $65 million, compared with $79.8 million in 2012. Gross profit as a percent of net sales was 31.2% for 2013 compared with 32.3% in 2012.
Selling expenses decreased 28.2% to $20.8 million for 2013, compared with $29 million for 2012. The decrease was primarily attributable to the same reasons that drove the decline in selling expenses during the fourth quarter. General and administrative expenses decreased 8.8% from $41.7 million for the year ended December 31, 2012 to $38 million for the year ended December 31, 2013. The decline in G&A expenses is attributable to cost reductions initiated in 2012 in the first quarter of 2013.
As reported, we reported a net loss of $3.8 million, or $0.16 per share for 2013 compared with a net loss of $65.7 million or $3.68 per share, which included a pretax of $69.8 million goodwill and intangible impairment charge for 2012. Adjusted EBITDA for 2013 was $9.7 million, compared with $10.6 million in 2012. Adjusted EBITDA for 2013 includes $2.6 million in permitted add back charges compared with $0.6 million in 2012.
Now turning to the balance sheet. As of December 31, 2013, we had $1.6 million of cash and $49.7 million of debt, compared with $3.1 million of cash and $65.5 million of debt in December 31, 2012. Since completing the restructuring of our debt in Q1 2013, we have been focused on reducing debt and since December 31, 2012, we have reduced our debt level by $15.8 million. Our current borrowing availability at the end of 2013 was $12.8 million.
We are also focused on managing working capital. Inventory at December 31, 2013 was $38.4 million, compared with $49.8 million at December 31, 2012. The inventory reduction is the result of our efforts to manage inventory to service lower sales volumes as well as to transition some category sales to direct import, improved inventory forecasting capabilities and SKU count reduction.
Trade receivables as of December 31, 2013 was $34.6 million, compared to $45.3 million a year earlier. The accounts receivable reduction is a result of lower sales as well as our efforts to improve payment terms with customers, and centralizing the collections efforts into our corporate office.
Accounts payable, accrued expenses as of December 31, 2013 was $31.7 million, compared to $37.1 million a year ago. We procure inventory on credit terms and our current policy is to submit payments weekly. These working capital improvements reduced Summer’s investment in working capital by $16.8 million year-over-year.
As Carol said, Summer Infant today is a much leaner and more streamlined organization than it was a year ago. We are focused on delivering more innovative and higher margin products that represent our core brands. We will strive to more efficiently manage our internal and external expenses to drive future profitability. We expect the mix of sales in 2014 will be more favorable, which will drive higher gross profits. We have more control over our program cost and the ability to better manage expenses and we anticipate realizing the full benefit of our cost reduction initiatives in 2014. While 2013 was a transitional year for Summer, we expect to begin to realize a long-term benefit of our actions in 2014.
With that, I’ll turn call over to the operator and Carol, Dave and I will take your questions.
Thank you. (Operator Instructions). Our first question comes from the line of Steph Wissink with Piper Jaffray. Please proceed with your question.
Steph Wissink - Piper Jaffray
I wanted to just ask a couple of questions if I could. It seems like we've now gone through a phase of kind of base lining sales, managing down the cost structure. But Carol, can you give us some visibility on how you're thinking about the business just structurally over time? As you think about margin balance, are there additional cost savings that you're looking for, whether it’s through margin mix or just to [over our] [ph] natural cost or are we now at a place where you feel like it’s a sales rebuild and there may actually be some cost increases over time, not necessarily in 2014 but over time as you reallocate and realign with future revenue opportunities?
Thanks for the greeting. I do think that the Company is leaner today and a very good platform from which to pursue future growth. We don’t have any existing current plans to make any major cost reductions on the organization. That has occurred a great deal in 2013. We have actually done some hiring recently as we indicated in our product development area and further improvement in profitability is likely to come from our gross margin line above.
Steph Wissink - Piper Jaffray
And then can you give us some sense, I think your outlook calls for maybe a bit of a sales contraction in the first half. Sales rebounding and growing again in the second half. Is that based on visibility through bookings or how are you kind of thinking about the visibility into that recovery trend line?
This is Paul. Two things. One is that, we still have some overhang from last year as we entered into two licensing agreements and so we will still have only two year-over-year comparisons. Particularly in the first half of the year, we'll still have that overhang that we would have to be measured against. But we do have a number of new products, some that are recently launched in December in first quarter that we expect to see some very nice sales in the third and fourth quarters of this year and some of those new products have actually been selling very well. But we believe that we have gone through a lot of cost restructurings last year and we’re to the point now there will be some selective adding of resources, some of which we've already started particularly in the area of product development because we truly believe and it’s part of our culture to be the innovators in our industry. And so we do realize that in places we will have to add back and prudently do that and that will drive additional sales and new products in the future.
Steph Wissink - Piper Jaffray
If I could just ask, it sounds like if you net away that licensing business being down year-over-year, the core underlying business is actually planned to be up for the full year, is that a correct assessment?
Yes, what’s really interesting Stephanie is when you factor out those licensing sales that we had for part of last year; Disney as you know ended in June and Cars will end this month; the health of the core brands in the business is very good and we do expect the growth in those areas.
Steph Wissink - Piper Jaffray
And then just a last question. Carol, you mentioned that specialty and e-commerce sales were up over 20%. I'm just curious if you could give us some detail into the mix of that business, specialty versus e-com and maybe then how you think about the profitability of that segment specialty and e-com versus your core legacy distribution point?
Clearly specialty and e-com in particular represent great future growth opportunities for Summer. Our market penetration in those areas is relatively light in the consumer and on the e-com side it’s definitely been making more frequent purchase decisions there. So we have been aligning with our large retail partners, as well as some new online retailers to better position ourselves in that segment and have also added some additional focused resources in-house to address the opportunities available with some of the smaller retailers out in the marketplace.
Steph Wissink - Piper Jaffray
Okay. Are you willing to quantify size, just so we can have a relative idea of scale within the organization?
When you look at our specialty accounts, Steph, which has actually been a focus of ours, when we look at 2013, it represented about 5% of our sales but the growth in specialty last year was far in excess of 20%. We had very good success in growing that segment of our business but it’s still a small piece of our business at 5% of our sales overall. E-com is actually growing very nicely as well. Last year it grew by 20% which is probably to be expected because most sales are going in that direction. And we are expecting, we've actually budgeted additional robust sales improvements in e-com this year as well.
Thank you. Our next question comes from the line of James Fronda with Sidoti & Company. Please proceed with your question.
James Fronda - Sidoti & Company
I guess can you just talk a little more about specific initiatives that you’re undertaking to help rebuild the Summer brand?
In terms of rebuilding the Summer brand we have done a great deal in order to improve our presence online and to track our success rate at different strategies using online. We’ve recently hired some additional outside resources to assist us in that area. And we recognize that consumers in the juvenile category like to do a lot of research before making their purchase decisions. So we’ve initiated programs to improve upon that on our website as well to aid in that decision process.
James Fronda - Sidoti & Company
Okay. And I guess could you just I guess talk a little more about the overall environment in the juvenile industry. Do things seem to be turning around a little bit?
One of the things that we've actually been seeing -- some of the research we've been reading James is that the birth rate actually has stabilized and actually starting to show some improvement. So that’s reassuring to us. Secondly, what these surveys and reports are showing us is that women are having children later, which means they have more disposable income. So there is two positive trends happening I believe that will be a part of that -- taking advantage at later on this year.
Thank you. (Operator Instructions). It appears there are no further questions at this time. I’d like to turn the floor back to management for any closing comments.
Thank you all for joining us for today’s call. We look forward to speaking you next quarter, take care.
Thank you. Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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