Summer Infant, Inc. (NASDAQ:SUMR)
Q2 2016 Earnings Conference Call
August 3, 2016 09:00 ET
Chris Witty - IR
Mark Messner - CEO
William Mote - CFO
Bob Stebenne - Director
David King - ROTH Capital
Stephanie Wissink - Piper Jaffray
Good day, ladies and gentlemen, and welcome to Summer Infant Second Quarter Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks, we'll hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded today, August 3, 2016.
I would now like to turn the call over to the moderator, Chris Witty.
Hello, and welcome to the Summer Infant 2016 second quarter conference call. With me on the call today is Summer Infant's CEO, Mark Messner; CFO, Bill Mote; and also on the call is former CEO and current board member, Bob Stebenne.
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 2016 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 Risk Factors contained in the company's Annual Report on Form 10-K, for the year ended January 2, 2016, and in our other filings with the Securities and Exchange Commission.
During the call, management will make references to adjusted EBITDA, constant currency sales, 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 a reconciliation of GAAP results to non-GAAP measures, included in today's financial release.
And with that, I'd like to now turn the call over to Bob Stebenne. Bob?
Thanks, Chris, and good morning, everyone. I'll keep my comments brief before turning the call over to our new CEO, Mark Messner. It gives me great pleasure to see him and hear at Summer Infant, and his appointment follows a long search to find a dedicated, experienced executive to take the company to the next level in its growth trajectory. Mark's background in the Juvenile product space is second to none. Having previously served as Chief Executive Officer of Artsana USA, and manufactured baby care products under the Chicco brand.
I'm proud of what we accomplished this past year and will stay on the board to help guide the company going forward. However, Mark will bring a fresh look drawing Summer Infant with the passion, capability and expertise needed going forward. It will continue to focus on new product development and investment in the core brands, increasing our international outreach while continuing to strengthen the balance sheet. It's fitting that Mark is taking the helm during a period we're in the current profitability and in middle of launching a number of new innovative products. The board and I are confident in the future of Summer Infant in Mark's hands as we turn to a new chapter in our history.
Before turning the call over to Mark, I also want to give recognition and thanks to an Independent Director, Dick Wenz, at his recent unexpected passing. Dick was instrumental in putting many of the initiatives these past few years to focus on product portfolio and emphasize brand innovation. His accomplishments were many, and his passion for the industry will surely be missed. The board is currently in the process of searching for his replacement.
With that I am happy to turn over the call to Mark Messner, Summer's new CEO. Mark?
Thank you, Bob. It's great to be on board with such a fantastic company for which I see so much potential. It's been a busy albeit short time since starting at Summer Infant, and I've been focused on meeting operational management, reviewing product roll out plans, and generally becoming familiar with every asset of the business. What I found is an organization of very talented individuals who know the juvenile space well and are excited to be a leading player across a growing array of exciting product categories. This potential, this opportunity is why I joined Summer Infant. I will lay out more of my vision in the weeks and months to come but I wanted to review a few areas that are already leading to improved performance this year.
A number of measures are already taken to reinvigorate and focus Summer Infant before I arrived and we'll continue to follow a path that increases both top line growth and bottom line results. The fact that margins are solid, expenses are down, and the balance sheet is strong provide the flexibility and foundation for us to focus on product innovation and better brand management. As Bill will review in a moment, we posted our first positive net income in over a year, and we believe the outlook for the rest of 2016 and beyond look even better. In the second quarter we posted core product revenue that was roughly flat with 2015. This reflects strong growth in certain categories as mentioned in the past, offset by some softness in other areas where we're transitioning many product lines.
The highlights for the quarter were clearly our strollers where revenue rose 24% and drove overall gear sales up 9% and our safety segment which grew 4% year-over-year. We also saw several areas within our nursery space post double digit growth such as feeding, sleeping aids, and soothers. Taken together these product categories and subcategories including Kiddopotamus underscore some of the best performing brands and successful rollouts of new innovative products. At the same time we saw continued momentum and increased demand coming from e-commerce platforms where sales rose 28% year-over-year. This should come as no surprise given ongoing customer trends, as well as purchasing preferences by millennial moms which has put pressure on several of our more traditional brick-and-mortar retail outlets.
I have a great deal of experience working with all types of retail customers and I look forward to meeting with many of our top selling organizations in the coming months. Our focus will be on finding ways to work together across all channels, be they specialty, big box or online to find strategies to provide customers what they want, when they want it, and ultimately accelerate sales growth.
Before turning the call over to Bill, I'll just mention that there are several categories undergoing major product transitions this year. As has been discussed on prior earnings calls, many of these innovative products are disruptive and as such can sometimes run to into complications due to manufacturing snags distribution issues or customer acceptance. I'll be spending a great deal of time over the next coming weeks assessing how to speed up transition and demand for such products, including those related to Born Free brand and our new monitors as well as our highly anticipated summer smart connected nursery. We need to ensure that the company is doing everything possible to ensure that these products are met with the right understanding and acceptance, not only in North America but abroad.
As Bob has mentioned in the past, we see a great deal of growth potential across the world, particularly in Europe and China which depends on product innovation. As such we look forward to this year's ABC Show in mid-October where just like in 2015 we hope to win many awards for our brands and consumer appeal. Overall, I'm pleased that summer's current product portfolio and I'm a strong believer in what the future holds for this company. I've been very impressed with the people here already and that's what matters the most when it comes to pursuing a strategy of product innovation, superb customer service, and faster growth. We've come a long way but I believe the future quarters will truly show the potential for this great organization.
I look forward to working with the board, with our entire staff, our customers and our investors to shape Summer Infant into a more innovative, nimble, better performing company in the months to come. Now Bill review our financial results in detail. Bill?
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 fillings. Our performance this quarter showed continued improvement across both our top line and bottom lines.
Net sales for the second quarter were $50.6 million, versus $51.8 million for the same period a year ago. If you exclude $1.1 million of sales in 2015 that were tied to the company's inventory reduction plan, core branded revenue was flat year-over-year. We believe that growth from new products, including additional ones being launched going forward should improve sales later this year and into 2017. We are very excited about the upcoming ABC Show in October as Mark mentioned, and our China business is off to a good start with the distribution of our first Born Free bottles and strong turnout at the CBME Show in Shanghai this past July.
Gross profit for the second quarter of 2016 was $16.2 million compared with $13.8 million for the second quarter of 2015. And our gross margin was 32% in fiscal 2016 versus 26.6% in the prior period with nearly 600 basis points increase reflecting improved product mix as well as favorable foreign exchange.
In addition, the fiscal 2015 second quarter included $1.8 million in losses on the sale of $2.9 million of inventory below cost tied to our inventory reduction plan, and $700,000 of inventory charges from exiting the furniture category. Excluding the impact of these charges gross margin for the prior year period would have been 31.2%. We continue to target gross margins in the 33% range going forward.
Selling expenses were $3.9 million in the second quarter of 2016 compared with $4.3 million in the second quarter of 2015 reflecting customer mix and lower royalty cost. General and administrative expenses were $10 million in fiscal 2016 versus $12 million in fiscal 2015. Note that the second quarter of 2016 included just $800,000 of legal expenses versus $1.4 million in the first quarter of this year and $1.7 million in the second quarter of 2015, down significantly.
Excluding litigation cost, G&A in the second quarter of fiscal 2016 would have been $9.2 million, down 10.5% from the prior year period on a similar basis. The lower G&A reflects cost reduction strategies and other operational initiatives and the company is benefiting from $4 million in annualized savings this year. It is worth noting that our headcount is at the lowest point in the last five quarters.
Interest expense decreased to $600,000 in the second quarter of 2016 from $1.3 million last year, reflecting reduced debt levels and lower interest rates on the company's credit facility. In addition, the second quarter of 2015 included a $600,000 write-off on unamortized financing fees and terminations fees associated with the company's April 2015 refinancing. Overall, interest expense for the last twelve months ended June 30, 2016 was just $2.5 million, down 30% year-over-year. What a difference a year makes.
Depreciation and amortization declined slightly to $1.2 million from $1.3 million last year due to lower capital expenditures. The company reported net income of $300,000 or $0.01 per share in the second quarter of 2016 compared with a net loss of $3.5 million or $0.19 per share in the second quarter of 2015. Not only was EPS $0.20 better than last year, it was also an improvement of $0.03 versus this year's first quarter.
Adjusted EBITDA for the second quarter of 2016 rose over 50% to $3.4 million versus $2.2 million in the second quarter of 2015. Adjusted EBITDA in the second quarter of 2016 included $1 million in banked permitted add-back charges compared with $4.4 million in the second quarter of 2015. The improved EBITDA performance clearly shows the impact of the many strategic decisions made at these past two years to strengthen our operations.
Turning to the balance sheet, as of July 2, 2016 Summer Infant had approximately $1 million of cash and $51.7 million of debt compared with $900,000 of cash and $53.6 million of debt on January 2, 2016. On a year-over-year basis, debt is down by nearly $4 million even with having spent some $8 million on legal fees to defend the company's IP. Given the lower debt and improved adjusted EBITDA levels, the company's bank leverage ratio was 4.5 times the trailing 12 months adjusted EBITDA at the end of the quarter. This is the lowest our leverage ratio has been in over three years.
Inventory as of July 2, 2016 was $36.6 million compared with $36.8 million as of January 2, 2016 and trade receivables at the end of the second quarter were $38.3 million compared with $40.5 million at the beginning of the fiscal year. Operationally, we are managing inventory levels appropriately while having the highest quality merchandise including in-stock positions and recent history. Accounts payable and accrued expenses were $37.9 million as of July 2, 2016 compared with $39.1 million on January 2, 2016.
Regarding cash flow we generated $3 million of cash in operations this quarter versus $6 million in the primary year's comparable period.
With that, I'll turn over the call to operator and open it up for questions.
[Operator Instructions] The first question comes from Dave King of ROTH Capital. Please go ahead.
Thanks, good morning guys. I guess first off on the revenue, what can you share about the growth in new products this period and how you're thinking about that and where do these new products stand as sort of a percentage of the business at this point? And then Mark in terms of your comments, to what extent did product transitions away at all in the quarter? I know last quarter there had been little bit of an impact. Did that continue into this period and some color there would be helpful. Thank you.
So from a new product perspective, we have several new products that we've introduced over the last two quarters. Obviously, the Born Free line that's new, as well as some items that we've even introduced in fourth quarter that are doing extremely well in the safety category; those contributed to new product revenues in Q2 and will continue. I don't have the percentage of what the mix of new product revenue is but we've stated those on several calls that those are the items that are the launch products. And we've also stated that or stroller business which continues to launch new products on an ongoing basis and different styles and what-not is up 24%, so that's driving a chunk of new revenue as well. Can you restate your -- the second part of your question?
The second part is product transitions. To what extent did those way at all this quarter? I mean I know it was an issue last quarter and so I'm just curious if that continued at all?
When you mean product you mean taking product out of the market to replace it with new product?
Yes and just some of the issues that have resulted right like what we saw with bottles last period. And then I think Mark in his prepared remarks or Mark in the prepared remarks you talked about just that looking forward you plan to be involved in trying to make sure that those goes smoothly going forward. So I'm just curious to what extent that may have waited all this period?
The bottles obviously at the beginning of the year, we took our old bottle -- our old feeding products out of the market. So that was a concern in Q1, that's no longer a concern as we start to sell the new bottles into the market. So product transition, that was probably -- in the recent history that was the biggest product transition issue that we are having, that wasn't the case in Q2 from a transition perspective. And then, I'll let Mark speak to his comments on the call.
Yes, I mean -- I'm just in two weeks now but reviewing the product roadmaps for each category, and I think we have a pretty robust pipeline filled but I get a little bit closer to the business in the next weeks to evaluate timing of projects and how they can impact the budget. But early days to comment too specifically on the product launches and transitions. I mean Bill covered it on the Born Free items but just normal transitions and fashion, and line extensions and different channels for the stroller business and Potty business is doing quite well, and we continue to get channel expansion there. So I think there is some good positive trend towards customer confidence towards listing summer and plan to ride that and enhanced that traffic.
That's good color. And forgive me for putting you on the spot so early. And then in terms of the gross margin, guidance fell 33% so I know you had targeted, 33.5% maybe even for the year. So when -- in your prepared remarks should we be assuming that for sort of the 33% in each of the next few quarters? Is that sort of the outlook for the year or is that sort of the longer term kind of target? Some color there will be helpful.
It's our goal to be at 33, we're obviously running about 100 basis points lower than that and really that's primarily related to currency in a couple of those transitions that had happened earlier in the year continue to strive to get to 33% and I wouldn't say we're going to hit it perfectly but definitely our goal is to get to 33% and that's -- I would think that we could get close in the back half. I don't think the full year number given that we're at 32% and Q2 is going to be exactly 33% but shouldn't be much lower than that.
Okay, that's good color. All right, good luck for the rest of the year guys.
[Operator Instructions] The next question comes from Steph Wissink of Piper Jaffray. Please go ahead.
Thank you. Good morning, gentlemen. Mark, I'm going to put you on the spot as well, but more just to give you a chance to talk a little bit about what you knew about Summer before you joined? And maybe just give us some flavor about your retailer conversation that you were going through your diligence process? And what's the perspective of the brand, the Company's portfolio of brands and assets in the marketplace?
Obviously I know a couple of folks on the board and that was key. And I did talk with a couple of retailers but obviously I had to keep that kind of -- on the down low uptil the end. They thought there was tremendous potential for the brand, and I think people thought that I could help bring some focus to the product development. And with a little of that and sharpening up on our operational excellence Summer could be right back on-track. So I think the outlook was very positive just with maybe some talent and infusion in certain areas, and -- I mean, they knew Summer as a very successful brand in the past, there were some hiccups along the way, obviously with the previous administration and the lawsuit. We get that lawsuit behind us, we're going to fly.
I feel really confident there is a great group of product development folks here, operational folks, folks of different disciplines, and I come from a company that had a strong performance background, and to make the decision to come here, obviously it was the people, the people and the board believe in this company, the executive team is quite strong and I'm very positive at this stage that we can really get some good momentum going here. And I think the executive team has done a great job of writing the financial performance of the company and we just have to keep the positivity go on with the product development and marketing to enhance and reinforce the brand, and you're going to see some great things out of this Company.
Thank you. And Bill, just a couple for you. The first is on G&A, I know you mentioned that sequential and year-over-year delta in the legal expense. How would you like us to model that line item? And I know there has been some incremental disclosure in your Q regarding the lawsuit but how should we think about just the cadence of legal costs, maybe the timing of what the next sort of events are related to the lawsuit?
Yes, I -- we don't want the outcome of the lawsuit or the costs going forward and we have some internal estimates and that's not really for public consumption. I wouldn't -- I think the average of what we've experienced in the last two quarters is probably the right modeling to that for the back half of the year. I don't think we go into much more detail over that, you never know the litigation if there is an actual trial or something, it will go up significantly but obviously we're -- we don't have insight to exactly what that means at this point. So if I were going to model it, I'd probably take the first half and kind of spread it through the back half.
Okay. So that would imply maybe just a slight step up from Q2's reported rate into Q3 and Q4. Should we assume that the underlying G&A is going to be relatively static?
Underlying G&A, and we've stated it multiple times our goal is to be at 18% in that sales and we're spot on that number in Q2 and anticipate that we'll continue to be at that run rate.
And then just final question related to your selling expense, I find it very more dramatically than we typically see, if you go back even to run rate peak at kind of $250 million in revenues, selling expenses were close to 12% of sales, and now trending in the high 7% year-to-date. How should we think about whether it's the mix by channel or your incentive model for your selling agent? Has there been a change structurally that allows you to operate at a lower level of selling expense?
No, our guidance in the past has been 8% to 8.5% and I think we'll probably run at the lower rate of that guidance for the year. So I think of it more in the 8% range, it's really more timing. You do accruals based on what you know but timing wise you can see fluctuations quarter-to-quarter. But on a full year basis it typically runs 8%, 8.5%. Given the lowness in the first two quarters, probably see it come in somewhere around a 8% for full year.
Okay, thanks Bill. Thank you, guys.
[Operator Instructions] There are no additional questions at this time. I would like to hand the call back over to Mark Messner for closing remarks.
Thanks all for joining us today. I look forward to speaking with you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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