Craftmade International, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

Craftmade International, Inc. (CRFT)

F4Q08 Earnings Call

September 24, 2008 11:00 am ET

Executives

Marcus Scrudder - Chief Executive Officer

Brad Dale Heimann - President and Chief Operating Officer

Brett Burford - Chief Financial Officer

Jimmy Ridings - Chairman

Analyst

David Taylor - David Retailer Company

George Schwartz - Schwartz Investment

Lee Rogers - Private Investor

John Beverly - Whitney National Bank

Presentation

Operator

Welcome to today’s Craftmade International fourth quarter and year end 2008 earnings conference call. Your host for today’s call is Marcus Scrudder, Chief Executive Officer. (Operator Instructions) I would now like to turn the call over to Mr. Marcus Scrudder.

Marcus Scrudder

With me today is Jimmy Ridings. As you know he retired at the end of the fiscal year, but remains our Chairman of the Board. Also is Brad Heimann, our President and COO and Brett Burford is joining us; he is our new Chief Financial Officer started mid-August and Brett brings a strong financial background to the company and has started right at year end and has jumped down with both feet and done a great job. So, right now I will turn it over to Brett to read the Safe Harbor statement and then I’ll continue with comments.

Brett Burford

During this call we are making statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations and assumptions that are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Craftmade International Incorporated to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

These factors are discussed in more detail in today’s earnings press release and in our most recent Form 10-K, subsequent quarterly reports on Form 10-Q and other reports and filings with the Securities & Exchange Commission. We do not undertake any duty to update any forward-looking statement.

Marcus Scrudder

Well, as you can see we continue to be effected by the weak housing market and we don’t know how long it’s going to last, but we believe that we are running this company pretty well. If you look at the historical Craftmade that specialty segment the independents, what we used to call the Craftmade segment is down 15.3% and compared to housing starts it’s not down there as much as the market. Our Mass was down more at 27.6% as we were annualizing some of the direct import business that we lost and announced back in November of 2006.

We continued to introduce new products and we are planning on several new introductions in the upcoming market in January. I’ll talk a little about the Woodard acquisition; we just ramped up the fiscal or the season for 2008. It closely coincides with our fiscal year.

We are right now starting to focus really hard on the 2009 season and one of the things that changes a little bit with the acquisition of Woodard is the seasonality to where right now we are busy producing products for 2009, but those will be selling through and typically December through July is when the majority of products sell through.

The acquisition into outdoor furniture expanded our product lines. The other thing it did for us is expand the Craftmade into hospitality segment which were working hard to develop. We diversed a part of the manufacturing; one of the things we are excited about is, the last weeks scheduled furniture show we opened our new showroom at the Merchandise Mart in Chicago. Historically Woodard had been off sight for a number of years and we opened up the showroom, it’s beautiful, well received and I think it’s going to show to be a good move for us.

We are still working hard on integrating and streamlining all of our operational processes for Woodard and we are also at this time taking the opportunity to evaluate our internal operations, comparing them against the Woodard sale, so that we can come out with the best overall operations. We believe that we are doing the right things and we look forward to come out of the downturn even stronger.

So, with that I’m going to turn it over to Brett to discuss the financial details program.

Brett Burford

For fiscal 2008, our net income was $2.1 million compared to net income of $5.9 million for the 2007 fiscal year; on a fully diluted basis the income per share $0.39 for the 2008 fiscal year compared to $1.14 for the prior year.

Weighted average diluted shares outstanding for the current year were $5.451 million this year versus $5.206 million for the 2007 fiscal year. Fiscal year consolidated net sales for the company increased by $34.2 million or 33.1% to $137.6 million compared to $103.4 million for the prior year. This increase was really due to the acquisition of Woodard and partially offset by declines in our historical ceiling fans, lighting and accessory sales business.

Although Craftmade continues to be organized by customer base into two operating segments, as of June 30, 2008 we have re-named these segments to be more descriptive. The segment that we formerly identified as Craftmade will now be referred to as Specialty and the segment formerly identified as TSI we’ll now refer to as Mass.

So moving into segments results, the net sales of the Specialty segment increased by $15 million or about 25% to $74.9 million; that’s compared to $59.9 million reported in the last fiscal year. This increase was primarily due to increased sales from the Woodard acquisition of $24.1 million and partially offset by a decrease of $9.2 million or 15.3% on our ceiling fan and lighting business.

Net sales of the Mass segment increased by $19.3 million or 44.4% to $62.7 million for the year and that’s compared to $43.4 million reported in the last fiscal year. Additional sales from the Woodard acquisition accounted for $31.3 million of this, which was partially offset by a decrease of $12 million or about 27.6% in the lighting and accessory sales business.

Gross profit of the company as a percentage of net sales was 25.3% for the fiscal year compared to 31.2% for the prior fiscal year, which is a decrease of 5.9% and again this decrease was primarily driven by an increased sales on the Woodard business which carry a lower gross margin that are our traditional ceiling fan and lighting business.

For fiscal 2008, our SG&A expenses increased by $7 million to $28.1 million; that’s compared to $21.2 million for the prior year and again this increase is due to rolling in the Woodard acquisition.

Interest expense for this fiscal year slightly increased by about $48,000 to $1.5 million compared to $1.4 million last year. The increase of debt was related mostly to the acquisition of Woodard and was offset somewhat by lower outstanding balances and lower interest rates versus the prior year.

Our minority interest expense decreased by $215,000 to $1.3 million for the fiscal year compared to $1.5 million for the same period in the prior fiscal year. This decrease resulted from lower profits at Design Trends as well as a again as a result of the decline in net sales.

I will now jump into some financial highlights we appeared to over period in comparison for the fourth quarter. That net income for the quarter which ended June 30, 2008 was $373,000 compared to net income of $1.8 million for the quarter ended June 30, 2007. On a fully diluted basis, net income per share was $0.07 for the quarter compared to $0.34 for the comparable year-ago period.

Net sales for the quarter were $39.1 million compared to $26.2 million in the prior year quarter, which represents an increase of about 49.4%; again this is due to incremental sales from Woodard of about $19.5 million and offset by a $6.6 million decline in our ceiling fan, lighting and accessories business and again this is really related to the overall decline in the housing markets.

Now to sort of wrap up for the quarter, our gross profit as a percentage of net sales was 26% compared to 30% for the same quarter in last year. I will now turn it back over to Marcus for his closing remarks.

Marcus Scrudder

We are laying the ground work for future long-term growth. Right now we remain focused on (a) successful integration of Woodard, gaining market share, expanding our distribution channels to include hospitality and then cross selling Woodard products and Craftmade products in to each others distribution channel.

We continue to really focus on developing desirable products and any other new opportunities that we find consummates our product line. So with that I’ll open it up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Taylor - David Retailer Company.

David Taylor - David Retailer Company

I guess I’m a little surprised by the difference in gross margins between Woodard and the Traditional Craftmade businesses. I guess I would expect that division that included manufacturing as Woodard does, would have a higher gross margin. Is there anything you can do to improve that?

Marcus Scrudder

Yes, we’re focusing on the improving gross margins right now. Even if you look at these results versus comparable historical results, they’re down a little bit. One of the issues affecting this year…

David Taylor - David Retailer Company

Volume of course.

Marcus Scrudder

Yes, volume; I mean on the math there is a dollar direct import. So that is always carrying a low margin and for the direct import business that counts into the math, was very similar to the TSI historical direct import business. If you remember whenever we had lost the 14 skews back in 2006, I believe those products had about 11% gross profits, which is roughly inline with where the direct import business is.

On Specialty, due to the nature of the season and the price for the entire season, the raw materials costs a massive increase; kind of had a little bit more of the bite this year than what everybody has been initially expecting. So we do believe that we can…

David Taylor - David Retailer Company

And again the raw materials are what; I mean steal?

Marcus Scrudder

Steel and aluminum.

David Taylor - David Retailer Company

So, if those are the major ones, how about PVC; in patio furniture a lot of PVC is used.

Marcus Scrudder

For Woodard what we focus on and what it’s known for is sun wrought iron. Then we also sell cast and extrude aluminum, which the extrude aluminum is made in our plant in Owosso and then also they do cast aluminum, which is probably made in China, probably made in the U.S. and was in the product, so we don’t do any PVC product.

The other thing that we do have to help margins overall is with Woodard we’re also picking up (a) the manufacturing facility that we hadn’t began to explore if there’s any opportunities there for core Craftmade products, but also manufacturing in Mexico. So, long-term we had diversified; the short-term results didn’t...

David Taylor - David Retailer Company

Let me ask you this kind of general question. You bought Woodard in December as I recall and so you were forming expectations in the fourth quarter of the last calendar year; has Woodard lived up to your expectations?

Marcus Scrudder

Overall, yes we hit the one spot; the margins were a little bit tighter than what we were expecting, but as far as sales volume and expenses and quality of products, quality of customer for the most part meets our expectations.

David Taylor - David Retailer Company

One last question on a completely different subject, your stock stand at $3 and change, which is as cheap as I’ve known it; are you interested in buying any shares at this point?

Jimmy Ridings

This Jimmy, we had a Board meeting yesterday and it is something that all the Board members are very much in favor of and so what we’ll have to do now is explore all the banks and make sure that any covenants that we could possibly break, that we can get those changed. We have plenty of our cash flow to do it with, but we will make sure that we’re in compliance and so we don’t want to break a covenant.

Operator

Your next question comes from George Schwartz - Schwartz Investment.

George Schwartz - Schwartz Investment

I was going to ask about the stock so extraordinarily depressed; what were the Board’s plans with respect to buyback and I certainly hope the Board takes advantage of this extraordinary low price obviously with your banker’s concurrence.

Marcus Scrudder

Yes, we’ve very much realized how cheap the stock is and we’re trading it at basically half a book, so we’re trying to figure this one out.

Operator

Your next question comes from Lee Rogers - Private Investor.

Lee Rogers – Private Investor

Your Woodard sales $55 million or so, you’re given data between specialty and mass; is the Mass segment which you referring to is hospitality?

Marcus Scrudder

Well, hospitality will follow in the Specialty segment; the Mass is just the Mass retail sales which are low as Costco, major account like Wal-Mart, major account like that.

Lee Rogers – Private Investor

Okay, so you are selling through individual patio furniture dealers as well as through mass merchandisers?

Marcus Scrudder

Yes, entertainment and hospitality.

Lee Rogers – Private Investor

Okay alright well. Glad to know you might take a move to buy some stock back. You had mentioned a couple of years ago Jimmy, you might try to take the company back private, any thoughts along those line with the stock down as far as it is?

Jimmy Ridings

I never say that was a problem. Talking about private, I said it would be nice if it was that private, but I don’t think they can discuss that.

Operator

Your last question comes from John Beverly - Whitney National Bank.

John Beverly - Whitney National Bank

Can you just briefly speak about the net profits from operations? I know they are showing $2 million net profit bottom line, but what’s exactly the net profit from operations?

Marcus Scrudder

Income from operations for the year was $5.9 million and that’s deferred to $10.3 million last year.

Operator

At this time there appears to be no more questions.

Marcus Scrudder

Well, I thank everyone for participating in the call today and we look forward to talking to you next quarter.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!