Q2 2020 Summer Infant Inc Earnings Call

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This time all participants are you listening.

Following management's prepared remarks, well older QNX Sasha.

To ask a question. Please press star followed by one on your touched so.

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As a reminder, this conference is being recorded today August 12 2020.

I would now like turn the conference over to the moderator Chris witty. Please go ahead.

Hello, and welcome to the summer brands Twentytwenty second quarter Conference call with me on the call today, it's the Companys interim CEO Stuart noise and see if I'd Schwartz.

I'd now like to provide a brief safe Harbor statement.

This call May include forward looking statements that relate to some of branch outlook for 2020 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 28, 2019, and its quarterly reports on form 10-Q.

Other filings with the FCC.

During the call imagine may make references to adjusted EBITDA.

Net income and adjusted earnings per share.

These metrics are non-GAAP financial measures, which the company believes help investors gave me a meaningful understanding of changes in summer brands operations.

For more information on non-GAAP financial measures piece the table for a reconciliation of GAAP results to non-GAAP measures included in the Companys financial release issued yesterday either.

With that I'd like to turn the call over to Stewart.

Oh, it's Stuart.

Thanks, Chris Good morning, everyone. We appreciate you joining our second quarter conference call today.

I'll start by providing an overview of recent developments after which add will go through our financial results in detail.

The quarter was one that clearly highlighted the purpose and benefits of the many actions taken to rightsize the company.

Improve our underlying operating performance.

Reported revenue of 38.2 million versus 46.4 million last year due primarily to the ongoing impact from cobot 19.

Pandemic kept some of our specialty brick and mortar stores closed.

Typically in Canada, as well as in our international markets.

And disrupted our supply chain for certain products made in Mexico, while our China in U.S. sources were operating near normal during most of the corridor. So production up some items elsewhere was curtailed due to.

Reduce manufacturing availability in the face of workers illness, and or government restrictions.

That said, there's a reason for optimism moving forward based on performance first these facilities.

Our now by and large back up and running at or near full capacity in second our inventory turns improve dramatically as many products in high demand sold through our distribution system to our major customers.

In addition, we believe there is still pent up demand for our products that should positively impact quarter three volumes.

We are optimistic about the second half a year given these demand dynamics.

At the same time, our focus business approach and implemented restructuring initiatives are producing positive financial results.

It is.

But positive bps in the quarter and significantly improved operating cash flow.

In a declined 6.7 million in the quarter from 8.1 million in the first quarter and 8.5 million last year.

And we reported net income of 1.3 million or 61 cents per share.

First substantial profitable quarter in recent history.

Adjusted EBITDA Rose to 4.3 million, we generated 9.6 million in operating cash during the quarter.

The operating cash generated in quarter, two was utilized to reduce debt bye now.

9.3 million to a total 35.2 million significantly strengthening our balance sheet.

All in it was a very good quarter. Despite some top line challenges we have.

I'd like to remind our listeners that in general most of our leading customers have done it remain open such as Wal Mart home depot target lows.

In Amazon is obviously continued to do well.

Products are seen as essential to many moms and dads, leading solid demand even in the states that supply chain challenges and the lingering economic impact a pandemic.

We saw double digit revenue increases year over year within several product categories, including specialty blankets and play arch.

And our new travel systems are off to a good start growing demand an attractive reviews.

As is evident from a quarter to results remain on track with regard to eliminating over 7.5 million in costs annually through our previously implemented restructuring initiatives, including at least 6.2 million at those savings realized this year.

Of course, we continue to assess the organization for ways to further reduce unnecessary expenses and crew and improve our reaction time to changes in market conditions.

Before turning the call over that I wanted to match in that we were pleased to be granted additional chair exclusions on certain products this quarter.

Resulting in a benefit to cost of goods sold along with the right to receive refunds of duties previously paid on such items.

However, these tariff exclusions.

As wells those previously granted were temporary in expired on August 7th.

Unfortunately, we learned that the U.S. trade representative.

Has denied our application to extend the majority of these tariff exclusions.

We knew this could happen.

Yeah.

Put together a plane.

That would mitigate much of this additional cost in 2020 and into 2021.

Lastly, I wanted to remind our investors continue to hold to see annual stockholders meeting on September nine 2020, we look forward to seeing some view that.

Closing I'd like to say what may seem obvious our results this quarter reflect not only our focus on streamlining business, but just as importantly during demand for our innovative products and high quality brands.

I believe we are well positioned for a strong third quarter and I'm upbeat about the future I'm proud of the entire summer team and what we've been able to accomplish together transforming summer into a mean customer centric profitable organization.

With that I'll turn it over they had to review our financial results in detail AD.

The next door and good morning, everyone. As a reminder, our 10-Q and related press release were issued last night.

In addition to listening to this conference call I encourage you to review.

Our filings.

Second quarter net sales were 38.2 million compared with 46.4 million in the second quarter fiscal 2019.

Stuart mentioned lower revenue was primarily due to the impact of Kobin 19, I've store closures and supply chain disruptions, which negatively impacted shipments during the quarter.

These manufacturing constraints have largely been corrected and we're optimistic about a return to growth going forward.

Gross profit was 14.0 million for the second quarter fiscal 2020 versus 14.8 billion in 2019.

Gross margin as a percentage itself was 36.7% versus 32.0% last year. The gross margin increased reflecting favorable mix up higher margin product categories as well as additional children exclusions certain items. These tariff exclusions result in a $1.8 billion.

The cost of goods sold during the quarter of which 1.7 billion was related to prior period sales.

The only expense was 3.7 million in the second quarter versus four point onebillion in the prior year period and as a percentage in that fills was 9.8% this year versus 8.7% in 2019.

The increase year over year as a percentage of sales was primarily due to higher cooperative advertising freight and royalty costs.

General and administrative expenses were 6.7 million in the second quarter versus 8.5 million in the prior year period.

DNA as a percentage of sales was 17.6% this year versus 18.4% in 2019.

The year over year change reflects lower labor and other costs due to the various streamlining initiatives undertaken by the company.

Interest expense was 1.1 billion the second quarter 2020 versus 1.3 billion last year.

The company recorded net income of 1.3 million were 61 cents per share in the second quarter 2020, compared with a net loss was 0.2 million or 11 cents per share in the prior period.

Adjusted EBITDA for the second quarter, 20, 24.3 million versus 2.4 million in the second quarter 20 like team.

Adjusted EBITDA 2020 included 0.7 million in bank permitted add back charges compared with 0.1 million.

In the prior year period, and adjusted EBITDA as a percentage of net sales was 11.4% fiscal 2020 versus 5.3% last year.

Turning to the balance sheet as of June 27, 2020 summer infant had approximately 0.8 million <unk>.

Cash and 35.2 million bank debt compared with 0.4 million of cash and 48 point Sixmillion bank that at the beginning of fiscal 2020.

We continue to use operating cash flow as much as possible to pay downs that you love or the company and strengthen our balance sheet.

Inventory ended the second quarter was 18.8 billion compared with 28.1 million as of December 28, 2019, reflecting ongoing efficient working capital management and our inventory turns were 5.1 versus 4.1 turns at the beginning of the year.

Great receivables at the end of June were 28.0 million compared with 32.8.

At the beginning of fiscal 2020.

Day sales outstanding or Dsos were 66, that's compared to 70 I just started the year.

Cost payable and accrued expenses were 32.5 million as of June 27, 2020, compared with 32.7 million at the beginning of the fiscal year.

The company generated approximately 9.6 million in cash from operations during the quarter as Stuart indicated and at the end of June we got approximately 7.5 million availability under our line of credit.

In addition, let me note that summer recently apply for a government backed loan as part of the cares a paycheck protection program otherwise known as PPP.

Given the economic uncertainty associated with the Cobot 19 global pandemic, we believe there was a necessary decision to do so.

On July 27, our loan application was approved and then August Threerd, we receive proceeds amounted to approximately $1.955 million.

That's our listeners may recognize this loan through bank of America will be used for payroll lease payments and other eligible expenses allowed under the program.

Overall, we accomplished a great deal this quarter and are encouraged by our progress in the company's improving financial results.

With that I'll turn the call over to the operator and opening up for questions.

Thank you.

Ladies and gentlemen, if you wish to register for a question for today's QNX session, you'll need to press Star then the number one on your telephone.

You will hear a crop to acknowledge your request.

At this time, we'll pause momentarily to assemble our roster.

[noise] and our first question will come from Mark Gums with pipeline data. Please go ahead.

Congratulations on progress.

HM.

Hi, Matt.

Yeah, Mike on 2019, My then I'd say.

We use that as kind of rough timeline math.

We're on track you get to where we are generating 13 anymore.

Yeah.

Well look I mean, where we're forecasting you know an improvement in our and our numbers Yeah, I think going I think going forward. If you want to use that as a as a proxy it could be but there's a lot of other things happening with the tariff exclusion.

Since becoming a the last of the pair of exclusions and other programs we have in place to the work that we're dealing with any in the upcoming quarters. So.

Look we think the outlook look fairly fairly good for us at this point and we're pleased with the sales growth that we that we anticipate coming forward here and our position with EBITDA books looks relatively strong.

Right.

Obviously no.

Just going be frozen bombs used et cetera.

I.

Impression is that <unk> million.

Finally, I kind of an additional Ron and Mike.

Maybe not be at <unk> nine beyond that.

No. It's fair to say that there are areas, where you might be able to get more than 7 million.

Operating lines and not.

Well in line.

Mark.

Wow.

No one and just margin Warners, yeah, Yeah, and Mark This is Stuart thanks for the the.

The comment there previously Oh, yeah, we are constantly looking at data I think you and I've discussed that.

And we do think there is more opportunity on price elasticity, I think you're referring to as well as some costing initiatives.

You know, whether it'd be a product costing and or you know what I'll call S. DNA in here, but that was a large like but there's definitely a yeah, we'll continue to get better as an organization.

Going forward.

Last question, where you go back in queue.

<unk>.

No maybe changes in demand trends brought online movie.

Really not Collins youre listening from a customer orange now perspective.

Improved or changed your market share in the marketplace.

What was the first part of that question I'm, sorry, Mark I.

Yeah.

Oh good has changed.

No you build believe properties Louis honestly, the you know more demand.

We are.

The only focusing on home for example, yeah, all right you see any change as your supply chain.

In the stores open back up demand trend might we see.

Not impact your company and then secondarily ones.

Sure first.

Yeah.

Yeah look we feel good in the in the you know the major categories worried when I look cobalt has changed what I would call demand in some of those.

<unk> some that we thought we're going to be higher demand actually been little less because they weren't traveling. So if you had you know a a stroll or that was a travel stroll or something like that maybe there's a little less demand while to your point stay at home demand is the Pos which everybody has access to it.

Very positive there and we see that and continuing.

Into the foreseeable future now one good thing we had were.

The large our customer base as as you know our retail a majority of retail that's still open.

Which was a you know we were at call it lucky or whatever as well as we put a large push on dot com.

With our large customers their dot com platforms as well as Amazon and we are starting to you know reap the benefits of that going forward the focus there.

So we do see that demand continuing though.

You know and will be honest the supply chain.

You know challenges you know we had no catch up let's call a catch up on certain.

Categories with certain vendor so.

We feel good about the demand that we can see moving forward right now.

Great. Thanks again, congratulations on the progress I'll go back into queue.

Great. Thank you.

And once again, if you have a question please press star one.

[noise] and once again, if you have a question. Please press Star then one.

Well move back to Markham's for.

Follow up on pipeline data. Please go ahead.

I guess, we can keep going.

So I'm looking at your.

EBITDA debt ratios things like that what what are you looking for in terms of key.

Oh inflection points to get you to the point, where you can actually get some good debt restructuring negotiations bill.

Well I think we're we're in a much better position currently as you can see by the but a number.

We constantly look at opportunities to do do any kind of refinancing the might help the business.

We're going to continue to do what we're doing here and hopefully be able to you know reduce our loan balance even even further than that it is today and improve our both our FCC are.

And our and our debt coverage position. So I'm not sure. We can project you are right now exactly where that point would be but where.

We're going to keep doing what we're doing and as soon as we get to a point, where we think the refinanced by might make sense for us well, we'll take advantage of that.

Great. Thank going back to the product side, what products are you seeing the most demand for one and then too can you give a little bit more color.

On the I'll, let you described earlier about some pent up demand.

Yes, so you know products I'd throw one out there I mean, obviously gates are you know there's a lot of stay at home now shoulder air at home.

No.

So gates as a category that has.

A lot of demand in that.

That was what I'll tell you what is the catch up kind of thing we had to chase after on pent up demand because of the Pos data as well as you know mark.

Originally you know the lunar new year, China came back online you know initial is not just summer, but anybody that had manufacturing in China didn't come back online for anywhere between 40 weeks to get back up to 100% capacity.

And do to covert there.

So we thought we were behind the a ball at that point.

Then co that hit here and everybody took a pause in did had no idea where demand was going so we started to plan for the worst.

And then you know.

The whole six weeks into Colvin seven weeks into coated.

Demand and Pos is going through the you know is in high.

Was was way higher than we expected. So now we're on the phone with our manufacturer, saying all by the way we've got to pull ahead peos.

So you've seen kind of a you know an up and down on the supply chain and when we say pent up demand is because we're I think many of the categories again, not just summarize that are out there I mean, you walk in some of those major retailers and I mean, it's their hand to mouth and.

Supply our safety stock that type of thing, we still think we've got it.

Good amount of demand just to get back into a safety stock position of where we should be and then if you add the POS data we are reviewing weekly on now.

You know, we that's why we feel good about the pent up demand out there.

Yes, it sounds like there's going to be assistant seasonality this year than as a result.

That that men shifting from.

Your summer quarter to fall we see.

Oh, how much how much did you see right like there is a big drop in revenue. So you know in a normalized quarter do you think it would've been a normal quarter and does all of that demand kind of translate grew and to what extent as your supply chain Allied to capture a lot of that in the up.

The border.

Yeah, we can capture a decent amount of that.

Going forward, we don't think that demands gone away.

You know there were a few different factors supply chain I think we mentioned to you.

Midmarket. We also did more direct import which is at a lower revenue number, but a higher a higher I gross profit.

Which stuff doesn't have to flow through our warehouse. It takes cost out of our business. So there are many things affecting that topline number.

But we're very focused on the bottom the bottom line, but I think look the company as we said in prior quarters. Our major goal here was to get stabilized to get profitable to get cash flow and get our balance sheet in an area, where now we can start to take advantage.

Of the marketplace going forward.

And try to maximize that so we would hope that you know we start to turn the corner.

To profitable growth contain growth going forward.

Great. Thanks again.

Okay. Thanks Mark.

Once again, if you have a question. Please press Star then one.

And the next question comes from John Kassere Reni with JC capital. Please go ahead.

Good morning, gentleman and congratulations on an excellent quarter, but many people have attempted turnarounds for this company, but you seem to have gotten the formula down Pat So congratulations thank you John.

Oh.

If if I look at your cost reductions interest rate or interest expense declines due to lower debt balances.

Improved supply chain.

The increase in some tariffs possibly.

Going forward and take into account.

Product mix, how should we think about operate.

Operating margins as we go out to future quarters.

Well, John I think the operating margins were obviously influenced in this most recent recent quarter.

But excuse me by the turf exclusion.

I think what you're going to find is there going to be stabilize going forward.

In a in a range, where weve you know, we there's been acceptable to us and what we what we budgeted for so while they won't be in that 36, 37% range still still be in a range, where we have room for continued profitability in a once a sales growth or growth this year.

Let me take.

Next up twice I think you'll see that we're able to manage our margins going forward and they'll be a very acceptable in terms of with the business.

Right.

It's wonderful and and looking at after.

The quarter's results.

I see that the U.S. sales.

We're down much less than international sales I can you expand upon a few other reasons why and do you expect those sales to pick up or.

Are you focusing mainly on optimizing profitability.

More domestic sales.

Yes so.

John on the international two things happened there one I think we've talked about it in the first quarter, we did restructure our business over there and we went from a.

Runner on warehouse in the UK that and staff.

Odd to actually a threepl and more of a distributor model, Okay, which helped on credit helped on charge backs, we were getting margins with customers that type of thing going through a distributor model. So.

Part of it was that we were moving the model and you had to get to that model and then start to build that business back got because there were some direct relationships that weren't going to go forward and.

And then the second pieces they've been clobbered by this covert 19, I mean look we have.

Well, we have four calls a week with international and.

They are just starting to open up in this morning, you know a new Zealand said they were shutting down so and we do business there. So.

It's been a real struggle there versus you know other parts of the world on the product flow.

So that's really what's happened there to you last part of your question going forward, we do see.

Growth there and we actually you know feel good about what we can do for profitability to kinda you know add to what we're doing here in the U.S. and in North America.

Right.

Okay. That's it for me. Thank you very much keep up the good work.

Thank you. Thank you.

And once again, if you would like to ask a question. Please press Star then one.

There are no further questions in the question Q, So I'd like to turn the conference back over to Stewart noise for any closing remarks.

Super Thank you very much well. Thank you all for joining us on today's call. We look forward speaking with you next quarter. Thanks again have a good day.

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

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