Q3 2020 Summer Infant Inc Earnings Call
Good morning, and welcome to the summer brands fiscal 2023rd quarter call.
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I would now like turn the conference over.
Over to Chris witty Investor Relations Moderator. Please go ahead, Hello, and welcome to the summer brands Twentytwenty third quarter Conference call with me on the call today is the company's interim CEO Stuart noise and CFO Ed Schwartz.
I would now like to provide a brief safe Harbor statement. This call may include forward looking statements.
Instead relate to some of the brands 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, that's quarterly reports.
It's on form 10-Q, and in our other filings with the SEC.
During the call management may make references to adjusted EBITDA adjusted net income and adjusted earnings per share. These.
These metrics are non-GAAP financial measures, which the company believes help investors gain a meaningful understanding of changes in summer brands operation or more.
More information on non-GAAP financial measures. Please see the tables for a reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued recently.
With that I'd like to turn the call over to Stuart noise Stuart Thanks, Chris and good morning, everyone. We appreciate you joining our third quarter conference call today I'll say.
Start by providing an overview of recent developments after which Ed will go through our financial results in detail.
As was the case in the prior periods. This year the third quarter was one with many accomplishments of which were quite proud.
Particularly given the ongoing pandemic, which has impacted our business as well.
The economy in general.
We reported net sales of 40.7 million sequential increase from the second quarter, although down slightly from last year's 41.5 million, while we saw solid double digit year over year growth across many of our key product categories, including gates bodies and bathers.
As well as increasing traction with our new travel system, we still face point of purchase headwinds due to the COVID-19, particularly with certain specialty and mid tier brick and mortar retailers. In addition, our previously announced strategy to restructure and streamline the international operations.
And our.
Move to more direct import sales have negatively impacted topline results.
We also continued to see some supply chain disruptions in quarter, three which I'll come back to this issue in a moment when I discuss our thoughts on on the outlook for the fourth quarter.
We posted much improved.
Yes of 86 cents adjusted for one time items, but more importantly reported adjusted EBITDA of 4.7 million.
I know that many of our investors already focused on EBITDA as well as free cash flow.
We do as well.
We successfully transformed the company into a streamlined.
Nimble enterprise well positioned to produce positive results under normal circumstances, you know.
Our EBITDA illustrates this.
Once again this quarter SG name was much lower year over year with selling expense as a percent of revenue declining to 6.9% in 2020 from 8.7%.
Last year.
In Genie falling 16.9% of sales from 20.1% in 2019.
These ratios are also down from where they were in quarter two.
And such performance helped drive this large increase in EBITDA and cash flow.
To date, we have generated nearly 15.
Okay, any cash from operations and 10.8 million of adjusted EBITDA.
We remain on track to eliminate over 7.5 million in annualized overhead expense.
Yes.
And are well on our way to completing the restructuring of our international operations and continue to focus on stream.
Lining initiatives to strengthen margins improved return on equity.
After the end of the quarter, we completed a debt refinancing, which really places us on solid footing and greatly reduced our interest expense burden.
Our new agreement allows for up to $50 million of borrowings.
At at interest rates that in aggregate.
Get are expected to save the company roughly 2 million annually.
While providing the necessary liquidity moving forward.
And we'll speak to this more in a moment, but after the refinancing we had 9 million of availability and we'll continue actively reducing our.
Indebtedness whenever possible.
I want to sincerely Thank bank of America for their many years of loyalty in support of the summer brands and their ongoing commitment through these new credit facilities.
Before turning the call over to add I wanted to talk about the fourth quarter and some increased challenges, we and the industry have recently been experiencing.
As you may or may not be aware there are significant logistical problems facing the supply chain for numerous goods, particularly within the consumer sector impacting product availability time to market in shipping expense.
Specifically, there's container theres vessel theirs.
Trucks and shortages throughout the supply chain.
And a material amount of inventory at this time actually sitting in a specific waiting to be unloaded at the port of long Beach.
Due to congestion there things are just backed up across the board in.
This is impacting large numbers of companies in the consumer goods and retail space, including those selling online.
Such challenges caused by these.
These issues, including the impact of COVID-19 on ships and truckers means that products are not getting to market on time tying up working.
Capital, both offshore or in warehouses.
This includes some are brands, where we are having to wait on delivery of numerous items in store, many others stretching the capacity limitations of our warehouse and increasing cost for freight logistics and leasing.
And this is on top of the fact that some product sales to.
Reinstatement of tariffs on August seven already requiring us to manage costs aggressively while pursuing price integrity.
All these issues are impacting.
Q4's bottom line such that even as we work to mitigate their impact and work around the bottlenecks, we anticipate fourth quarter EBITDA maybe.
Me down 40% to 60% compared to what we just reported in Q3.
We wanted to be upfront about this to make sure that our investors are not blinded by these in the near term headwinds that many companies are facing summer included.
Some are brands has come a long way this past year and to a large extent.
We've restored some credibility with our investors I feel so the last thing we want it was to not share something that it's definitely impacting near term results.
Without question for doing everything possible to navigate through these issues and continue driving solid performance the team and I are committed to keep keeping the company on solid.
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In closing I believe that summer brands has made tremendous headway this year, improving its bottom line and positioning the company for higher results going forward. This hasn't changed the many initiatives to reduce costs streamline company to crew customer responsiveness and created a healthy enterprise.
Where that really wasn't the case before and the recent rifiber credit facilities underscores just how far we've come while positioning us for higher returns in future.
With that I'll turn it over to add to review our financial results in detail Ed.
Thanks, Stuart and good morning, everyone as a reminder, our.
Q and related press release were previously issued in addition to listening to this conference call I encourage you to review our filings third quarter net sales were $40.7 million compared with $41.5 million in the third quarter of fiscal 2019 as Stuart mentioned, the lower revenue was largely.
Two through the impact from restructuring our international operations, a move toward more direct import sales and from COVID-19, primarily related to store closures and certain supply chain disruptions. While we are pleased with the quarterly results, we remain cautious going forward through through the continuing economic uncertainty.
And supply chain issues that remain challenging.
Gross profit was $13.5 million for the third quarter of fiscal 2020 versus 12.6 million in 2019, and our gross margin as a percentage of sales was 33.3% versus 30.3% last year the growth.
The margin increase reflects a favorable mix of higher profit product categories fewer closeouts sales and lower tariffs on certain items as compared with 29 team.
However, as we previously noted some therapy exclusion we received since December 2019 expired in August of this year the.
The company has.
Gross can action to mitigate the impact of tariff reinstatement through some strategic pricing supply chain management and cost reductions, although the extent to which we can mitigate the loss of tariff exclusions remains uncertain.
Selling expense was $2.8 million in the third quarter versus $3.6 million in the prior.
Two year period.
As a percentage of net sales was 6.9% this year versus 8.7% in 2019.
The decrease year over year as a percentage of sales was primarily due to lower freight and advertising costs.
General and administrative expenses were $6.9 million in the third core.
Taylor versus $8.4 million in the prior year period, and Gionee as a percentage of sales.
Was 16.9% this year versus 20.1% in 2019.
The year over year change reflects lower labor and other costs due to the various streamlining initiatives undertaken.
By the company in 2020.
Interest expense was $1.0 million in the third quarter of 2000, Twentys versus $1.2 million last year cash interest expense will decline in Q4 as we begin to operate under our new credit facility, which was completed on October 15.
The company recorded a net.
Core income of $2.2 million or $1.30 per share in the third quarter of 2020, compared with a net loss of $1.7 million or 0.79 cents per share.
The prior year period as Stuart mentioned, our current year results included a onetime 17 cents favorable tax.
Moving to provision adjustment related to changes in the interest deduction threshold under the U.S. Cares Act.
On an adjusted basis, our 2023rd quarter earnings were 86 cents per share.
Adjusted EBITDA for the third quarter of 2020 was $4.7 million versus zero point.
$8 million in the third quarter of 2019 adjusted EBITDA of 2020 included zero point $7 million in bank permitted add back charges compared with zero point $1 million in the prior year period.
And adjusted EBITDA as a percentage of net sales was 11.4% in fiscal 22.
20 versus 2.0% last year.
Who are mentioned a variety of issues related to logistics and supply chain management could possibly reduce adjusted EBITDA by as much as 40% to 60% in Q4 versus Q3 earnings.
Turning to the balance sheet as of September 26, 2002.
20 summer infant had approximately zero point $9 million of cash and $35.0 million bank debt compared with zero point $4 million of cash and $48.6 million of bank debt at the beginning of fiscal 2020.
On October 15th the company entered into a third amended and restated loan.
Loan and security agreement with Bank of America that replaces our prior $17.5 million term loan with path like capital and a $48.0 million ABL with bank of America.
The new credit facility consists of a $40 million deal with.
$7.5 million term loan and a two and a half.
$5 million file alone for an aggregate amount of 50 million.
After paying off existing debt the company had approximately $9 million in availability under the new credit facility.
We'll continue to manage working capital appropriately and use excess cash to pay down debt whenever possible.
Inventory at the end of the third quarter.
Quarter was $24.5 million compared with 28.1 million as of December 28, 2019, and our inventory turns were 4.4 versus 4.1 turns at the beginning of the year.
Trade receivables at the end of September were $30.8 million compared with 32.8.
Yeah, that's the beginning of fiscal 2020 day sales outstanding or Dsos were 68 as compared to 70 at the start of the year.
Accounts payable and accrued expenses were 37.3 million as of September 26, 2020, compared with $32.7 million at to begin.
Turning of the fiscal year.
With that I'll turn the call over to the operator and open it up for questions.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Mark Downs with pipeline data. Please go ahead.
Hey, gentlemen.
Congratulations on the.
Progress this year.
Looking at the near term outlook I appreciate the candor there.
Kind of looking past that though you know wondering kind of normalize financials that we could be looking at as we look past colvin kind.
Deeper into 2021, you guys have had a lot of expenses and.
This was a EBITDA profitable company beforehand.
Maybe 5.5 million the year before you got guidance. So with those you know it looks like you're going to end.
The year with maybe 15 or 16.
10 million of EBITDA total how does that.
Compared to what you think the company can do long term as we start to build or attempt to rejigger, our DCF based valuation models. Thanks.
Yeah go ahead, Ed you can take that one.
Oh look we're in a process of.
Completing our 2021 budget for the for the upcoming year and as you know we don't we don't give that type of type of guidance Mark will we are looking at it and we're going to continue to do the same things we've been we've been talking about doing is.
As much as we can to make sure that we keep the EBITDA number headed and headed into right direction. So we're doing everything we can we're watching what's happening on the expense side and we're trying to build some revenue back.
On that on the growth so we do show a little bit of growth.
Right so well.
Where we sit without getting into guidance is it unreasonable to assume that your cost.
Efficiencies gained.
In addition to your prior baseline level of EBITDA.
That is that we can make some assumptions based on that.
Is it safe to assume that your competitive positioning.
Has at least remain the same if not improved thus allowing for.
That scenario to play out.
Yeah, I think that's safe to say with our customer base. Obviously, you know you know kind of the big three big four that we serve.
Christian.
How they kind of manage through this.
Pandemic, which obviously, we're not to the other side yet there's still a lot of unknown there, but I do feel are.
Product teams and our selling teams helped position us well in the competitive marketplace going forward Mark I mean I just.
Sure.
When we talk about that every day and offensive.
Yeah, you know we will continue.
To look at cost initiatives or actually even redeploying capital, whether we're moving that from one area in the business to another.
Based on what that marketplace is forcing us to do to react.
Great.
And do.
Do you get the sense that there is.
Once once things kind of settle down that there is pent up demand at the retail brick and mortar level that concern.
As a tail.
And as these headwinds Dr Tiller base.
Yeah, I mean look everybody's got an opinion on that and that's all this is just my opinion I mean I think.
With you know what's going on at the federal level and potential stimulus on you.
You know elections and pandemic there's just.
A lot of uncertainty out there I'm sure you are seeing at throughout you know in your businesses and.
So I do feel there has been a little bit of you know, there's there's a soccer there in that in that the economic you know environment right now.
But look I think we just keep plugging.
In a way we do that we do the right things to position ourselves to take advantage of that you see that we bill you know a little bit of inventory here going.
Going forward I mean, we did that consciously on our key items to make sure we earn a position whether it be through the lunar new year.
Said around or based on what could happen economically in a position to take advantage of that.
Great and final question.
And what are the long term plans that you have for the company considering your status as an interim.
CEO, what you're obviously, what you do for a living.
And the incentives that you have in place with summer infant in the event that the company gets sold.
Yeah look right now we've got a board meeting coming up this Friday and I mean.
I think I might have mentioned this before I mean, it we were very focused on stabilization get 320 20 getting 20.
21.
You know locked and loaded budget forecast wise, which we're in the middle of as as Ed.
You know mentioned.
So we'll continue to talk about timeline on interim CEO and that type of thing, but at this point you know we were just focused on.
John on the business, and making that right near and long term, but.
Well, we'll continue to update you on that as things develop with the board.
Great. Thanks, gentlemen.
Thank you Mark Thank you.
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I'd like to turn it back over to Mr. noise for any closing remarks, great I. Appreciate it. Thank you all for joining us for today's call.
We look forward to speaking with everybody in the next quarter have a nice day. Thank you.
The conference has now concluded.
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