Q4 2020 Summer Infant Inc Earnings Call

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Good day and welcome to the summer brands fiscal year, 'twenty 'twenty fourth quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask a question.

<unk> to ask a question press Star then one on a touchtone phone to withdraw your question Press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Chris witty Investor Relations adviser. Please go ahead.

Hello, and welcome to the summer brands 'twenty 'twenty fourth quarter Conference call with me on the call today is the company's CEO Stuart Noyes and CFO, Ed Schwartz I would now like to provide a brief safe Harbor statement. This call may include forward looking statements that relate to summer brands outlook for 2021 and beyond.

The 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, its quarterly reports on form 10-Q.

There are other filings with the Securities and Exchange Commission.

During the call management may make references to adjusted EBITDA 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 brands 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 the company's financial release issued yesterday evening.

And with that I'd now like to turn the call over to Stuart Noyes Stuart.

Thanks, Chris and good morning, everyone. We appreciate you joining our fourth quarter conference call today.

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

As we disclosed last quarter, we saw several challenges impacting our ability to grow top line results as we approached the end of fiscal 2024.

Foremost among these where logistics constraints and associated supply chain issues that hampered us from getting product to market.

This situation was exacerbated by the resurgence of COVID-19, leading Jewish slower than anticipated recovery of our mid tier brick and mortar cash conversion and.

And the reopening of international businesses.

In addition, our year over year revenue variance reflects the fact that 2019 fourth quarter included significant closeout sales, which was not the case this past year.

Such topline headwinds coupled with some extraordinary charges recorded in the quarter resulted in adjusted EBITDA coming in lower.

Ed will review this further in a moment, but suffice it to say that the quarter was more challenging than expected.

That said the company had a good year in 2020.

We are pleased to have weathered the storm as well as we did all things considered in this quarter and this was due to the hard work and dedication from our associates throughout the organization.

We ended this year with just under $31 million of debt and saw a substantial reduction in year over year SG&A expenses fourth.

Fourth quarter gross margins.

Notably were higher than last year, when adjusted for the 2019 retroactive Cherokee tariff exclusions.

Testimony to an improving overall product mix.

The strategies, we put in place. These past 18 months to become a leaner streamlined organization have resulted in higher margins and improve customer responsiveness.

Even in the midst of the pandemic.

We've also cut our debt levels dramatically reduced cash interest expense from tandem significantly strengthening the balance sheet and our overall financial flexibility.

While I'm pleased with these many accomplishments we obviously were disappointed in how the fourth quarter turned out due to the various headwinds facing the company.

I'd like to say that things have improved considerably, but really it's a mixed bag logistical and supply chain constraints continue to hamper our ability to get product to customers in a reliable and consistent manner. In overall consumer demand is lower than anticipated due to the lag impact from COVID-19.

While bottlenecks seemed to have lessened there is a lot of product working its way through the system slowly delivery timing and storms in Texas and elsewhere negatively impacted certain markets this quarter.

However, I'd say that we are slowly becoming more optimistic for several reasons, which are likely.

To positively impact quarter, two and beyond.

First is the overall improving economic outlook, including the reduced challenges related to COVID-19, as vaccines are rolled out and rates of infection drop in addition, Congress just approved.

Fiscal incentive package, which includes substantial stimulus for consumers. We believe that like last year. This could have a positive impact on product sales.

Lastly, we are hopeful that current supply chain issues will moderate in the coming months, leading to greater control over shipments in the second half of 2021.

While maintaining our focus on cost discipline and delevering the balance sheet, we will continue to invest in new product development brand extensions, where appropriate as I've mentioned in the past we remain focused on those categories categories that provide the highest returns to the company.

Even as we're looking at other areas that may prove fruitful and product extensions or ancillary market penetration.

Before turning the call over to Ed I'd like to take a moment to thank him for his service to the company this past year.

Yeah. It has chosen to retire and we wish him all the best going forward. He came aboard just as we were moving forward on a number of fronts to restructure the company.

And is impeccable skills judgment have been instrumental in helping summer successfully navigate a period of significant disruption and change I personally want to thank you for being a trusted advisor to me and a true business partner to the whole team, we wish him a long happy and well deserved retirement.

Although I don't know if he can really improve that scratch golf score by having more time off.

Ed will be succeeded by Bruce Meyer, a colleague of mine from Winter Harbor.

Bruce brings over 20 years of diverse business and financial experience.

It has been consulting with the company since its engagement with Winter Harbor in December 2019.

Over the past year, Bruce has worked with us to transform summer into what it is today.

And he was particularly helpful with regard to last year's refinancing of our credit facilities.

My great confidence to know that Bruce just stepping into the CFO role as he has already contributed significantly to the strategic operational and financial functions of summer.

I am confident that he will prove a great addition, as we drive profitable growth in a prudent disciplined manner welcome aboard Bruce.

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

Thanks, Stuart and good morning, everyone. As a reminder, our 10-K and related press release were issued yesterday. In addition to listening to this conference call I encourage you to review our filings.

It's been a great pleasure to be part of the company to have worked with your store and this dedicated management group. This past year through some extraordinary times. Thank you.

<unk> for your well wishes and I wish you the team in the company all the best going forward.

Now to the results.

Fourth quarter net sales were 36.1 million compared with $42 7 million in the fourth quarter of fiscal 2019.

As Stuart mentioned the decline in revenue year over year was largely due to the negative impact from supply chain constraints and lower demand related to COVID-19 restrictions, particularly with regard to our mid tier specialty accounts and international sales.

We believe that for 2021, well currently dealing with many of the same headwinds things are likely to improve as market conditions stabilize helped by economic stimulus measures as well as the general easing.

Debit related restrictions and supply chain bottlenecks at this point, we are cautiously optimistic about prospects for topline growth later this year, while the first half of 2021 will remain challenging.

Gross profit was $10 8 million for growth.

Fourth quarter of fiscal 2020 versus $14 1 million in 2019, and our gross margin as a percentage of sales was 30.0%.

32, 8% last year.

The 20th 19 results included a $1 $5 million benefit to cost of goods sold related to the retroactive tariff exclusions without rich adjusted gross profit was $12 5 million.

With a gross margin of 29, 3%.

Yes, Stuart mentioned, the 2024th quarter benefited from improved product mix and a higher percentage of direct import sales along with fewer closeouts.

We will continue to focus on maintaining gross margins that are in line with achieving our financial objectives and as much as possible effectively manage supply chain supply chain costs.

Selling expense was $2 6 million in the fourth quarter versus $3 6 million in the prior year period and as a percentage of net sales was seven 2% this year versus eight 3% in 2019 the.

The decrease year over year and as a percentage of sales was primarily due to lower program costs with our major customers.

General and administrative expenses were $7 6 million in the fourth quarter versus $8 6 million in the prior year period, and G&A as a percentage of sales was 21, 1% this year versus 21% in 2019.

Year over year change reflects lower labor and other costs due to our various streamlining initiatives.

Partially offset by higher logistics and warehousing expenses interest expense was 0.5 million in the fourth quarter of 2020 versus $1 1 million last year, reflecting lower outstanding debt levels and more attractive interest rates following the company's refinancing of its credit facilities.

We will continue to focus on further delevering of the balance sheet. This year.

The company reported a net loss of $3 4 million or $1 59 per share in the fourth quarter of 2020, compared with a net loss from 0.9 million or 42 cents per share in the prior year period with 2024th quarter included $2 $5 million of pre tax charges.

Related to the company's previously announced refinancing and an asset impairment charge.

For the prior year fourth quarter included a $1.5 million benefit to cost of goods sold related to retroactive tariff exclusion as previously mentioned the.

The company recorded a tax provision of 0.2 million and the fish.

2024th quarter versus zero point $7 million in the comparable period of fiscal 2019.

Adjusted EBITDA for the fourth quarter of 2020 was $1 4 million versus $2 4 million from the fourth quarter of 2019 adjusted.

Adjusted EBITDA in 2020 included zero point $7 million in bank permitted add back charges compared with 0.4 million in the prior year period, and adjusted EBITDA as a percentage of net sales was three 9% net fiscal 2020 versus five 6% last year turning to.

Through the balance sheet as of January 2021 summer infant had approximately zero point $5 million of cash and $39 billion of bank debt compared with 0.4 million net of cash and $48 6 million of bank debt at the beginning of fiscal 2020.

We view the company as being in a much stronger position after lowering debt levels by 36% and also refinancing of our credit facilities, allowing for significantly lower interest cost in the future.

Inventory at the end of the fourth quarter was $25 1 million compared with $28 1 million as of December 28, 2019, and our inventory turns were 4.0 versus four one turns at the beginning of the year free.

Trade receivables at the end of fiscal 2020 were 26.1 million compared with $32 8 million at the beginning of fiscal 2020 day.

Day sales outstanding or Dsos were 66 as compared to 70 at the start of last year.

Accounts payable and accrued expenses were $34 1 million as of January 2021, compared with $32 7 million at the beginning of the fiscal year.

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

We will now begin the question and answer session to ask a question Press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys.

If at any time. Your question has been interest and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

And the first question comes from Eric better with S. C. C Research. Please go ahead.

Good morning, congratulations on navigating through a very difficult and crazy year.

Thank you Eric.

Great could you talk a little bit about when you look at the product mix for 2021, what are you seeing that some of the opportunities here I know that logistics is an issue, but when you look at the products. What are you excited about for this year.

Absolutely.

Thanks, a lot.

What I'll call, new distribution or penetration, we're making some good headway I think in Canada with some of the retail and dotcom up there as.

As well as the discount channel.

And trying to you.

You know manage through what our product mix might look for look a little bit different in that channel that would enhance the company as well as just basic opening up of Europe, Although we've had a little setback as I think we've all heard on the vaccine over there in the last week, but the opening up of that because that was a start and stop.

Two or three times this year, so just distribution wise as well as we've got new items and party et cetera that are getting set in store and then I would say the last thing is we are looking at.

Now what I'll call consistent with what we manufactured a day or contract manufacturer is a new categories that actually align very well with our product mix.

And are easily transferable.

And one of those is the pet category that were looking at in and making a push there so more to come on that in the future.

Right. When you look you know I know the business has become much more.

Online driven in terms of both reviews and in terms of boat sales per hour.

Are you guys managing that spend.

Given the focus on kind of being as lean as you can be.

Kind of how should we think about that spend going forward, yes, that's actually a great question. Eric So we we've created a team within the organization that's focused.

Specifically on that whether it be Amazon span or the other dotcoms Wal Mart target.

And actually even more dotcom players that we are in the midst of penetrating and or having meetings with so analytically. We look at that we look at that spend we measure that spend and I think it's taken us probably six or eight months to put that all together, but I feel that teens.

Shinning very well right now and we actually even split that out in our in our budgeting process going into 2021.

So the team has their own budgeting, we can monitor.

Monitor that monthly on on how that's being done and what we're what we're actually getting from it because the future is that and we've got to be on the forefront of that and I think we reacted you know in a timely manner to put that team together.

Okay and finally you.

He's got a great job of paying down the debt do you have a specific.

Debt or coverage ratio that you are focusing on going forward and where do you want to call. It.

Like the debt to be zero error [laughter].

[laughter] look it's a balance right because we've got too.

If you're if we get into some some of those growth categories or even those channels that that will increase the debt, but I would say in a good way.

But at the end of the day, we want to generate cash to pay that down even in growth mode. So.

I don't probably have a good a great target number at it.

But we're going to continue to pay that down as we generate cash in the business and manage our working capital effectively.

Great and good luck for the rest of the year.

Thank you.

Again, if you have a question press Star then one to be joined into the queue. The next question comes from Eddie Reese, who is a private investor. Please go ahead.

Hey, guys how are you doing.

Good day alright. Thanks.

Hey.

My first question is when you look at.

The issues that started in the supply chain I guess started.

If it is if this is right I would say like maybe.

October of last year.

And you alluded to on that on the call. The last call that you were looking at ways to get around that maybe moves from stop to Mexico.

It seems like what Youre seeing today that maybe six months later.

It really hasn't the picture Hasnt changed is that is that fair to say.

Yeah, I mean, it's fair to say at night may even become a little worse I'll call. It the perfect storm I mean.

You know I don't have to tell you I mean, you're you're on top of this but you watch the financial news early in the morning, and I mean aided can lead storage I think over the last 10 days has been all about logistics and supply chain and I mean, everybody from retail to manufacturing its satirize and you know the.

Horror stories about the ports and all that so.

I think.

Something that we thought would've worked its way through I wish I had a crystal ball is still itself through.

Got worse before it actually became better and I wish that wasn't the case, but that those are the facts at this point.

Yes.

Yeah.

Okay, I mean, given that situation that you are kind of in the middle middle of this right now.

Sure.

You also talked on the last call about the fact that the company was in the middle of the budgeting process for 2021.

And that you really couldn't you know you you were in the middle of it you really could not kind of give us an idea about where you thought things would play out in 'twenty one.

Can you share with us today, where you think your EBIT dollars.

Well, we'll come.

We'll be at for full year 2021.

Well I can't share that but I can tell you and look we had a what I'll call a very good year for the company in 2020.

Based on prior year's end and all the different items, whether it be the streamlining and the costs for managing the working capital I can tell you that look we are about trying to grow and trying to make more money in the future and as these things come at us.

I don't look at this any different than I would any business look we all have these challenges and theres always going to be challenges. This has been quite a year in a different year with with the whole pandemic and then hopefully starting to get that behind us, but it's caused some different what I'll call a.

Options and you know I haven't seen this in the supply chain Ed and.

You know I don't know if I've ever seen it quite quite quite honestly in my career.

In this in this state, but look what you do is you say what is that mean.

I mean to US you know what is that hurdle now I've got to figure out different things to do to get to to make that up if that adds some cost to it or can I.

Is that cost is going to come flush back out of the system when things get back to normal in the back half so.

Every day, we wake up and do that REIT week to week month to month on if I've got something hit me here.

My levers I can pull the gain you know.

And another area of the business. So we continually look at that.

Look.

And we see even I look at the gas pump right now and commodity prices changing et cetera, so, but but I think those are just normal business challenges. This one being a little bit more but look our goal is to try to grow that top line I think the stimulus is going to have a positive effect on.

Yes.

We've seen it in the past and now that's starting to get into People's hands.

So it's to grow the business and to grow our bottom line.

When you when you're going back the last thing I'll I'll at all what kind of question I have when you look at the supply chain situation.

And I know, maybe there's a lot of factors that are going into it but from from your perspective.

Is I'm just looking at how does it improve is it a matter of the fact that day.

We need more ships is it the fact that we need more the COVID-19 kind of cut back on the amount of handlers at long beach to take products off the ships is it a factor of that the whole supply chain got surprised by the level of.

Demand came back into U S. What do you see.

The major issue that needs to get solved so the supply chain.

Loosens up.

Yeah, well look I I actually think it's all the above year hitting on you know.

Four or five different elements that.

Why I called it kind of a perfect storm right, whether shortage Alps shortage of containers.

Shipping lanes that were upside down or backwards you know we had.

No.

Assets in places, where you need it assets in a different place so I.

This is a tough one to answer but I think time [laughter].

Time is going to help kind of straight break this out as you know the freight forwarders.

And the docs.

Get their arms around everything Unfortunately, we're not in total control of all that.

Much like any either retail or a wholesale or is.

But look we talk daily weekly with our freight folks and to get updates on that and they do publish some things internally for their customers. So.

So we've got a bead on it but and Theres some different views out there on when they think it's going to be straightened out so I wouldn't dare.

You know estimate, but I think it's right now we're at a point, where it's just time is going to have to work its way through the system here.

<unk>.

Really straighten this out and look there are people, saying that could be june or or whatever.

Look the sooner the better for everybody not just summer infant.

Alright.

I appreciate it guys and good luck this year.

Thank you very much yet.

Okay.

The key was still currently open for questions. So if you have a question. Please press star then one to be joined into the queue.

Again Star then one to join the question queue.

And it appears we have nobody else joining the question queue. So.

This concludes our question and answer session I would now like to turn the conference back over to Stuart Noyes for any closing remarks.

Great. Thank you. Thank you all for joining us for today's call. We do look forward to speaking with you next quarter have a nice day.

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

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