Q2 2021 Summer Infant Inc Earnings Call

Good day and welcome to the summer brands fiscal year 2021 second quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

After todays presentation, there will be an opportunity to ask questions to ask a question Press Star then one on a touchtone phone to withdraw your question. Please 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 2021 second quarter Conference call with me on the call today is the company's CEO Stuart Noyes and interim CFO Bruce Meyer.

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.

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, its quarterly reports on Form 10-Q and in our 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.

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.

With that I'd like to turn the call over to Mr. Stuart Noyes Stuart.

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

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

So Andy one watching current events and supply chain disruptions facing companies worldwide.

This quarter was not surprising, but again, both challenging and certainly well below our potential for the company's performance reflected the ongoing tug of war between strong demand and limited supply, which is the primary reason, we did not post year over year growth this quarter.

Net sales of $30.6 million reflected the realities of container bottlenecks and related issues negatively impacting trade across the Pacific rim.

If normal or even near normal levels of container ships had been available on operating I'm certain we would have seen many of our core product categories post strong revenue gains year over year.

As it was we were able to show nice growth in certain areas even in the face of such challenges, we saw double digit expansion in sue their strollers Bath and boosters.

But even some of our hotter categories more than demand items like parties engage were hampered by supply chain disrupt disruptions.

That said, we are cautiously optimistic about the third quarter's topline growth given the current level of product being built now.

Now in transit in our warehouse, we have aggressively tried to increase the level of available inventory.

Placing more orders to meet demand going forward.

However, logistical uncertainties remain a shipping factors seem to change week by week, if not day by day. In addition container pricing is still much higher than normal, which we expect to continue negatively impacting gross margins for the foreseeable future.

Let me assure our listeners that we're doing everything possible to mitigate these circumstances.

Salary product throughput and get our goods in the hands of consumers.

For example, we are when possible using alternative ports in China, and the U S and are actively managing our suppliers here and abroad.

Has researching additional manufacturing options that are less constrained.

We will continue to adjust prices when feasible to help mitigate pressure on margins.

We used operating cash flow this quarter to pay down an additional $2 million of debt and while the company's bottom line performance was an improvement from quarter one.

Largely reflected the forgiveness of a $2 million PPP loan from the federal government ASP.

Bruce will discuss more in a moment.

That said, we continue to control SG&A costs, even while investing for the future.

On that note I'm pleased to say that we recently hired Michael Silverman and Kim Ashley as Vice President of product.

Together, they bring years of experience from such well known needs of Central Garden, and Pat maybe towards in Doral.

Michael will focus on executing the company's new pet brand strategy in managing product development, while Kim will be responsible for driving growth across our core categories and managing the Companys fashion T V.

These steps align our internal talent with summers goal of strengthening its product portfolio and accelerating topline growth.

Let me add that our pad expansion.

In areas, where we already dominate the market such as gates and play yards is well underway.

I have more to say about that in the next quarter.

While already selling some of these items online through channels, such as <unk> Dot Com. The company is positioned for a broader launch in the pet Arena early next year.

We're currently investing in IP and branding for this important complement to our product portfolio.

Before turning the call over to Bruce Let me remind our investors of the underlying improvement in our operating structure, even in the face of the current challenging supply chain environment.

We now have a solid array of products.

Many with enviable brand loyalty, which are in high demand, we have paid down debt stabilize the business are managing working capital and doing everything possible to get product to market, while handling freight cost challenges.

This is a balancing act of immense proportions, while many things could still change in the weeks and months to come I believe we are well positioned for sequential top line growth in the third quarter and as of now are hopeful that container expenses will start to normalize.

In any event, we do not take these issues lightly and are clearly focused on managing the day to day challenges that this operating environment has handed us.

I don't think summer could be any better prepared for such unusual and ever changing conditions than it currently is and we will continue to take advantage of the economic recovery and increasing consumer demand.

Last weekend this fall with that I'll turn it over to Bruce to review our financial results in detail Bruce.

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

Now to the result.

Second quarter net sales were $30.6 million compared with $38.2 million in the second quarter of fiscal 2020 revs.

Revenue was down year over year due to the reasons Stuart discussed mainly ongoing supply chain constraints and shipping bottlenecks.

As was the case in the first quarter these issues more than offset robust product demand within an improving economic landscape.

While revenue did rise double digits across several categories.

Such as Sue Theres Strollers, Bath and boosters. This was more than offset by the company's inability to secure sufficient containers, thus preventing shipments to customers. We have however experienced some near term success with obtaining inventory, which.

Just the potential for topline growth in the third quarter the.

The problem is not demand, but supply and we are doing everything in our power to get product to market, while managing the associated higher freight costs and other extraordinary logistical expenses.

Gross profit was $9.7 million for the second quarter of fiscal 2021 versus $14 million in 2020.

And our gross margin as a percentage of sales was 31, 6%.

36, 7% last year.

Year over year margin decline, primarily reflects an increase in transportation and raw materials cost and the fact that certain items are no longer receiving tariff exclusions that were granted in 2020.

Selling expense was $2.5 million in the second quarter versus $3.7 million in the prior year period.

And as a percentage of net sales was 8% this year versus nine 8% in 2020.

The decrease year over year and as a percentage of revenue was due to the revenue decline and lower cooperative advertising costs.

Resulting from a shift to more direct import sales.

General and administrative expenses were $6.8 million in the second quarter versus $6.7 million in the prior year period.

And G&A as a percentage of sales was 22, 2% this year versus 17, 6% in 2020.

Consequence.

The lower revenue base.

Interest expense was <unk> 3 million in the second quarter of 2021 versus one 1 million in 2020, reflecting lower outstanding debt levels and more attractive interest rates following the company's refinancing of its credit facilities in the fourth.

<unk> of 2020.

The company reported net income of one 4 million or 62 cents per share in the second quarter of 2021, compared with $1.3 million or 61 cents per share in the prior year period.

No that's.

For fiscal 2021 second quarter included a <unk>.

2.0 million benefit.

The forgiveness.

The U S paycheck.

Protection program or PPP loan.

The company recorded a tax provision.

Zero point $1 million in the fiscal 2021 second quarter versus zero point $4 million in the comparable period of fiscal 2020.

Adjusted EBITDA for the second quarter of 2021 was $3.5 million versus $4.3 million in the second quarter of 2020.

Adjusted EBITDA in 2021 included the benefit from the forgiveness of the PPP loan and.

<unk> 0.8 million of bank permitted add back charges compared with zero point $7 million in add backs for the prior year period adjusted.

EBITDA as a percentage of net sales was 11, 3% in fiscal 2021 versus 11, 4% last year.

Turning to the balance sheet.

As of July 32021 summer infant had approximately $5 million of cash and 27.8 million of bank debt compared with <unk> 5 million of cash and $39 million of bank debt at the beginning of fiscal 2021.

We continue to focus on reducing debt and strengthening the balance sheet whenever possible.

Inventory at the end of the second quarter was $18.2 million compared with $25.1 million.

As of January 2021.

Our inventory turns were four six versus 4.0 at the beginning of the year.

Trade receivables as of July three 2021 were $23.8 million compared with 26.0 million at the beginning of fiscal 2021.

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

Accounts payable and accrued expenses were $26.2 million as of July three 2021, compared with $34.1 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 a touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys 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 very difficult times.

Thank you Eric.

When you look at.

A little bit morford out you've done a lot of people here, how do you want to keep the what innovation is you need to kind of keep the business continuing to have frac when you do see.

<unk> returned to more normalized shipping the demand will still be there on your market position will still be there also.

Yeah look we're working diligently on our product road maps into 'twenty, two and 'twenty, three which consists of new and refreshed product based on the needs of the retailer of the dotcom.

Customer.

And I think as we look forward, we mentioned pattern on this call you know an extension there in categories, we really already operate in so.

There is a little less startup in and that we know the categories.

But also we're looking at.

Line extensions right now than even a few new categories, but we'll be very diligent on that but we've got leading positions you know.

In all our core categories, and we will continue to innovate there we've had great success this year in new placements and our major customers.

Which is.

Really a testament to the product and sales teams and the whole team here at summer on <unk>.

Even with these headwinds being able to do that.

Great and when you look at online versus.

Brick and mortar or what should we be thinking about longer term about where those are going and where kind of percentage the splits should be from those going forward.

Yes, I wish I had that Crystal ball based on you know obviously with the pandemic yet ship things up and maybe accelerated online sales as we all know, but I think.

You heard some recent.

Quarterly announcements from some of the retailers that store traffic is still strong and picking up again.

So we we early balanced both I.

I do think the dotcom gives you a a an environment where you can bring products to market quicker. So we're not potentially waiting for line reviews and door yearly plan O grams or buy by yearly plan O grams.

And look all the retail, they're all pushing dotcom, even the brick and mortar.

So we will continue to focus on dot com and make sure we're there to gain that customer and supply them with new and innovative product.

Great and I wish I were inventory I'm, sorry, I wish I knew the breakdown, Eric but it's ever changing right now based on you know kind of what's going on in the world.

I hear you it's.

Interesting times.

Last question on inventories.

As you normalize what should we be thinking about inventories and where they should be.

Yeah. So you saw the drop in inventory there we want to operate at a higher level than that.

But what I would tell you is I have a very material number on the water right now headed our way as well as I've got inventory over in Asia.

In the factories that we're working diligently to get containers to move that.

But I think anybody could tell you whether it be direct import.

Groups that are big massive retailers or production folks.

That is a challenge getting things out of Asia right. Now you saw one poor close because of Covid last week that backs up hundreds of thousands of containers.

But we probably we have right now as much on the water and being that's finished goods ready to ship as we do in our our inventory.

But we do not want to I'll say, this where we're moving more of our business to direct import.

And we've got a.

A decent percent that's domestic right now are in North America, we want to keep a tight lid on that inventory manage working capital, but you are going to you should start to see a build although demand.

It seems too.

Limit a little bit of that build here going forward because the demand is very very good right now for our product.

Hello, guys. Good luck and I hope, we see much hope going forward. It gets more normal so we can really see how well summer can do.

Very much.

Again, if you would like to ask a question press Star then one to join the queue.

At this time there appear to be no further callers in the question queue. So I'll turn it back over to Mr. Noyes for any closing remarks.

Thank you very much.

Want to thank everybody for joining the call today, and we look forward to.

Speaking with you next quarter, Thanks, and have a great day.

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

Thanks.

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