Q3 2021 Summer Infant Inc Earnings Call

Good morning, and welcome to the summer brands third quarter 2021 earnings Conference call.

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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 third quarter conference call.

On the call today is the company's CEO Stuart Noyes and interim CFO Bruce buyer I would now like to provide a brief safe Harbor statement.

Call May include forward looking statements that relate to summer brands outlook for 2021 and beyond.

These forward looking statements statements are subject to various risks and uncertainties.

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 gaining 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 like to turn the call over to Stuart Noyes Stuart.

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

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

When we last spoke the team and I, we're very clear on the issues.

Facing summer branch, which where those being faced by the entire industry.

Really nothing operationally specific to us as a company, but rather involve supply chain challenges impacting thousands of organizations around the globe affecting product availability as well as driving up our cost.

As I'm sure. Our listeners are aware these factors have not gone away.

However, I'm pleased that our team to the best of their ability.

Proven adept at managing through this difficult situation.

Their work has at a minimum increased inventory levels and got more product into the hands of our consumers who continue to exhibit high demand for many of our.

Core category offerings net sales rose to $41.6 million this quarter versus $40 7 million a year ago.

Significant improvement over the second quarter's $36 million.

Even with ongoing supply chain disruptions and resurgent pandemic related restrictions.

We were also successful in shifting certain domestic sales to direct import avoiding some of the logistical bottlenecks the company otherwise experienced.

We posted earnings of <unk> 12 per share and adjusted EBITDA of $2 4 million again, a substantial improvement over quarter two results, excluding the benefit from the PPP loan forgiveness.

Many of our categories saw solid demand during the quarter with revenue growth across gates bathers entertainer specialty blankets strollers boosters.

While we would have liked to ship more product revenue through the Companys top customers, particularly true e-commerce channels remains strong.

Bottom line results were once again negatively impacted by higher freight expense and in some areas increased raw material costs.

We're doing everything that we can control to mitigate mitigate these issues and raise prices when possible to offset the additional expense.

Cana rates continue to be unusually high and hard to forecast, but we are aggressively seeking out opportunities to ship greater volumes when possible.

Use alternative routes when available and ship more product through our direct import channels. All of these actions have positively impacted our results this quarter and we anticipate will again help in quarter four.

As with last quarter, we simply have more demand than we can satisfy and.

The reality is that we cannot say that current supply chain bottlenecks appear to be subsiding. However, we are working hard to overcome various parts of this puzzle to build a better level of inventory available for sale while in transit products are.

Higher than normal percentage of the total inventory at this time.

We are at times seeing improvement in supply chain, but cannot say with certainty. If this is temporary or not.

Bruce will review further in a moment we.

We took on debt this quarter to handle working capital issues and ensure we had inventory on hand.

This does not mean that we are taking our eye off the balance sheet. Rather we are doing what is necessary to grow the company.

This current predicament.

We remain dedicated to keeping debt levels low and delevering the balance sheet when possible in the current environment, while cautiously optimistic we will remain vigilant and operating summer brands as efficiently as possible.

Before turning the call over to Bruce Let me add that our pet expansion is on track for launch next year and we continue to believe that these additions to our product portfolio will help strengthen our overall market presence as well as open up new avenues of growth to the company.

Our product and marketing teams are focused on creating new innovative products broadening the depth and breadth of our brands and increasing consumer demand.

Feel optimistic about 2022, given the strategic plans, we've implemented in our ability to execute on this vision.

I'd once again like to thank our investors for their steadfast support over the past year, while we could that could not have predicted the supply chain inefficiencies nevermind. The pandemic. Our results have been a disappointment just as we were at the point of taking summer to the next level in terms of growth and operating performance.

That said I am very proud of the team at the company and what they've been able to accomplish during an extreme an unusual circumstance.

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 results third quarter net sales were $41 6 million compared with $40 7 million in the third quarter of fiscal 2020, and $30 6 million in the second quarter of 2021, showing substantial improvement sequentially.

The company's higher revenue year over year reflects growth in many product categories, including gates bathers entertainers specialty blanket.

Soldiers and boosters as Stuart mentioned offset by the negative impact of logistical challenges across the global supply chain.

This resulted in missed shipment opportunities.

Without which sales would've been higher.

Notably revenue derived from the company's top customers, particularly through e-commerce channels remains strong.

Gross profit was 11 8 million for the third quarter of fiscal 2021 versus $13 5 million in 2020, and our gross margin as a percentage of sales was 28, 3% versus 33, 3% last year.

The year over year margin decline.

Primarily reflects an increase in transportation and raw material costs and the fact that certain items, we're no longer receiving tariff exclusions granted in 2020.

We are taking every step possible to safeguard and improve margins going forward, including raising prices when appropriate.

Selling expense was $3 1 million in the third quarter versus $2 8 million in the prior year period and as a percentage of net sales was 7.5% this year versus six 9% in 2020.

The increase year over year and as a percentage of revenue was primarily due to higher freight out costs.

General and administrative expenses were $7 1 million in the third quarter versus $6 9 million in the prior year period.

And G&A as a percentage of sales was 17, 1% this year versus 16, 9% in 2020.

The year over year change reflects higher distribution costs as well as an increase in customer related chargeback.

A result of order cut back when demand could not be met.

Interest expense was <unk> 3 million in the third quarter of 2021 versus 1.0 million in 2020.

Reflecting more attractive interest rates following the company's refinancing of its credit facilities in the fourth quarter of 2020.

The company reported net income.

0.3 million or 12 cents per share in the third quarter of 2021, compared with $2 2 million.

A $1 <unk> per share in the prior year period.

Note that the fiscal 2023rd quarter was favorably impacted by tax provision adjustment related to changes in the interest deduction threshold under the U S. Cares Act worth approximately <unk> 17 per share.

The company recorded a tax provision of zero point $4 million in the fiscal 2021 third quarter versus the tax benefit.

<unk> $2 million in the comparable period of fiscal 2020.

Adjusted EBITDA for the third quarter of 2021.

With $2 4 million versus $4 7 million in the third quarter of 2020.

Adjusted EBITDA in 2021 included 0.9 million in bank permitted add back charges compared with 0.7 million an add back for the prior year period.

Adjusted EBITDA as a percent of net sales was five 8% in fiscal 2021 versus 11, 4% last year.

Turning to the balance sheet.

As of October 2nd 2021 summer infant had approximately zero point $4 million of cash and $36 6 million of bank debt compared with 0.5 million of cash and $39 million of bank debt at the beginning of fiscal <unk>.

2021.

As Stuart mentioned, we utilized debt this quarter to manage our working capital requirements and ensure inventory was available to better meet market demand.

Inventory at the end of the third quarter was $24 7 million compared with $25 1 million as of January 2021, and our inventory turns were four eight.

Versus 4.0 turns at the beginning of the year.

Trade receivables as of October 2nd 2021 were $34 4 million compared with 26.0 million at the beginning of fiscal 2021.

Days sales outstanding or Dsos.

We're 75 as compared to 66 at the start of the year.

Accounts payable and accrued expenses were $33 6 million.

Tober second 2021, compared with $34 1 million at the beginning of the fiscal year.

With that I.

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

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then two.

Our first question today comes from Eric Beta with G Research.

Good morning, congratulations on a muddling through here.

Thanks.

Okay.

You shipped it talks about shipping some of your shipments to direct to the customer obviously, there is a cost to that so how should we be thinking.

Obviously, it helped you meet more of your contract demands.

How should we be thinking about that going forward is that going to continue do you think to be a key piece of this business is going to continue to increase.

Yes for sure where we're working with our different customers now to take.

Take that number up or in some cases actually start the program with certain customers were going to be doing at the first of the year.

Obviously, you know it it takes inventory.

Because the P O R R built to and and they actually take a take the freight move the freight from Asia.

Okay.

So that's kind of thing.

We think about that it's continuing to be a drag kind of on a car.

Origins going forward also.

Yeah, I mean look at it it's.

Actually it's a drag on the top line the revenue.

And you know if we can in many cases it.

It may be better on some of the margins and the actual percent to the bottom line.

So it it actually on the top line, but not so much on the bottom line.

Okay.

You mentioned this new pet initiative as it possibly can give us a little bit more information on that I know you guys do a great business with.

With the gates and some of the other pet products and kind of where are you looking to expand in terms of I.

I guess.

Product lines or customer base with that too.

Yeah. So look at the product line, we're right at kind of the 11th hour now on final decisions on SKU.

Categories that type of thing, but it will be some accessories, whether its bowls or collars leashes things like that and then we're kind of right now we're working through the timeline on introduction to that as you mentioned gates. We've already started although there'll be a new branding effort that you'll see in the gates.

Net early next year and then we've got a we've got marketing plans in place to build that.

As it is your question on the customers.

Online first and then regional and then we would go to you know more national type of thing, but online is an easy startup as you know you can get your skus place things like that very quickly and efficiently and then it would be mid tier specialty slash to the bigger customers later on is.

We work our way through the launch.

And is this just.

This also having the same kind of issues in the supply chain in terms of what you'd like to do versus what you're going to be able to do here or do you think there isn't a start easing officers out of that.

It's actually a.

That's one of the things we're considering too is you know if we having supply chain issues. When is the right time to launch what are the categories.

Because we obviously don't want to launch something new and then run into you know an out of stock or that type of thing with the customer.

So were being very pragmatic about that and careful and that's why there'll be different launch times on the timeline to make sure. We're walking before we run there, but but but look a lot of that product also comes from Asia and Europe. You are facing the same logistical challenges that youre doing in any business today.

Okay and last question I know you guys are always.

Pretty innovative in terms of your product how have you been able to kind of manage and stay innovative here while at the same time trying to get availability to get product to come through.

Yes.

Our.

Development as you know one two and three years out we actually have roadmaps at about three years.

So we don't slow that team down on working on that.

And look developing it still can be done that is that I don't want to call. It the easy part, but that's the part that doesn't slow down it's been actually getting it to getting it into production and then getting it in the hands of consumers.

We'll tell you.

Our team internally they need actually once a week to go through a whole review on launch product are we on time.

What do we need to do to make sure we're shortening the lifecycle or building an extra weeks to make sure we have launches that our major customers.

Okay got it good luck for the holidays.

Thanks.

Yeah.

As a reminder to ask a question. Please press Star then one.

And once again Thats Star then one to ask a question.

At this time there appear to be no further questions. So I'd like to turn the call back over to Mr. Noyes for any closing remarks.

Thank you very much well. Thank you everybody for joining us for today's call and we look forward to speaking with everybody in.

And our next quarter. Thank you.

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