Randall Chestnut - Chairman, President and CEO Olivia Elliott - VP and CFO.

Nick Meyers - ROTH Capital Partners Bryan Caronia - Wunderlich Securities Charles Levy - Morgan Stanley.

Hello, ladies and gentlemen and welcome to the Crown Crafts Incorporated Third Quarter Investors Conference Call. Your host for today’s call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call, in whole or in part, is not permitted without prior written authorization from Crown Crafts Inc. And as a reminder, this conference is being recorded today, February 09, 2016.

At this time, I would now like to turn the call over to Ms. Olivia Elliott, Vice President and CFO who will begin the call. Please go ahead..

Thank you. Welcome to the Crown Crafts investor conference call for the second quarter of fiscal 2016. With me today is Randall Chestnut, the Company’s President and Chief Executive Officer..

Good afternoon..

A telephone replay of this call will be available 1 hour after the end of the call through 8:00 AM Central Time on February 16, 2016. Also, a Web replay of this call will be available for 90 days and can be accessed by visiting our Web site at www.crowncrafts.com.

Before we begin, I would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in today’s conference call.

Also, in regard to comments made in today’s conference call that are related to the Company’s recently announced dividends, it’s history of paying dividends and the annualized yield on the Company’s common stock, we would like to remind everyone that the declaration of each dividend is at the discretion of the Company’s Board of Directors and the Company expressly disclaims any assurances as to the frequency and amount of any future dividends.

I will now turn the call over to Randall..

Olivia, thank you very much and again good afternoon to everyone, and welcome to our investor conference call. Earlier today before the market opened, we released our earnings for the third quarter of our FY 2016 and the quarter which ended December 27, 2015 and we'll be talking results of the quarter and the year-to-date.

Net sales for the quarter this year were 20.69 million as opposed to the previous year of 23.743 million or a decrease of just over $3 million or 12.9% decline. Net income for the quarter was 2.143 million as opposed to 2.046 million or an increase of $97,000 of last year or 4.7%.

Diluted earnings per share increased from $0.27 last year to $0.21 this year for the quarter. Turning to the year-to-date net sales were 59.265 million as opposed to 59.888 million in the previous year or a slight decline of $623,000 or 1%.

Net income for the year-to-date was 4.635 million as opposed 3.579 million last year or an increase of 1.056 million just over $1 million or 29.5%. Diluted earnings per share increased from last year $0.36 to $0.46 this year.

Last year's year-to-date net income was adversely impacted by $760,000 in after-tax legal settlement and fees associated with the lawsuit that was settled in FY 2015.

Also the tax this year the net income in both the quarter and the year-to-date periods in the current year are favorably impacted by $315,000 or $0.03 per diluted share due to a change in the Company's calculation of state portion of an income tax provision. Olivia will address this later in the call.

Turning to the sales while our business remained strong this year, the third quarter presented some several challenges. Retail sales for us are typically slower for our product categories here in the holiday season when the retailers shift their focus more towards seasonal goods.

This year, we also experienced lower than typical replenishment orders due to softer retail sales, as some retailers adjusted their weekly supply of on-hand inventory downward. Additionally, during the last year's third quarter, we had initial shipments of product gained from a competitor that exited the business.

As expected, we were not able to anniversary these initial shipments in the current year. Gross profit, our gross profit percentage increased from 27.9% in the prior year quarter to 30.2% in the current year quarter. Year-to-date gross profit percentage is 28.2% versus 28% for the nine month period year-over-year.

The increase in gross margin for the three months is primarily due to the Company's overall tight cost controls combined with improved costs in China resulting in favorable -- resulting from favorable exchange rate fluctuations. If you turn to the balance sheet side of the business, we ended the quarter with no debt and 7.5 million cash in the banks.

Today we announced our 25th consecutive quarterly dividend. The dividend which is $0.08 per share represents 40.9% annualized yield based on yesterday's closing price of $8.23. The company also announced today that its Board of Directors declared a special cash dividend of the Company's Series A common stock of $0.25 per share.

Both the quarterly and special dividend will be paid April 08, 2016 to shareholders of record as of the close of business on March 18, 2016. Our consistently strong cash flow and cash balances have enabled us to further reward our shareholders with this special dividend, in addition to the quarterly dividend.

We remain committed to managing our business to maximize our return to shareholders for the long-term. I'd like to also note that once this $0.25 special dividend and the $0.08 quarterly dividend are paid the Company will have paid back to the shareholders $22.5 million since April of 2010, six years. Okay, I'll now turn it over to Olivia..

Thank you, Randall. I am only going to give financial highlights. For a more detailed analysis, please refer to the Company’s Form 10-Q filed with the Securities and Exchange Commission this morning.

Net sales decreased by $3.1 million or 12.9% for the three-month period ended December 27, 2015 and decreased $623,000 or 1% for the nine-month period ended December 27, 2015 compared with the same periods in the prior year.

The sales decrease for the three-month period is primarily due to lower replenishment related to soft retail sales and retail customers shifting their inventory purchases for seasonal goods. Also the prior year included initial shipments of products gained when a competitor exited the business, which were not repeated in the current year.

During the nine month period sales increased due to replenishment orders for the new collections gained during the second and third quarter of the prior year. However these increases were offset by the current quarter deceases previously mentioned.

Gross profit decreased in amount by $376,000 but increased from 27.9% of net sales for the prior year quarter to 30.2% of net sales for the current year quarter. For the nine-month period gross profit was stable at 28.2% of net sales for the current year compared with 28% of net sales for the prior year.

The increase in the gross profit for the quarter is primarily due to the Company's overall tight cost control combined with a good product cost in China resulting from favorable exchange rate fluctuations.

For the nine-month period the slight increase in the gross profit as a percentage of net sales was the result of the previously mentioned efficiencies during the quarter offset by a decrease associated with the assumption of new business from a former competitor with lower preset prices beginning in the three-month period ended December 28, 2014.

Legal expense for both the three-month and nine-month periods of fiscal 2016 decreased compared with the same periods of the prior year.

Legal expense for the nine-month period of the prior year included a charge of $850,000 related to the settlement of litigation, as well as legal fees of $369,000 incurred in connection with the settlement negotiation.

Other, marketing and administrative expenses decreased in amount by $136,000 but increased from 13.9% of net sales for the prior year quarter to 15.3% of net sales for the current year quarter. The increase as a percentage of net sales is primarily related to the decrease in net sales.

For the nine-month period other marketing and administrative expenses decreased in amount by $207,000, and was stable at 16% of net sales for the current year compared with 16.1% of net sales for the prior year.

The Company’s provision for income taxes is based upon an estimated annual effective tax rate from continuing operations of 38.3% for the nine-month period of the current year.

During the three-month period ended December 27, 2015 the Company recorded a discrete net income tax benefit of approximately $230,000 primarily resulting from the application of more favorable state apportionment percentages.

As a result of that benefit the actual effective tax rate for the nine-month period ended December 27, 2015 has been reduced to 35.1%, the favorable apportionment percentages also explain the reduction in the effective tax rate of 1.2% for the nine-month period of the current year over the effective tax rate for the six-month period ended September 27, 2015 of 39.5%.

The overall impact of the change in the effective tax rate from 39.5% to 38.3% when applied to the year-to-date earnings is approximately $85,000. Net income for the third quarter of fiscal 2016 was $2.1 million or $0.21 per diluted share compared with net income of $2 million or $0.20 per diluted share for the third quarter of fiscal 2015.

Net income for the nine-month period of fiscal 2016 was $4.6 million or $0.46 per diluted share compared with net income of $3.6 million or $0.36 per diluted share for the first nine-month of fiscal 2015.

Net income for both the quarter and year-to-date periods in the current year was favorably affected by $315,000 or $0.30 per diluted share, due to the changes in state tax apportionment previously mentioned, while last year's year-to-date net income was adversely impacted by the previously mentioned legal settlement and associated fee totaling $760,000 after the tax rate.

I’ll now return the call to Randall..

Olivia, thank you very much. And Austin, if you come back, we will open it up for anyone that might have any questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dave King with ROTH Capital Partners. Please go ahead..

Hello guys this Nick Meyers on for Dave King.

How are you doing?.

Hi..

Hi, how are you today?.

I am doing very well thank you. Thanks for taking my questions.

[Multiple Speakers] First just to start off on you have some recall conditions over, have any of those persisted post third quarter or have they improved?.

I am not sure..

Can you repeat the question?.

Can you repeat the question?.

I am sorry I was just asking have the weak conditions seen over the holiday period persisted after the third quarter?.

Okay, we didn’t understand the question. Again I have to place my bet a little bit on that question because that’s sort of a forward-looking statement. But historically our fourth quarter, the quarter we are in now and everyone knows I think that we are on a March ending quarter has historically been a stronger quarter than our third quarter.

And let me answer that..

I understand thank you.

And then also I know there is some weakness at retail and then on a tough anniversary from third quarter, but can you explain more about what happened with bedding compared to bibs back in disposable?.

I said bedding has been going through some transitional issues where there has been some the bedding category i.e. bumpers which sort of diminished in the quarters over the last few years and that’s put some additional pressure on some of the bedding sales. And so that has sort of made the bedding a little bit tougher business.

And on the bibs side of the business we have some additional business that we picked up and some additional licenses that we were able to obtain that have increased the business on the bib and bath side and the Hamco side of the business.

So it's really more there from the business that we picked up an increase then it is from the outside of the bed..

Okay perfect, I appreciate the color and then just one more and then I’ll step back.

You guys giving a one-time dividend, can you explain the rationale for this one-time dividend versus maybe buyback, acquisitions or any other uses of the capital?.

Yes, I mean it's a good question and the short answer is we finished the quarter we said with roughly 7.5 million of cash on the balance sheet.

And we are still building cash as we have said on many conference calls in the past, we continue to look for potential acquisitions, but we are not going to overpay and we are not going to apportion and make a mistake.

So we haven't been successful in securing an acquisition that we thought was appropriate to this point, not to say that we won’t to do it and can’t do it, I mean I’ll come back to that in just a second.

The second part out there is on the stock buyback we’ve considered stock buybacks in the past, we've done stock buybacks in the past and we spent several million dollars doing stock buybacks. And it just didn’t seem to move the needle whereas the paying the dividend has been very successful for us.

And as we said earlier we maintained that program and we've paid out $22.5 million to our shareholders in just over six years. So, the Board felt that it is prudent to issue a one-time special dividend, this is not our first this is our second time. We did a $0.50 a couple of years ago.

And so that’s really the rationale behind doing the special dividend versus the stock buyback..

The next question comes from Eric Beder with Wunderlich Securities. Please go ahead..

Yes good afternoon this is Bryan Caronia on for Eric..

Hi, Bryan..

Hi..

Hi, good afternoon. Just had two questions here the first one more of one on a diligence basis. You were referring to in your prepared comments about the adjustment you made to your recognition of the state level income tax and then referenced that for the first nine months of this year a 38.3% incremental on a tax rate or effective tax rate.

On a going forward basis, would that be prudent to be used as a marker for what you expect to be starting out at in terms of a tax rate on a quarterly and annual basis?.

That is our estimated effective annual tax rate..

Okay, thank you that’s appreciated.

And then secondly more on a operational perspective, would you be able to provide any color related to the pricing environment in both your lines of business and whatever basis that may be some of the forces effecting pricing whether that’s any pressure from your retail partners to pass through any costs of its old savings or pricing competition from your competitors anything that you could notably point out in terms of depressing environment in the States?.

Okay, as far as competition from competitors that’s never seized that’s up and ongoing from many-many years and I don’t see that changing, that will continue as long as we have competitors.

Are we seeing pressure from the retailers to pass on some of the exchange rate fluctuations from the R&D out of Asia, yes we are and we are accommodating some of those and we believe in supporting the retailers and we believe in keeping the Company profitable but we have seen some requests and we have passed on some of those savings..

All right, perfect.

Thank you, and then if I could just add the as a corollary to that, are you expecting in the fourth quarter and then moving forward to your fiscal year '17 for further pricing gains to come out of China based upon advantageous foreign exchange rates?.

I mean that’s a crystal ball that I don’t think that anyone has a clear perspective on what's going to happen with the RMB versus the U.S. dollars. I mean we are not quite candidly smart enough to figure that out. It's something we watch every day but it's a moving target and it's a mixed bag. So, I really can’t speculate on we think is going to happen.

It has moved depreciatively over the last six to eight months but we don’t know what's going to happen in future..

[Operator Instructions] Our next question comes from Charles Levy with Morgan Stanley. Please go ahead..

Randall could you kind of delineate by let’s say product line, over this past few years you've made some new acquisitions of smaller companies, you've made some new joint ventures, you have done some licensing agreements.

Could you kind of give us in a list of sorts how each one is doing, which ones you may have decided to discontinue for one reason or another, and whether any of them are contributing significant volume to the top-line? Thank you..

Charles to go through the laundry list we'd be here for the next few hours. But I can have on a few of the top ones I will do that. Okay. And if you go back to 2007 whenever we did the acquisition of the Springs Global which got us into the partner business in a huge way, and we now own I don’t know 65% or 75% of the U.S.

market share in toddler bedding that one has been hugely successful and I mean it has been a barn-barn. The second one that we did in, that was 2007, 2009 we did an acquisition in Neat Solutions that one too has been very successful.

They got us into different product categories into disposables and to placemats or table toppers that got us into different channels of distribution through fast service restaurant chains. They got us into some additional businesses and additional products that one too has been very successful.

The third one was bibsters which we bought from Procter & Gamble in 2010, that one also have been successful and got us into international distribution with one major international customer. In Japan that has been very successful with that as well as pretty much every major retailer in the U.S.

That one has not been as far as success it’s been very successful, but if you rank it, I would rank it number three in the three I just mentioned.

Many of you go down into the licenses Charles and those are way too many too to mention, but the ones that have been more successful has been the expansion of the Disney license when we gained some of that when a former competitor of ours sort of went out of business a year or so ago or a couple of years ago now that has been successful, the Carter’s license for us has been very successful, the Nautica license, which we did now over a decade ago has been very successful over 10 years.

We’ve had some others without naming them because I don’t want to offend anybody they are sort of have not been the brightest bulb on the tree. So those have sort of faded a little bit. But it’s -- you got to keep trying the new licensees the new products and everything else. So does that give you a little bit of flavor for it..

Yes, that’s great. I appreciate it. Thank you..

You’re quite welcome. Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Randall Chestnut for any closing remarks..

Okay. Austin, thank you very much. And just to give the closing remarks on the surface Q3 was a little difficult, because the sales were down. However, we’re very pleased with the overall results. We remain debt free with significant cash on the balance sheet.

Our position in the marketplace also remains very strong, we have very strong licenses and designs and I’ll tell you we’re very pleased to offer our shareholders a special dividend which we announced today of $0.25 per diluted share in addition to the $0.08 regular dividend.

We’d also like to conclude by saying thank you to all of our customers, employees, suppliers and shareholders for their continued interest and support of Crown Crafts. And with that we’ll speak again in a few months. Just a reminder, we are a March ending quarter, so this is our last quarter of the year.

So the next conference call will be in June of 2016. With that, I’ll give it back to you Austin to wrap it up. Thank you very much and have a good day..

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