Olivia Elliott - Vice President & Chief Financial Officer Randall Chestnut - Chairman, President & Chief Executive Officer.

Eric Beder - FBR Capital Markets.

Hello, ladies and gentlemen, and welcome to the Crown Crafts Incorporated Investors’ Conference Call. Your host for today’s call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer. Currently, 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 Incorporated. And as a reminder, this conference is being recorded today, August 10, 2017. At this time, I would now like to turn the call over to Ms.

Olivia Elliott, Vice President and Chief Financial Officer, who will begin the call. Please go ahead..

Thank you. Welcome to the Crown Crafts investor conference call for the first quarter of fiscal 2018. With me today is Randall Chestnut, the company’s President and Chief Executive Officer..

Good morning – good afternoon..

A telephone replay of this call will be available one hour after the end of the call through 4 PM Central Time on August 17, 2017. Also, a web replay of the call will be available for 90 days and can be accessed by visiting our website 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, its 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 good afternoon, again, and welcome to our investor conference for the first quarter that ended July 2nd of 2017. We released the earnings before the market opened this morning, and we’ll go through that and we’ll take questions at the end of it.

Net sales for the first quarter of FY 2018 were $13,647,000, as opposed to $15,599,000 in the prior year, or a decline of $1.9 million, or 12.5%. Net income for this year 2018 was $518,000, as opposed to $1,103,000 last year, or a decline of $585,000, or 53%. Diluted earnings per share were $0.05 this year versus $0.11 last year.

Addressing the sales decline first. The half of the sales decline that we experienced can be contributed to two major customers. The first one is due to credit difficulties we had with one of the major customers and that we’ve been having for over a year.

The second is a shift in timing of another retailer of a modular program from the first quarter of last year to the second quarter this year. So that had an impact on the sales for this year. The balance of the sales decline is related to soft retail sales and retailers adjusting inventory levels. Turning to the gross profit.

Gross profit for the quarter was 26.4% of net sales compared to 27.5% in the prior year quarter. Allocation of indirect costs related to inventory negatively impacted the company by $398,000 in the current year quarter and $99,000 in the prior year quarter, or a differential from year-to-year about $300,000.

Excluding these impacts, the gross margin percentage would have been 29.3% of net sales compared to 28.1% in the prior year. The company also recorded certain SG&A expense in the first quarter of 2018 that was not incurred in the prior year. These expenses totaled just over $200,000 for the quarter.

Olivia will discuss both of these items in more detail in a moment. Turning to the balance sheet. We remained debt-free and ended the quarter with a cash balance of $11.9 million. We announced earlier this week the acquisition of Carousel Designs, LLC for $8 million plus the assumption of certain liabilities.

This acquisition was funded from cash on hand, and after the payment of the $8.8 million, we still remained debt- free. Dividends. The company also announced that its Board of Directors declared a quarterly cash dividend of the company’s Series A common stock of $0.08 per share.

This will be paid on October 6, 2017 to shareholders of record at the close of business – as of the close of business on September 15, 2017. This represents an annualized yield of 5.8% based on yesterday’s stock closing price. We are pleased to continue to reward shareholders with this cash dividend.

As I said earlier, the company has acquired the assets and business of Carousel Designs, LLC based in Douglasville, Georgia. This strategic transaction immediately transforms the company’s online presence providing a major sales channel of the company and enhancing its direct-to-consumer business.

Carousel Designs will be operated as a wholly-owned subsidiary of the company and is expected to be immediately accretive to earnings. We’ll be pleased to discuss this and take any questions that anyone on the call may have about this acquisition after Olivia makes her remarks. With that, I’ll turn it back to Olivia. Thank you..

I’m only going to give financial highlights. For more detailed analysis, please refer to the company’s Form 10-Q filed with the Securities and Exchange Commission this morning. Net sales were $13.6 million for the first quarter of fiscal 2018, compared with $15.6 million for the first quarter of the prior year, a decrease of $2 million, or 12.5%.

A portion of the decrease in sales is due to lower replenishment related to the delay by a major retailer and the roll out of a new modular set the second quarter of the current year. The company also experienced reduced product shipments in the current year to a customer that experienced credit problem.

Also affecting sales is the continuing overall sluggish retail environment coupled with the change in the infant bedding marketplace.

Specifically, on the advice of pediatricians, parents are moving more to the concept of a naked crib, whereby parents are opting to purchase separate rather than bedding set, leading to a lower average price point for the company’s infant bedding products.

Gross profit decreased by $685,000 and decreased from 27.5% of net sales for the first quarter of fiscal 2017 to 26.4% of net sales for the first quarter of fiscal 2018. The decrease in gross margin amount is primarily due to the decrease in sales.

Also, the company’s allocation of indirect costs associated with inventories negatively impacted gross profit by $398,000 in the current year quarter, as compared with $99,000 in the prior year quarter.

Marketing and administrative expenses increased in amount by $62,000 and increased from 18.2% of net sales for the first quarter of fiscal 2017 to 21.3% of net sales for the first quarter of fiscal 2018. The increase in amount is due to expenses recorded in the current year first quarter that did not occur in the first quarter of fiscal 2017.

These expenses include audit fees of $90,000 associated with the company’s transition from a smaller reporting company to an accelerated power; $64,000 associated with the Master Stand-by Claims Purchase Agreement between the company and JPMorgan Chase Bank; and $52,000 of expenses associated with the company’s acquisition of substantially all of the assets of Carousel Designs, LLC.

The company’s provision for income taxes is based upon an estimated annual effective tax rate from continuing operations for the current year of 35%.

During the first quarter of fiscal 2018, the company recorded a discrete income tax benefit of $60,000 to reflect the effect of excess tax benefits arising from divesting of non-vested stock during the period.

The recognition of this benefit was the primary factor in the lowering of the overall provision for income taxes to 28.2% for the current year period.

Although, the company does not anticipate a material change to the effective tax rate from continuing operations for the balance of fiscal year 2018, several factors could impact the effective tax rate, including variations from the company’s estimates of the amount and source of its pre-tax income and the amount of certain tax credit.

Net income for the first quarter of fiscal 2018 was $518,000, or $0.05 per diluted share, compared to net income of $1.1 million, or a $0.11 per diluted share in the first quarter of fiscal 2017. I will now return the call to Randall..

Olivia, thank you very much. And before we open it up for questions, I would like to address Carousel Designs just a little more. It’s something that we’ve been working on for a number of months. We are very excited about it. Carousel is a different customer, excuse me, a different company than what we are.

We sell to the traditional retailers and brick-and-mortar and online retailers. Carousel has taken a different approach and they’ve built a platform on the web, where they sell direct to the end user, 100% of their business is one-off business to the end user. And we’re – that’s something we’re very excited about it.

They also – if you go on their website and look, it’s babybedding.com, and look at their website, they have a design your own nursery. They have customization, where you can customize sheets. And all of it is made in the U.S. It’s made in Douglasville, Georgia and we’re going to continue that.

The management of the company, which has bought the company in 2007 are going to remain with the company and also they have done a phenomenal job in social media and the person that directs that is also going to stay with the company. It’s transformational, because it is a different type of business.

We aren’t selling to the traditional customers, the brick-and-mortar, we are selling to the end users and we are very excited about it. Okay. With that, Andrea, if you’ll come back, we’ll open it up for any questions that anyone may have..

Thank you. We will now begin the question-and-answer session [Operator Instructions] And our first question comes from Dave King of ROTH Capital. Please go ahead..

Hi, everyone. This is Phil Claudis [ph] on for Dave King..

How are you?.

First question is, how should we think about the gross margin and EBITDA contribution from Carousel? What type of margins does it generate and how should we think about potential synergies?.

We haven’t published our gross margin. And we – at this point, I don’t intend to, because it is a direct-to-consumer, I’m sure you can sort of rationalize that it’s got a better gross margin than what we have. That’s all I’ll say about that..

Okay..

Synergies are going to be unique synergies, because we’re going to build on Carousel’s own platform. They’ve done a great job. We plan and keep that and build on it.

But then we plan to do reverse synergies and that’s – they’re going to help us enhance our social media and also enhance our direct-to-retail business, which we do from CCIP Crown Crafts Infant Products and Hamco. So that’s where the synergies are going to come in..

Okay, thanks. That was good color.

Then do you plan to use a Carousel website to sell any of your non-bedding products? And are there any products that you offer that could benefit from its customization platform?.

Well, I mean, let me answer the second one first. There’s products that we sell that could benefit from the customization, that’s very true. Do we plan to use the Carousel website? We haven’t decided that yet, that’s going to be determined. It maybe a different website that is developed by Carousel to help us.

Obviously, they know a lot more about developing websites than we do. And there maybe reverse situation, where we use our brand or another brand and keep Carousel pure and do another one-off on a different website. That has not been decided, that will be decided in next couple of weeks..

Okay. And then the last one for me and I’ll step back.

In terms of the legacy business, do you still expect to anniversary some of the issues related to the naked crib bumpers and your credit talents customer in the second quarter?.

We think and we said in the press release and I’ll read you the comment we put in press release. We said, we believe we reached the turning point. Under the acquisition of Carousel Designs combined with the ongoing developing of new appealing products will drive improved results. We think we’ve hit the bottom of the trough..

Okay, thanks, and best of luck..

Does that answer your question?.

Yes, thank you. Best of luck with rest of the year, guys. Thanks..

Thank you..

Thank you..

Our next question comes from Eric Beder of FBR. Please go ahead..

Hi, it’s Eric Beder.

How are you doing?.

Hey, fine, Eric, good.

How about you?.

Hi, Eric..

I’m good.

So you guys basically put out the last 12 months in sales for Carousel, do they have the same level of seasonality that you guys do, or is it a little bit different?.

It’s a little different, because they’re going directly to the end consumer. Eric, there is some seasonality to it. It’s not major, but there is some seasonality to it. But it’s not the same as ours, because ours we go through the retailer that sits on the shelf for a while before it gets to the end user, there it’s directly bought by the end user..

So am I to assume that basically, December quarter will be a more important quarter? Is that the thought process for that with the seasonality difference?.

I’ll be honest with you, Eric, I can’t answer that question, okay? I’m not sure. I think the Christmas quarter is not so strong for them. And the crib purchase is a purchase that you can postpone. I mean, you’ve got nine months and to make the purchase.

And if you’ve got other kids, you divert your sources and retake your dollars to the toys for the other kids. So I’m not sure. I’m giving you a straight answer, I don’t know..

Okay.

The credit – the customer with the credit difficulties, we – I guess, the question is, is that continuing? And what are you going to do? Will you be able to do anything about it? And when do you start to really kind of anniversary the issues with this?.

Okay. All right. How do I answer those questions? Is it continuing? Yes. What are we going to do about it? We can’t do anything about it. And it all depends on the retailer. Are we anniversarying it? Yes, we are circling around on it.

It’s becoming less and less numbers, because they have closed a lot of stores, they’re buying a lot less product, et cetera. And so – but it’s going to continue until we eventually get out of it, or they get out of the business..

Okay. That makes sense.

Are you looking for further acquisitions beyond what you just did? And if you are, what are you looking to do?.

We are – and I think we proved with this acquisition. We’ve got the liquidity and the cash to do to make acquisitions beyond this one. We paid for this one with our cash. And so yes, Eric, we are looking for additional acquisitions and we will continue to explore new opportunities..

Would you take on debt for an acquisition?.

Yes, I would. We just didn’t have to in this one, which is pretty good feeling..

Do you guys believe you are at the turning point for the crib business?.

I mean, we think we’re at the bottom of the trough and....

Are you seeing that in terms of your orders to make you feel that confident there? It’s been pretty wild?.

We are seeing trends that showed that there is a light at the end of the tunnel and doesn’t have a train up to it..

Okay. All right, guys. It’s – I hope we’re at the pivot and good luck on the rest of the year..

Thank you very much, Eric..

Thank you. Operator [Operator Instructions] This concludes our….

Okay, Andrea, I don’t think we have any follow-up questions unless you see somebody on the list..

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

Thank you very much. As we began another year at Crown Crafts, we’re excited and optimistic about the future. And we are pleased with the – we are very excited about the acquisition, the addition of Carousel Designs, LLC to the Crown Crafts family. We think it is transformational, and we think it’s going to be a very solid addition to the company.

We’d like to thank all of our employees, suppliers, customers and shareholders for their continued support. With that, that concludes this – the presentation. Thank you for your interest. We’ll talk to you next quarter. Thank you..

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