Hello, ladies and gentlemen and welcome to the Crown Crafts, Inc. Investors Conference Call. Your host for today’s call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer. [Operator Instructions] Any reproduction of this call in whole or in part is not permitted without prior written authorization from Crown Crafts, Inc.

As a reminder, this conference is being recorded today, June 13, 2019. And 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 proceed..

Thank you. Welcome to the Crown Crafts investor conference call for the fourth quarter and full fiscal year 2019. With me today is Randall Chestnut, the company’s President and Chief Executive Officer..

Good afternoon..

A telephone replay of the call will be available 1 hour after the end of the call through 4:00 p.m. Central Time on June 20, 2019. 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 listeners 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 dividend, its history of paying dividends and the annualized yield on the company’s common stock.

We remind listeners 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 dividend. I will now turn the call over to Randall..

Olivia, thank you and good afternoon again to everyone. Before the market opened this morning, we released our press release for the fourth quarter and full year of FY ’19 ending March 31 of this year 2019. I will touch on the numbers for the quarter and the year, a few comments and Olivia will come back with more detail.

Net sales for the quarter in the current year were $21,717,000 as opposed to $22,686,000 in the same quarter last year are down $969,000 or 4.3%. Net income for FY ‘19 was $1,392,000 as opposed to $1,247,000 in the same quarter last year, or up $145,000 or 11.6%.

Diluted earnings per share in the current year were $0.14 as opposed to $0.12 last year same quarter. Turning to the full year, net sales for the full year were $76,381,000 as opposed to last year FY ‘18 of $70,270,000 or up $6,111,000 or 8.7%. Net income for FY ‘19 was $5,019,000 as opposed to FY ‘18 of $3,021,000 or up $1,998,000 or 66.1%.

Diluted earnings per share for the current year were $0.50 and in the previous year FY ‘18 were $0.30. As we began FY ‘19 we were dealing with some very difficult market conditions. Late in fiscal 2018, our second largest customer went into liquidation.

Not only did we lose a large customer, we also had to deal with a tremendous amount of merchandise that flooded the market as in essence they became one of our competitors. We began the year looking for new customers to replace this huge hold. Over the course of the year, FY ‘19, we recovered nicely.

We finished the year with an 8.7% increase in net sales. We also finished the year with a 66.1% increase in net income. Of course, this was helped by not having numerous non-recurring charges to repeat in the current year. Most of which were related to the bankruptcy and subsequent liquidation of our second largest customer.

Gross profit as a percent of net sales for the quarter increased from 25.9% in the prior year to 28.6% in the current year. Gross profit as a percent of net sales for the year increased from 28.1% in the prior year to 29.2% in the current year. We finished strong and we are proud of the efforts of all of our staff. Fiscal ‘19 was a good year.

Turning to the dividends on May 13 of this year we announced a quarterly dividend of $0.08 per share. This represents a 6.67% annualized yield based on yesterday’s closing price per share of the company’s common stock. This quarterly dividend will be paid July 5, 2019 to shareholders of record on June 14, 2019.

It was a very challenge – in this very challenging year we actually returned $3.2 million in cash to the shareholders, which was a tremendous feat. We are proud of the track record. We continue to operate the business in a manner that generates very strong cash flow and delivers substantial value to our shareholders.

Olivia, I will turn it back to you for comments..

Thank you. I am only going to give financial highlights. For more details, please refer to the company’s Form 10-K filed with the Securities and Exchange Commission this morning. Net sales were $21.7 million for the fourth quarter of fiscal 2019, down $969,000 or 4.3% from prior year sales of $22.7 million.

For the year, net sales were $76.4 million for fiscal 2019, up $6.1 million or 8.7% from $70.3 million in the prior year. The increase in sales for the year is primarily due to sales that resulted from the acquisitions of Sassy and Carousel during fiscal 2018. Sassy sales were $11.8 million in fiscal 2019 compared to $2.1 million in fiscal 2018.

Carousel sales were $6.5 million in fiscal 2019 compared to $5.4 million in the prior year. These increased sales were partially offset by the elimination of Toys R Us, Babies R Us, which amounted to $9.7 million during the prior year.

Gross profit increased by $326,000 and was 28.6% of net sales for the current year quarter compared with the prior year quarter gross profit of 25.9% of net sales. Gross profit increased by $2.5 million and increased from 28.1% of net sales for fiscal 2018 to 29.2% of net sales for the current year.

The increase is primarily due to the net higher sales levels in the current year.

In addition, sales in the current year were made at overall higher gross profit percentages and sales to Toys R Us, Babies R Us during the prior year leading up to and continuing through their bankruptcy and liquidation resulted in a shift for less profitable product mix and shortfalls of minimum guarantee royalties in the prior year.

Marketing and administrative expenses increased by $922,000 for fiscal 2019 compared with fiscal 2018. Contributing to this increase is $3.1 million in cost incurred during the current year that were associated with Carousel compared with $2.6 million in such costs during the prior year, which included $347,000 in acquisition costs.

Cost in the current year also included $210,000 in charges associated with transferring most of the Sassy inventory from Grand Rapids, Michigan to the company’s distribution facility in Compton, California.

Offsetting the increase in the current year is the elimination of credit coverage fee of $653,000 and a bad debt charge of $218,000 that occurred in the prior year that were associated with the bankruptcy and liquidation of Toys R Us.

The current year provision for income taxes is based upon an annual effective tax rate from continuing operations of 24.4% compared to the prior year rate of 32.7%. Tax legislation enacted in 2017 included a provision to lower the federal corporate income tax rate from 34% to 21% effective as of January 1, 2018.

As the company’s fiscal year 2018 ended on April 1, 2018, the lower corporate income tax rate was phased in resulting in a blended federal statutory rate of 30.75% for fiscal year 2018. The company provides for deferred income taxes based on the difference between the financial statement and tax basis of the company’s assets and liabilities.

The company’s net deferred income tax assets had previously been recorded based upon the enacted composite federal state and foreign income tax rate of approximately 37.5%. That would have been applied as the financial statement tax differences began to revert.

Because these differences are now expected to reverse at a composite rate of approximately 24.5%, the company was required to revalue its net deferred income tax assets. This revaluation resulted in a discrete charged income tax expense of $377,000 during fiscal 2018.

Additionally, the company’s measurement regarding the tax impact of certain state apportionment percentages are measured net of federal income tax. The company also revalued its reserve for unrecognized tax liabilities, which resulted in a net discrete charge to income tax expense of $120,000 during fiscal 2018.

During both fiscal 2019 and 2018, the company recorded discrete entries associated with excess tax benefits or charges arising from the vesting of non-vested stock during the period and also recorded reserves for unrecognized tax liability.

The effective tax rate from continuing operations combined with discrete income tax charges and benefits resulted in an overall provision for income taxes of 26.1% for the current year and 44.3% for the prior year.

Net income for the fourth quarter of fiscal 2019 was $1.4 million or $0.14 per diluted share compared with net income of $1.2 million or $0.12 per diluted share in the fourth quarter of fiscal 2018. Net income for fiscal 2019 was $5 million or $0.50 per diluted share compared with net income of $3 million or $0.30 per diluted share for fiscal 2018.

I will now return the call to Randall..

Olivia, thank you very much and that concludes our remarks. And now Ian, if you come back we can open it up to any questions that anyone on the line may have..

[Operator Instructions] Our first question comes from Linda Bolton-Weiser from D.A. Davidson. Linda, please proceed..

Hello. Hi, Randall. Hi, Olivia? This is Cindy Ding on for Linda. Thanks for taking our questions. So, our first question is can we expect modest sales growth in fiscal ‘20 and what you see as the key drivers of growth? Thanks..

Okay. I am sorry I didn’t quite get the question. It was a little blurred..

I am sorry, let me repeat the question.

So can we expect modest sales growth in fiscal ‘20 and what do you see as the key drivers of growth?.

Okay.

And I know you are not Linda, so your name is, what’s your name?.

Hi, this is Cindy on for Linda..

Cindy, okay. Hey, Cindy. We spoke with Linda earlier and she told me you were going to be on. The drivers for the growth is and we are working diligently to do this is developing new products.

And it’s not just new product within the categories that we currently participate in, it would be products – developing products in adjacent categories to the infant and toddler businesses that we are in, okay. And we are doing that as rapidly as we possibly can. We have nothing today to announce, but we accept that we are working towards that end..

Great.

And our second question is your cash flow was really strong in fiscal ‘19 and do you expect a similar level in fiscal ‘20?.

Well, I mean the best way I can answer the cash flow is yes, it was very strong and you have got to look back for the last 15 to 17 years and our cash flow has been strong over the last 15 to 17 years, as the market adjust, as situations occur, i.e., bankruptcy, liquidation of major customers, we adjust our business to compensate for that and to protect the cash flow.

So our cash flow if you look back over almost 20 years has been very, very, very strong. So we see no reason to believe that we cannot continue there. We are very low debt. We have considerable amount of borrowing availability. And so therefore, we think from the balance sheet side we are healthy..

Thanks.

And then are you actually looking for potential acquisitions and has the Babies R Us liquidation created any opportunities?.

The answer to that is to both of those is yes, we think that the Babies R Us situation has created some opportunities. And yes, we are always looking for additional acquisitions that would complement the product categories and the subsidiaries that we are in. So that’s an ongoing active conversation..

Okay.

And how will you manage through the impacts of the 25% tariffs if they go through?.

That’s a good question. And we will address it in the following manner and we believe that most of our competitors are going to take the same approach is – our margins are not strong enough to support us absorbing a 25% tariff increase. We have had very minimal impact through rounds 1, 2 and 3 and we have passed those on to our customers.

And without exception, put that in manner, don’t get me wrong, they haven’t been large numbers, but in every case the customer accepted it sometime not quite as quick as others did, but they did accept the price increase with one small exception where customer discontinued the product, but as we learned, they have intended to discontinue it anyway for performance reasons.

So our philosophy is we are going to pass it on and we are going to pass it on to the consumer – to our customers and we think the retailers are going to pass it on to the ultimate consumer.

And I applaud a couple of – one in particular, the large retailer who has gone public and said we will pass it on and it’s going to be passed on ultimately to the consumer. So we can’t absorb it, we are going to pass it on. The timing we don’t know for sure when that will be, but it’s anticipated that it will be sometime in July if it occurs..

Okay, great.

And we have a follow-up to the previous question do you think demand for your products will be impacted by the tariff related price increases?.

That’s hard to say. Okay, we don’t know the answer to that question.

It could have an effect, but we have learned over the many, many years that if there is discretionary spending in the family that the baby, the infant, who is our market, infant and toddler are not going to be effective as the family has to cut the budget as maybe some of the older kids or the parents, i.e., the father may wear shoes with holes on the bottom still, but they are going to try to provide for the new born baby.

So we are hoping that, that still takes place. Will there be some downshifting to less expensive product? Could be, we don’t know, okay. We have never been through rough seas like this, where there is a 25% increase in one pair of sports. And so we just have to see how it happens..

Okay, thank you very much. That’s all of my questions..

Thank you. Have a good day..

Our next question comes from Justin Putnam of [indiscernible]. Justin, please proceed..

Great. I just had a more quick follow up on the impact on the tariff and you are pretty clear that you are going to pass price increases along.

And I was curious to know if there are any opportunities for you to improve the pricing for your suppliesyou’re your negotiations for your suppliers?.

I mean just there might be a little, but there is no enough to offset a 25% price increase I can assure you. As you may have noticed, the exchange rate between the RMB versus the dollar has gotten, the RMB has gotten less exchange rate is going up.

So, there maybe a point in the future if it keeps going up, it’s in the low 6 90s or something as of today. If it keeps going up and gets above 7, there is an opportunity to go back to the vendors and shave a little off, but it’s nowhere near what the cost of the tariffs are going to be..

Okay, great. Next question there is on a year-over-year basis for the fiscal fourth quarter, it looked like your Carousel and Sassy numbers for the quarter went to kind of different directions with Carousel being down maybe 40% year-over-year and Sassy being up somewhere around 50% for the quarter.

I was just curious what impact may have been in the quarter, but more importantly what kind of your outlook is going forward?.

Well, the Hamco Sassy business, this – we purchased Sassy in December ‘17 so we didn’t get the full benefit that first year, we only got 4 months or 3.5 months of effective Sassy, but this past year we had the full 12 months effect. So that did help..

No, I am talking about quarter-over-quarter sorry?.

Okay. The quarter to quarter, I mean, it’s hard to say quarter-to-quarter it could be one order that got moved up or one order that got delayed, okay and that could happen the last day of the month, where a truck doesn’t pickup and it shifts at one quarter to the next. So it’s sort of hard to analyze a business based on one quarter to one quarter..

Okay.

Then so for fiscal 2019 actually was $11.8 million, I think, is that a good annual run-rate for that business or has there been a changes in the expectations for that one?.

We don’t make forward-looking predictions, but I mean it’s a solid business and we think that it’s going to continue to be solid for the future. We are very pleased with that acquisition..

And the same question for Carousel is there anything unusual in business this year and let me put it that way?.

Anything unusual in the Carousel business coming up for 2020..

Yes, we are changing a few things that we are just not at liberty to say as we speak, but we are changing a few things at Carousel to expand their sales opportunity. And we think that’s going to payoff in 2020 some new channels of distribution etcetera..

Okay.

Last question there and Olivia, this might be more for you then, CapEx for 2020 was up little bit in 2019, I am just curious to know if there was any change in 2020 in CapEx?.

The reason that it’s up is the Sassy acquisitions for the toys. Toys include moulds, etcetera, for the manufacturing process that we put those on the books of fixed assets. So that’s the reason for the increase and with that business being a good business, I would expect that to continue to be that – pretty close to the rate..

Okay.

So maybe it’s got back going forward more in the $700,000 range there?.

I would think it’s going to be closer to what it ran in 2019 than the previous numbers from prior fiscal years..

Okay, thank you. Thank you for taking my questions..

Thank you..

Thank you..

At this time, our next question comes from Josh Peters of Zenith Sterling Advisers. Josh, please proceed..

Hello.

Congratulations on quite a year here, quite a good job coming back from – I actually wanted to drill in just a little bit more on that thinking about the disruptions that you faced especially in the first couple of quarters of fiscal ‘19 were easy to say not only have you lost Toys R Us as a customer, but that inventory had become a competitor of the own shipment, does that create an opportunity to have something you’ve found new outlets for your products here going into fiscal 2020?.

Well, I mean, Josh, thank you for the kind remarks, but now it really doesn’t. The Toys R Us has reemerged as a new company, but it’s really -- they don’t have any storefronts for any sales in the U.S. it is really a licensing business.

So the business that Toys R Us, Babies R Us add has been spread out to a number of retailers that we had before, including Wal-Mart, Amazon, Target, Buy Buy Baby and the list goes on. So there is not like a big huge opportunity to sell into that.

It is the same customers that just – they are picking up the bits and pieces and there is no one retailer that stepped up and took it up. So, it’s sort of spread out and it was a tough thing to overcome the loss of our second largest customer..

Okay.

So at this point you feel like things have kind of sorted themselves out in terms of market share between the different retail partners that you have?.

We sure hope so. We think they have yes, but we sure hope so..

Well, I know in the absence of guidance for this year, I think it would be kind of helpful to get a sense if you are even just lapping some easy comparisons in the year ago period, because that’s kind of what it would look like to me, but I don’t have a feel for how much that business really shifted?.

Well. And again, we don’t give guidance and we stand pretty firm on that, but what we can tell you is we are out everyday beating the bushes for every possible order that exists..

Okay.

And the other question I want to touch on I think it’s interesting that you consider looking at other acquisitions, what would be your position in terms of your willingness to borrow in order to finance that, is there a feeling on how much leverage you would be willing to be put on the balance sheet in order to finance transactions?.

Yes, there is. I mean, Josh, we are not going to go crazy. I mean, we have had huge debt before and we don’t want to have huge debt again. So any acquisitions we do, yes, we would borrow and we proved it. We did require to do the Sassy acquisition a year and a half ago.

So, we are not fearful to borrow money and our bank is supportive of us doing that to borrow money, to do acquisitions, but we are not going to go out and runoff a huge, huge debt beyond what we are capable of service..

Okay.

And within that framework and I am assuming that the dividend remains the priority for shareholder returns?.

Well, again let me say that dividends are approved quarterly by the board. There is no guarantee that they will be done, but again you got to look in the rearview mirror and we have been doing it now since 2010. So, that’s the best answer I can give you on the future of dividends..

Well, I do appreciate the commentary and thanks again..

Thank you, Josh. You are quite welcome..

[Operator Instructions] At this time, our next question will be coming from Ralph Marash of First Manhattan Company. Ralph, please proceed..

Good afternoon, Olivia and Randall..

Hello.

How are you?.

Hello, how are you?.

Okay.

How are you?.

Doing good..

Good..

Good.

I had follow-up on tariffs, are you exploring any alternative sourcing manufacturing sites away from China?.

Ralph, we have and we have looked in a number of countries and we have done sample costings out of at least a half dozen different countries. And it’s very difficult to find a country that can do it competitive with China.

And like in some countries they don’t have the fabric available, the woven fabric, there is knits available on a lot of different countries, but we don’t do a lot of knits. So in the woven category, there is not a whole lot and they have to go back and rely on China to get the fabric.

So you have to bring the fabric from China and to whatever country and by the time you do that, the cost is in all cases that we run into so far is in excess of 25%. For instance, there is one basic fabric that we use for a lot of our products and it’s not produced outside of China and it’s got to come from China.

So – and when you move that fabric from one country to the other, you are adding cost to it and freight, etcetera, so the savings you get doesn’t really help you and in most cases, it’s equal to or more than the tariffs that are imposed. So, we think that we are going to have to bite the bullet, pass it on..

Thanks. I am sorry I cut you off..

We have looked, I promised..

Thanks. For Carousel, is all of their products U.S.

made?.

At this point, Ralph, it’s all U.S. made. We do some products of imported fabric, that’s imported, but then its imported fabric and then printed at Carousel and then all made in U.S. Yes, at this point, it’s all U.S. made..

And I am assuming given Carousel’s go-to-market and their niche in the market they have, they can absorb that cost structure, but the rest of the company’s products couldn’t absorb domestic manufacturing?.

The rest of the company’s products going…..

The rest of the Crown Craft’s products, yes..

The rest of our business going to customers like Wal-Mart, Target and Amazon quite candidly, no, they cannot absorb the cost it would be to make that product in the U.S..

Okay, thanks a lot..

You are quite welcome. Thank you..

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

Ian, thank you very much and thanks to everyone who participated on the call today. And just a couple of closing remarks, management remains very optimistic about the future of our business. We are pleased with our position in the market.

Our staff has done a remarkable job of rebuilding after the demise of Babies R Us and the ultimate liquidation of Babies R Us. We would like to thank all of our customers, employees, suppliers and shareholders for their continued interest and support of our company. Fiscal 2019 was a recovery year.

The company remains very solid and has a bright future. We thank you very much and we will speak to you again next quarter. Have a good day..

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