Lifetime Brands Inc (LCUT) 2005 Q3 法說會逐字稿

Welcome to the Lifetime Brands Third Quarter Conference Call.

[Operator Instructions].

I would now like to turn the conference over to Harriet Fried. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone and thank you for joining Lifetime Brands Third Quarter 2005 Conference Call. With us today from management are Jeffrey Siegel, Chairman, President and Chief Executive Officer, and Robert McNally, Chief Financial Officer.

Before we begin, I'll read the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties including, but not limited to, product demand and market acceptance risks, the effects of economic conditions, the impact of competitive products and pricing, product development, commercialization, technological difficulties, capacity restraints or difficulties, the results of financing efforts, the effects of the Company's accounting policies, and other details contained in its filings with the SEC. The Company undertakes no obligation to update these forward-looking statements.

With that introduction, I'll turn the call over to Jeffrey Siegel. Jeff?

Thank you, Harriet. Good morning, everyone. As announced in this morning's press release, Lifetime Brands just completed another outstanding quarter. Even before taking into account contributions of the Pfaltzgraff business we acquired in July 2005, we set records for Lifetime's third quarter in terms of both sales and earnings. For the third quarter period net sales totaled 94.2 million, compared to 51.2 million the third quarter of 2004. Including the 29 million in sales from Pfaltzgraff, this represents an increase of 84% over the prior year period. Excluding those sales, it represents an increase of 27%.

For the period, we reported net income of 4.5 million or $0.40 per diluted share, compared to net income of 2.6 million or $0.23 per diluted share for the same period in 2004. Pfaltzgraff contributed only a nominal amount of pre-tax profit for this year's third quarter. In all respects, 2005 is shaping up to be an excellent year for Lifetime and we are most satisfied with the direction in which our company is going and our future prospects. We began the year on a strong note in the first quarter and our momentum has continued to accelerate.

Throughout the year, we've been realizing the benefits of a number of important growth initiatives we implemented in 2003 and 2004. These include expanding Lifetime's portfolio of powerful brands, enhancing our product development and design capabilities, creating new product categories and broadening our lines to appeal to all levels of trade, restructuring our sales force into servicing all key accounts, and further strengthening our overseas sourcing organization. We have begun reaping the benefits of these efforts in 2005. We expect them to position us for a very successful year in 2006 as well.

In particular, I want to note our team selling approach has enabled us to better focus our efforts on our most important customers. We are experiencing growth in every one of our top 15 customers this year and there's only one case that had growth of less than 10%. In fact, our volume at our top 15 accounts is up a total of 38% year-to-date.

In the third quarter, we generated significant organic growth in all our major product categories. In our cutlery category, which includes kitchen cutlery, cutting boards, and scissors and shears, we actually doubled our sales. This increase was fueled by substantial gains in sales of our KitchenAid branded products, as well as our Farberware and Cuisinart products. Those of you who listen to our conference calls regularly will recall that we began shipping KitchenAid cutlery late last year. We had great expectations for this merchandise, but reception at retail has been even better than we expected, and the products that we developed for this line have been exceptionally well-received by consumers. We also reinvigorated our Farberware cutlery lineup.

Our philosophy is to use our design capability, which is one of the pillars of our company, to constantly upgrade our product lineup so that we are at the forefront of the industry. In the third quarter of 2005 Farberware cutlery recorded an increase over the prior year's third quarter of over 50%. Farberware continues to be a key brand for Lifetime. The Company's kitchenware division -- which includes kitchen tools and gadgets, barbecue accessories, sinkware, brushes and functional glassware -- was also a great source of growth in the quarter, increasing by over 25% over the prior year.

Again, we had particular success with the KitchenAid brand, where we added new lines of tools and gadgets to maximize our distribution through diverse retail channels. In addition, as we predicted, the additional shelf space we obtained this year from one of our leading customers, was an important contributor. We also are quite excited about the launch of our KitchenAid branded sinkware, which is scheduled to begin shipping this December. We have significant commitments for this line from major retailers who will be rolling out new planograms featuring KitchenAid sinkware in the first half of 2006.

Our Farberware kitchenware line also showed double-digit growth in the third quarter of 2005. Innovative new Farberware lines we introduced earlier this year are being well-received by retailers and consumers alike. We intend to continue to introduce many more new Farberware lines in the next several months. Our bakeware and cookware category produced excellent growth as well, as we continue to dominate the fastest-growing segment in the business with silicone bakeware. We currently offer 143 SKUs of silicone bakeware, and for 2006 we will be introducing at least another 48. It's interesting to note that silicone bakeware has finally become mainstream, with sales that are strong at all levels of trade.

In addition to giving you an overview of the sales growth of our company, I'd like to give you an update on our expansion into the important tabletop category, where we've made a number of acquisitions, including assets from Excel, Pfaltzgraff and most recently, Salton. We've now combined all of these wholesale operations into one division, which we call the Pfaltzgraff Studio. It in turn is made up of two categories -- luxury and housewares.

The former includes our upscale tabletop brands such as Calvin Klein, Stiffel, Sasaki, Block and Atlantis. Our centerpiece Pfaltzgraff brand is focused on the broader housewares segment of the tabletop business. Other brands in this segment include Retroneu, Farberware, Sabatier, Nautica, Joseph Abboud and Kathy Ireland. The major tradeshow for the tabletop industry just ended in New York on Tuesday and we introduced 59 dinnerware patterns and 40 new flatware patterns at that show, encompassing many of the brands I just mentioned.

I'm pleased to say that these introductions were extremely well-received by the major retailers. In fact, a number of them commented that Lifetime's was the busiest showroom at the show. As a result of the significant adjustments we have made in our design group over the past several years, we have been able to accelerate our product development and tabletop is just one of the areas in which this effort is beginning to pay off.

Our integration of Pfaltzgraff, which we acquired in July, is virtually complete. Our primary focus has been on improving the price-value relationship in that business. Pfaltzgraff has long been one of the most recognizable names in housewares but its business suffered in recent years because of the unfavorable cost structure. Products were manufactured domestically and were therefore considerably more expensive than competitors.

We have been applying Lifetime's extensive overseas sourcing expertise for Pfaltzgraff and are well along in the process of reducing the cost of merchandising while keeping the quality at the same high level. Pfaltzgraff has always offered consumers some of the best designs in the business and our goal is to give them a much better value as well. We've combined our Farberware direct-to-consumer business with the stronger Pfaltzgraff direct-to-consumer business. Pfaltzgraff has a long history of operating a direct-to-consumer business that features line extensions to dinnerware patterns that other retailers do not carry such as ice cream dishes and corn dishes.

Consumers purchasing sets at traditional retailers often know that they can get these additional pieces direct from Pfaltzgraff, and at times that is the reason they choose Pfaltzgraff patterns instead of a competing pattern. Like most consumer products companies, our business generally is stronger and more profitable in the second half of the year. Going forward the addition of Pfaltzgraff's direct-to-consumer business will increase the impact that the third and fourth quarters will have on our results for the full year.

Our integration of the Salton business we acquired just a couple of months ago is well underway. This acquisition enabled us to extend our tabletop offerings into fine china and crystal, which will give Lifetime a prestigious presence in the very attractive tabletop business. Our tabletop team has already begun to focus on these lines. By the first quarter of 2006 we will be showing retailers several exciting luxury tabletop lines that we expect to ship by the end of the second quarter.

In the past two years Lifetime has made five acquisitions. It should be apparent to all that one of our key strategies is to acquire businesses that complement our current offerings and integrate them quickly. We are in an industry that is ripe for consolidation, and we are frequently approached by companies in the industry asking if we would be interested in acquiring them. Our proposed secondary offering will enable us to pay down debt, and be in a better position to make additional acquisitions.

As noted in our press release, we have signed an amended agreement with Whirlpool Corporation to both expand the scope of our KitchenAid license, and to extend the term of the license through the end of December 2009. Our growth under the KitchenAid brand has been nothing short of spectacular, so the signing of this amendment is an important milestone for Lifetime.

Before I turn the call over to Bob McNally to go over the financial results for the quarter in more detail, and to discuss our new guidance for the year, I would like to note that according to 2005 HFM annual brand survey, Lifetime has 3 of the 4 most recognized brands in kitchenware. Bob?

Thank you, Jeff. Let me start out by saying, and repeating, what Jeff said and what's in our press release this morning. Our third quarter sales and earnings are at record level for the Company in the history of our third quarter results. Net sales for the third quarter of 2005 were 94.2 million. That is $43 million higher or, 83.9% higher than 2004's third quarter sales of 51.2 million. Net income increased 75.6%, 4.5 million or $0.40 per diluted share for this year's third quarter as compared to net income of 2.6 million or $0.23 per diluted share, recorded for the third quarter of 2004.

The $43 million increase in net sales for the 2005 quarter, included approximately 29 million of sales for the Pfaltzgraff business that we acquired in July 2005. If we exclude Pfaltzgraff sales, our net sales total 65.2 million, and that is a 27.3% increase over the comparable 2004 period sales of 51.2 million. This sales increase was primarily attributable to significantly higher sales of cutlery products. In particular, sales of the Company's newly introduced lines of KitchenAid branded cutlery, along with higher sales of Farberware cutlery, and strong growth in sales of KitchenAid and Farberware branded kitchen tools and gadgets, as well as Roshco and KitchenAid branded bakeware.

The 29 million of Pfaltzgraff sales for the quarter included 11 million of sales to retail customers and 18 million of direct-to-consumer sales through Pfaltzgraff outlet stores, internet and catalog operations. Pfaltzgraff's business net of interest expense netted only a nominal amount to our third quarter net income.The Pfaltzgraff direct-to-consumer business, combined with our Farberware outlet stores makes our total direct-to-consumer retail sales a more significant part of our overall business.

Therefore, starting with the filing of our quarterly report to the SEC on form 10-Q for the third quarter ended September 30, 2005, we will be disclosing certain financial information in the footnotes and in management's discussions about operating results for our two segments; our wholesale business and our direct-to-consumer business. We will be filing our form 10-Q for the third quarter early next week and we urge everyone to read this report to gain a more complete understanding of our business.

The cost of sales for the 3 months ended September 30, 2005 was 53.1 million, compared to 30.6 million for the 2004 quarter. Excluding Pfaltzgraff, the cost of sales for the third quarter of 2005 was 38.3 million and that's a 25% -- 25.2% increase over the 2004 quarter and as a percentage of net sales, cost of sales decreased to 58.8% in 2005 as compared to 59.6% in the 2004 quarter. This improved gross profit margin was primarily attributable to product mix.

Distribution expenses, which consist primarily of warehousing expenses, and handling cost of product sold and freight out, were approximately 10.2 million in the third quarter of 2005, and that compares to 6 million in the third quarter of 2004. Once again, excluding expenses for Pfaltzgraff, distribution expenses were 7.2 million in the quarter -- 2005 quarter, and that's 19.1% higher than the 2004 period. And again, as a percentage of sales, distribution expenses were 11.0% the third quarter of 2005, as compared to 11.8% in the 2004 quarter. This improved relationship primarily reflects the continued benefits of labor savings and efficiencies, generated by our major distribution center in Robbinsville, New Jersey.

Selling, general and administrative expenses in the third quarter of 2005 were $22.7 million. That compares to 10.1 million of expenses in the 2004 quarter. Excluding expenses for Pfaltzgraff, selling, general and administrative expenses were 11.9 million for the third quarter of 2005, and that's a 17.8% increase over the same expenses for the third quarter of 2004. And again, as a percentage of net sales selling, general and administrative expenses were 18.2% for the third quarter of 2005, compared to 19.7% in the 2004 quarter.

Income from operations for the 3 months ended September 30, 2005 was 8.2 million, and that's an increase of 80.7% or 3.7 million, over income from operations for the 3 months ended September 30, 2004. Then excluding Pfaltzgraff, our income from operations as a percentage of net sales improved to 12.0% in the 2005 quarter, compared to 8.9% for the 2004 period.

This improvement in operating profit margin was primarily the result of significant sales growth in the 2005 quarter, and the corresponding leverage gain from distribution expenses and SG&A expenses growing at a slower rate than sales, and to a lesser extent, improved gross profit margin in the quarter.

Recapping our year-to-date results, net sales for the first 9 months of 2005 were approximately 183.5 million, and that compares to 121.4 million for the first 9 months of 2004, and that calculates out to a 51.2% increase. Net sales for the 9 months ended September 30, 2005 for the Excel business that was purchased in July 2004, and the Pfaltzgraff business that was purchased in July 2005, was 6.6 million, and 29 million respectively.

Excluding net sales attributable to Excel and Pfaltzgraff, net sales for the 9 months ended September 30, 2005 totaled 147.9 million. That is a 24.8% increase over the 118.5 million of net sales recorded for the comparable 2004 period, excluding 2.9 million in net sales of Excel. Again, this sales increase for the nine months was primarily attributable to significantly higher sales of cutlery products, in particular, sales of the Company's newly introduced lines of KitchenAid branded cutlery, along with higher sales of Farberware cutlery, and solid growth in sales of KitchenAid and Farberware branded kitchen tools and gadgets, and Roshco and KitchenAid branded bakeware.

Net income for the first 9 months of 2005 was approximately 6.9 million or $0.61 per share, and that's more than double the net income of 3.1 million or $0.28 per share that we earned in the corresponding 2004 period.

Turning our attention to the balance sheet, as of September 30, 2005 our financial condition remains solid with 99.1 million in stockholders equity. Our accounts receivable at September 30, 2005 was approximately 48.6 million; that's up 17.5 million over the same number at September 30, 2004. This increase is commensurate with the increase in sales in the latter part of this third quarter, including the added volume from the 2005 acquisition of Pfaltzgraff.

Inventories at September 30, 2005 were approximately 122 million and that's 57.9 million higher than at September 30, 2004. The higher inventory levels primarily reflect the added inventory for the Salton and Pfaltzgraff businesses that were acquired during the third quarter of 2005, and to a much lesser extent, the buildup of inventories necessary to support expected growth in our other businesses.

Property and plant and equipment at September 30, 2005 was 28.9 million, as compared to 19.7 million a year ago. The increase was primarily related to property and equipment that we acquired with the Pfaltzgraff acquisition. Capital spending during the first 9 months of the year was approximately 4.8 million Borrowings under our $100 million secured credit facility at quarter end was 87.2 million, of which 82.2 million was short-term borrowings; 5 million is a long-term loan due in August 2009.

The 87.2 million in borrowings were $55 million higher than the 32.2 million outstanding at September 30, 2004. This increase in borrowing was primarily used to fund the July acquisition of Pfaltzgraff, which was approximately 34 million, and the September 2005 acquisition of Salton's tabletop business for approximately $14 million, and of course the seasonal needs to build up our working capital to support the fourth quarter growth.

As we noted in our press release this morning, we have reviewed our projections for 2005 and raised our guidance. We now expect our total sales to range between 297 million and 304 million, with earnings per share of $1.17 and $1.22. That's pro-forma, assuming a sale of 1.5 million primary shares upon December 1, 2005. Our prior guidance had been for sales to a range between 290 million and 300 million, with earnings per share of $1.05 to $1.15. And these earnings and share numbers did not include an adjustment, to reflect the additional shares that we now expect to be outstanding at year-end. I'll turn it back to Jeff.

Now I think we want to open it to questions.

Thank you.

[Operator Instructions].

Your first question is from Larry Rader with LAR Management. Please proceed with your question, sir.

The question is, you attained this sensational quarter without the benefit of much in the way of gross margin improvement. As you look at your mix a couple of years out, how much room do you feel you have, if any, for further gross margin improvement?

Larry this is Jeff -- I think that will not improve that much. We certainly try, if you don't try it seems to go backwards.

Right.

But I don't -- it's not in our model to get --

All right, so you're saying you get the leverage out of the sales, marketing, G&A distribution line?

Sure.

And there you have, over a couple of years, depending on your sales gain, as much as 100, 150 basis points?

Yes, I think we have stated that in the past, that depending on the growth we can get between 100 and 200 basis points improvement to the bottom line by leveraging distribution expense and SG&A.

Thank you.

[Operator Instructions].

There are no further questions at this time. Please proceed with your presentation or, any closing remarks.

Thanks, everyone, for joining us this morning. As we expected, the growth initiatives we put into place in the last 2 years, are making 2005 a stellar year for Lifetime, with widespread growth across our brands, products and customer base. Our outlook for both the remainder of the year, and for 2006 is very positive.

I've been with Lifetime since 1967. I have never seen a brighter future for our company. Indeed, this past Monday we shipped more in volume in one day, than we did for the entire year in my first year with the Company. We look forward to bringing you up to date on the results of our many growth initiatives after the fourth quarter. Thank you, all.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation, and ask that you please disconnect your lines.