Lifetime Brands Inc (LCUT) 2006 Q3 法說會逐字稿

Welcome to the Lifetime Brands third-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded November 6, 2006.

I would now like to the conference ever to Harriet Fried of LHA. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining Lifetime Brands' third-quarter 2006 conference call. With us today from management are Jeffrey Siegel, Chairman, President and CEO, and Robert McNally, Chief Financial Officer.

Before we begin, I will 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 products demand and market acceptance risks; the effects of economic conditions; the impact of competitive products and pricing; product development; commercialization; technological difficulties; capacity constraints or difficulties; the results of financing efforts; the effects of the Company's accounting policies; other details contained in the Company's filings with the SEC. The Company undertakes no obligation to update these forward-looking statements.

With that introduction, I will turn the call over to Mr. Siegel. Go ahead Jeff, please.

Thank you, Harriet, and good morning, everyone.

I would like to give you my commentary for the quarter in two sections, reflecting the fact that our two different business segments performed in very different ways during the third quarter. After that, I would also like to take you through our current guidance for 2006 and give you some perspective on our goals for 2007 and beyond so that you can appreciate the direction that we are taking the Company.

Our core wholesale business accounts for over 80% of Lifetime's annual sales. This business has met our goals for revenue growth and margin all year, and the most recent quarter was no exception. Indeed, this segment outperformed our expectations in the quarter and should finish the year ahead of plan.

Our wholesale business operates generally in three sectors, food prep, tabletop and home decor. Food preparation, which comprises of kitchenware, cutlery, bakeware and pantryware businesses, is our oldest, largest and fastest-growing business. As they have all year, sales of our Farberware, KitchenAid in Cuisinart branded food prep products grew at an excellent pace. While the market for these categories is obviously a mature one, we continue to be able to grow this business by offering retailers innovative new products at the best and largest portfolio of brands in the industry.

Many of you know that, for a number of years, we have been the nation's largest provider of kitchen tools and gadgets, cutting boards and pantryware. This year, we believe we have become the number one provider of kitchen cutlery as well. Our second-largest business is tabletop, which comprises of dinnerware, glassware and flatware. This is a relatively new business for Lifetime, one that we entered in 2004 with the acquisition of Excel. Last year, we expanded our presence in this category by acquiring the Pfaltzgraff brand as well as Calvin Klein and other key tabletop brands from Salton.

Earlier this year, we rounded out our lines by acquiring the Wallace, Towle and International Silver Company flatware business from the Syratech Corporation. As a result, Lifetime is now a major player in this market. We are able to offer retailers some of the strongest brands in the business both in the broad housewares arena in the upstairs trade. We are very pleased with the progress we're making in this market.

I am pleased to be able to report that we have achieved strong retail placement of our new Pfaltzgraff, Cuisinart, Joseph Abboud, Sasaki and Calvin Klein dinnerware patterns. At the New York tabletop show, we also introduced an entirely new Nautica line, which was very well-received by buyers. At the same market, we introduced our first collections of new Wallace, Towle, International Silver, Sasaki and Cuisinart and Pfaltzgraff flatware patterns which were very well-received by the trade and should enable us to gain significant market share in this category in 2007.

Our third market is home decor, which comprises nonelectric lighting, home and garden accessories and picture frames, categories that we acquired early this year from Syratech. To succeed in home decor, one needs to have a strong design capability and an advanced sourcing expertise. These of course are Lifetime's--two of our great assets. In contrast to our other businesses, the home decor category requires us to be able to introduce entirely new collections every three months. There is not another company in the industry with the resources to match our 90-person internal design staff and our 150 sourcing professionals.

Now let's turn to our direct consumer, or DTC, segment. As many of you know, this business accounts for less than 20% of Lifetime sales. As we announced in September, that business has faced some severe challenges during the quarter and continues to perform below our expectations. We expected our Farberware and Pfaltzgraff stores to report an operating loss in the first half of the year but to break even for the full year. However, we now expect that the stores will operate at a loss for the year. This disappointing and unacceptable result is due to a number of inventory and merchandising problems, which frankly were self-inflicted. As discussed in our last 10-Q, earlier this year, we dominated our agreement with Mier Corporation, under which Mier had 30% of the square footage of each of the Farberware stores and was it devoted to their product. They also are responsible for 30% of the cost and expenses of operating the Farberware stores. Unfortunately, the management of the DTC division had not sufficiently taken into account the longer lead times needed to receive the cookware products they had sourced from the new overseas vendors and consequently, the stores were without a full cookware assortment during the quarter. The Pfaltzgraff stores also did not have full assortments of dinnerware during the period due to the same late ordering issue. In addition, a decision was made by our retail store management to devote a significant portion of the square footage of each Pfaltzgraff store to kitchenware product. We believe this confused our customer base, which was accustomed to visiting a Pfaltzgraff store primarily for its broad selection of dinnerware and other tabletop products.

In August, once the results of these missteps became apparent, we immediately replace the leadership of the DTC division. Our new head of retail, [Bill Margulies], has been in the business for over 30 years and is a seasoned brick and mortar retailer. Bill was formerly a senior executive of Federated Department Stores and for the last several years served as Lifetime's Vice President of Special Projects. In addition, we are strengthening the DTC financial oversight team and bolstering its merchandising staff.

The proper amounts of product are now flowing into the stores and we are correcting the merchandise selection in the Pfaltzgraff stores. We acquired Pfaltzgraff 15 months ago. At that time, we thought we had the right team in place to run the retail operations. We were wrong. However, we have now made the personnel changes necessary to turn around that business.

I would also like to note that we view the Internet and catalog operations as the growth drivers in Lifetime's DTC business over the next several years. We do not intend to grow the retail stores beyond the 84 stores we currently have, but will be focusing our efforts on leveraging the rest of the Internet ordering and fulfillment infrastructure that is already in place.

Just last week, we announced the addition of Fiona Dias to Lifetime's Board of Directors. Fiona is Executive Advisor for Strategic Branding Initiatives to Circuit City stores and was formerly its Executive Vice President and Chief Marketing Officer. In that all, she oversaw all of Circuit City's marketing efforts and had general management responsibility for Circuit City Direct, which includes the Company's e-Commerce, catalog, call center and business-to-business activities. We identified Fiona after an extensive national search. Her expertise will be invaluable in helping us leverage the Pfaltzgraff catalog and Internet capabilities across all our brands, as well as helping us to make the outlet stores more profitable.

Another addition to our team is [Chris Casper], SENIOR Vice President, who was previously in charge of financing corporate development at Syratech. We have added investor relations to his responsibilities at Lifetime, and I am sure many of you will be meeting and speaking with him over the coming months.

With that overview of the third quarter and other recent developments, I would like to turn to our guidance for 2006 and give you some insight into our outlook and growth targets for 2007 and beyond. First, I would like to reiterate that the response of retailers to our product offerings has been excellent. Although we have all seen speculation that consumer demand weakened this year, we are gratified that Lifetime's business has not been impacted. However, because of our acquisitions in the tabletop sector and our purchase of the Pfaltzgraff DTC business, our results are increasingly being driven by the year-end holiday shopping season. Given the growth and profitability our wholesale business has been demonstrating, we continue to expect Lifetime will achieve earnings per diluted share out between $1.45 and $1.55 in 2006. We expect to reach this level of earnings on revenue of approximately $480 million to $490 million.

For 2007, we are very enthusiastic and optimistic about our continued profitability of our businesses, especially as we fix the operation and strategic problems in the DTC business. We have repeatedly said that we think Lifetime should be able to achieve 15% to 20% organic growth in its wholesale business, and we see no reason why that should not prove to be the case in 2007. Further, we have said that such growth should increase our operating margin by approximately 100 basis points. Again, I foresee no reason that should not be achieved.

Looking at a little further, after a thorough in-depth analysis of our business units, our goal is for Lifetime to become a $1 billion in sales business by 2009. We believe we can achieve this largely through organic growth. In addition, we have discussed in previous calls we are in a fragmented industry, which means there are many opportunities for us to acquire companies that fit well in Lifetime's model.

With that overview of the quarter and the recent events, I will to the call over to Bob McNally, who will run through our numbers with you. Bob?

Thanks, Jeff.

Net sales for the third quarter of 2006 or $141.7 million, which is 50.3% higher than 2005's third-quarter sales of 94.2 million. Net income increased 47.3% to $6.7 million or $0.45 per diluted share for this year's third quarter compared to net income of $4.5 million or $0.40 per diluted share recorded for the third quarter of 2005. These results primarily reflect the impact of continued double-digit sales growth and improved profitability of our food prep business, plus the added sales to the Salton business that we acquired in September of 2005 and the Syratech business we acquired in April of 2006. In addition, our third quarter of 2006 earnings per share included a charge to earnings of approximately $0.02 per diluted share from stock option expense.

The $47.5 million increase in net sales in the 2006 quarter includes approximately $42.6 million of combined sales for the Salton and Syratech businesses. Excluding the sales attributable to these acquired businesses and excluding the net sales of the Farberware and Pfaltzgraff Outlet stores that the Company closed since September 30, 2005, net sales for the 2006 quarter rose 9.3% to 98.5 million.

In our wholesale segment, the Company's total sales were 120.7 million for the third quarter of 2006, and that's 67.4% higher than wholesale sales for the 2005 period. Excluding sales for Salton and Syratech, wholesale sales were $78.1 million. That is 8.3% higher in the 2006 period.

Sales in our food prep categories grew 15.7% in the quarter due to the significant sales growth in KitchenAid and Farberware branded kitchen tools and gadgets and KitchenAid and Cuisinart branded cutlery, offset by lower sales of home entertainment bakeware products. Sales of Pfaltzgraff dinnerware were lower in the 2006 quarter compared to the 2005 period as the Company terminated the low margin contract business that was included in Pfaltzgraff's results in 2005. And we also realigned the distribution channel for this important brand, which also resulted in a loss of sales with certain customers.

Our total direct-to-consumer sales, including Pfaltzgraff Outlet stores, the Internet and catalog operations and the Farberware outlets stores, were $21 million for the 2006 quarter compared to $22.2 million for the 2005 quarter. The decrease was due primarily to fewer outlet stores operating in the 2006 period as the Company closed a number of unprofitable stores earlier in the year and lower comp store sales. The lower comp store sales were due principally to shortages and misalignment of retail inventories and failed execution of merchandising initiatives that Jeff has already discussed.

Cost of sales for the three months ended September 30, 2006 were $83.9 million, a 57.9% increase over cost of sales of $53.1 million for the comparable 2005 period. Cost of sales as a percentage of sales for the wholesale segment increased to 61.6% in the 2006 quarter compared to 60% for the 2005 quarter. The lower gross profit margin was primarily attributable to the net impact of the Syratech business acquired in April of 2006 as these products generally have lower gross profit margins than the Company's other major product categories. That offset improved margins in the Company's food prep categories. The improved gross profit margin in our food prep business was attributable to product mix.

In our direct-to-consumer segment, cost of sales as a percent of sales increased to 45.6% in the 2006 quarter, and that compares to 45.6% in the 2005 quarter. The higher cost of sales to net sales percentage reflected the negative impact of some aggressive sales promotion in the outlet stores in the 2006 period.

Distribution expenses were approximately $14.1 million in the third quarter of 2006 compared to $11.1 million in the third quarter of 2005. In our wholesale segment, distribution expenses as a percentage of net sales improved to 9% in the 2006 quarter compared to 12.6% in the 2005 quarter. This improved relationship was due primarily to the impact of the Syratech business that was acquired in April of 2006, which business has a much higher proportion of their sales shipped direct to retailers from our overseas suppliers than the other companies' major product lines.

If we exclude Syratech, distribution expenses as a percentage of net sales were 11.6% in the wholesale business in the 2006 quarter compared to 12.6% in the 2005 quarter. This is the result of continued benefits of labor savings and efficiencies generated in our main distribution center in Robbinsville, New Jersey.

Distribution expenses for operating the direct-to-consumer business were approximately $3.2 million in the 2006 quarter compared to $2 million in the 2005 quarter.

Selling, general and administrative expenses for the three months ended September 30, 2006 were $31.3 million, and that's an increase of $9.5 million over the expenses for the comparable 2005 period. The Company measures operating results by segment, excluding certain unallocated corporate expenses that are included in SG&A. Unallocated corporate expenses for three months ended September 30, 2006 were $2.4 million compared to $2.3 million in the 2005 quarter. Unallocated corporate expenses for the 2006 quarter include approximately $400,000 of stock compensation expense.

In our wholesale segment, selling, general and administrative expenses were $18 million for the third quarter of 2006, and that's $8.6 million higher than the 2005 quarter. As a percentage of sales, it was 14.9% in the 2006 quarter compared to 13% in the 2005 quarter. A significant majority of the increase in expenses was the added operating expenses of the recently acquired Syratech business and to a lesser extent the higher selling costs associated with our increased sales volume.

Selling, general and administrative expenses in our direct-to-consumer business were $10.9 million in the 2006 quarter compared to $10.2 million for the 2005 quarter. As a percentage of net sales, it was 52% in the third quarter of 2006 compared to 45.8% in the 2005 period.

Income from operations for the quarter ended September 30, 2006 was $12.4 million compared to income from operations for the 2005 quarter of $8.2 million. Income from operations in our wholesale segment was $17.5 million in the third quarter of '06 compared to $10.4 million in the 2005 quarter. As a percentage of net sales, it was 14.5% in the 2006 quarter compared to 14.4% in the 2005 period. Excluding Syratech's results, operating income has a percent of net sales in the wholesale segment rose to 18% in the 2006 quarter.

Our direct-to-consumer segment had an operating loss of $2.7 million in the third quarter of 2006 and that compares to income of $100,000 in the 2005 quarter. The loss in the 2006 period was primarily the result of negative comp store sales in the Farberware and Pfaltzgraff outlet stores due the same reasons as Jeff covered already in his speech.

Interest expense for the third quarter of 2006 was $1.5 million compared to 900,000 in the 2005 quarter. The increase in expense was attributable to higher debt levels.

Our diluted earnings per share calculation for the third quarter of 2006 includes the dilutive effect of the Company's 4.75% convertible notes. The EPS calculation requires that you add back to net income the after-tax impact of the interest from the notes, which amounted to $657,000 for the 2006 quarter. Therefore, the net income used for diluted earnings per share calculation was 7.341 million which is then divided by 16.309 million shares. The 16.309 million shares is the combined total of shares outstanding, dilutive stock options and dilution from the assumed conversion of the convertible notes.

Recapping our year-to-date results, net sales for the nine months ended September 30, 2006 totaled $300.1 million compared to $183.5 million for the same period in 2005. That represents a 63.5% increase. Excluding net sales in both periods attributable to Syratech, Pfaltzgraff and Salton businesses that were acquired since June 30, 2005 and the net sales for the 2005 period of the closed Farberware outlet stores, net sales for the nine months of 2006 increased 19.1%. This sales increase came primarily from the Company's food prep division, in particular significant sales growth in KitchenAid and Farberware branded kitchen tools and gadgets and Cuisinart and KitchenAid branded cutlery.

Income from operations for the nine months ended September 30, 2006 was $12.6 million compared to $12.5 million in 2005. Results for 2006 include an operating loss of $8.7 million for the Company's direct-to-consumer business compared to an operating loss of $900,000 in the 2005 period. Net income for the 2006 period was $6.1 million or $0.45 per diluted share and that compares to $6.9 million or $0.61 per diluted share for the first nine months of 2005.

Focusing on our balance sheet now, at September 30, 2006, our financial condition remains very strong with approximately $158 million in stockholders' equity. Accounts Receivable at September 30, 2006 was approximately $76.8 million. That is $28.2 million higher than at September 30, 2005. This increase is commensurate with the increase in sales we recorded for the quarter, including the added sales volume from the acquired businesses of Salton and Syratech.

Inventory at September 30, 2006 were approximately $166.2 million, and that's $44 million higher than September 30, 2005. The higher inventory levels include $34 million of additional inventory from the recently acquired Syratech business and remainder is for increases to support the forecasted growth.

Property, plant and equipment at September 30, 2006, net, was $36.7 million, and that compares to $28.9 million a year ago. The increase again is primarily related to property, plant and equipment that was acquired with the Syratech acquisition. Capital spending during the first nine months of 2006 was approximately $8.8 million and depreciation expense was approximately $5.1 million.

As of September 30, 2006, the Company had outstanding $75 million of 4.75% convertible senior notes due 2011 that were issued in June 2006. In addition, the Company had a $100 million secured credit facility at September 30, 2006, under which there were $30 million of short-term borrowings outstanding as well as a $5 million long-term note due in August 2009. Total outstanding debt at September 30, 2006 was, therefore, $110 million, including the $75 million of convertible senior notes. That compares to $87.2 million of debt outstanding at September 30, 2005. The 22.8 million increase in borrowings primarily reflect the net effect of $41.9 million of borrowings used to fund the acquisition of Syratech in April 2006, offset by the paydown of debt using the $35 million of proceeds from the Company's sale of 1.733 million shares of stock this past November and then additional borrowings to fund operations and working capital.

On October 31, 2006, the Company amended its $100 million senior secured credit facility, increasing the size of the facility to $150 million and extending its maturity to April 2011. The amended facility also has an accordion feature that allows it to be further increased to $200 as fewer and less restrictive covenants and provides the Company with more favorable pricing.

As was noted in our press release this morning and as Jeff has said, our annual sales and earnings guidance for 2006 calls for total sales to range between $480 million and $490 million and diluted earnings per share to total between $1.45 and $1.55.

Now, I would like to open the floor to questions.

(Operator Instructions). Steve Colbert, Canaccord Adams.

Looking at the direct channel, I know you mentioned in your talk, but the [missing] line inventories and merchandise shortages--can you give us any more specifics about what was unsuccessful and what has changed going forward in that division?

What was unsuccessful is that we terminated the agreement with Mier and we had to replace it with merchandise in the stores, and the management to the stores did not replace the merchandise or ordered it for delivery that was much too late, late in the quarter, number one. Number two, they changed the Pfaltzgraff store format to be 40% housewares, kitchen prep products, and that really confused the Pfaltzgraff customer, who was walking into the store looking for dinnerware and accessories for dinnerware, which is what the stores had been successful with before, and just in general, late ordering of product so that the stores basically had empty shelves, and empty shelves don't do us any good.

Now, what we've done to correct that is we have replaced the management. We have put in a truly professional manager into that division after consulting with the outside consultants. We have also improved the ordering process. The stores are now getting into stock; they are not fully in stock, they are getting into stock in cookware. They are getting into stock in dinnerware. After the Christmas season, we will reset the Pfaltzgraff stores back to what they are supposed to be. We cannot do them now; it would be more damaging to do them now than anything else. But we believe we have put the corrections in place that are necessary and we believe we can make a profit in that division.

So basically, for Q4, you are still going to have kind of the resets that are not happy with, and you are still getting things back into stock? Is that fair to say?

That is correct. That is absolutely correct. It is improving, but it is certainly not anywhere near where it should be.

Fair enough. Then looking at expenses, any update you have? I know there was some talk about consolidation of facilities, particularly out West, from some of the recent acquisitions and the overlap that you had.

We have only been able, at this point, to close one facility out West and consolidate one of them. We still have leases from the acquired companies that we have to live with for another period of time, for about another year, a little more than a year. But we are actively working on a distribution strategy that is right for a company that is trying to grow to $1 billion by 2009.

Then are you seeing any price pressures in Asia, and are things heating up, or is it relatively stable, and what are your thoughts kind of regarding that?

There were some materials that we deal with that did go up in price. We have given some minimal price increases overall, but we have passed them on. We have been able to pass them on. The retailers are much more accommodating because of the situation. They know what is going on with material. It is not a secret. We do not expect any change in our margins. Let's say put it like this, any negative change. In some of our businesses, we do expect some positive changes, actually. But we are not anticipating this year nor our next year any negative changes in margins in our business.

Finally, not to sound like a broken record here, but can you talk a bit more about the consumer environment? Obviously Wal-Mart and others have commented on the softer flat consumer. I know you had mentioned you have not seen an indication yet, but your thoughts going forward in that regard?

We have definitely not seen any indication of a softness in the sectors that we are in. I guess, overall, there obviously are in some areas. We have not seen them. Our products seem to be performing very well in Wal-Mart and in any other customers that shares information with us. Our order flow that we are getting from customers is exactly what we expected. As we have said, in the wholesale segments of our business, we actually are running ahead of what we expected. So we do not see any of that.

Gary Giblen, Brean Murray.

Can you update us on a couple of programs that were pending? You had the Macy's/Martha Stewart possible program and also the Food Network, Kohl's initiative?

We cannot comment on either one of those, Gary, not at this point.

Okay, so they are still pending.

We really cannot comment on them. I am sorry.

Okay, sure. Then given the $1 billion objective in 2009, my higher mathematics tell me that 27% compounded growth from '06, so that would entail meaningful acquisitions. So, are they that visible that you would count that into your objective?

No, Gary. Actually, as I said, we are primarily doing that with organic growth. There are parts of our business that are very underdeveloped, especially the newer businesses that we have acquired. We see great growth potential in those businesses, hopefully getting them to equal our older businesses in growth--in other words, the food prep businesses, which are still continuing to snowball ahead in a really tremendous manner.

We completed, as I said, an in-depth analysis of our businesses going down to the--into details way beyond just the divisions in order to come up with the numbers that we have come up with for 2007, internal numbers for 2007, 2008 and 2009. In 2009, we have a real shot of hitting $1 billion with organic growth. It is going to take a lot of work on our part. It is going to take execution, proper execution on our part. But we are focused on heading in that direction.

So what you're saying is you're going to have a few years above the 20% organic growth level because you are still relatively undeveloped in home dec and so forth.

Right. As we have said and we continue to say that we feel confident we can do 15% to 20% organic growth. As you know, we have been doing it, on the high end of that, closer than 20% pretty consistently. We think there is room to improve.

Okay, that is what I'm trying to understand. What is the best, among the many numbers that Bob presented, what is the best wholesale organic growth member that we should look at for this quarter? For the third quarter, what was the wholesale organic growth?

I think the organic growth in the food prep business, as I said in my commentary, was 15.7%. That in large part was organic growth for us. Pfaltzgraff, because it was in most of the third quarter of '05 and all of '06, was a negative sales comparison, as I said in my comments, because we discontinued the contract sales that Pfaltzgraff had with some people, and we realigned the distribution channels for the brand. That naturally came--or came in with lower sales for certain customers. So if you wanted to combine the food prep business of 15.7% and add the negative with the Pfaltzgraff, our growth is probably around 8% organic growth on a pure calculation.

I understand where Pfaltzgraff is a different animal, but the rest of it would be captured by the 15.7%.

That is correct. That's--as you know, that has been the engine this year and it is planned to be over 20% or at 20% for the year, for the whole year.

A couple more--the 30% of the store which had been filled by Farberware, you know, the agreement changed in June, so is that 30% now well under control? That's a sort of a separate thing that you deal with other than the other issues in retailing.

No, we are still not fully stocked in that space. We are getting there. It is getting better consistently, but the merchandise was ordered much too late.

So that is part of the problem there.

It is. That is definitely a significant part of the problem with the losses that we are having in the outlet stores is that is a significant part of it.

Was there recognition of income from your role as Talking Horse for the wherever bid in this quarter?

It is negligible.

Well, you know Wall Street. We always want to know what the number is. Can you tell us what the number is?

No, I actually do not have a number with me, Gary. I think, with all the legal fees and all the other things, I am not sure there is a dime of income.

Okay, it all nets out so it's virtually-- okay. I got it. There is offset.

Absolutely. You got finders fees, you got legal expenses, you got accounting. We did a lot of due diligence on it that cost us money.

Okay. Since you've consolidated a couple of the California DCs, what is the annualized savings from that roughly?

We do not have it, Gary, but it is not significant yet. It will not be significant until we are in California into one facility, and we are a year away from that.

The last question is what are the milestone that you are managing to internally to make sure the retailing is normalized by the end of the year?

What do you mean?

In other words, what are the key things that--I mean, in your desk drawer, you are probably looking at a few things that you're really tracking to make sure that your retail,--that your direct-to-consumer segment is rectified by the end of the year. So are you looking at in-stock position? Are you looking at gross margin because you want to avoid excessive markdowns? What are the key things to think about there?

Obviously, comp store sales are important. We have to increase the sales per store topline. Our margins are good in that business. They are very good. We certainly watch them to make sure that they do not deteriorate and it doesn't look like there any indication of that whatsoever. The key is for us to get topline sales up, and basically it comes down to comp stores, comp store sales.

How did you manage to do such a good job with inventory, which was up 37% versus the 50% increase in total sales? I would imagine inventories being stacked up to the rafters in the stores and all that, but--.

That really is--the inventory--it is not all the improvement in our turns, I can tell you that. Overall, the Company's turns will probably improve. Parts of the business, especially part of the acquired businesses, are more direct shipping from the Orient direct to customer, and that could change some of the numbers. I think at some point maybe on the next call, maybe, we can try to break that down and explain it a little bit better. But there--for instance, in the home decor business, it is primarily direct shipping. We do not carry a lot of inventory, which we would not want to carry, especially when we are changing the assortment every 90 days. We could really get ourselves into trouble inventory-wise. So it is direct shipping to customers for the most part. So it makes the overall Company's turns look like they're improved. We are focusing on improving our turns, but don't look as somatic--if you looking comparable business, it is not as dramatic as it looks.

Right, because the category mix is driving the inventories on (indiscernible) business basis. It's not, I got it.

Yes, but we are getting improvements, but nothing like what is appearing on the surface.

Yes, it looked pretty (indiscernible) on the surface. Okay, thank you very much.

David Cohen, Midwood.

Nice quarter. If I may, I'll ask a couple of questions. One, I'll call it the core, Bob, that you mentioned, the 15.7% growth, what are the dollars last year or this year that you are looking at, that sort of core food prep?

We have not really broken out the numbers by category.

Well, call it--what I think you said, I thought, excluding Pfaltzgraff, Salton, Syratech, that that was $78 million. Is that right?

Hold on a second, let me--yes. I am not sure. Hang on a second. You're right. I said excluding sales to Salton and Syratech, sales are 78, right, or 8.3% higher.

All right, so that number is 8.3% higher.

Right, because it includes Pfaltzgraff. So we are dealing with--the two things that make up that are the food prep business and the Pfaltzgraff wholesale business.

So that is where it is dragged down by the decline in the Pfaltzgraff.

That is correct.

Just everyone understands, it's the Pfaltzgraff business, but it is not Pfaltzgraff, really. The Pfaltzgraff Company had a business with a couple of contract customers that were unbranded and they were entirely unprofitable to Pfaltzgraff. We elected not to do that business. We do not do business just for the sake of doing business. We are, as you know, a margin driven company. So we elected to go out of that business and it is affecting us because there was inventory and sales in the same period last year, but no profit.

Did you say that in highlighting the core food prep business that was up 15.7%, that the target for 2007 is still 20% for the year?

It is between 15% and 20% for 2007, 15 to 20. This year, it looks like it will be 20%, possibly even more. Next year, what we are saying is 15% to 20%. Our internal target is not 15% to 20%. It is higher. But what we are saying we are comfortable with is the 15% to 20.

I got you. When will you think about providing guidance around next year for the fourth quarter or before that?

Probably in January.

In the guidance that you maintain for EPS for 2006, what is implied in terms of, for an EPS perspective, what is implied for the weighted average share count for the year? If converted to (multiple speakers) if you could save us all the effort there.

Yes, it should be about the same as it was this quarter, maybe up 100,000. So use 16.4 million shares for the fourth quarter.

For the fourth quarter, not for the--so balance that with the first half's 13 and change or whatever, right?

Yes, you're probably somewhere around 14.8 million or something like that.

Okay. I know, Jeff, you talked a lot about the considerable investment you have made in your infrastructure on the wholesale side to support a bigger business. Can you quantify for the annual--I mean, all the merchandise managers, the assistant merchandise managers, all that talent to manage this portfolio of brands--can you quantify that investment?

We have not added that many people this year. Don't get me wrong. In the newly acquired businesses, of course, there are many people coming on as we acquire companies, but it is not that we have added that much. We do not try to go that far in advance. We are looking at the business growth. It does not mean we have to layer on that percentage more people. What we're doing is we are looking at all of the different components of our business, whether it be finance, product development, sourcing, etc., to see what we need for next year, not what we need for 2009 yet. When we look at distribution strategy, we do have to look further out. But we only--we are looking further out. We are not trying to build empty warehouses and keep them running for the next few years.

Okay, so when you look at the wholesale business' G&A increase of 8.6 million, what are the components of that? Where did the increase come from?

As I said, David, the substantial majority of that increase is Syratech operation.

The newly acquired business, in other words.

David Cohen I know you have highlighted the issues in the outlet stores, but what can you tell us about catalog and Internet and the level of profitability that you are experiencing there, and the level of growth that you are seeing there?

We have not broken that out, but that is certainly not the sick part, let me put it this way. Right now, we are focusing on the other part, but we are looking for, over the next several years, to get the growth out of the catalog and Internet business.

At the current scale, do they make money? Are you profitable (multiple speakers)?

I would say yes. We would have to break it out and really get a little deeper into some of the people that overlap. There is quite an overlap of people, overlap in the distribution facility. We will try to do a little bit better job on that going forward so we can break it out better for you. Just so you understand it, as that business increases, the SG&A there does not go up.

Right. That is why I would think some scale and that is why I am asking if you are already at the scale where you are profitable and could get a lot of leverage on that. Do you think you are?

It would be very close. It would not be the most profitable part of our business, but it certainly is not a sick business.

From a seasonal borrowing perspective, would there be more seasonal--significantly more seasonal borrowing needs than the September 30 level of short-term borrowings?

Yes, the high point in our borrowing is generally October 31--from a quarter end September 30, but on month-end, it does increase all the way up to October 31. The low point is probably either January 31 our February, depending on the build of inventories for the new year.

The last question--it is not question, but Bob, you gave a lot of detail around the economics of the different businesses across cost of goods and distribution, SG&A. IF that staff were in the press release, that would make life a lot easier.

We do put out a very detailed 10-Q.

I know. But you already have the information, so it would save you a lot of time reading it.

No, you're probably right. We should look at that.

Howard Goldberg, Morgan Joseph.

I am wondering if you could talk about your satisfaction with the Syratech business on kind of a stand-alone basis, how it has met your expectation so far this year. I know it's kind of early and what it is going to take to speak about it I think much more positively in the quarters ahead.

It has met our expectations. It is doing well. We see a tremendous opportunity to gain market share. Syratech is basically--there's three businesses or really two businesses within that company. One is what we call the metals business, which is basically flatware and products related to flatware. We see considerable opportunity to gain market share using many of the brands we have. We just came from a market that--tabletop market which really showed well. So we are expecting very good things from that division. The home decor, which also includes the frame business, also is going very much in the right direction and doing well and showing opportunities to grow, especially in wall mirrors and more than anything else, wall decor, wall mirrors seem to have a tremendous potential. The other parts of all the business are also very strong. The lighting business is strong and the ornaments that are done for outdoors and so forth are also very strong. So the businesses there are heading in the right direction and definitely have met our expectations for this year.

In the direct-to-consumer business, if the math adds up, the operating loss for the first nine months of the year is just under $9 million, and you have said that you expect to lose money in that business for the year. Can you quantify in any way what your marching orders to the new management of that business might be, what you would be comfortable providing and sort of ballpark profitability guidelines for 2007?

In 2007, we would hope to make a profit in that division, which will be quite a swing. From there, we will move from there, but really the goal is to make a profit in the division in 2007. We are diligently working in that direction, I can tell you that.

Is there some bonus amount that management would be geared towards a minimum threshold, anything that you could provide as far as (multiple speakers) performance?

I can't give you the numbers, but there will be--there is an incentive for the management of that division to make a profit. I can tell you that.

My last question has to do with this additional financing that you have put into place. I know you have got to be opportunistic as far as potential acquisitions come long, but do you see this as something that you would use in an meaningful way in 2007 or is there something that might hold you back from using this additional leverage sooner rather than later?

Nothing would hold us back. We are opportunistic in acquisitions, as you know. We look at many, many companies. We certainly don't buy them all, not even a fraction of them. It all depends on what comes along and what the value of the Company is, what the price of the Company is and so forth. We are not ready to do anything.

Thanks. Good luck.

[John Hawken], Whitney.

One quick question--you guys have articulated sort of 15% to 20% organic growth. Can you just give us a rough sort of sense how that breaks down between adding new channels versus maybe adding shelf space and existing customers versus adding new products and brands?

It is all of those things, actually. There is no way to break it down because it all goes together. It comes from more than anything else getting more shelf space within the customer base that we already have. Second to that is possibly getting some new customers, but that is quite far down on the list. It is mostly getting shelf space by having better products than other people do under better brands.

Great. Can you spend a second just talking about private-label? Obviously, we are seeing that increase across the board in retail. If you just break down your big categories, where is your biggest worry I guess from a private-label perspective?

First of all, it is not a worry. We are involved in number of them, just so you know. One of the strengths--actually, two of the strength of the Company, one is brands. I will put that aside. Obviously it does not mean a thing in private-label. The other two strengths of the Company are having 90 in-house designers and having by far the best overseas sourcing capability in our industry. We have 150 professionals overseas that work for the Company and 90 designers.

So what happens is that when a retailer wants to do a private brand in the categories we are in, they come to us. They want us to bring them to market. So we are involved in those. We know how to design it. We can design and much quicker than anyone else can and we can bring the product to market much quicker than anyone else can. We are involved in many of them. I don't want to get into the details. Sometimes it's contractual; we're not supposed to discuss them. We are involved in them and it is not something that we fear in any way.

And just ballpark, what would be your margin on a branded product versus private-label fully loaded?

We will not give that out, but I can tell you we do not do business without making money. We are not--that's why we gave up significant business in the acquired Pfaltzgraff. It was a business that we saw no way in the future of making a profit, and we just walked away from it when we acquired the company. We are here to make a profit. We're not here to do business without making a profit.

J.D. Padgett, Boston Company.

Nice results. One question was Syratech--of the 42.6, how much of that were they?

Roughly $40 million.

The margin performance in the wholesale business I think you said was about 18% margin, excluding Syratech. That is incredibly impressive, given that I think you're including the Pfaltzgraff business in that now, right?

No. Yes, it does, you're correct. It did include the Pfaltzgraff. But Pfaltzgraff, that is the Pfaltzgraff wholesale business, which was not that great. But yes, this quarter, we did have a substantial increase in operating margin because this quarter, we also got some improvement across the sales because we actually, in our food prep business, shipped more of the higher margin products like kitchenware and the cutlery and less bakeware products, which have a lesser margin. So it was a product mix issue, not anything more than that. It ended up bolstering that operating profit line.

That's impressive results. Is that something, as you look into '07, you hope to build on?

We focus on building our operating margin, obviously. We redesign products in order to make them more profitable also by changing materials.

Another question was just on the retail business. I think another caller had asked. Through the nine months, it was close to a $9 million loss. What do you think for the full year we would see in loss there? What would kind of indicate to you that you've successfully gotten that business back on track?

I think we are, at this point in time, I think the loss in that business will exceed $5 million for the year.

If you come in somewhere around that range, then you are kind of encouraged as you look into '07 and confident that things are in fact restored?

Things are getting better on a daily basis. But we are going into the best-selling season for that business, where of course it would make a profit. The goal is to make sure that we make money in the third and fourth quarter. In that business, we don't anticipate making a profit in the first or second quarter. Everyone should understand that. We have said that a number of times. But we certainly do not expected to lose as much money as it has this year either in the first or second quarter.

I guess, with respect to that, you talked someone about seasonality as we start to think about the shape of earnings for next year. Would you expect for the Company overall that we would see losses in the first or a maybe the first half and then strong profits in the back half or how do you kind of think about that from a high-level?

We certainly are not in a position yet to comment on our quarterly results for '07. We haven't even put our plans together. But it is likely the Company will lose money in the first half.

I guess the final question was I think you had talked from a high level about the operating margin expansion target for next year. (indiscernible) what 100 basis points would be--or maybe that was more of a long-term target.

No, it was for next year.

Okay, 100 basis points. It seems like if you can turn the retail business around, that alone could be the 100 and then I suspect there is probably improvement in the wholesale business as well.

We would answer that by saying we break our business down into a number of different businesses. Every one of those will have improved operating margins.

When I said, in my prepared statement, the first statement, that we should be able to achieve 15% to 20% organic growth, which would give us the 100 basis points, that was for the wholesale business.

Okay. For the wholesale business, you think you can--?

Sorry, that is company-wide.

The wholesale business grows 15% to 20% organic?

That's right.

And company-wide 100 basis points of margin expansion.

That's right.

But clearly, there is room in the wholesale business to continue to expand margins there and you can get the retail business back to profits or breakeven next year, that is quite a feat as well.

That is correct. We do feel that.

Gary Giblen, Brean Murray.

Just on the amended credit facility, what would be the average borrowings during the year and then how many basis points are saved in the step-down in rates that you've achieved?

I can't answer the borrowings because we did not do our projection for next year. I would say about you can figure 100 basis points improvement. We've really got a solid deal. I think the banks recognize the solid financial condition of the Company, loosened up all its covenants, which I think was appropriate, but it also underscored the Company's position. I would tell you one other thing, that we are expecting not to be a borrower at December 31 other than the $75 million of convertible notes.

Okay, even short-term working capital drawdown?

That is our projection at this point in time. It shows we will be in a net cash position.

You mean throughout '07, not just (multiple speakers)?

No, at December 31. Gary, we are certainly a borrower--a working capital--I mean, think of what I just said. We lose money in the first six months. We have to support operations as well as increasing the inventory. So we are a borrower, certainly, running into the first quarter.

I just want to make sure (inaudible) understanding. Okay, well, it sounds like a good deal. Thanks very much.

[Rick Federman], [Federman] Investment.

Bob, the SG&A number for obviously for the nine months is, I mean, for various reasons that you mentioned is a little on the high side. Do you have a number that would be a better number to use, let's say starting next year?

I really do not have that kind of detail to talk about right now, no, for next year.

Is it reasonable to think that it would be noticeably under the 26 and fraction number for the nine months?

You mean as a percent of sales?

As a percent of sales, yes.

For the whole year, yes.

I am talking about that number on an annual basis.

On an annual basis, that number is going to come down this year. So the SG&A as a percent of revenue will certainly--is lower in the fourth quarter than it is through the first nine months, so annually, that number will be lower than the 26% that you said. Year-over-year, we should have improvement coming from SG&A.

Okay. Realizing the inventory went up noticeably less than the revenue, are you comfortable with inventory at current levels?

Yes, I think as a company, company-wide, yes we are. I think we have talked about some shortages in the direct-to-consumer business but from a wholesale business, they are in good shape and we continue to improve our turns. So we are--are we totally pleased? No. But we look for improvement and we are getting improvement every year.

Thank you very much and good luck going forward.

David Cohen, Midwood.

You guys highlighted distribution as an area where there is the potential for taking out the structural cost that are there, given how spread out your facilities are and many you have. Are there other areas of the business where you actually think you are going to take out cost or is it more the leverage you're going to get is going to come from growth?

I think more of the leverage from growth in other parts of the business. In distribution, there is certainly a considerable potential. We are also trying to rationalize some of our showrooms to make sure that we do not have excess showrooms in places that they are not necessary. So, there is some potential there also.

But the infrastructure you have for the different businesses, Syratech, the Lifetime businesses, reflected in your SG&A, that is a base that--that is the appropriate base?

We always look at it. We're the kind of company that believes in looking at everything every year. We certainly, where necessary, we will make changes. But we also--though we might be taking away from some areas in order to grow, we might be adding two others. Certain investments, like investments in additional designers, are very productive for the Company. So where we have the ability to add more designers, we will add them because the payback is very quick. So I guess it is a mix on both sides. There are areas that we find that we can reduce some personnel and some overhead, and we will do that.

Thanks, guys. Good luck.

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

Thanks again, everyone, for joining us on this morning's call. I hope we have shown you that we have taken many steps to position Lifetime to realize its full potential and the full potential of our strategy. We feel good about our company's prospects, both for the coming months and for the long-term. We look forward to giving you another update after the fourth quarter. Thank you.

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