Lifetime Brands Inc (LCUT) 2006 Q4 法說會逐字稿

Welcome to the Lifetime Brands Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded March 6, 2007. I would now like to turn the call over to Ms. Harriet Fried of LHA. Please go ahead, ma'am.

Good morning everyone and thank you for joining Lifetime Brands fourth quarter 2006 conference call. With us today from management are Jeffrey Siegel, Chairman, President and CEO, and Robert McNally, CFO.

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 constraints or difficulties, the results of financing efforts, the effects of the Company's accounting policies and other details contained in the filings with the S.E.C. The Company undertakes no obligation to update these forward-looking statements.

With that introduction I'd like to turn the call over to Mr. Siegel. Go ahead please, Jeffrey.

Thank you, Harriet, and good morning everyone. 2006 was year of considerable progress for Lifetime but it was a year of transition when one of our most important tasks was to bring together multiple parts of our business, most notably those we acquired from the Pfaltzgraff company and Syratech and to apply Lifetime strategies and strengths to them. We've made a lot of progress toward those important goals unifying our design, sourcing and sales functions as well as taking the first steps towards consolidating our warehouses and accounting functions. But we also encountered some significant challenges. Before I talk about those challenges and our plans of rectifying them in 2007 I will summarize the many strides forward that we did take this year.

First, I'd like to emphasize that our core wholesale business did well in 2006 achieving an organic growth rate of approximately 14%. As you'll recall, our wholesale business operates in three general sectors; food prep, tabletop and home décor. Food preparation, which includes our kitchen ware, cutlery, bakeware and pantryware lines, did especially well during the past year. As I have mentioned in past conference calls, this is our oldest, largest and most profitable business and the strength continued in 2006 driven by both new products and expanded retail placement. Our Farberware, KitchenAid and Cuisinart branded products grew at an excellent pace and we're highly encouraged by the first rollout of products under the Pedrini brand.

Our second largest wholesale business is tabletop, which includes dinnerware, glassware and flatware. This is a much newer business for Lifetime and one we expanded considerably in 2005 when we acquired the Pfaltzgraff brand as well as the Calvin Klein and other key Tabletop brands from Salton. The addition of Syratech's flatware business in 2006 added other key tabletop brands including Wallace, International Silver, Towle and Tuttle. One of our goals for the year was to reposition our expanded array of tabletop brands in line with Lifetime's basic strategy of having the aspirational brand for each level of trade in every category that we compete. While brand repositioning invariably creates some short-term negative comparisons, we believe having a more defined brand strategy will deliver the most value for each brand longer and longer term and we feel we took the right steps for this business during 2006.

In our third and newest wholesale business, home décor, which is comprised of wall décor, non electric lighting, seasonal and the picture frame businesses we acquired from Syratech last April, we focused on increasing placement in major retailers as well as bolstering their category management and product development staffs. This is a business that is design driven and, as many of you know, design is one of Lifetime's key competitive advantages.

Moving from a discussion of the year overall to more specific discussion of the fourth quarter, as we frequently told investors, Lifetime's recent acquisitions have significantly increased the extent to which our results are driven by the year-end holiday shopping season. While our business at point of sale was very strong in this year's fourth quarter, many retailers concerned about overall sales falling off took a more cautious stance with respect to the inventory levels in all product categories. Although orders did pick up in the closing weeks of December, when in fact we reached a very impressive level, it was too late to fill those orders and we were unable to attain the full level of sales we had expected. It's important to note that though more than anything else, sell through of our products to consumers continued at a very strong level through this period.

Now let's turn to our direct to consumer segment. Though it's a much smaller part of our business, it is nevertheless crucial to get it right so Lifetime can reach its full potential. This segment performed far below our expectations throughout the year producing a sizable loss that acted as a drag on the Company's overall results. In talking about our direct consumer business it's first necessary to distinguish between two components. First, the Internet and catalog portion and second the outlet retail stores. We believe the Internet catalog portion of the direct to consumer business is an important but still underdeveloped part of our enterprise and we are conducting a national search for a senior level manager to bring this business to its full potential. We've identified several highly qualified individuals and we hope to have someone on board shortly. We believe that that business has as strong bottom line potential for Lifetime.

The serious issues arise from our chain of 83 Pfaltzgraff and Farberware retail stores. I mentioned at our last conference call that the previous management of the direct to consumer division had not sufficiently taken into account the longer lead times needed to receive the cookware products that they sourced from a new overseas vendors and that the stores were consequently without a full cookware assortment, which did continue well into the fourth quarter.

I also mentioned that our previous retail store management had decided to devote a significant portion of the square footage of these Pfaltzgraff stores to kitchenware product. This confused our customer base, which was accustomed to visiting Pfaltzgraff stores primarily for their broad selection of dinnerware and other tabletop products. Once these missteps became apparent in August we replaced the leadership of the direct to consumer division, strengthened our financial oversight and bolstered its merchandising staff. However, the new management could not implement the many changes that were needed by year-end. It was just too much and too late in the year and, while direct to consumer was profitable for the fourth quarter, it was by no means enough to offset the significant losses that mounted during the first nine months of the year.

I'd like to assure you that we recognize the severity of the problem. We recognize what's causing the problem and that we are aggressively taking steps to turn the retail store business around. The areas that need improvement to return the outlets to profitability are increased sales per door, higher margins and better control of SG&A expenses. So far we've made great strides in improving margins and we're actively addressing the other two issues. We have a long way to go but you can rest assured that the situation is receiving our utmost attention. Our current projections foresee great improvements in the operations of our outlet stores in 2007. However, we have taken a conservative approach in our financial forecasts. That said, Lifetime has many exciting plans on tap for 2007 and we believe we are well positioned to grow as a result of our traditional strengths. Based on detailed reviews of our business with our largest customers, we are looking forward to another year of organic revenue growth in excess of 15%. In addition, our financial performance in 2007 will benefit from savings in operational expenses as we continue to integrate the businesses that we acquired in 2005 and 2006.

Let me just share a few of the most important initiatives with you so you can fully appreciate the basis of our confidence. First, a number of our major retailers have already confirmed Lifetime's products will receive considerably more square footage in their stores in 2007. Part of this has to do with private label lines we are rolling out at two major customers as well as increased placement in our current accounts of Farberware, Pedrini, Sabatier, Cuisinart and KitchenAid lines. In addition to improving our position at the major retailers where we already do sizable business, we're expanding our business at strong regional chains such as Publix, Safeway, Belk, Voscogs, Foodline, Fred Meyer and The Bon-Ton.

We recently secured a license for the Cuisinart pantryware category and will be rolling out a new line under the Cuisinart brand with a major retailer in the third quarter. This is the period where most of our new products by the way. We are again significantly expanding the number of products Lifetime will introduce during the year. In 2006 we rolled out approximately 3,000 new products. In 2007 based on our current monthly run rate of over 300 new products, we expect the number to be closer to 3,600 for the year. As I said in the past, there is not another company in our industry with the resources to match our 90 person internal design staff.

And our new product capabilities were also recently enhanced when we opened our fifth innovation center in Shanghai. We also recently opened our new expo center showroom in Garden City. It allows us to have a continuously running trade show with advance presentation techniques showcasing all of our businesses. In one visit to our expo center a retailer can now see how a full range of food prep, table top and home décor products, which is the equivalent of visiting 9 different companies. We're seeing a significant increase in the number of retailers coming to visit us now that we're able to display all of our business under one roof. We're also finding that they spend much more time with us than they previously did when they visited us. We have become a much more important destination for our customers.

Finally, as we have often said, there are many promising acquisition opportunities in our industry. We're focused on the organic growth as a Company. However, we are well positioned to acquisition and quickly integrate companies that have the potential to be accretive to our earnings. We are interested in acquiring companies that offer both short-term and long-term profitable growth for our Company. Robert, I'll turn it over to you.

Thanks, Jeff. Net sales for the fourth quarter of 2006 were $157.3 million and that's 26.4% higher than 2005's fourth quarter sales of 124.4 million. Net income increased 30.9% to $9.5 million or $0.62 per diluted share for this year's fourth quarter compared to net income of 7.2 million or $0.60 per diluted share recorded for the fourth quarter of 2005. The increase in net sales for the 2006 quarter includes approximately 37.6 million of sales for the Syratech business that we acquired in April 2006. Excluding sales attributable to this acquired business and the net sales of the Pfaltzgraff and Farberware outlet stores that the Company closed in early 2006, net sales for the 2005 quarter rose 1.2 % to 119.1 million. In our wholesale segment the Company's total sales were 127 million for the fourth quarter of 2006 and that's 45.2% higher than wholesale sales for 2005.

Sales in our food prep category grew 5.3% in the quarter and that was due to increased sales of KitchenAid and Cuisinart branded cutlery and Farberware branded kitchen tools and gadgets offset by lower sales of bakeware products, primarily silicone bakeware products. Sales in our tabletop category excluding Syratech 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 2005 numbers and we also realigned the distribution channels for our major brands in this category, which also resulted in a loss of sales with certain customers.

Our direct to consumer sales including the Farberware outlet stores, the Pfaltzgraff outlet stores, in our Internet and catalog operations were 30.3 million for the 2006 quarter compared to 36.9 million for the 2005 quarter. This 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 to lower comp store sales. The lower comp store sales were due in part to the lingering impact of shortages and misalignment of retail inventories from prior management and to the impact of planned reductions of the aggressive sales promotions that occurred in the 2005 period. on a consolidated basis cost of sale for the three months ended December 31, 2006 were 91.4 million and that's a 25.5% increase over the cost of sales for the comparable period in 2005.

In our wholesale segment cost of sales as a percent of sale was 62.6% in the 2006 quarter compared to 60.4% for the 2005 quarter. the lower gross profit margin was attributable to the impact of the Syratech business that we acquired in April 2006 as these products generally have lower gross profit margins than the average margins of the Company's other major product categories. In our direct to consumer segment cost of sales as a percent of sales decreased to 39.7% in the 2006 quarter compared 54.2% in 2005. This significantly improved cost of sales to net sales percentage in 2006 reflected the positive impact of our decision to reduce the number of aggressive sales promotions in the business that occurred in the 2005 period.

Company wide distribution expenses were approximately $14.8 million in the quarter or 9.4% of sales and that compares to 11.8 million or 9.4% of sales in the fourth quarter of 2005. In our wholesale segment distribution expenses as a percent of net sales improved 8.2% in the 2006 quarter compared to 9.5% in the 2005 quarter. This improved relationship was due primarily to the impact of the Syratech business, which has a much higher proportion of their sales shipped direct to retailers from overseas suppliers than the Company's other major product lines. Total selling, general and administrative expenses for the three months ended December 31, 2006 were $33.8 million and that's a $6.8 million increase over the $27 million of expenses for the comparable 2005 period. As we said before, we measure operating results by segment excluding certain unallocated corporate expenses that are included in SG&A. And unallocated corporate for the three months ended December 31, 2006 were $3.2 million compared to $2.4 million in the 2005 quarter. In 2006 it included $433,000 of stock compensation expense.

In our wholesale segment SG&A expenses were 17.6 million in the fourth quarter, $5.9 million higher than the 2005 quarter and as a percent of sales were 13.9% in the 2006 period compared to 13.4% in the 2005 quarter. The increase in expenses was solely attributable to the added operating expenses of the recently acquired Syratech business. SG&A expenses in our direct to consumer segment were $13 million in both the 2006 quarter and the 2005 quarter and as a percent of net sales were 42.8% in the 2006 period compared to 35.2% in the 2005 period. The Company's income from operations for the 2006 quarter were $17.3 million compared to income from operations of 12.7 million in the 2005 quarter.

In our wholesale segment income from operations was 19.6 million in 2006 quarter compared to 14.6 million in the 2005 quarter and as a percentage of net sales was 15.5% in 2006 compared to 16.7 in the 2005. Now if we exclude Syratech from our wholesale segment, operating income as a percent of net sales rose to 18.7% in the 2006 quarter compared to 16.7% in 2005. Our direct to consumer segment had operating income in the fourth quarter of 2006 of $900,000 compared to operating income of $500,000 in the 2005 quarter.

Interest expense for the fourth quarter of 2006 was 1.9 million and that compares to 1.1 million in 2005 quarter. The increase in expense was attributable, primarily to higher debt levels. Our diluted earnings per share calculation for the fourth quarter of 2006 includes the dilutive effect of the Company's 4.75% convertible notes. The EPS calculation requires that you add back the net income the after tax impact of interest from the notes, which amounted to $630,000 for the 2006 quarter. therefore, the net income used for diluted EPS calculation was $10.1 million, which is then divided by 16,311,000 shares, which is the combined total of shares outstanding, the impact of dilutive stock options and the dilution from the assumed conversion of the convertible notes.

To recap our annual results for 2006, net sales totaled 457.4 million compared to 307.9 million for 2005 and that represents a 48.6% increase. Trying to get an apples to apples comparison, if we exclude the net sales attributable to Syratech, Pfaltzgraff and Salton businesses that we have acquired since June 30, 2005 and we also exclude the net sales of the closed Farberware outlet stores in '06 from both years, net sales for the 2006 year increased 14.3%. That effectively is what we call our organic growth. This sales increase came primarily from the Company's food prep division, in particular significant sales growth in Farberware and KitchenAid branded kitchen tools and gadgets and Cuisinart and KitchenAid branded cutlery and, again, offset by lower sales of bakeware products primarily silicone bakeware.

Income from operations for the 2006 year was $29.8 million and that's up from 25.2 million for 2005. Again, we measure operating results by segment, excluding certain allocated corporate expenses. Those expenses were $8.9 million in 2006, which includes 1.2 million of stock option expense compared to $7.5 million in 2005, which by the way had no stock option expense. Operating income in our wholesale segment for 2006 increased to $46.8 million and that's 121.5% of sales compared to 33.2 million in 2005, which was 13.7% of net sales. If we exclude Syratech our operating income in our wholesale segment improved to 15.2% of net sales compared to 13.7% in 2005.

For 2006 we incurred an operating loss of approximately $8.1 million in our direct to consumer business and that compares to an operating loss of only 400,000 in 2005. Net income for 2006 was 15.5 million or $1.13 per share compared to net income of 14.1 million or $1.23 per diluted share for 2005.

If we turn our focus to our balance sheet, our financial condition remains strong with approximately 167 million in stockholders equity. Accounts receivable at December 31, 2006 was approximately $60.5 million, 11.3 million higher than a year ago. This increase is commensurate with the increase in our sales that we recorded for the quarter, which did include the added sales volume from Syratech.

Inventories at December 31, 2006 were approximately $155 million , $63 million higher than at December 31, 2005. The higher inventory levels include approximately $25 million of additional inventory from the Salton business that we acquired in '06 and further increases to support our future growth. Property, plant and equipment net at December 31, 2006 was $7.2 million compared to $24 million a year ago. The increase was primarily for capital expenditures and to property and equipment that was acquired with Syratech.

Capital spending during 2006 was approximately $21.7 million, which includes the leasehold improvements, the Company's new headquarters in Garden City , which does include our expo center, expenditures for our new SAP system and capital expenditures related to the 150,000 square feet of expanded space in our Robinsville Distribution Center.

Depreciation expense was approximately 7.5 million for 2006. at December 31, 2006 the Company had outstanding $75 million of our 4.75% convertible senior notes due at 2011 that were issued in June 2006. The Company also had outstanding $21.5 million of short-term borrowing and a $5 million long-term loan due in August 2009 under its $150 million secured credit facility. Total outstanding debt, therefore, at December 31, 2006 was $101.5 million compared to 19.5 million of debt outstanding at December 31, 2005. The $82 million increase in borrowings primarily reflect the use of 42 million to fund the acquisition of Syratech, $21.7 million to fund capital expenditures and additional funds to support increases in working capital. The Company's $150 million Senior Secured Credit Facility also has an accordion feature that allows it to be further increased to 200 million.

As we note in our Press Release this morning, our sales and earnings guidance to 2007 bolstered total sales to range between $540 and $575 million and diluted earnings per share to total between $1.40 to $1.70. While we do not give quarterly earnings guidance I do want to point out the acquisitions Pfaltzgraff in 2005 and Syratech in April 2006 have significantly increased the seasonality of our business. As a result, we expect to report operating losses for the first two quarters of 2007. Some of the major expectations supporting our overall positive view for 2007 are 15% plus organic growth in our wholesale segment, improved operating profit margin in that wholesale segment, a full year's results for the Syratech business and a substantial improvement in our direct to consumer business, although we do expect some operating losses for the year.

Now, I'd like to open up the Q&A.

[Operator Instructions] Your first question comes from Derek Leckow with Barrington Research Associates.

Congratulations on a good finish to a tough quarter. Jeff, a question on your prepared remarks, you said that you expected to see an increase in retail placement of your wholesale product, wondered if you could kind of quantify for that us, maybe give us a sense for how much more space you're going to be achieving there?

Well, it's not across any one customer, Derek. It's across a wide swath of customers and the increased space varies dramatically by customer, so I really couldn't give you a total square footage increase or anything like that. I have no way of doing that. The way we quantify it internally is the amount of dollars we expect to get out of it by customer and I really can't get into each individual customer with you either.

But baked into your 15% improvement guidance there for that--?

Yes. We are very comfortable with it actually. We've gone through. We've already had meetings with most of our major customers. We have a trade show that starts this Sunday in Chicago, our main show the Housewares Show and we have meetings scheduled with every one of our most important customers, significant meetings, sometimes all day meetings. So we're very comfortable and I have to, again, I mentioned our Garden City headquarters and getting the people here, you know it's not a small thing. We're averaging 2 major customers a week here and I could tell you one major customer came last week and it's a regional retailer, but a very strong regional retailer and they brought their entire management team from the Chairman on down and they were here from 8:00 in the morning till 4:45 and we accomplished a tremendous amount with them and our business with them this year is going to double and we're finding that across the board.

We've never had an opportunity, other than somewhat at the trade show, to display all of our products and really work our different businesses with a retailer. This is a tremendous opportunity for us and it's so efficient for a retailer to visit us and visit basically 9 companies in one time versus visiting any of our competitors and spending a day visiting one customer, which is not a productive day. So we basically have an ongoing tradeshow that we seem to be getting a tremendous amount out of that.

Sounds like a smart initiative. Then shifting over to the direct business, you a loss here for the year of approximately I think you said $8.1 million and you expect a loss in 2007 for the consolidated business. Can you break out the impact of the stores versus the Internet catalog business and do you expect that Internet catalog business to be profitable for the year?

We can't really break it out completely because a lot of the infrastructure is the same. So it's very difficult to break it out, but I can tell you that the problem area is the outlet division. The other area though you know it's marginal in profitability if we broke it out we believe, but it has tremendous potential. So we're certainly concentrating on the other side, but we still want to fix the outlet area I mean and we are focused on fixing it. We have a team of people working on it. They've identified every one of the problems. They've come up with very good solutions that we're implementing. We've already, as I said, had a dramatic improvement in margins. We're seeing dramatic margin improvements in that business. Things that were being done a year ago are not being done, as those things were hurting margin, driving some business, but not profitable business. So those things are stopped and we're going in the right direction. I can tell you that.

So you're seeing some progress and also-- I mean if you take a look at the first two quarters of the year, you know expecting some pretty significant losses, you said that the seasonality is more back half weighted. Does the outlet store situation reach profitability let's say in the second half of the year?

In the second half of the year the outlet business will be profitable as far as we're concerned. We're convinced of that.

So that part, yes, okay.

Yes, but the question is making it profitable enough to make up for the losses that we're going to have in the first and second quarter. We're making progress in that direction, but no matter how good we get at the outlet business I do not believe that the first and second quarter are going to be profitable with brick and mortar outlet stores.

Okay. All right, well thank you, very much, for the comments.

Steve Colbert, Canaccord Adams.

I know you touched on this, but could you talk a bit more about the cautious inventories situation you saw in Q4 and what your take was on what was behind the retailers decision to keep inventory thin and then your comments on stronger trends in the closing weeks for the quarter.

Yes. We saw across a large number of major retailers a desire to lower the amount of weeks on hand of product. I'm not sure what drove it in each retailer. You know it's obviously the senior management of the retailer has made these decision. It was not made at the buying level. In one major case it was made in just a broadly done across all levels number of weeks on hand were reduced and for all product, even products that were selling very well they still reduced the weeks on hand. And that retailer even told us that they went too far and reversed-- not completely reversed, but substantially reversed that trend they were getting towards in December, but frankly it was too late to do any good for us, but we haven't seen that continuing.

We're seeing very nice open to buy at retailers in the first quarter of this year. We're not seeing anything like that going forward at this point. You know some of the retailers tell us part of the reason had to do with gift cards and the great acceleration of the sale of gift cards in the November and December period and when a consumer buys a gift card they're not buying a product. They redeem it in January, February and March, but they don't buy a product. And, as you know, retailers can't take that as a sale. That becomes a liability until it's redeemed and the merchandise goes later. So anyway, I think that had some effect on it. I'm not sure that was all of the effect, but I think it had some of the effect.

Okay, sure and looking at the direct channel, obviously we're in the soft portion of the year, but the misaligned inventory and the merchandise initiatives that weren't quite right, are those issues all cleaned up at this point?

No, not completely. We're getting much better at being in-stock in the cookware end of it, which was a serious issue for us. Other areas are in-stock as well, but they are still resetting stores and tweaking them in a way that the consumer would really understand them properly. The Pfaltzgraff stores have to have a very strong tabletop impact. The Farberware stores should have more of a food prep impact. You can cross-merchandise in the stores, but you can't-- for instance, walking into a Pfaltzgraff store you can't just immediately see food prep items and not see the Pfaltzgraff products, the tabletop products. That's being fixed. It's being fixed right now. This is the right time of the year to fix it. It's a slow time of the year anyway, so we're working on that now.

Fair enough and then just continuing with the direct business, you talked about trying to get some increased margins, is that your product mix, or pricing, or how do you get to the higher level?

It's more pricing strategy in the stores. They were taking discounts that were too deep, unnecessarily deep discounts. They were running promotions on those discounts, so basically offering the customer a double discount. It drove business, but it didn't drive profitable business. There was no sense to it really. I mean in the consumer shopping in an outlet environment is looking to buy a product at a savings. That's normal and we can offer a good savings, but there's no sense in offering an absurd savings.

Fair enough, fair enough and then finally, you had a real strong organic growth rate of 14% in 2006. As we look to 2007 I know you touched on this, but where do you see the most opportunity in your business right now?

It's a little more across the board. We still see great opportunity in our oldest businesses, the food prep business, and we expect them to have significant increases this year. We also see great opportunity in the tabletop and home decor businesses. They are newer to us. They're becoming more stabilized within our environment. We cleaned up some of the brand issues that we were having with dinner ware last year and have everything in the proper perspective now for the Company. We see all of those businesses going in the right direction, though it's not going to be in any one place. We're looking for it pretty much across the board.

Gary Giblen, Brean Murray, Carret

Can you give us some color on what was evidently the consultant's recommendation not to divest brick and mortar retail at this point? What was the reasoning?

Well, you know we always look at all businesses to see what's right and wrong. At looking at the plans that the direct to consumer business has after having several consultants look at and look at the business and analyze the business we have a plan that seems to be taking it in very much in the right direction. If they can execute this plan there is no reason for us to exit that business. We believe there is a place for it, but it's a wait and see right now. We're watching it very carefully. We have very strong financial oversight in that division. We're watching things very carefully, Gary.

Got it. The SG&A challenges remaining at brick and mortar, is that due to labor management issues or is it just lack of absorption in sales per door?

It's a combination of both.

Okay, so you should be able to fix the labor pretty readily. That's not a tough one?

Yes. They are working on that. I mean there's a-- we understand that's one of the issues. It's frankly of the three it's probably the least important to fix, frankly. Right now, as I told you, margin wise we are very much heading in the right direction. We see the improvement. We're very happy with the way the margins are going. In the sales-- the one key thing now is to drive more sales. What they call sales per square foot or sales per door it doesn't make a difference. We need to drive more sales without sacrificing the margin. We know that. We have plans to do that. Brick and mortar is very different then traditional retailing. You know it's just a different business, so I think we've identified what has to be done and we have a strong team in place. Hopefully they can get it done.

Okay, got it and then do you have any rough sense of what the 14.3% organic growth would have been if a couple of those big chains didn't change their order flow abruptly?

Well, I think Gary we had been saying all year long that organic growth would approximate 20%, so we stand by that. We probably would have approached 20% without that pullback.

Okay, yes. That is helpful. Can you give us some interest expense guidance for next year because the quarter came in a little higher than I thought on interest expense?

Well, in total we're looking at interest expense somewhere around $4.5 million next year.

Okay.

I'm sorry. I'm sorry. I got the wrong number. Let me make that 6 million please.

Okay. All right, I'll give you the 1.5 million there. I'm sorry, what were you going to say.

No, it's nothing.

And also distribution expense, I mean overall the quarter came in better than what I thought, but the distribution expense was a little bit higher and I didn't quite follow-- you know I understand you were saying that some of the new businesses are shipped direct, well that would help distribution expenses, but why was wholesale higher then I guess on--?

Well, I think, as we've said in the past, think about what we said, our wholesale business grew 5.3%. You know if you're only going to grow 5% you're not getting leverage, so effectively you're distribution expense is not going to come down year-over-year and I would also point out in 2006 we added 150,000 square feet to our Robbinsville facility, so our overhead went up in distribution and we didn't get enough revenue to absorb it.

Yes, okay, I understand. And then finally, on the inventory you sited Salton and then just inventory for future growth, so I mean is it just particular pipeline fill that is creating some extra inventory in there? I mean is the inventory going to come down on a seasonally adjusted basis it would be coming down later in the year?

Yes, it'd be coming down. It's definitely a little higher at year end as a result of the pullback by our major retailers. Since we bring it in from across the seas it's in our warehouse, whether or not the retailer follows through with it's orders, so it is a little higher than we had expected it, but we've also-- my comment was there's a lot of our inventory on the water at December 31 to support some new programs in 2007 as well.

Yes. Okay.

We don't consider-- the inventory is a little high definitely, but there's no problem inventory there.

Right, okay. And finally, I mean what can you update us on in terms of the Martha Stewart potential business at Federated and the Food Network at Kohl's?

We're not supposed to be talking about that.

Okay. I mean going well, in the right direction?

We're going to launch a number of private label programs, Gary-- that I will say-- and those will be all launched in the third quarter, not before the third quarter.

Okay, so just possibly those match up with the two private label programs you mentioned earlier, but we'll leave that undefined. Okay, thanks very much.

David Cohen, Midwood.

My questions been answered actually.

[Operator Instructions] Alvin Concepcion, Citigroup.

With regards to sourcing, are you seeing any price pressure in Asia?

No. Last year we did see some in some areas, but we redesigned an awful lot of products. You know that the benefit of having a 90 person design and engineering staff. We redesigned a large number of products to eliminate some of the problem materials and move to other alternative materials. So overall we are not experiencing any serious problems with materials at all and we don't expect-- as long as things don't get out of hand from they are now we don't expect that to happen this year as well. You know we have so many materials that we use--keep that in mind-- and we have many alternatives to a lot of the materials, so we are able to move to different materials when it's appropriate.

Okay, great and then would you be able to provide any outlook on your SG&A and distribution expense?

Well, I think overall we're expecting distribution expense in all of our businesses to continue to come down as a percent of revenue. I think SG&A has a bunch of different components to it, but if I were to switch and then talk about operating profit, for instance, our operating profit margin we're expecting to improve in our wholesale business despite the fact that with a full year of Syratech's operations their margins will actually decrease in the operating profit margin. Not operating dollars earned, but remember Syratech looses money generally in the first six months of the year and last year in '06 we only had them for 8 months. This year in '07 we'll have them for 12 months.

Okay, great. Thank you.

J.D. Padgett, Boston Company Asset Mgmt, LLC.

I had a couple questions. On the unallocated corporate expense of 3.2 million last quarter, how should we think about that going forward?

If we keep it pure-- I mean that component right now is really just the top management executive group in the Company, the Board of Directors, so unless we redefine it and it's going probably only grow by the amount of salaries that Jeff, Ron and myself get in bonuses.

Okay. There's no plans to add to the executive staff, those kind of things?

At the least we'll have to look at the allocations on that. I mean we have added a Vice President of HR for instance and have got in-house counsel, but right now those numbers, those people are not in that number. It's not going go-- it won't rise substantially out of line.

Okay, so just think about that kind of run rate with some slight growth going forward?

Yes. We prefer not to-- there are some companies that put a lot into that to make the operating income look better. That's really not part of our game.

And then-- sorry to cut you off. What were you going to say?

No, that's okay. I was just going to say, at least the practice we have here is we try to put all of the allocations to each operating division to measure them appropriately.

And then what tax rate are you using for '07?

We're keeping it the same, about 38.5%.

And then just one other thing I wanted to get clarified. I think in your script you were talking about the wholesale business and there was a number, the 119.1 million, what was that?

That was really trying to strip out-- in fourth quarter revenue strip out the impact of the acquisition of Syratech, as well as stripping out the sales of the stores that we closed. So trying to give you an apples to apples comparison of total company wide sales in the fourth quarter.

Okay, so that wasn't for the wholesale business that was for total revenues--?

It was largely wholesale; it also included the Farberware stores that were open both years.

Okay, thanks.

[Clinton Meynard], [Morehead Capital].

Congratulations on pulling through. Just a couple of quick questions, one, on the innovation centers you mentioned in Shanghai, could you just describe how those are used compared to your stateside design centers? How do those function for you?

They're managed by the person we have managing our China operations, who's a highly qualified individual and it functions a bit differently than our U.S. based design centers. It has two basic functions. One of them is interpreting the designs and engineering drawings to a factory. Some of the factories are not as qualified to understand the drawings and to execute them properly. So having a design staff there really it'll shorten time to market.

And secondly, if there's a major project that has to go through-- you know some of our products take a very short time to design and engineer and some are very long. The ones that take longer sometimes it pays to pass off the design to a designer sitting in Shanghai at the end of the day and let him work on it during our night and then pass it back the next day and we're trying to pair. The goal is to pair designers here with designers there.

And the third thing that we do is that we also have graphics capability in Shanghai to, again, adjust graphics. If we design graphics for a particular package and in the final construction of the product the package comes out a different size we need someone on sight to adjust the size of the graphics. Again, that would save a day versus coming back here. So it's a little different than the function here, but very much a compliment to the function in the States.

Great. Thanks, so much, for that. Just one other question, on the announcement about the investment from Jove Partners I didn't know if you could give us any color on who they are, what kind of expertise they are bringing? I had read that you mentioned that they were going to help out with marketing expertise, but there wasn't any real description of whether the group was made up of folks with a lot of background in that area, etcetera and just was wondering if you could give us some color on kind of what your relationship with them is and where you see that heading in the future?

Certainly. They're what I call an active investor. In other words they made an investment in our stock and then they've offered some advice to us and they have some expertise in certain areas and we're very happy to take advice, especially free advice in this case. Jove besides having an investment they also have an operating where they own some companies and they are very expert in the Internet and catalog-- well, Internet business more than anything else and as you know that's something that we're trying to get right and we think has great potential for the Company. So we were very happy to take their advice on some things and they've given us some advice on what a candidate should be and so forth. They also have some people they've worked with in the past that have been on Boards of their companies that were very strong marketing people and we certainly were very much happy to talk to those people and see if they're potential candidates for our Board, which is possible. We like active investors. We like investors that are willing to call us and give us advice. We're very open to advice.

Wonderful. Thank you so much.

[Operator Instructions] Derek Leckow, Barrington Research Associates.

Thanks. I've just got one follow-up question and perhaps a comment if I might. Looking at the quarterly break out for next year, when you have net losses in the first two quarters I guess you would use a lower share count, you would not fully dilute the share count and then, furthermore, in the third and fourth quarters you would then add back the interest component to arrive at a fully diluted EPS for the convertible bonds. Now what-- I'm wondering what that amount should be for next year, what are you using for that?

The amount being, what is the add back of net--?

Yes. Is it like 890,000 per quarter then or how does it?

It's more like 660,000 per quarter.

Six hundred and sixty thousand per quarter, okay and that would only affect quarters three and four I suppose, right, is that correct?

Correct.

You might consider in the future-- the comment is-- just maybe adding this to your income statements or perhaps putting a schedule in the Press Release that kind of outlines that because it is kind of confusing.

We'll consider that. Thank you.

Thank you.

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

Okay, thank you. Thank, again, everyone for joining us on this morning's call. While we need to make significant steps to turnaround Lifetime's direct to consumer business, we are pleased with the progress we've made in many other important areas. We're optimistic about out potential for 2007 and we believe that the many initiatives we're working on will produce excellent results for our shareholders during the year. I'd also like to add that starting this Sunday we have a trade show in Chicago, the National Housewares Association Trade Show, which is by far the most important trade show for the Company on an annual basis and if anyone's in Chicago Sunday, Monday or Tuesday please stop by and see us. Thanks, everyone.

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