Lifetime Brands Inc (LCUT) 2008 Q1 法說會逐字稿

Welcome to the Lifetime Brands' first quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, May 8, 2008. I would now like to turn the conference over to Ms. Harriet Fried. Please go ahead, ma'am.

Good morning everyone and thank you for joining Lifetime Brands' first quarter 2008 conference call. With us today from management are Jeff Siegel, Chairman, President and Chief Executive Officer; Larry Winoker, Senior Vice President and Chief Financial Officer; and Chris Kasper, Senior Vice President Corporate Development.

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 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 effect of the Company's accounting policies, and other details contained in its filings with the SEC. The Company undertakes no obligation to update these forward-looking statements.

With that introduction, I would like to turn the call over to Mr. Siegel.

The first quarter of 2008 was one of the most difficult periods for retailers that I can remember. Given the environment, most retailers cut back on purchases, which had a negative effect on our wholesale business, which was down by about 10% compared to last year. While it may be premature to say that the worst is over, I can tell you that since early April our order flow has turned around, and as of right now it appears that our wholesale sales for the second quarter will exceed last year's.

As the magnitude of the slump in overall retail sales became apparent, many retailers in effect wrote off the spring season and began aggressively to focus on the fall. But we expect retailers to continue to be cautious. The ongoing collaborative planning process between Lifetime and our retail partners leads us to believe that we should have a strong second half of the year. This will be driven by a combination of new product introductions, as well as very strong promotional offerings that can drive retail sales, especially in the last six weeks of the year.

As business slowed in the fourth quarter of 2007 and the beginning of the year, we began working with our key suppliers to develop strong promotional offerings in all of our product categories. As a result, we're in a good position to capitalize on retailers' fall promotions.

As I mentioned in this morning's release, product innovation is especially important during periods when consumer spending is constrained. When business is tough, retailers rely on those vendors who can offer great product at exceptional value. Lifetime offers both the innovation and promotions they need.

With those overall comments on our approach and strategy, let me give you an update on some of Lifetime's key initiatives. First, we introduced our new environmentally friendly kitchenware products at the International Home & Housewares Show in Chicago, and the reception was outstanding.

Eco-friendly products are one of the fastest-growing, most dynamic sectors of the economy. Our products are made from a bio-plastic blend that contains significantly less petroleum than ordinary plastics. Unlike some other materials, they are completely safe to use for food. And though they are dishwasher safe, and will withstand years of use, at the end of their lifecycles the products are also recyclable.

Our first product under the EcoWorld, [EcoLite] and Pedrini Eco trademarks will be available at retail in the fourth quarter. After that we will build on our core assortments by offering products in many of our other categories. Our green productlines have a multibrand strategy, so we will be able to sell them -- be offered to all of our retail customers at every level.

Second, we're making good progress with our launch of Vasconia brand -- the Vasconia brand, one of Mexico's best known brands. In 2007 we identified the U.S. Hispanic consumer as a fast-growing, but underserved segment of the population, and we have developed a line of more than 150 products targeted to this market. Our product offerings cross multiple categories of business, and provide programs to every level of retailer. Placement starts this quarter and has been running ahead of our original expectations.

Third, our entry into the fast-growing category of waste management is going well. We're offering exclusive designs and exclusive features, such as child and pet friendly locking lids, our liner vents that prevent suction between the garbage bag and the liner, and front and back handles and wheels for easy moving and cleaning. We expect these advantages, combined with sleek styling, competitive pricing, and universally recognized brands to put us in the forefront of the category.

I would also like to update you on the progress we're making in our dinnerware business. In the second half of last year our dinnerware business performed far worse than our other wholesale businesses. New management took over in January, and though they were not onboard long enough to make much of a difference in the first quarter, they are on track to move sales up considerably starting in this second quarter. Glenn Simon, the new Division President was put together a first-rate group of experienced professionals to run the business. And they have rightly already gained significant new placements for the second half of the year.

I also want to give you a quick update on some operational matters before turning the call over to to Larry and Chris. In our Direct to Consumer, or DTC, business we completed the closing of the 30 stores we targeted because they didn't make a four wall profit. We expect the closings alone to improve profitability by about $2 million. Our remaining stores are doing well. Same-store sales in continuing locations were up 3.3% in the first quarter and were up about 2% in April. The Internet and catalog business was up about 13.5% in the first quarter.

The consolidation of our warehouses in Southern California is continuing on plan. And we finalized a strategy to improve the efficiency of the York Pennsylvania distribution center that came with the Pfaltzgraff acquisition.

In addition, our inventory reduction initiatives continue to make progress. As of March 31, inventory levels were at $137 million, which is $17 million below the prior year. Chris will give you details on these matters later in the call.

The restructuring of the Direct to Consumer business resulted in a $2.9 million non-recurring charge in the first quarter. The consolidation of the West Coast distribution facilities caused us to incur an additional onetime expense of $1.5 million. We expect the consolidation of this facility to be substantially completed by the end of June.

We have given a lot of thought as to whether we should change our guidance to our full -- for the full year of 2008 for our financial results. It would be easy to infer from our first quarter results that our year will be disappointing. However, when we look at our current sales trend for the second quarter, and how the Company is positioned for the fall, we believe that we can makeup the shortfall we experienced in the first quarter. As a result, we are maintaining our guidance for 2008. Now of course this would change if the economy were to continue on a downward slope.

I would like to NOW turn the call over to Larry to provide more details on our first quarter numbers.

Net sales for the first quarter of 2008 were $98.2 million, a decrease of 5.4% from the 2007 period. Net loss was $6 million or $0.50 per diluted share for 2008 compared to a loss of $1.3 million or $0.10 per diluted share in the 2007 period.

For our wholesale segment net sales were $80.4 million for the first quarter of 2008, a decrease of $8.8 million from the 2007 period. This decline in sales volume primarily occurred in the tabletop and home decor categories. We believe the most significant factor contributing to the segment's overall decline was the extremely challenging retail sales environment.

In the Direct to Consumer segment net sales was $17.8 million for the 2008 quarter, an increase of 21.9% from the 2007 period. This increase is driven primarily by our going out of business program for the previously announced closing of 30 underperforming stores. Catalog and Internet sales increased due to the successful spring catalog and the late holiday orders in 2007 that were shipped in January 2008. Comparable store sales also showed an improvement.

On a consolidated basis cost of sales for the first quarter of 2008 was 60.7% of sales compared to 58.9% in 2007. Our wholesale segment cost of sales was 63.2% of sales in 2008 quarter compared to 62.2% in 2007. This increase was due to our continued effort to reduce inventory levels and higher sales allowances.

In the Direct to Consumer segment cost of sales was 49.3% in 2008 compared to 38.7% in 2007. The increase as a percent of sales primarily resulted from lower margins from the going out of business program, and to a lesser extent, promotional activity in our ongoing stores.

Distribution expenses were $13.4 million or 13.7% of sales in the 2008 quarter compared to $13.3 million or 12.8% of sales in 2007. In the wholesale segment distribution expenses increased to 12.7% in 2008 versus 11.1% in 2007. As Jeff noted, the increased percentage primarily resulted from the integration expenses of consolidating into our new West Coast distribution center. Excluding the integration expenses, distribution would have been 10.9% of net sales.

For the Direct to Consumer segment distribution is 17.4% of sales in the 2008 quarter compared to 23.3% in 2007. The decreased percentage was primarily due to reduced third-party warehouse costs as a result of planned decreases in inventory levels and improved labor efficiency.

Selling, general and administrative expenses for the 2008 quarter were $31.1 million, an increase of 4% over 2007. Excluding unallocated corporate expenses, SG&A was $28.5 million in 2008 and $27.9 million in 2007.

Increases attributable to the amortization of our SAP enterprise system and leasehold improvements for our new headquarters was partially offset by the elimination of duplicative expenses of our former headquarters, and expense reduction efforts in the Direct to Consumer segment. In addition, SG&A reflects the expenses of trade credit risk protection we obtained to offset our risks associated with Linens 'n Things.

Unallocated corporate expenses for the 2008 and 2007 quarters were $2.6 million and $2 million, respectively. This increase was primarily due to higher professional fees and stock option expense.

During the first quarter of 2008 we recorded a charge of $2.9 million for restructuring expenses related to the planned closing of 30 underperforming stores. These charges were primarily for the lease obligations related to the closed stores.

Loss from operations for the 2008 quarter was $8.8 million compared to $552,000 in 2007. In our wholesale segment income from operations was $345,000 in 2008 and $5.6 million in 2007. In the Direct to Consumer segment loss from operations was $6.5 million for the 2008 quarter and $3.6 million, excluding restructuring expenses, versus $4.1 million in 2007.

Interest expense for the 2008 quarter was $2.1 million versus $1.5 million in 2007. The increase was attributable to higher borrowings under the bank credit agreement, which was partially offset by lower interest rates.

Our income tax rate was 42.5% for the 2008 quarter versus 38.5% for the 2007 quarter. The increase was principally due to stock option expense that is not deductible for income tax purposes.

Now turning to the balance sheet, our inventory reduction effort continues to show progress. At quarter end inventory was $136.9 million, which is $6.8 million lower than at year end, and $17.6 million lower than at March of '07.

At March 31, 2008 our borrowings -- bank borrowings was $73.9 million, an increase of $5.2 million from year-end 2007. This compares to an increase in borrowings of $21.3 million in the 2007 period. While 2007 was burdened by $4.8 million in higher capital expenditures and acquisitions, this improvement especially reflects our management of inventory levels. We currently expect capital expenditures for 2008 to be approximately $8.5 million.

We recently amended our credit agreement to provide for additional seasonal borrowing capacity. At April 30 of 2008, availability under our bank credit facility was approximately $35 million.

Now I will turn the call over to Chris.

My remarks this quarter will highlight our progress in four areas -- the Direct to Consumer division, our distribution strategy, our inventory reduction initiative, and our recently announced Canadian strategic alliance.

Turning first to DTC. As Jeff mentioned, in December 2007 we announced our plan to close 30 outlet stores, or approximately 40% of our total retail doors, as part of a restructuring initiative. As of March 31, all 30 stores were closed. We expect these closures and the associated reduction in divisional overhead to improve profits by approximately $2 million on an annual basis beginning in the second quarter.

We are pleased to report the going out of business sales were a success, and we realized a 28% margin on the approximately $5 million in inventory liquidated through the sale. Our efforts at lease mitigation were also successful. We're now estimating that the $4.2 million in lease obligations will be terminated at a cost of $2.3 million.

In the first quarter we expensed $2.9 million of restructuring expense, and are confident that it will total less than our original $5 million estimate on a full year basis.

We continue to believe that the restructuring initiative, coupled with the comp store sales growth, and organic growth in the Web and catalog business that Jeff mentioned, will result in a substantial improvement in the division's profitability.

We expect all our remaining retail stores to show a four wall profit in 2008. However, until the completion of the York warehouse restructuring initiative, which I will discuss a minute, the stores are likely to operate at a loss on a fully burdened basis for 2008.

As previously noted, at such time as we were to conclude that our retail stores cannot achieve an acceptable level of profitability, we would pursue other strategic alternatives with respect to those locations.

Moving to our distribution strategy. As previously announced, we are in the midst of consolidating our three distribution facilities in Southern California. The final result will be a single, efficient 753,000 square foot facility located in Fontana, California.

We are pleased to report that we've started shipping from the new Fontana warehouse, and have vacated one of the two previously existing facilities that had been run by a third-party logistics provider. We're also on plan to vacate the Company-run Mira Loma facility by June 30.

As mentioned in this morning's press release, the Company incurred approximately $1.5 million, equal to $0.07 per diluted share, in added distribution expense in the first quarter attributable to the operation and integration of the three California distribution centers. Going forward we expect the consolidation to result in $1 million in annual pro forma savings starting in the third quarter of 2008.

The next phase in our distribution strategy addresses as our York distribution center, which currently operates our wholesale dinnerware and DTC businesses. The lease for the center, which we inherited during the Pfaltzgraff acquisition will expire on July 31, 2009. We have defined our near-term strategy for this facility, and are in the process of implementing it now.

We will be consolidating the wholesale dinnerware business into the Fontana facility, and rightsizing the York distribution center to meet the future needs of the DTC division.

In addition, we have been focused on improving the efficiency of its operations, and were recently able to reduce the staffing levels by 30 FTEs due to efficiency gains. These changes should have a meaningful impact on the profitability of both the dinnerware and DTC businesses in 2009.

We are also very pleased with the progress we have made continuing to reduce inventory levels and increase inventory turns. At March 31, inventory levels were $137 million, which is $17 million below the level at March 31, 2007. Adjusted for acquisitions, inventory levels as of March 31 were $22 million below the prior year's level. A significant portion of the reduction was a result of improvements in the most recent quarter when we reduced inventory by $7 million compared to a reduction of only $1 million in last year's first quarter. Excluding the effect of the going out of business sale, the reduction in the first quarter was $4 million.

At the same time we're reducing inventory, we're also changing the way we order and manage our inventory so that sales will not be negatively impacted. These process improvements, coupled with extensive employee training, have resulted in our inventory planning accuracy improving from 58% to 72% in the last year. As we have previously stated, we expect that changes in working capital and other operating assets and liabilities will be a source of at least $5 million in cash for 2008.

Finally, I would like to note that we have finalized our strategic alliance with the Accent-Fairchild Group to grow our business in the Canadian market. AFG will combine its food preparation, tabletop and home decor business with that of Lifetime Brands, and operate as a single business under the name, LTB Canada. We expect AFG's focus on the Canadian market and deep relationships with the key Canadian retailers to substantially increase the size of the business.

As part of the agreement AFG will take over all direct responsibility for the business, and have committed itself to invest in staff and resources to grow it. Lifetime will participate in the profits of LTB Canada, and also have the right to acquire that business at defined periods, beginning five years after the date of the agreement.

While Canada is a small market compared to the U.S., the strategic alliance with AFG, like that with Ekco in Mexico, provides opportunities for us to expand Lifetime's geographic footprint, build consumer recognition of our brands, and becoming a more important supplier to our retail customers.

Operator, we're now ready to take questions.

(OPERATOR INSTRUCTIONS). Alvin Concepcion, Citigroup.

I just wanted to talk about the guidance for the year a little bit. It was 105 to (inaudible).

Alvin, excuse me, would you please speak up, we're having difficulty hearing you.

I just wanted to talk about the guidance a little bit. It was 105 to 125, and that is excluding the DTC restructuring. Does also exclude the consolidation of the West Coast distribution facilities -- the $0.07 that you guys are impacted by?

No, it does not.

And just to make sure, there is about $0.05 left of restructuring on the DTC?

We had estimated the DTC restructuring expense in total for the year 2008 to be $5 million. Year-to-date that number is substantially less than that, but there are remaining expenses that will be incurred associated with the closing of the stores as previously announced. At this point we're still anticipating $5 million in total restructuring charges.

Then could you comment on your inventory levels at retail, your level of comfort with them?

The inventory levels at retail are low. They are much lower than they were at the same point last year.

Then going into the Vasconia product, how large do you think that opportunity is?

We have never given out the number, and we still are reluctant to do so. We are getting terrific placement. We have national chains on board. It is going to be a very important brand for Lifetime. I don't want to go into any numbers at this point.

Bill Chappell, SunTrust Robinson.

I guess first just a basic question. You had said I think in the press release you are expecting 4,000 new products this year. I think if I remember the button from the housewares show was like 2,500, 2,600 new products. Have you stepped up that since the housewares show even further or is that just a different number?

The largest number of new products are introduced in the first quarter of the year. That is when we get placement for the year. I would say the number this year will be more than 4,000 but we haven't out a new number.

To your point I think it is important to note that we have accelerated the development of new products and the timing of new product introductions earlier in the year to get more bang for the buck, so to speak, out of Delta products later in the year. So I do think that is an important point to note.

In terms of the dinnerware business, can you talk to us a little bit more about profitability this year? Can you get back to profitability and shrink the losses from last year? Maybe talk a little bit more about what gives you confidence there?

It is difficult to give a real number. I can tell you there is going to be a dramatic turnaround, a truly dramatic turnaround. Starting already -- starting in this quarter, the topline sales in this quarter look like they're going to be terrific. We have tremendous placement in customers that we had either no placement or negligible placement last year. We're making great progress.

In addition to that, we already starting the process towards 2009 and opening a lot of doors for 2009 as well. So I don't want to -- again, I don't want to put a number on it, but there will be a dramatic turnaround in that division. We're very, very happy with the way the business is going.

Help me just understand that again. Is it just management focus? Is it design? Is it better retail relationships? Why such a change?

More than anything else it is management really understands the design of products that are necessary to do business today. Dinnerware is driven more by the style of the product than anything else. Brands are very important, but the style of the product is everything. A consumer is not going to buy a pattern of dinnerware if she doesn't like it, no matter what the brand is.

The current management that is in place, Glenn Simon and his team, have experience. They were extremely successful in the past with dinnerware, and they are just doing a phenomenal job today.

Finally, on China manufacturing is there any way to quantify your cost increases as you are looking out with the VAT tax and other things going on there?

There have been many increases, probably starting about 18 months ago. It was between raw materials, between VAT tax changes, and exchange rate changes, between social issues that drive up cost and different label laws, there have been continual increases. But remember this is an industrywide thing. It certainly doesn't affect us more than anyone else, if anything, it affects us less.

And the reason it affects us less is that we have more than 100 in-house designers that can redesignate product and change product, reconfigure products, change materials. We have capabilities that our competitors don't have. So for us it is not a negative. As you can see, we have pretty much been able to maintain our margins through most of it already, in almost every part of the business that we're in. We don't expect things to change. We expect costs to continue to go up, but at a much slower rate.

We think we have seen peaks in most of the materials. As demand slacks off for some of the materials, we have actually been seeing, even with the increasing price of oil, there has been a pullback in the price of plastics in the last two months.

So we don't see it as being a serious issue going forward. There it certainly increases out there, and retailers are open to accepting the increases. Their main goal is remain margin neutral, which is the same goal that we have. But yet you can't pass prices -- push prices too high to consumers, so we have to reconfigure a lot of things and change things. But so far we have been able to manage it very well at this point.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions at this time.

Thank you. Thanks again for joining us this morning. As I noted, we are very focused on innovation and exciting products. And that is the key driver of our profitable growth. We're working more closely than ever with our retail partners to give them what they want and what they need to ignite the interest of consumers. We will give you an update on all the activities in our second quarter call. 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 at this time.