Lifetime Brands Inc (LCUT) 2008 Q2 法說會逐字稿

Welcome to the Lifetime Brands' second quarter 2008 earnings conference call. At this time all participants are in a listen only mode. Following management's prepared remarks we'll hold a Q&A session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded August 7, 2008.

I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please go ahead, Ma'am.

Thank you operator. Good morning everyone, and thank you for joining Lifetime Brands' second 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'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 developments, commercialization, technological difficulties, capacity constraints or difficulties, the results of financing efforts, the effects of the company's accounting policies, and other factors contained in the filings of the company with the SEC. 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. Please go ahead, Jeff.

Thanks Harriet, and good morning everyone.

As I mentioned in our last earnings call, the quarter ended March 31, 2008 was one of the most difficult periods that I can remember. In early April however, our order flow began to improve and sales results for the quarter ended June 30 improved compared to the first quarter.

You will recall that in the first quarter Lifetime's net wholesale sales were down almost 10% compared to the prior year. By contrast, in the second quarter net wholesale sales excluding Mikasa were just about on par with last year, reflecting a good strength in our kitchenware and home decor businesses offset by lower sales elsewhere. The addition of Mikasa's net wholesale sales for the last three weeks of June enabled us to report a 3.2% increase in total net wholesale sales over last year's quarter.

As I outlined in our last call, our strategy for these difficult times is to focus on innovation and to develop strong promotional offerings in all of our product categories. When consumer spending is constrained, retailers rely on those vendors who can offer great products at exceptional values. So we're making very sure that Lifetime offers both the innovation and the promotions retailers need.

With those overall comments on our approach and strategy, let me run through some of Lifetime's key initiatives. First, we introduced a new line of durable environmentally friendly kitchenware products made from a bio-plastic blend that contains significantly less petroleum than ordinary plastics. Second, we're continuing with our introduction of our broad line of food prep products under the Vasconia brand, which is targeted to the fast growing Hispanic consumer in this country. Third, we've introduced a line of large kitchen trashcans offering a great brand, exclusive design features, sleek styling, and competitive pricing. While each of these introductions is going well, it will take several months until we can expect to see any significant impact from these initiatives.

One of the most important developments in the quarter for Lifetime was the addition of Mikasa, a premier tabletop brand to our portfolio. We are very excited about the acquisition and the opportunities it opens for us. The acquisition of Mikasa expands our position in the tabletop category where we expect our sales to exceed $150 million in 2009. We were very disciplined in our approach to bidding on Mikasa and we were able to acquire the business at a very favorable purchase price. We expect the acquisition to be accretive in 2008.

I also want to give you a quick update on some important operational matters that Larry and Chris will then cover in more depth. First, we remain focused on our inventory reduction initiative which continues to yield results. Compared to June 30, 2007 inventories are down $31 million, or 19% on an acquisition adjusted basis. In addition, as planned we completed the consolidation of our distribution facilities in southern California on June 30. As previously announced we expect the consolidation to generate approximately $1 million in annual savings. With continued inventory discipline we do not expect to need a new warehouse for Mikasa and instead expect to be able to move their inventories into our existing facilities by January 2009.

Finally, we also continue to focus on our DTC division, where results have not kept up with our expectations. We're currently evaluating our strategic options with regard to the outlet stores. At the same time we are continuing to grow our Internet business which now consists of both Pfalzgraff.com and Mikasa.com.

Now to the matter of financial guidance. As we said in this morning's press release, we do not expect to achieve the earnings guidance we gave earlier in the year. Despite the improvement in our sales during the second quarter, we remain very concerned about the state of the general economy and especially its impact on consumer discretionary spending as evidenced by the recent bankruptcies of Linens n Things, Mervyns, and Boscov's.

We have given a lot of thought to how to approach this problem and have decided not to speculate as to our results for the balance of the year. If by November, when we report on our results for the current quarter we think that we have a solid feel for the year, we will communicate that at that time. That said, we remain optimistic about our business and business model, and we continue to believe that new branded product offerings at the right price and quality will propel growth in our business.

I'll now turn the call over to Larry to provide more details on our second quarter numbers.

Thanks, Jeff. Net sales for the second quarter 2008 were $92.4 million, an increase of approximately 1% from the 2007 period. Net loss was $3.2 million, or $0.27 per diluted share in 2008 compared to a loss of $2 million, or $0.15 per diluted share in the 2007 period. For our wholesale segment net sales were $79.9 million for the second quarter of 2008, an increase of $2.5 million from the 2007 period. This increase resulted from the inclusion of Mikasa since it was acquired in early June. In addition, strength in the kitchenware division and home decor categories were offset by lower volume from other food preparation divisions and the tabletop category.

In the Direct to Consumer segment, net sales were $12.5 million for the 2008 quarter versus $13.9 million in the 2007 period. However, on a comparable basis, that is excluding the sales of the 30 stores closed earlier this year, 2008 period sales were up by approximately $1 million reflecting increased Internet and catalog sales which benefited from the earlier release in 2008 of the Spring/Summer catalog.

On a consolidated basis, cost of sales for the second quarter 2008 was 59.8% of net sales compared to 56.8% in 2007. Our wholesale segment's cost of sales was 63% in 2008 compared to 60.7% in 2007. What appears as a reduction of overall gross margin in fact was due to our continued effort to reduce inventory levels. In the Direct to Consumer segment cost of sales was 40% in 2008 compared to 35.3% in 2007. The increase as a percent of sales primarily resulted from lower margins from increased promotional activity and higher freight-in expense.

Distribution expenses were 13.9% of sales in the 2008 quarter compared to 12.8% in 2007. In the wholesale segment distribution expenses increased to 12.6% versus 11.8% in 2007. This increased percentage primarily resulted from the integration of consolidating into our new west coast distribution center, which has now been completed, and transitional services related to Mikasa, partially offset by improved labor efficiency at our other distribution facilities.

For the Direct to Consumer segment, distribution expense was 21.6% of sales in 2008 quarter compared to 18.7% in 2007. The increased percent is due to proportional growth of our Internet catalog business which structurally has higher distribution expenses as compared to our retail stores. This increase was partially offset by lower inventory levels and improved labor efficiency.

Selling, general and administrative expenses for the 2008 quarter were $31.2 million, an increase of 5.8% over 2007. Excluding unallocated corporate expenses, SG&A was $28.4 million in 2008, and $27.2 million in 2007. Higher employee, professional, and Mikasa transitional service expenses were offset in part by a lower expense base to operate fewer retail stores. During the second quarter 2008, we recorded final restructuring expenses of $107,000 related to the 30 stores closed. The total recorded during 2008 was approximately $3 million, which compares favorably with our original projection.

Loss from operations for the 2008 quarter was $6.9 million compared to $1.8 million in 2007. In the wholesale segment, the loss from operations was $1.2 million in 2008 compared to income of $3.5 million in 2007. And in the direct to consumer segment, loss from operations was $2.9 million for the 2008 quarter, $2.8 million excluding restructuring expenses, versus $3 million in 2007.

Interest expense for the 2008 quarter was $2.1 million versus $1.5 million in 2007. The increase is attributable to higher borrowings under the bank credit agreement which was partially offset by lower interest rates. Our income tax rate benefit for this 2008 quarter was 56.8% versus 38.5% in 2007. Excluding a non-recurring benefit in the current quarter resulting from the reversal of a tax reserve, the income tax rate would have been 42.5%. As we explained in prior periods, the increase was principally due to stock option expenses, which is not deductible for income tax purposes.

Turning to the balance sheet, our inventory reduction efforts continued to show progress. At quarter end inventory was $134.9 million. Excluding acquisitions made in the past 12 months, the reduction was $30.7 million versus June 2007. At June 30, 2008 our bank borrowings were $95.8 million and our availability under the facility was $19.8 million. We currently expect capital spending for 2008 to be approximately $10 million.

Now I'll turn the call over to Chris.

Thanks, Larry. My remarks today will focus on two areas, the Mikasa acquisition, and DTC.

First, turning to Mikasa. The entire Lifetime team is very excited about our recent acquisition of this business. As Jeff mentioned Mikasa is one of the best known and most respected brands in the home, and commands a leadership position in better quality dinnerware and glassware. The business has very healthy gross profit margins and when combined with our existing tabletop businesses, we expect 2009 wholesale sales for the division to be in excess of $150 million. It also has a meaningful but still underdeveloped e-commerce business. The addition of the brand makes Lifetime one of the leading resources for tabletop products.

We were pleased with the terms of the purchase and think our disciplined approach to valuation resulted in us getting an excellent value. The purchase price totaled $20 million consisting of $12.3 million of cash paid at closing, the assumption of $2.7 million of accounts payable, and $5 million of cash, subject to certain adjustments, to be paid on December 15, 2008 as a nonrefundable advance against an additional payment in the amount equal to 5% of the annual net sales of Mikasa's post closing business for 2009, 2010, and 2011. The purchase price included all of the intellectual property of the business and inventory valued at the seller's cost of $26 million.

Mikasa fits into our model of being a classic bolt-on acquisition. With the exception of Mikasa's Madison Avenue showroom, which is in a prime location, Lifetime did not acquire any long-term liabilities or facilities. As a result, we entered into a transitional services agreement with the seller to provide both administrative and distribution services for a period of time. These services are not inexpensive, but most of the administrative services ended in July and we expect to have transitioned all Mikasa products from the seller's distribution center by the end of the year.

Further, we have added only 18 new employees to our existing tabletop division to support the entire Mikasa business. As Jeff indicated, the business should be accretive in 2008 and we look to expand the business in the future through broadened distribution and expanded product categories.

Moving to our DTC division. Let me take this opportunity to reiterate that division is comprised of two very discreet businesses. First, our outlet stores business which has 52 stores and generates approximately $40 million in sales. And second, our direct marketing business including e-commerce and catalog which has approximately $25 million in sales excluding Mikasa's e-commerce sales. Given the sales volume done by the direct marketing business under the Pfalzgraff brand, we believe direct marketing can be a significant growth and profitability driver for Lifetime once other brands, including Mikasa, have been added.

Despite having closed all 30 unprofitable stores earlier this year, the outlet stores continue to be a drag on earnings due to anemic sales and the high fixed cost infrastructure we inherited with the acquisitions. It is clear to us that further steps need to be taken and we are currently in the process of evaluating our strategic options.

Operator, we're now ready to take questions.

Ladies and gentlemen (OPERATOR INSTRUCTIONS). One moment please for the first question. Our first question comes from Bill Chappell at SunTrust Robinson. Please go ahead with your question.

Good morning.

Morning.

I guess first on the outlet stores, I mean, can you maybe give us a little more color on how your thinking has changed just in the past three months? I mean--and from that standpoint are we getting too late in the year to really do anything dramatic for the calendar 2008?

We're--as Chris said, we're in the process of evaluating it which we're doing right now. We are not too late to take action to fix whatever is wrong in 2008. And I have to say that the stores were doing fairly well up through the end of May and actually through the first week of June, but since the first week in June traffic has been off, the outlet mall traffic--and we've talked to a number of operators in outlet malls, the traffic is off, and our business is considerably worse. It was heading in the right track but now it's not. I can't say much more.

Any update in July, or I mean, any thought that--

It has stayed weak in July. It stayed weak in July and it's continuing to stay weak.

Got you, and I mean, with that in mind it sounds like you won't get the--recoup the full benefit that you had hoped on that side of the business. What about on the bakeware business? I think it's bakeware/dinnerware business? How is that progressing for this year?

They're two separate things. Bakeware is a separate division from dinnerware.

Sure.

I think you mean the dinnerware (multiple speakers).

Yes, exactly.

The dinnerware/glassware business is definitely making progress. It certainly will not, other than the Mikasa part of it, will not be profitable this year. It's taken us longer than we thought, more than anything else because of the economy, but we believe we have the right team in place, we seem to be winning battles every day for getting placement--ongoing placements starting in the fourth quarter, and going into next year which we're working on now. We have very, very high hopes for that division. And putting the two together, the Mikasa business with the Pfalzgraff business and other brands makes it a very, very powerful division.

Got it, and I guess, as you look to the fall with, I guess, no longer having guidance, what can you do with the mindset that the consumer maybe or likely will be weak for the holiday season? I mean, are you at a stage where you can cut back orders and hold the profitability, or are you still kind of at the mercy of the retailers until we get to September/October?

Again, we're at the mercy of the consumer. It just flows through the retailers to us. Yes, we are as you know and you've seen, we've become very disciplined with inventories, we know how to manage inventories without hurting our fill rate, which we've done. We've gotten I'd say very, very good at it a lot faster than I thought we would get.

As far as doing more things, we continue to be working with retailers on promotions for the third and fourth quarter, primarily the fourth quarter at this point. The retailers still are somewhat optimistic, but we're less so. That's why we felt we couldn't give guidance. It's like looking at this point into a crystal ball. It's not something that we've--I've seen before. I've been doing this for 41 years. I have never seen a retail climate quite as bad as this. As you saw in the last quarter, we were holding our own in sales. But I have to tell you it's a very, very difficult retail climate, and there are unfortunately are a number of retailers who are troubled, I mentioned a few, and we have to be very careful with the retailers that are troubled and therefore we're a little concerned to say the least.

We're just being as careful as we can be. We're certainly being very, very careful on expenses, being very careful on capital expenditures, trying to cut back wherever it won't hurt the business, and we continue to run our business on the same model. We're not going to have any fire sales or doing anything like that. That's not in the plans.

But that--would that imply though that acquisitions are likely done for this year?

Excuse me?

No more acquisitions for the remainder of the year? Just as (multiple speakers)?

Yes, unless somebody wanted to give us a company. I doubt we would have--but I don't think we'll be buying anything else for the rest of this year, no.

Great, well, thanks so much.

Our next question is from Alvin Concepcion with Citigroup.

Good morning. I just wanted to get a sense--you talked about DTC in July a little bit, but how did trends hold up in wholesale in July? It looked like there was an improvement sequentially in the second quarter.

Well with--for us it's more difficult to see that. Our quarters--what's happened as the retail economy has gotten weaker, we've noticed very clearly that the retailers are ordering much closer to need. So our business is tending to shift later. It's later in the month, it's later in the quarter. So it is very difficult for us to say how it will be for this quarter. We're really having difficulty with it.

Remember, our model has--is such that most of our orders come in with a very short window to ship, a week or two, sometimes actually less than that. For many customers it comes in with a window of three days, so we don't have any--I shouldn't say any, we have very few long-range orders which makes it a little more difficult for us to project.

Hey great, and then how would you characterize your market share at the retail level, and then also how comfortable are you with inventory levels at retail?

Our market share is increasing. If it wasn't increasing, I think we would be severely negative in business, in sales. It has increased this year. Our shelf space is increasing quite a bit it looks like for next year starting in the spring on top of that. So market share wise we seem to be gaining.

Inventory levels, we're very comfortable with where our inventory levels are now, and we're--the way we run our process and the way our systems are handling inventory, I'm pretty confident that we'll bring the inventory down further by the end of the year. I think we're managing this well.

Have you seen a benefit from maybe the rebate checks or anything like that?

(Multiple speakers) repeat the question?

Yes, the tax rebates, have you seen any impact from that from that or not?

In my opinion, and this is strictly speculation on my part, it was very beneficial to the retailers we deal with in May and June. I think the benefit is going to fall off pretty quick. That's opinion. I'm not an expert in this.

Yes, yes, and then, I guess, with the weak economy, I mean, are you seeing consumers trading down or are they just delaying purchases?

Yes, I--yes, we have. We've seen consumers definitely are trading down. Every level of consumer seems to be trading down to some degree. I guess the good part is that we cover every level of consumer. So if somebody wants to trade down from one of our brands to a little bit lower price point, we usually have the brand with a lower price point as well. But there's no question in my mind that there is a trade down happening out there with consumers.

Okay, thank you.

Our next question is from Derek W. Leckow with Barrington Research.

Thank you, good morning everyone.

Good morning.

Mikasa, that's quite an acquisition there, $20 million for $150 million in revenue.

No, no, that's not the number.

Clarify that for me then.

Let me correct that.

Yes.

We haven't given out Mikasa numbers, but--so we--I can't do that now. But it's not $150--our tabletop business in total is $150 million in sales.

What was the $150 million you referred to earlier? Was that for the whole category then?

$150 million is putting all of our tabletop businesses together.

Oh, that's the whole tabletop. Okay.

Not from Mikasa.

Derek, for competitive reasons we're reluctant to give specific brand level sales information.

Okay.

What we tried to do to give folks an order of magnitude for the size of the business was to combine the Mikasa business with the rest of our tabletop business including our Pfalzgraff wholesale business, as well as our dinnerware and glassware under some of our other brands. And that all combined together for 2009 we're expecting to be in excess of $150 million in sales.

Great, thanks for clarifying that. That makes much more sense now. Okay, and then, I want to get to the SG&A expenses because that's something that we can control and we know what they are as compared to the revenue expectations that you don't really have much of a visibility on at this point. You guys have obviously consolidated the distribution, so as we look at the rest of the year on expenses did you say expect that to be down by about $1 million per quarter, or what was the information you gave there?

Derek, I think you're referring to the information we gave regarding our distribution consolidation in southern California.

Right

Where in going from three distribution centers 24 months ago, in those two years we've consolidated down--eliminated the three that we had, opened up a new one in Fontana, consolidated all of our distribution in southern California in that facility, still have extra space, and have a $1 million per annum savings starting basically now in the third quarter.

In the past two quarters, I should just point out that our distribution expenses as a percentage of sales were higher as a result of the transition going from those multiple facilities into the new Fontana facility because basically we're paying double rent and having transitional expenses. So starting in the third quarter of this year, the current quarter, we expect to have that $1 million annual savings going forward.

(Multiple speakers).

Let me answer that.

That's realized compared to last year, right? So not compared to the first half?

Yes. That's correct.

Okay.

Let me add one thing. What we're doing is looking at the different pockets of SG&A within the company and we've identified other areas where we believe that we could have considerable savings that we're working on both for this fall and for next year.

Also in the distribution area or what department?

In several areas, and a lot of it has to do with our new found ability to properly control inventories.

Okay, getting to the inventory issue, the gross margin rate we saw through the first six months of the year I guess reflects some of that effort, and do you think we'll see that gross margin rate go back up, especially with all the new products you're launching in Q4? What's the directional guidance you can provide on gross margin from here forward?

I think it's tough for us to do it for this year. We are still liquidating some inventories that we feel we want to get ourselves into really proper shape in every one of our divisions, so that's a little difficult to give you right now. Maybe at the next call we can give you a little more.

But is it fair to say that the new products, which is I guess is going to be a record period of launch for--of new products in Q4. Is that's a positive, or--I mean, that's going to be a positive influence on the wholesale side.

The new products are always--new products for us always are at a slightly higher margin than our old products.

Yes.

It's just the nature of things. They're easier. It's a lot easier to introduce a new product versus trying to raise the price on an old one, although today retailers are pretty comfortable raising prices because materials have gone up so much and costs have gone up. But we're finding that some--and it's always been the history of the company, new products are always for the most part at a higher margin level than--gross margin level than old products.

Okay, and then on the Direct to Consumer, I mean, how telling is the first half of the year typically? In my view the first half of the year is kind of meaningless in those sorts of retail categories when you have so much more of your revenue shifted from seasonality into the back half of the year. So what do these trends really tell you right now?

They--we can still, probably easier in that business than any other to project where things are going to end up.

Okay.

And you're right. Certainly we never expected to make money in the first half of the year with DTC, but we expected the losses to be considerably less than they are.

Yes.

I think, Derek, we have good visibility into what the back half of the year might look like for the DTC division, certainly much more than we do for the wholesale business. Enough visibility for us based on year to date results and based on the plan that we have in place and how we're tracking to that to be very clear about what we need to do to address the challenges in that division.

We really need to just kind of worry about the wholesale business and sort of be conservative there. That's kind of the message I'm hearing.

Yes, and the wholesale business, the interesting thing about the wholesale business is the food prep businesses are more than holding their own in this economy, which is something I've experienced in the past in a recessionary period.

Consumers buy basics. If they need a can opener, they'll buy a can opener. If they need a knife, they'll buy a knife. They tend to hold off on discretionary purchases, and some of our businesses are more discretionary than others, so the ones that are less discretionary and were basic needs are doing much better than the ones that are more discretionary right now.

Just to follow--on the free cash flow, you guys are going from I think $19 million in CapEx last year to about $10 million. What's the depreciation, amortization expectation for the year?

I would say it's probably at the same run rate as is year to date, so I would say it's probably around $10 million.

$10 million, okay. Great, thanks a lot guys. Good luck.

Thanks Derek.

Our next question is from Quinton Maynard with Morehead Capital.

Hey guys, how you doing today?

Good morning.

I wanted to visit the wholesale business a little bit more. As you're talking about sales being up a little bit with the acquisition, and you're kind of feeling good about sales levels for the quarter, and then to come through the quarter and have the wholesale division netting negative, I wanted to get a little more clarification on what expectations should be and if the reality is that the actual business for your wholesale products going forward is going to be smaller because we're in a much longer period of conservative consumer spending, can this business be right-sized such that on lower levels of revenue you're able to still be profitable?

Yes, I expect--and the short answer is yes. And that's what we're focusing on. We're making sure that with anticipation on the economy not improving, not this year, not next year, we have to make sure that the company is profitable so that we are doing everything we can to make sure that we control or reduce our SG&A and certainly control our capital spending. We intend to do that. And keep in mind that Mikasa is accretive, it'll be accretive this year and more so next year. We bought a business and took on the 18 employees for that business, and we're not going to be using anything other than a showroom as far as facilities. Otherwise everything else is going into our showroom and being absorbed by our current infrastructure. So we're doing whatever we can to optimize our current infrastructure and to make sure that the company is profitable.

It's probably also worth pointing out, and we alluded to it in our prepared remarks, that the Mikasa business, even though we only owned it for about a month in our second quarter results, we incurred very significant expenses associated with that in the form of distribution of expenses, as well as transitional service expenses basically to have the seller continue to operate the business for us until we could sort through the employees and do what needs to be done to integrate it. That's now certainly from an administrative perspective behind us, and so when you look at second quarter SG&A results, they were impacted in a not insignificant way by the additional SG&A expense that is not going to be part of our go-forward business, but was just a result of that transition.

Got you. The other thing I'm just trying to get my arms around are kind of some absolutes around the DTC business because I feel like this is I believe the fourth or fifth conference call where we've talked about the DTC business needing something different to come out of it. And I remember last year the conversation being that, "We're going to be able to give you some clarity by the end of the year. This is what's going to happen with the business and it's either going to be profitable or it's going to be gone." As the year ended it was neither profitable nor gone. You closed the stores that were not profitable at the store level, and now we're still not getting real positive view of what the expectations for this year are going to be in that business. Any clarity about, can you give us it's going to do X or it will be gone even if that means we just close the stores? Or can you just--just to have some confidence about exactly what's going to happen there would really help us I think as investors.

That's really not something we can discuss at this time. We want to do things in a proper manner and that would not be--allow us to do things in a proper manner. We'd be shooting ourselves in the head. We're not--we can't discuss that at this point.

All right. That'll be it from me, thanks.

Our next question comes from Gary Giblen with Goldsmith & Harris.

Good morning everybody. How's business going outside the crummy US economy, i.e., Grupo Vasconia in Mexico, and Canada as it develops for you?

We're very happy with the results of the--our affiliates and equity interest in Grupo Vasconia in Mexico. The Mexican economy is in better shape than the US economy, and that business is benefiting significantly as a result of the new products, brands, and expertise that they are receiving from Lifetime and through our strategic alliance, and using that as a platform for real significant growth in that market. So we're very happy with them. We were just down there a couple weeks ago for the board meeting and they continue to perform consistent and above expectations, and we're very pleased with the progress we've made there.

The Canadian venture is still quite new. It's just a couple of months old. We have been pleased with the progress that they have made in terms of ramping up that--the infrastructure and the activity--to handle the brands and the product portfolio that they're going to take to market in Canada. We are very optimistic that they can dramatically increase the sales that Lifetime had previously done in the Canadian market through our strategic alliance to really expand the opportunity there. So while that's still in the early stages, we've gotten some good indications and they've made some good progress to date.

Okay, that's good, and back in the US, is there any general de-stocking going on that affects you because of retailers being hard-pressed to cut costs and cut inventory?

Inventories are low. They're the lowest I've ever seen them at retail. I guess it could be a good thing. There could be a lot of upside, but I guess the consumer still has to go into the stores and buy things. The weeks on hand and the retailers that we have more clarity and insight into and see what they have is lower than--considerably lower at this period than it was last year.

Okay, that's good, and then any push back from retailers to hold you up for more allowances or lower prices?

No, definitely not lower prices. As everyone knows costs have gone up, raw materials have gone up considerably, labor, the exchange rate between the US dollar and the Chinese currency has changed. Retailers understand that. They want to remain margin neutral as we do, and they work with their vendors, otherwise they won't have any vendors. So it's something we work with them. It's something that if you--we work closely with our customers to make sure that the adjustments are made in an appropriate way that won't hurt sales.

Okay, and at this point would you say retailers have given up on a good Christmas or could there be some renewed optimism that could then translate to a little order fluff?

I don't see that they've given up, and there's--as you know because I know--I'm sure you've seen the retail results that were announced this morning. There are some retailers who are doing very well and others who are not. And predictably, our business is growing faster with those that are doing well, and it's weaker with those that are not doing well. So it's--I think some retailers are going to have an excellent year, and others are going to have a very challenged year. I guess-the good thing is that Lifetime does business with every level of trade and I guess that could be a bad thing at times also.

Okay, and do your results pretty much mirror the results that we see where the more discount oriented retailer is the better--where your sales are or does that translate necessarily to your categories?

To a large degree, yes. Not 100%, but to a large degree yes. The retailers that are doing well are buying more from us and we're doing more business with those retailers.

We've always done business with just about everyone who sells our categories and that's not changing. The emphasis and the growth is coming in different places, so it's--and it's also, as I mentioned earlier, it's in different parts of our business. I mean, certain parts of the business--our business are not really affected by a recession. They're really a function of need, the basic products, and we do well with them. Others that are more discretionary are a little more difficult. Consumers are putting off discretionary purchases.

Okay, that helps a lot. Thanks Jeff.

Our next question comes from Rick Fetterman with Fetterman Investment.

Good morning everyone. Can you tell me in--if there are such a thing as normal times, what percentage of accounts receivable are generally questionable or likely to be written off? They're currently running close to 25%

I don't know if you're reading that correctly.

Okay.

Those--that amount you see on the balance sheet relates to customer deductions that they're entitled to per agreement, cost advertising and the like. Our bad debt expense is very low. Obviously it's been a little higher this year because of a couple of retailers that filed, but that amount that you see on the balance sheet relates to customer deductions, not--valid customer deductions does not relate to bad debt.

Okay, have the--for those bankruptcies that we're all familiar with, have they--those write-offs already been taken?

Yes.

What--I didn't see it, but what is the operating cash flow for the first half of the year?

The operating cash flow we will be reporting is a use of $11 million compared to $19 million use for last year.

Are you currently in compliance with all your lending agreements?

Yes.

What is the--I guess I'm looking for reasons for maybe more confidence than I have right now, but it seems like there's not a lot of cash on hand, which is not unusual, but the accounts receivable which will be coming in pretty much equal short-term debt in accounts payable, costs are increasing both in dollar terms as well as a percent of revenue, while revenues are flat at best.

I'm just having a hard time figuring out where the money's going to come from, operating money, going let's say six months from now, nine months from now assuming nothing wonderful happens in the economy?

Remember we--our cash generation period begins in the fourth quarter and goes into the first quarter 2009. So our outstanding borrowings declined significantly during that period, and that's what you're driving. I mean, obviously you need--business needs to improve, but that's when we should see that benefit and that number should come down substantially.

All right, thank you very much.

(OPERATOR INSTRUCTIONS). And there are no further questions at this time. Please proceed with your presentation or any closing remarks.

Thanks for joining us on today's call. As I described, our strategy is to focus on innovation and to offer strong promotional offerings in all our product categories. We think new branded product offerings at the right price and quality will drive our growth and the growth of our business. We'll touch base with you again in another three months. 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.