Lifetime Brands Inc (LCUT) 2009 Q2 法說會逐字稿

Welcome to the Lifetime Brands Group second quarter 2009 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 call is being recorded today, August 6.

I would now like to turn the conference over to Harriet Fried of LHA. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining Lifetime Brands second quarter 2009 conference call. With us today from Management are Jeff Siegel, Chairman, President and Chief Executive Officer; and Larry Winoker, Senior Vice President and Chief Financial Officer.

Before we begin I'll read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties, including the Company's ability to comply with the requirements of its credit agreement; the availability of funding under that credit agreement; the Company's ability to maintain adequate liquidity and financing sources and an appropriate level of debt; changes in general economic conditions which could affect customer payment practices or consumer spending; changes in demand for the Company's products; shortages of and price volatility for certain commodities; the effect of competition on the Company's markets; and other risks detailed in its filings with the SEC. The Company undertakes no obligation to update these forward-looking statements.

The Company's earning release-- earnings release contains non-GAAP financial measures within the meaning of Regulation G, promulgated by the Securities and Exchange Commission. Included in this morning's release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP.

With that introduction, I'd like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thank you. Good morning, everyone, and thank you for joining us today. This morning Lifetime reported its results for the three months ended June 30, 2009. While we customarily lose money during this quarter, our net loss this year, $1.3 million or $0.10 per diluted share, was substantially below the loss we reported for the same period in 2008.

I am pleased to note that our adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, restructuring expenses and stock option expense, increased by over $7 million in the quarter and by almost $11 million in the first half as compared to the same periods last year. This dramatic improvement reflects a positive underlying trend in our business as well as the success of many-- of the many steps we've taken to reduce costs by restructuring and improving the efficiency of our operations.

The increase in our cash flow from operations coupled with our inventory reduction program enabled the Company to reduce its bank borrowings by over $31 million during the first six months of the year. While the recession is by no means yet over, the tone to the economy certainly has improved.

In general, our customers are anticipating that this year's holiday shopping season will only show modest gains over last year. As a result, our strategy has been to expand our market share in each of our key product categories. We already have seen positive results in a number of areas, including our kitchenware, dinnerware, picture frame and pantryware businesses.

I'd especially like to single out Mikasa, which we acquired in June 2008. As the entry level brand of luxury dinnerware and glassware, Mikasa is uniquely positioned to do well in these tough times by gaining market share at the expense of other high-priced luxury brands. Our strength in the flatware business has allowed us to reinvigorate that category by introducing bridal sets as well as other flatware offerings under the Mikasa brand that have been well received by retailers. We have also expanded the brand by introducing new categories and using sub-brands to broaden its reach.

At the Atlantic Gift Show in July, we introduced new lines of Mikasa fragrance candles and diffusers and other home accent products. We expect to begin shipping these new products late this year or early 2010. We've also signed agreements with distributors in several countries to help us expand this distribution of this well-known brand on a global basis.

Importantly, we believe we can increase our market share without negatively affecting our margins. Indeed, we expect margins to increase during the year as we begin to flow goods that reflect lower prices, which we've been able to obtain from our vendors, and substantial reductions in ocean freight and distribution expense.

A key element in maintaining and improving our margins continues to be our commitment to innovation in everything we do. We've implemented our formal innovation gathering system, Ideas of a Lifetime, in our Garden City, Elmsford and most recently in our Medford locations. This system has already generated more than 4,000 ideas to improve our business, over 1,500 of which have already been implemented.

We've also established a worldwide network of thousands of independent investors-- excuse me, inventors to augment our 100-person in-house professional design staff. Several of the new SKUs we've introduced this year came from ideas submitted by these independent inventors. It is our goal to have about 50% of our new introductions come from this group of independent investors-- excuse me, inventors.

At this time, I'll turn the call over to Larry Winoker, our CFO, to provide more details on our second quarter results. Larry will also discuss the significant progress we've made towards strengthening our balance sheet. Larry?

Thanks, Jeff. As reported, net sales were $85.3 million for the second quarter 2009 versus $92.4 million in 2008.

Net loss was $1.3 million or $0.10 per share for the second of '09, as compared to a loss of $3.6 million or $0.30 per share in the 2008 period.

Due to accounting guidance for income taxes, the Company did not recognize a tax benefit for the loss in the second quarter 2009, as was the case in the first quarter. Income from operations, excluding restructuring expenses, was $771,000 in the 2009 period, compared to a loss of $6.8 in 2008, an improvement of $7.6 million.

Looking at our wholesale segment, segment income from operations was $3.6 million in the 2009 quarter versus a loss of $1.2 million in the 2008 period. Wholesale net sales were $80.9 million in the 2009 period, an increase of $1 million from 2008. On a comparable basis, after adjusting 2009 for Mikasa, which was acquired on June 6, 2008, to reflect sales only for the period after June 6, 2009, the same post-acquisition period as in 2008, net sales decreased by $5.3 million.

This decline was primarily attributable to lower volume due, in part, to the non-recurrence of sales to Linens 'n Things, which was liquidated in 2008, less inventory reduction plan activity, the Company's elimination of certain low-margin business in the 2009 period and a planned, effective change in the Company's relationship with Accent Fairchild Group, a Canadian Company that previously had served as the Company's distributor in Canada but now operates a portion of its business as Lifetime Brands Canada. The Company's share of the profit of Lifetime Brands Canada is included in our net sales.

Wholesale gross margin was 36% in 2009, compared to 37% in the comparable quarter of last year. The improvement was primarily due-- excuse me, the reduction was primarily due to a shift in product mix. As expected, gross margin improved sequentially from the 33% reported for the first quarter.

Wholesale distribution expenses were 9.7% of net sales in '09-- in 2009, compared to 12.6% in 2008. This improvement reflects better labor efficiency, elimination of duplicative expenses that were incurred in 2008 during the consolidation of our West Coast facilities, the elimination of distribution services for Mikasa provided by the seller in 2008 and the closing of York, Pennsylvania facility.

Wholesale SG&A expenses for 2009 were $17.7 million or 21.9% of sales versus $20.7 million and 25.9% of net sales in 2008. While a decrease, in part, is due to the elimination of transition services for Mikasa in 2008, it also reflects our ongoing effort to pare overhead.

Now, turning to the direct-to-consumer segment. As you know, our direct-to-consumer business now consists of internet and catalog only as we closed all of our retail stores last December, so my comments will address the ongoing business only.

Segment operating loss from operations, excluding restructuring expenses, were $600,000 in the 2009 versus a loss of $1.2 million in 2008.

Net sales were $4.4 million in 2009 versus $5.3 million in 2008. The 2009 quarter includes $600,000 of sales from the Mikasa.com website. We attribute the overall volume decline to the weak retail environment.

Gross margin increased to 70.8% from 66.6% in 2008 due to selective product pricing increases. Direct-to-consumer distribution expenses were 37.9% of sales compared to 39.9% in 2008, reflecting the benefit of lower shipping rates. With the recent closing of the York, Pennsylvania facility we anticipate a significant improvement in the expense rate going forward.

SG&A expenses for 2009 declined to $2 million from $2.6 million in 2008 due to lower catalog expenses and the benefits of the restructuring plan.

Unallocated corporate expenses were $2.3 million in 2009 and $2.8 in the 2008 period. This decline is due to lower professional fees and stock option expense.

During the second quarter of 2009, certain restructuring expenses were revised, and we recorded a reduction of $663,000 related to the 2008 initiative. For the 2008 period, restructuring expenses were $107,000 and relate to the Farberware retail store closings that began in December 2007.

Interest expense for the 2009 quarter was $2.9 million versus $2.7 million in 2008. This increase was due to higher average interest rates that were offset in part by lower average borrowings.

As I noted earlier, we did not record a federal income tax benefit for the loss incurred for the 2009 quarter. The expense of $281,000 is primarily related to minimum state taxes.

Looking at our current financial position, we have made significant progress towards strengthening our balance sheet. At December 30-- excuse me, June 30, 2009, our bank borrowings were $57.8 million, a reduction of $31.5 million from yearend 2008 and a reduction of $38 million when compared to June of last year.

The reduction reflects lower inventory levels consistent with our plan, improved operations and lower capital expenditure requirements. In addition, during the second quarter we received a federal tax refund of $11.3 million, which we filed for earlier this year.

At June 30th, availability under the bank credit facility was $44.3 million, which is net of $10 million of minimum required availability.

Capital expenditures were $1.2 million for the first half of this year, and we expect full-year expenditures to be below $6 million.

We are compliance with all financial covenants required under our bank credit facility.

Strengthening our financial position is an ongoing effort. We remain focused on further improving liquidity and de-leveraging the balance sheet to working capital management that are operating performance inefficiencies and expense controls.

This concludes our prepared comments. Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS) One moment, please, for the first question. Your first question comes from Greg Badishkanian with Citi.

Good morning. This is Alvin Concepcion in for Greg. As we look into 2010, you know, you mentioned innovations are going to be a significant driver, can you provide any color on which areas you see the most opportunity in your business?

For us, innovation is more than just product. But I guess-- I think you're referring to product.

Right.

When it comes to product, innovation falls more into the food prep areas because tabletop is more design driven, and we have many designers, both in-house and outside contract-- designers under contract. But the innovation will probably fall more into the kitchenware business, the pantryware business and the cutlery business for products.

Great. And, you know, looking at the, you know, your retail customers, you know, how much of the inventory de-stocking there do you think is behind us?

Restocking?

De-stocking.

Well, you know, the retailers are certainly going to continue to run on low inventory levels until business really improves dramatically, I would say. And we've anticipated that, so that will continue. They don't have much more to go. You know, when it comes to, especially into the fourth quarter, we're-- I think we feel we've reached the bottom as far as the retailers having to de-stock, so they're not going to go much further than that, and we should be on a normalized basis beginning in the fourth quarter.

How would you characterize your inventory levels at retail?

Low. Very low.

Okay.

Lower than I've ever seen them since I've been in the business.

Great. Great. Thank you.

Your next question comes from Derek Leckow with Barrington Research.

Thanks. Good morning, Jeff. Good morning, Larry.

Fine. How are you?

Hi.

Pretty good. Hey, I just wanted to touch on the internal growth rate at the wholesale. If you exclude the exposure to Linens, what was the internal growth there?

It's kind of flat. You know, it's not-- there's Linens, and as Larry mentioned, there's two other factors. One is this Accent Fairchild where we used to-- in prior years we sold merchandise to our distributor in Canada. Now we've formed a-- somewhat of a joint venture where we share in the profits, but we no longer sell them merchandise. They now source the merchandise directly from our suppliers, so we gave up top-line sales on that.

And there's also an OEM customer that I'd rather not mention that we inherited when we acquired Syratech that up until this year we were doing business with them but the margins were so small, and it was an unprofitable customer. So last year we told them that we would not be doing business with them anymore. So you'd have to put it all together.

And I guess if you factor in all that we're pretty close to flat on a comp basis. And there's a little more into that, so you understand. In the-- we've moved-- because we've-- after we acquired Mikasa when-- this brand is such a powerful brand and performing so well in retail, we've moved many lines, even housewares lines into Mikasa. We have a line called Gourmet Basics by Mikasa, which somewhat cannibalizes some of our other business.

So it's very hard to make an apples-to-apples comparison. It'll be a lot easier starting this next quarter.

That's what I was trying to get to is, you know, that's a pretty positive number I thought in terms of the-- being flat in this environment and with the inventory de-stocking that you've been facing. You know, it looks like, you know, we're seeing a little bit of a turn in consumer confidence. And so I was thinking that it might lead to some replenishment here in the back half. And you have a lot of new product programs going on.

So from our perspective, you know, what can we look for in terms of internal growth rate and maybe in Q3 and Q4, if you want to speak to that?

Yes, I don't think we're ready to give guidance on that. I can tell you that we've gained a considerable amount of market share. And assuming that all these new programs that we put into place performed reasonably well we should do well, but we don't want to put any numbers on it.

No numbers at this time. Just kind of--

No.

Maybe we'll just assume kind of flattish for now then and wait to see what happens in Q3, is that fair?

Yes, I think so. I mean, you know, we still have-- even though we don't have anymore-- we're no longer up against any Linens 'n Things business, we still are up against this one-- some business with this one customer that we discontinued with last year, although it was-- it'll be a positive-- it'll be positive for our bottom line but will hurt our top line a little bit.

Top line a little bit.

Yes.

And just to touch on the gross margin, you mentioned it was a mix related issue. Any other really comments there as far as, you know, what impacts, some of the expense increases that we saw last year in China might have? Are we seeing a reversal of that?

Yes, we are. And we should see a continuation of-- and margin improvement as the year goes on.

So sequentially we should see it rationing up. And then what about fourth quarter, does that go down again?

No, it should continue because the prices have not-- we have not had increases overseas. I mean, it's-- the prices have come down. They've pretty much stayed down. Ocean freight is anticipated to stay down for quite some time. It's dramatically lower than it was in the past.

Okay.

No, I think our margins will improve.

They should be improving. Okay. Well, thanks a lot. I appreciate it.

Yes.

Thanks.

Your next question comes from Neal Goldman with Goldman Capital Management.

Hi, guys. This is the first quarter I've been impressed with in a long time, primarily on the balance sheet. How much further inventory reduction can we expect as you get everything aligned?

Well, I think I'm more optimistic that some other people, so I thought a higher number. But within the Company the feeling, in general, is somewhere $10 million to $15 million.

Okay. Great. I was looking at your-- you know, the financing agreement that was concluded. And they had an assumption for June 30th of a-- you know, to stay in line you had to have a negative $3.4 million, and you had a positive $5.6 million, so that was a $9 million EBITDA swing, okay.

Correct. Yes.

That's correct.

And I'm assuming that trend will continue for the balance of the year based on your comments before.

Yes, we think so. And of course we set covenants that are, we believe, very easy to achieve. But, yes, we expect that to increase.

Okay. And so between profitability and inventory reduction, you know, we should be able to reduce-- forget the timing because I know it's a December yearend and you get paid in January, but you probably had, like, what another $20 million of bank debt you can pay down between now and yearend or from January 30--

I mean, certainly-- I mean, it does go down December, and it goes down also in the early part of the next year.

Right.

So that certainly should occur.

We're going to continue our focus on inventory management. And I think it's a good assumption that will go down quite a bit, Neal.

Okay. Also, in your agreement you had a CapEx, you know, maximum of $6 million. What have you spent to date, and what's your anticipation for the balance of the year?

Well, spent $1.2 million year to date.

I didn't hear that. How much?

We spent $1.2 in CapEx through the first six month sort of the year. There will be more of it, but it will not-- we will not hit $6 million. We have no plans to hit $6 million for the full year.

I mean, will the second half be similar to the first or just a little higher or what?

It could be-- I think it'll be a little higher, yes.

(Inaudible) $3 million for the year in total instead of the $6 million.

It could be. You know, we're certainly being conservative.

Is all the plant consolidation and warehousing fairly much complete at this point? Will we start seeing the benefits?

Yes, and as I said we should-- as I said for direct to consumer, which we'll get the biggest benefit we have yet to realize because we've closed York in June. So all the facilities have been closed and consolidated, so we're in a position now where we're using a lot of our capacity to be very efficient on the distribution expense.

Okay. And how much of the increase is tied to that new accounting rule in terms of that long-term debt of yours? You know, what I mean? I mean, the cash.

Yes, it's about-- yes, the accounting we're referring to, how we bifurcate between an equity and debt component, it's approximately $2.6 million annually.

Okay. So that's just a non-cash number, right?

Correct. Yes.

Okay. And that'll continue till that loan is paid off at this point or?

Right. The way we did it, and of course you said it, too, that it fully accretes at the maturity date.

Okay. One last question. Jeff, how's Vasconia doing in our investment? (Inaudible) in terms of the value of peso but in terms of their business what's happening.

Their business is good. I mean, they're gaining market share, considerable market share. And the Mexican retail economy has not suffered anywhere near as much as the US retail economy. And they have gained considerable market share. So their business is good. It's solid as can be.

And how is that brand doing in the US?

We're getting traction within the US. We have a number of major retailers that are working with us on it. Even-- we broke into Wal-Mart with it. So it's got a future for us. It's got a serious future for us.

There's much more emphasis among US retailers in the Hispanic community right now. I think we were early in what we did, but the-- there's no question that the retailers are moving in that direction. I don't know if you read recently what Wal-Mart has started. They opened a number of Hispanic stores that are doing extremely well, and we're in there.

Okay. And how is that brand relative to other, you know, names in the Hispanic rank?

It's number one. It's the brand that's most known in Mexico and Mexican-Americans, which are more than half the Hispanics in the US, know the brand and respect the brand. It's great for us.

Okay. Great. Nice quarter. And hopefully we'll have real nice profitability in the second half.

Thank you.

Thank you.

Your next question comes from Doug Lane with Jefferies.

Good morning, everybody.

Good morning.

Jeff, can you just sort of give us some idea of your thought process going into this holiday season versus the last year? What are you doing differently from a product or channel standpoint, marketing? Just how's your mindset now versus maybe a year ago [looking] at the holiday season?

Well, the-- we certainly have spent more time getting market share from those retailers that are doing well, frankly, and we've worked very hard at doing that. I don't want to go into the names, but it's been a very important part of our emphasis in gaining additional SKU placement in the retailers that are healthiest of all the retailers. And we don't ignore the others, but we really make more emphasis.

I think we're-- we certainly went in very aggressive early in the year. We-- when we went to the houseware show, which is the major show for our industry. We went over the very large number of what we call Black Friday special, and we have a great placement on those. And they're not only to be run on Black Friday, but they run it anywhere in the-- really start it in the fourth quarter for the retailers.

So we have a significant number of items that are going to be run promotionally by the retailers. Retailers will be aggressive again this fall just like they were last year. There's no question about it. And we want to be a big part of that. We intend-- we expect to be a big part of that.

How do you think the consumer approach is this year versus last year?

It's conservative. The-- you know, consumers are holding back to some degree. We're finding it different in different parts of our business. But there is certainly more weakness at the very upper end, which is not the biggest part of our business. Fortunately it's a very small part of our business. But the opening price points are very strong right now.

Okay.

And the step above the opening price points are very strong.

Okay. Thank you.

Your next question comes from Gary Giblen with Axiom Capital.

Hi. Good morning.

Hi, Gary.

Good morning.

On the gross margin question, you know, you're pretty optimistic about margins improving for the rest of the year, but retailers would-- are telling the Street that they're going to capture all the freight and lower cost of goods, improvement. I mean, this is in general for all categories. So, I mean, to what degree might you have to give up some of the cost in freight improvements to pass it on to the retailer?

We certainly do. I mean, the-- if we have our freight go down 50% we're not going to keep it all. The retailers expect a good part of it, and we will give it to them. But at the same time we'll improve our margins. So it's a combination of the two.

There's, you know, the retailers-- you know, in this economy they need the lower prices. We're going to work with them with their partner. We will give them the lower prices. But fortunately with the worldwide cost of raw materials and ocean freight and the fact that hungry-- you know, factories in foreign countries are pretty hungry we're able to get lower costs. But we will pass on a substantial part of that to the retailer, yet we'll keep some for ourselves.

Okay. Thanks for that clarification. And how is Canada shaping up with Accent Fairchild? Are they, you know, improving-- yet showing improvement in sales through better focus on the Canadian market?

Yes, they are. They've always been focused on the Canadian market. The people who run that business are pretty much experts in that business.

But improving versus your previous lesser focus on it.

Well, their benefit now is that they have a much lower cost. I mean, we don't-- when we sold to them in 2008 and prior we marked up the merchandise. Now, we don't mark it up. They're buying directly from the factory. It doesn't go through us. And we share in their profits.

So they've been able to reduce their selling prices considerably for a number of reasons. First, they're getting the same cost reductions that we get in raw materials and, you know, merchandise and so forth. And in addition to that they've eliminated our markup. So, you know, for them it's a considerably lower cost. They're able to give it to their-- do that with their customers. But overall the bottom line for us is better for us. It's more profitable for us in the long run and even the short run.

Okay. And just finally are there any other retailers that, you know, could become credit problems either in, you know, you're shipping less to them or even, you know, going totally negative on you, or are you pretty well over that?

I think, yes, it seems to have really calmed down. We watch things very carefully. As you know, we're very much on top of that, and we watch credit very much with retailers. But we seem to have passed the bad phase, and hopefully things will improve even more. We do watch it very carefully, Gary.

Okay. Very good. Thanks so much.

Your next question comes from John Walthausen with Walthausen & Company.

Yes, good morning. I don't think I ever expected to ask you this question, but your inventory reduction in the second quarter was very dramatic, and it's kind of an unusual time of the year to be able to accomplish it rather than during the heavy selling season. Could you talk about, you know, whether there was a substantial amount of discounting to remove the inventories and whether-- well, just how we should understand that, and what the implications are for the balance of the year having really-- looks like taken relatively small amounts of new merchandise in during the quarter?

Yes, the-- no, there wasn't the heavy discounting. We had more heavy discounting, frankly, last year when we were getting rid of some merchandise from other divisions. It's just we went into the first half-- into the year with a heavier inventory than we expected because retail sales did slow down dramatically in the fourth quarter of last year. And we have been working that down.

But it wasn't-- we didn't have the need to discontinue as much. Our discontinued inventory has been running at a very low level, and we've been cleaning very carefully. It does have somewhat of a negative effect on volume because, you know, with less discontinued inventory you have less to sell to some of the close-out retailers.

Right. Okay.

And that-- we expect that's going to continue for the rest of the year and probably into the future as we manage our inventories better. So another-- it's another thing that affects our top line but certainly doesn't affect our bottom line. It's better for our bottom line overall.

But we have not had to liquidate a lot of merchandise. We're in a very-- we have a very clean inventory. It's just managing it well right now. That's all.

And is the lower levels of trade out there enabling you to take some of the merchandise that you need for the second half, even coming in in the third and fourth quarter rather than in the second and third quarter?

We're bringing in the-- we are bringing in the merchandise much closer to need.

Okay.

We have systems in place that allow us now to be able to do that while still, you know, maintaining the fill rate that's up in the upper 90s, close to 100%. We didn't have those systems in place, you know, in 2007. We started getting them in place in 2008. Had to get comfortable with them. We're very comfortable with them now, so we do bring merchandise in much, much closer to need. We've reduced what we call our safety spots dramatically.

So that's as much an issue of the systems as you-- as greater availability of ships out there. So because, I mean, I think it's unprecedented to have inventory go down during the second quarter versus the first quarter.

Well, in our case it was-- it had-- it started going down in the first quarter and just continued into the second quarter.

Yes.

And it-- you know, we're getting to the point where it's not-- our inventory is not going down anymore. We reached the bottom, I think, in July of where we thought we were going to be for the year. It's now going up a little bit and will come down again in the fourth quarter.

Well, congratulations. That's very helpful.

Thank you.

Your next question comes from Quinton Maynard with Morehead Capital.

Hey there, Jeff.

Sure.

Congratulations on the good results. Just a quick question for you. I believe the new covenants required you to engage a financial advisor to prepare a report outlining suggested changes in the business.

Yes.

Do you plan to release the report? Or, if not, is there any chance you could just give us a little color on what those results look like?

Well, you're absolutely right that we did engage Carl Marks & Company to do that, but we will not release the results, you know, for a number of reasons. And we have implemented a number of the changes that they've suggested. Some of them are just reinforcing things that we expected to do anyway. And, you know, they certainly have given us some help, and we appreciate the help.

All right. Thank you very much.

Thanks.

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

Thank you. Thanks for joining us today on today's call. I hope we've given you a good overview of how we've positioned Lifetime to do well even though the retail economy remains difficult. Our acquisition of Mikasa, the many operational improvements we've implemented and our new ways of generating innovative products are all designed to make 2009 a much stronger year.

We're looking forward to giving you an update on our efforts after the third quarter when we've entered into what's traditionally the most active part of our year. 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 line.