Lifetime Brands Inc (LCUT) 2009 Q4 法說會逐字稿

Welcome to the Lifetime Brands fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks we'll hold a Q and A session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, March 11, 2010.

I would now like to turn the conference over to Harriet Fried. Please go ahead, ma'am.

Thank you, Michael. Good morning everyone and thank you for joining Lifetime Brands fourth 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 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, Harriet. Good morning, everyone. I trust you've had a chance to read earnings release we issued earlier today. Larry Winoker, our Chief Financial Officer, will review the numbers with you shortly. Clearly 2009 was a challenging time.

The year began amid grave concerns at the direction of the economy and substantial uncertainty as to the government's ability to provide an adequate timely response to the worst economy any of us have experienced. Generally speaking, consumers reacted by, in effect, shutting down and restricting their purchases to bare necessities and retailers accelerated the destocking process that had begun in 2008. Taking retail inventories to their lowest level in memory.

Lifetime's ability to withstand these conditions stands to the tribute to the strength of our brands, the resilience of our organization, the flexibility of our business model and our ongoing commitment to innovation. In our wholesale business, adjusting for the nonrecurrence of sales for Linens 'N Things, the change in our Canadian business that we previously described, the elimination of sales to an OEM customer and our acquisition of Mikasa net sales declined by 3.8% for the year.

While this is not what we had wished given how the year began and the year long emphasis on destocking by our customers, this represents a solid performance in the worst environment I've experienced. I'd like to note that in the latter part of the fourth quarter, we finally went to a full year of retailer destocking and we saw our sales begin to normalize. Those of you who are regular listeners to these calls have heard me forecast that our dinnerware business would turn around.

Well, I'm pleased to say that it has. This is -- this would have been an outstanding accomplishment under any circumstances, but it's particularly notable that it came in a year in which most dinnerware companies struggled to stay in business. Thanks to Glen Simon and the great team he's built over the past two years our downstairs, our housewares dinner wear which we sell principally under the Pfaltzgraff brand gained significant placement and chalked up nice sales increase for the year.

Our upstairs bridal dinnerware which is primarily under the Mikasa brand had a terrific year. We expanded both the Pfaltzgraff and Mikasa brands with exciting new designs and brand expansions such as Pfaltzgraff Traditions and Gourmet Basics by Mikasa that allow us to present those brands to a broader spectrum of consumers and we introduced Pfaltzgraff and Mikasa flatware that immediately achieved acceptance by retailers and consumers. I'm also pleased to report that two of our smaller divisions Melannco and Design for Living achieved significant growth in 2009.

Melannco which is run by Barry Gordon had great success with its frame, decorative shelf and over the door mirror products while Designed for Living or DFL run by Paul Feeney achieved broad placement for our innovative new line of water bottles and coffee mugs.

Looking forward, we believe that consumers are likely to continue to be cautious and retailers still are in no mood to expand inventories. Under these circumstances growth must come from increased market share.

As they have in the past, we believe that increases in market share can only be attained by bringing to market innovative products at great value. As many of you know, Lifetime, for many years, has led the housewares industry in new product development.

Indeed, in a year when many companies cut product development budgets and reduced staff across the board, Lifetime increased overall spending in this area. With almost 100 designers, engineers and artists in the US and Asia focused on creating new products, we have been able to introduce more new and innovative products annually than anyone else.

In 2009, we introduced over 5,000 new or redesigned items, a number that we expect to increase by over 55 -- to over 5,500 in 2010. Many of these will be shown for the first time next week at the International Home and Houseware Show in Chicago.

In addition to our full-time in-house design staff, we've developed a network of thousands of inventors and new product entrepreneurs through our association with a national and vendors group.

In 2009, we screened over 1,000 inventions submitted by this group and of some of our most successful new product introductions originated from this network. Since great products only succeed if they're priced right, we have developed our own sourcing and manufacturing operations to ensure that the cost of our products is as low as they can possibly be.

Perhaps our most remarkable achievement in 2009 was the deleveraging of our balance sheet that was brought about by strong cash flow and reduced inventory levels. Together, these enabled us to reduce borrowings under our bank credit agreement at December 31, 2009, by almost $65 million as compared to December 31, 2008. I'd also like to note that though we dramatically reduced inventory, our fill rate was virtually unchanged.

The new disciplines we've developed will be a permanent part of our culture and should serve us well as business conditions improve. Many of you no doubt are aware that borrowings under our bank credit agreement mature next January followed shortly by the $75 million convertible notes which are due in July of next year. Together with our advisors, we're working to refinance both the bank credit agreement and the convertible notes prior to their maturities.

Before turning the call over to Larry, I want to acknowledge and express my personal thanks to our employees, customers, vendors, financial partners and investors for your input and assistance during this extraordinary period. Your support was critical to the progress we made in 2009. For many years we used these calls as an opportunity to give financial guidance. Rather than resuming the practice of giving you specific earnings per share goals, let me outline our thinking about 2010 the following way.

As I said earlier, we believe consumers are likely to remain cautious and we don't expect retailers to expand inventories. Consequently, I don't believe our -- I don't expect our wholesale sales to grow more than say 3% to 6%.

On the other hand, our direct consumer business which is done mostly through the internet although relatively small should grow by a much higher percentage. Gross margins on balance are likely to stay pretty close to where they were for 2009. There are variables that we cannot control include changes in transportation costs, commodity prices, and exchange rate fluctuations.

However, we've experienced these variables in the past and have often found ways to mitigate their negative effects. In 2009, we achieved significant reductions in distribution expense and SG&A, both still can improve as a percentage of net sales as long as we're able to achieve sales increases. Interest expense, of course, should come down significantly reflecting lower average borrowings during the year. I'm sure you'll have questions and I'm delighted that Larry's here to provide you with the answers. Larry?

Thanks, Jeff. As we reported earlier this morning net income was $5 million or $0.41 per share for the fourth quarter, 2009 as compared to a loss of $36.8 million or $3.07 in 2008. Income from operations excluding restructuring and impairment expenses was $11.7 million in 2009 quarter versus $261,000 in 2008.

Looking at the fourth quarter results from our wholesale segment, net sales for the 2009 quarter were $118.2 million, a decline of $900,000. However, income from operations excluding the restructuring and impairment expenses more than doubled to $15.2 million from $6.6 million a year earlier. The segment achieved these results through improvement throughout the entire P&L, gross margin, distribution and SG&A.

Net sales for the food preparation and home decor categories were approximately the same year-over-year and decline in the tabletop category attributable to weakness in flatware was offset by growth in our Design for Living division. Gross margin for wholesale increased to 37.4% for the quarter from 34.7%. The improvement is primarily due to favorable product mix and lower inbound ocean freight costs. Distribution expenses declined to 8.1% of net sales from 10.7% in 2008.

This improvement reflects the consolidation efficiencies realized primarily from the closing of the York, Pennsylvania facility and the nonrecurrence of distribution services for Mikasa provided by the seller and related integration costs incurred in 2008. SG&A in 2009 was $19.4 million, a decline of $2.7 million as a percent of net sales it declined to 16.4% from 18.5%.

The decrease is primarily due to ongoing efforts to pair overhead expenses including selling expenses and occupancy costs. The 2009 quarter also included higher bad debt expenses.

Turning to the quarter for the direct to consumer segment, as a reminder, our direct to consumer business now consists of the internet and catalog channels only as we close all our retail outlet stores in December of '08. So my comments will address the ongoing business only. Net sales for the quarter was $9.9 million, a decline of approximately $800,000 from 2008.

However, direct to consumers operating result improved by $1.9 million to approximately $300,000. Although income was modest, the result was quite significant and while the segment still produced a loss for the year, it did not begin realizing the benefit of the distribution consolidation efficiencies until the back half of 2009.

Had these efficiencies been in place throughout the year, this segment would have produced a modest profit for the full year. The decline in net sales for direct to consumer reflects our deemphasis of catalog driven sales which historically were not profitable. Gross margin increased to 71.9% from 69.4% primarily due to selective product price increases.

Distribution expense for direct to consumer was 29% in 2009, a significant improvement from 39.4% in 2008. This improvement reflects the benefit of vacating the York, Pennsylvania facility. SG&A declined to $3.9 million from $4.7 million primarily due to lower catalog production and mailing expenses associated with the deemphasis of the catalog channel.

Now looking at the nonsegment items. Unallocated corporate expenses were $3.8 million in 2009 versus $2.9 million last year. The increase reflects restoration of management incentive compensation and was partially offset by lower stock option expense.

During the 2009 quarter, we recorded approximately $1.8 million of restructuring expenses primarily related to vacating office space in York, Pennsylvania. Our plan restructuring efforts are now complete and we do not expect any significant charges in the foreseeable future. Interest expense for 2009 quarter increased by $700,000 to $4.1 million.

The 2009 period includes an $800,000 non-cash expense related to a portion of our interest rate swapped contracts that no longer qualifies for hedge count. This occurred because we substantially reduced our outstanding bank debt below the notional amount of the swaps. Excluding this item, interest expense was approximately the same in both years as higher interest rates on our bank debt were offset by lower average borrowings.

For the full year 2009, we reported income before taxes of $2.4 million. However, excluding restructuring expenses and the non-cash charge for the interest rate swaps, we would have reported $5.8 million. Equity in earnings in Grupo Vasconia our 30% owned Mexican investment was approximately $500,000 for the quarter an increase of $400,000 reflecting its continued strong performance.

Income tax expense for the quarter in the full year 2009 reflects state income and minimum taxes and deferred taxes related to basis differences in certain indefinite life and tangible assets. We expect to pay only minimal federal income taxes on accounts of 2009 results.

Going forward we expect our normalized effective tax rate to be approximately 40%. However, due to the losses incurred in 2008, accounting rules required us to report a reserve against our deferred tax assets which is approximately $10 million. A release of this reserve would reduce our tax expense but have no effect on our normalized effective tax rate.

Turning to our financial position, in late 2008 we set a course to deleverage our balance sheet and restore our operating performance. We navigated through this course during a very challenging 2009. Our success is evidenced by the reduction in our bank borrowing of $67 -- $64.7 million to $24.6 million at year-end 2009 and adjusted full year EBITDA of $34 million.

We achieved this outcome through better operating performance which included the closing of the unprofitable retail outlet operations, consolidating our distribution facilities and pairing operating expenses and capital spending where appropriate. We reduced working capital by $32.8 million mostly from lowering inventory levels. We also benefited from an $11.3 million federal income tax refund related to the carryback of 2008 tax losses.

We believe our actions have put us in a favorable position to refinance our indebtedness which matures in 2011. Though we can't provide details of our plan at this time, I can say that we are in active discussions with various lenders and are working toward a solution which will allow us to operate without concern for current debt maturities. At December 31, 2009, availability under the bank credit facility was $49.9 million which is net of a $50 million minimum required availability.

While we are not going to provide guidance for 2010, there are some changes to our P&L that will make the first quarter 2010 different from the first quarter of 2009. Our wholesale gross margin, which has improved during the back half of 2009, is expected to remain through first quarter of 2010.

In addition, first quarter 2010 will benefit from the distribution efficiencies that were not in place during early 2009. Based primarily on these factors, we believe that the first quarter of 2010 is expected to approach a break even P&L versus a $6 million loss in the first quarter of 2009.

This concludes our prepared comments. We're ready for questions.

(Operator Instructions) Your first question comes from the line of Gary Giblen with Quint Miller. Please go ahead with your question.

Hi, good morning, everybody.

Morning.

Jeff, from your comments

Gary, could you speak louder? We can't hear.

Sorry want from your comments at the beginning are you saying that stocking is completely over by retail?

We've come to a normalized level, you know. The retailers now have reached the bottom from what we see of where they're going. So we've anniversaried it. We start anniversarying it in November. So we're now at a normalized level of inventory -- the new normal, so to speak, and I think it will stay this way for quite a while. We don't see any retailers that we know of reducing their inventories further than they reduced them.

Okay. That's good. And also now that the first quarter is kind of 75% the way through, you know, Larry addressed some of the margin factors that would be different in the first quarter but how about sales? I mean, you know, you had said for the year maybe wholesale up 3% to 6% but would that -- is that what the first quarter is looking like?

We're not going to give guidance on sales, but, you know, I can tell you that we're enthused with the way things are going. That's all I can tell you.

Okay. And just finally when do you think you might restore, you know, a complete guidance offering?

We haven't made a decision on that, Gary. We'll think about it as the year goes on and if things continue to be back to a normal situation they were in earlier years, we would certainly consider that.

Okay. Good luck through the quarter and the year.

Thank you.

Thank you.

Your next question comes from the line of Derek Leckow with Barrington Research. Please go ahead with your question.

Thank you. Congratulations on a great quarter.

Thanks, Derek.

First question is dealing with Larry's comment about the first quarter. That's a pretty dramatic swing you're expecting in profitability if we look at last year's $0.43 loss. Is the primary reason for that going to be something, you know, obviously the expense savings you guys have put in place, I'm assuming a lot of these savings are sustainable and is that the major factor driving that year-over-year improvement?

Well, as they said, if you look at the first quarter of last year, of 2009, our gross margin and wholesale were below 34%. That had a lot to do with mix as well as that we were suffering from the higher freight costs that we incurred earlier in '08. Now we have realized the benefit of some of those declines from freight costs as well as better mix. So we think we'll be able to continue what we've achieved in the back half of 2009 and particularly the fourth quarter into the first quarter. That's probably --

That's the biggest factor, then, leaving that gross margin where it is.

That's four points. Distribution, we didn't completely exit north until the back half of 2009. So -- that's particularly an effect I would direct to consumer business. They have started to realize the benefit in particularly the fourth quarter and will certainly, you know, now continue permanently to get that benefit. We also had an $800,000 restructuring charge last year in the first quarter and we're not anticipating anything this year.

I want to one thing on the margins, you know. In the beginning of the year we set about to dramatically reduce our inventory levels of which we were successful and, you know, to some degree that included selling things at a lower margin than we normally would have, some excess inventory. So with that behind us, also, that clears the way for us to maintain reasonable margins again.

And then can you guys address the sustainability of some of the savings just on the SG&A and the actual costs, you know, SG&A costs? I mean are those also -- you mentioned having some leverage on those expenses this year, but I just wonder if we're at a lower than usual level right now or lower than normalized level at this point in time and should we expect that to grow a little bit throughout 2010?

I don't think so. As we mentioned, we did restore the incentive plan. So that's reflected in 2009 and the profitable in 2010 will continue to improve for that.

Yeah. But we've set a new standard for ourselves and we restructured the company in a way that we have a lower -- considerably lower SG&A and we also have a lower distribution expense and we're not going to go back to the old ways. I mean not significant, but when you add them up it might be that I mentioned occupancy costs, we have vacated some locations, showrooms, office space in York that we don't have the full year benefit in in 2009 which we will see in 2010.

A functional improvement, I guess, starting in 2010. That's why we're getting this big swing in Q1. If I go back to your model back when you guys were purely a wholesale company back in '04/'05, you guys were profitable every quarter. Is it reasonable to assume that probably won't happen in Q2? Could we possibly see profitability --

We're not going to give guidance to Q2 yet, but I think the way we've structured the company now going forward could we make money in of quarter? The answer is yes. Where it wasn't possible a year ago, but I'm not going to give you a prediction for the second quarter.

All right. And then if I could just finally ask one question on the longer term strategy with regard to Vasconia. I mean, it's producing positive equity. I just wonder what your longer term strategy is?

Right now we're certainly working very closely with them in many ways. This is terrific, really phenomenal, grew great, you know, had great growth in 2009, very profitable company. They're expanding their distribution further into other countries in Latin America other than Mexico in addition to growing their Mexican business and, you know, we're going to -- we're very happy with the investment obviously and it's helped us in many ways, also. We're doing some of the things here from them. So right now we're going to stay the course. We're happy with our partners there. We think the people are terrific. We just want to stay with them.

So are they also anticipating growth in their earnings next year? Are we seeing them make some investments that might -- I'm just trying to figure out how to model the equity.

Again, they're a public company in Mexico and, you know, they don't give guidance, so we certainly wouldn't give their guidance.

But just in terms of their profitability, it is improving. So I mean --

It has been improving. It certainly improved in 2009 but we're not going to give guidance on their profitability in 2010.

Okay, very good.

We're not allowed to do that.

Well thanks a lot and of good luck.

Thank you.

Your next question comes from the line of Neil Goldman with Goldman Capital Management. Please go ahead with your question.

Good morning, guys. As far as on the interest side it looked extraordinarily high with $13.1 million. You have $100 million now in debt at year-end. What would you guess would be your peak borrowing there's year and your average borrowings? Forgetting the refinancing.

Well, the peak borrowing always comes in the end of third quarter, beginning of the fourth quarter. Because of the way we are moderating our inventory levels, it's not going to be as dramatic as you've seen in past years. I won't give a number because again, it really ties into what our volumes will be and things of that sort. So I really can't give you what --

You're not looking for significant increase in volume. So if you maintain your inventory balances like you have, I mean, it doesn't sound like you'd be borrowing on average more than the $100 million, okay, if not less.

Are you including the notes?

Yeah, I'm including the notes.

Okay. Well, the notes are $75 million. So then you're saying it wouldn't go at $25 million. Well, we're at $25 million at year-end. So it certainly has to go above that.

It will go up a little. We still have a little room to reduce inventory, nothing like we did in the past and, you know, we're able to acquire goods in a way that we've been able to shorten the lead times and work, you know, work a little bit better. So it's certainly not going to go much more, but it will go up a little more we expect.

On the short term --

Depends how the year goes. It should be lower than the $100 million. Then, of course it, will go up a little bit.

But I mean I can't conceive of more than $6 million in interest costs, you know, given the current mix of borrowings.

That's half of what we had this year.

That's my point.

We don't want to put a number on it because we're obviously in negotiations with the banks. Just understand because on the note, $75 million is because of the change in accounting rule, the effective interest rate on that is over 9%.

Right.

So 75 times nine, that's almost $7 million.

Okay. But on the assumption you've refinanced -- well --

You got to tell me what rate we're going to refinance at. There's so many variances here. It's a little too early -- so many variables here. It's a little too early.

It's going to go down somewhat and the question is how meaningful?

All I can say is that the interest rate, the amount of money we pay for interest, will come down and will come down substantially, but we don't want to put a number on it until we do.

That's fine. That's fine. You made a comment some more inventory or working capital reduction. What would be a reasonable goal for this year?

You know, I don't want to give a goal. I tell you what my personal goal is which is not in our financials. It's taken down at the end of the year about $15 million.

So let's assume it's $5 million on that.

I can tell you that would really be a stretch. Most likely it will be somewhere between five and that, somewhere in that area.

All right.

It's nothing like we had in the past, though. We don't have that much room.

I understand, but it's still another $5 million or whatever, you know.

Yes. We could certainly take it down another $5 million. The long term goal has been to get the three turns. Some of our divisions have already hit the three turns. We're there. Others have not. The goal is to have them all at three turns.

Okay. What's your CapEx this year forecast and what's your D&A?

For 2009?

2010 what's your CapEx assumption and what's your depreciation amortization.

It should be -- I don't have the D&A. Should be lower than it was this year, I mean 2009, because, you know, we had some accelerated amortization. I don't have it at my fingertips. Something around $10 million.

Okay. And your CapEx?

Excuse me?

What will be your CapEx this year?

I said for 2010 it shouldn't exceed $5 million.

Five would be the outside number.

Okay. So there's another $5 million of cash flow generation on top of any working capital.

Depreciation's $10 million. Yes, that would be correct.

Okay. If you -- you know, I guess I'm trying to understand if I -- because if you have sales, let's just say it's up 4% to $430,000,000 and you maintain 37% gross margin given the business, okay? Just assume Vasconia is flat.

I'm hard pressed for you not to come out with a 6% pre-tax margin which would lend itself round numbers to $1 a share after tax, okay? I think it could be a lot more, but just given the SG&A reduction, the bank debt reduction which will affect interest, you know, plus additional working capital benefits of $5 million of inventory and $5 million of excess in terms of your, you know, CapEx versus depreciation amortization plus the earnings, you know, by the end of this year essentially you could be almost at a bank that -- forget the $75 million and how you restructure it?

Your assumptions, you run those assumptions how you'd exactly work mathematically. As you said, we're not going to give guidance. You said that you're making the assumption that our margins are maintained. Obviously we can't predict where they'll be.

We certainly know what they are now and looks like we have a pretty good prediction on the second quarter but the margins in the third quarter are a little more difficult for now. We don't want to give guidance. We can't comment on what you said obviously.

What did you lose in the second quarter of last year? I mean for the first half what would you say you lost last year, $6 million or $5.2 million pre-tax.

We lost money in the second quarter as well.

Okay. So already we have an enormous swing. I don't know if it's $0.50 in earnings just there or $0.40 in the first half.

We lost -- we think we lost about $2.5 million for the six months of last year.

Okay. So you lost $0.15, $0,16 cents?

Right.

Okay.

No, no, more. $0.21 for the six months. Anyway, let's go on. Yeah.

All I'm saying is if you have all these cost savings built in and lower interest rates and a normalized tax rate, okay, because you earned in the -- what did you earn in the third quarter, $0.40 also?

Yes.

Okay. And $0.41 was still a lot of flakey numbers in this fourth quarter, you know, and you saved yourself, you know, $0.20 some odd in the first half, you know, if you break even overall, you know, you're already over $1 a share. You know, forget sales growth and other efficiencies that will be a full year benefit. That's why I said I'm hard pressed to see less than $1. I know you're not going to comment on it, but, you know, and if the economy ever picks up, then we're dealing with a different sales values.

We've certainly positioned ourselves. We're a leaner stronger organization. We can certainly do a lot better, but you're right, I'm not going to comment on it.

Okay. That's fair. Okay. All right. Thank you very much. Good luck, guys.

Thank you.

Your next question comes from the line of Pier Uslin with Jefferies & Company. Please go ahead with your question.

Thanks. Good morning, everybody.

Good morning.

I guess most of my questions have kind of been answered, but maybe just a qualitative question on IHA coming up next week. It sounds like the product development activity has accelerated this year and perhaps maybe your competitors have kind of been a little bit more stagnant on that front. Is that -- do you see that leading to increased shelf space at this point?

Yeah. You know, the goal has been for the last year has been a market share growth, you know. With the shrinking somewhat of the market the only way we're going to grow is gaining market share and the only way we're going to gain market share is if we have more innovation at better prices than competitors do and we do that in every one of our businesses.

We really are very focused in each one of the businesses to do that. We're showing more new at the show than we've ever shown before. We've had some preshows with, you know, before the show showing products to some major retailers. It's gone extremely well. That's all I could say. I mean, it's really -- we have high expectations for the show, but even before the show things are working well. We're very enthused. Our whole organization is.

Good, good. So it would seem as though retailers, if anything, despite their, you know, judicious inventory control, if anything, they're probably embracing the extra development to find of spice up the shelves is. That fair?

You're right, but they still are going to maintain low inventories. The turns have, you know, greatly improved and it's been very good because it's really helped the retailers that we deal with stay somewhat healthy. I mean otherwise, you know, a year ago we were facing some pretty scary situations with retailer health and we're not right now, which is wonderful.

I think it's probably better than it's ever been and a lot of it has to do with their financial controls, which we appreciate even though we went through some pain to get there. We're through the pain. We hope they stay this way and stay healthy. So we're happy the way things are going.

That makes sense. Are there any different areas of focus? I mean 5,500 new or resigned products versus 5,000, it's a lot regardless, but, I mean, is there any, you know, category that you're focusing disproportionately on versus the past or are there any, you know, particular couple of things that you're more excited about than anything else?

Of course there are. For us the way I look at it, it's the size of the price. Wherever there's a bigger potential prize, we put more emphasis. I won't say which is here now, but I could say every one of the divisions has significant new products coming to market and we're enthused with that, but the ones I get most enthused with are the ones that have the potential to do more dollars.

That's fair. Maybe one last quick one. Gross margins gotten better here for looks like about six quarters in a row. Has there been any change, you know, looking out ahead and I know you're not guiding, but has anything changed on the sourcing cost front or, you know, the overseas shipping or anything like that that, you know, incrementally better or worse looking out?

Well, yes. I can give you a little bit of guidance on this. It's pretty easy. The biggest change we're seeing is that ocean freight has gone up, not dramatically, but it has gone up, but we've already put that into our pricing and, as do other people as well. So that's not going to really be much of a factor right now. Some materials have gone up.

The biggest material increases are coming in resins. Resins are a relatively small part of our overall sourcing costs, probably somewhere -- you remember some of our business says have no resin at all like dinnerware and flatware. So it's probably the overall input cost are about 10% or 11%. Some of them have gone up, but we've redesigned some products. It's not affecting us right now, not at all, and my expectation is you're going to see fluctuations in raw materials. We've dealt with this before. We know how to redesign products. We know what to do and we will continue to make sure that it doesn't hurt us. That's all I can tell you.

Good. Thank you very much.

Your next question comes from the line of Brian Freckmann with LS Capital. Please go ahead with your question.

Hey, guys, how are you?

How are you?

Good quarter. You know, Larry, since we talked the last couple quarters you guys continue to just sort of block and tackle, was hoping you could maybe help me out a little bit more without giving too much guidance. You know, what are the levers, that you know, can still pull on?

So I mean I wasn't able to sort of break out the numbers from your press release in regards to sort of, you know, SG&A by direct and wholesale and all that, but I know you guys have done a good job of maximizing margins there. You know, what lines are still -- are you still able to pull on maybe if you can help me kind of go through where there's still hope for benefit?

Well, most of them have been put in place and as I said earlier, we haven't seen a full year benefit of those improvements, particularly the one that we can control, which is the distribution expense, and, you know, you look through in the comments, you know, we're going to see a substantial improvement in the distribution rate for our direct to consumer.

The SG&A, the things that we put in place, are largely done. So that's sort of our run rate and if we can grow -- as I said before, if we can grow the business, we don't need to invest in infrastructure neither in warehousing or in people or systems because we have made that investment. So, you know, we can grow the top line, we will see a much lower growth rate in SG&A and distribution expense.

Okay. And then I'll take this last one offline. You know, you just maybe this is just sort of tell us about the industry as you see it right now.

You mentioned you more are taking organic growth. I don't know, maybe a little more clarity this. Does that mean product lines? Could you explain maybe more about, you know, what your customers are telling you? Kind of help me clarify what are the, you know, organic within the industry, how you're taking it versus your customers.

Well, you know, the industry certainly didn't grow in 2009 and we don't expect that overall we will have much growth in 2010. So we're just taking market share. If we take market share by just doing things better than the competitors do.

It sounds simplistic, but that's really what we have to do and that's what everybody in this company is focused on doing. Doing everything we can better than the competitor does, whether it be designing products, sourcing products, manufacturing them. We do some of our own manufacturing. Whatever we do we just want to do it better than someone else and therefore, the retailers give us a little more space on their shelves. Really nothing more than that.

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Okay. Thanks, everyone. I really appreciate you joining us. We have made a lot of progress.

We've changed our structure, our systems. We're a much leaner and more focused company. Our whole organization is enthusiastic, especially about the upcoming show next week and we look forward to having a very good year. So we look forward to talking to you again in a couple of months. Thank you.

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