Lifetime Brands Inc (LCUT) 2010 Q1 法說會逐字稿

Welcome to the Lifetime Brands first-quarter 2010 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, Thursday, May 6, 2010.

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

Good morning, everyone, and thank you for joining Lifetime Brands' first quarter 2010 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 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; effect of competition on the Company's markets; and other risks detailed in Lifetime Brands' 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. Go ahead, please, Jeff.

Thanks, Harriet. Good morning, and thank you for joining us as we review our first-quarter 2010 results.

On today's call, I will be joined by Larry Winoker, our Chief Financial Officer.

What a difference a year can make. As compared to 2009's first quarter, in which the Company lost approximately $6 million, today we reported net income of $729,000, equal to $0.06 per diluted share.

Gross margin increased sharply from last year, and we continue to see leverage from reductions in distribution expense and in SG&A. Most important, we returned to growing our top line. Excluding $3.4 million of nonrecurring net sales to one of our customer's going-out-of-business sale, wholesale net revenue for the quarter were up by 2.4%.

We also strengthened our balance sheet by further reducing inventory and paying down debt. Lower inventories mean that we will have fewer goods to close out and, therefore, margins likely will be greater than in prior years. Lower borrowings will result in lower interest expense. We intend to maintain a prudent attitude towards inventory. We feel that there is still room for improvement in inventory turns, though the reduction in inventory will not be as dramatic as it has been in the past year.

Overall, our performance reflects improvements we have made to all facets of our business. In our wholesale business, our food prep and tabletop businesses are up as compared to last year. Our internal plan, which is updated monthly, anticipates increases in these businesses every quarter this year, with the most significant increases occurring in the third and fourth quarters.

We attribute our improved performance to the results of our focus on innovation, brands and value. For many years, Lifetime Brands has led the housewares industry in new product development. In 2009, a year in which many companies cut back development budgets and reduced staff across the board, we increased overall spending in this area. With almost 100 designers, engineers and artists in the US and Asia, we have been introducing more new and innovative products annually than another of our -- than any company in our industry.

In 2010, we expect to introduce over 5,500 new or redesigned items. Many of these were shown for the first time at the International Home and Housewares Show in March and at the Tabletop Show in April. These were two of the best shows I have ever attended, and I have been attending tradeshows for over 40 years.

Reflecting our goal of offering innovative solutions to improve everyday tasks, new product introductions included enhanced designs and functionality in water bottle and coffee mugs, multipurpose peelers, graters and slicers, high-quality barbeque tools and accessories, fashion-forward cutting-edge cutlery, shearer and board designs, unique spice and storage solutions and a significant number of new patterns in dinnerware, flatware and glassware.

In addition to our own full-time in-house design staff, we now have an open innovation network of thousands of inventors and new product entrepreneurs. In 2009, we screened more than 1,000 inventions submitted by this group and some of our most successful new product introductions originated from this network. We expect this network to be a very important source of innovative new products for many years to come.

Eighteen months ago, when we saw that the weakening US economy would put a damper on overall growth in the housewares sector, we began an intense focus on gaining market share. We hold a weekly meeting with our key salespeople and division heads focused only on market share gains in the top 25 retailers we do business with. I can tell you that this intense focus has begun to really pay off. I think you'll see what I mean when we report our sales in the next few quarters.

Our performance also reflects the operational improvements we have made over the past two years. The new disciplines we have developed now are a permanent part of our culture and should serve us well as business conditions improve.

Grupo Vasconia and Lifetime Brands Canada also performed well in the quarter, with each company recording strong local currency sales growth.

On our last call, I told you that I did not expect our wholesale sales to grow more than 3% to 6% this year. Based on indications that the US economy is recovering, I now expect that the number will be closely to 4% to 8% growth in 2008 (sic).

I'd like now to turn the call over to Larry Winoker. Larry?

Thanks, Jeff.

As we reported earlier this morning, net income for the current quarter was $729,000, $0.06 per share, as compared to a net loss of $6 million, $0.50 per share in 2009.

Income from operations was $2.5 million in 2010, compared to a loss, excluding restructuring expenses, of $2.5 million in the 2009 period.

Adjusted EBITDA, which is a non-GAAP measure and is defined in our release, was $37.2 million for the trailing 12-month period ended March 31, 2010, versus $12.7 million for the comparable period in 2009. For the 2010 quarter, adjusted EBITDA was $5.7 million versus $600,000 in 2009.

Looking at our wholesale segment, net sales in the first quarter were $82.1 million, a decline of $1.5 million or 1.8%. As Jeff noted, the 2009 period included $3.4 million of sales including a going-out-of-business sale of a customer that was liquidated. Excluding these sales, wholesale volume increased by 2.4% over 2009.

Wholesale segment gross margin increased 400 basis points in the first quarter to 37% due to favorable product mix, the current period absence of the going-out-of-business sales, lower royalty expenses as we allowed certain unprofitable licenses to expire, and lower ocean freight costs.

Wholesale distribution expenses as a percentage of net sales was approximately the same in both periods, at 10% and 10.1%, respectively.

Wholesale SG&A expenses in the first quarter were $17.1 million, a decrease of 7.1% from $18.4 million last year. As a percentage of net sales, SG&A was 20.8% in 2010 versus 22% last year. This decrease is attributable to the benefit of restructuring activities, namely a reduction in employee costs from management realignment, lower depreciation and amortization, and lower occupancy expenses primarily from consolidating showrooms.

Now turning to our direct-to-consumer segment, net sales for the segment were $6.6 million for both periods. An increase in product revenue, which includes our new Lifetime Sterling website, was offset by lower shipping income, reflecting free shipping promotions.

Direct-to-consumer gross margin decreased to 66.6% from 67.4% in 2009, primarily due to the free shipping promotion activities. Distribution expenses for the segment were approximately 28.6% for the current quarter, compared to 39.8% last year. This significant improvement is due to the efficiencies realized from our exiting the York, Pennsylvania distribution center during July of last year. This segment's SG&A in 2010 was $2.6 million, compared to $2.5 million last year.

With respect to our nonsegment items, unallocated corporate expenses were $2.4 million compared to $2.7 million in 2009. The 2009 period had higher consulting expenses and severance costs. Interest expense declined to $2.4 million from $2.9 million. This decrease is due to lower average bank borrowings in 2010, which was partially offset by higher interest rates.

Grupo Vasconia, our 30% owned investee, continues to deliver very positive results. Its stronger operating performance and the effect of a strengthening Mexican peso both added to our earnings increase.

Turning to our financial position, our cash flow continued to be positive, which enabled us to further improve our balance sheet. During the quarter, we reduced bank borrowings by $4.5 million to $20.1 million at quarter-end. This was achieved through operating cash flows, a planned further reduction in inventory with a modest but appropriate level of capital expenditures of $600,000. We expect full-year capital expenditures not to exceed $5 million.

At quarter-end, availability under the bank facility was $48.4 million, which is net of a $50 million of minimum required (technical difficulty) availability. Given our continued operating improvements and stronger capital position, we believe we are well positioned to address our current maturities.

As we noted during our last call, we are not giving guidance for the year. However, I do want to provide some information that may be helpful to you for your analysis of 2010. First, as you know, our business in the first half of the year is normally lower than the second half. Therefore, wholesale sales volumes during the first half of the year is more likely to produce fluctuations in our wholesale gross margin percentage due to product and customer mix.

Also note that, on an annual basis, we expect a greater portion of our wholesale sales to be sold on a direct import basis. This means that these product sales are shipped directly from overseas factories to retailers, bypassing our distribution facilities. This has a favorable effect on our distribution expense but results in a reduction in gross margin.

Second, the benefit of our restructuring and consolidation actions on distribution and SG&A are now fully reflected in our Q1 2010 results. We do not foresee any reason why these benefits should not continue for the balance of the year.

Lastly, as noted, we are currently in discussion with lenders with respect to our 2011 debt maturities. If these discussions are successful, there will be an impact on our interest expense and related non-cash items attributable to our existing debt. On an overall basis, we do not anticipate a material change in the interest expense solely as a result of any refinancing. Of course, lower average borrowings in 2010, as compared to 2009, would significantly lower our interest expense for this year versus last year.

I just want to make one correction on what I said. I expect that the wholesale sales will increase 4% to 8% in 2010 not 2008.

Now, Operator, you could open up to questions. Thank you.

(Operator instructions.)

Our first question is from Greg Badishkanian with Citigroup. Please proceed with your question.

Hi. This is actually Alvin Concepcion in for Greg.

I just wanted to get a sense -- do you know what the POS at retail was in the quarter and also how trends have been in April?

I'm sorry. I didn't understand what you said.

You didn't come in clearly. Could you repeat that?

Yes.

Oh, POS -- I'm sorry. Yes -- no, POS sales have been trending high.

Last year, we went through a period where retailers were destocking. They're no longer destocking. So they're starting to order more towards sales trends and, also anticipating a little further out, as we can see by our order flow. But the POS sales seem to be rather strong.

So would you say it's growing faster than the 2% at wholesale, excluding that sales -- those nonrecurring sales from last year?

Overall, yes, but the retailers are still being very conservative. They're maintaining low inventories. I talked to one retailer a few days ago that was very, very encouraged by POS sales, and was one of our biggest customers. So I would say overall the answer is, yes, POS sales are increasing.

Okay, great. And then you mentioned some market share gains. Are there any particular segments driving that?

We don't want to go into that, but it's pretty much across the board for us. We've gained market share. It's been a truly intense focus of the Company. It's a two-hour meeting every week. It really is something that's paid off. And frankly, it took a lot longer to pay off than I thought it would, but it's really starting to produce results for us because we're analyzing things that -- in ways we never did before, so quite a focus for us.

Okay. And can you give an update on your view on commodities and also, based on that, do you feel your pricing and product mix will allow you to grow margins this year?

Well, as far as commodity prices, they went up very quickly, starting last year -- starting late last year. It has not had a major -- as you can see, it has not had a major impact on our margins. And we don't expect it to.

A large part of the products that we market are -- they're more labor intensive than material intensive. So while raw materials do have some place in it, it's not a very large place. And we have also been using our design staff to redesign products, to change materials. And we've resourced things when, worse comes to worse, is -- the areas where we were very concerned with raw material prices, we firmed our prices very early and enabled the manufacturers and worked with material suppliers to buy the materials very early on.

Okay. And on that note, what are you seeing on the labor front?

Labor has gone up in China but not so much that it will have a great impact on us. We're doing things to help factories do more automation to compensate for some of the labor increases. But we anticipated the labor going up, and we were right.

Is it sort of trending in line with what you were expecting?

Yes, it is. It's very much in line with what we expected. We also anticipated the considerable increase in ocean freight, which was built into our pricing for 2010.

Okay, great. Thank you.

Our next question is from Peir Uslin with Jefferies & Company.

Thanks. Good morning, everybody, and congratulations on the quarter.

Thanks, Peir.

A question on the interest expense really quickly, the number -- by my math, if I adjust out the APB 14 interest expense, if I'm right about this, the interest expense in the quarter would've been closer to $1.7 million. I guess two parts - is that the right way to look at the math, and then, secondly, is that a reasonable run rate to kind of expect, given the sharp reduction in borrowings?

The 14.1, which is the debt discount, that and any fee amortization with respect to the bonds -- yes, it's about $800,000. So you're right on, on your calculation there.

In terms of run rate, obviously the bonds are fixed rate. That doesn't change during the year. The other part, or course, is bank, and that's certainly a function of what our borrowings will be. On average, they were $22 million in this first quarter and, assuming rates don't change, then you could do -- make some assumptions as to our working capital needs in your model to say what it might be on a full-year basis.

Okay. Shifting gears to the -- you mentioned the increasing shift in the wholesale side to a direct import. I guess, is that -- first of all, maybe what's behind that, and then, secondly, do you see that as kind of a little bit more of a permanent condition?

This is not going to be a very dramatic shift. We've been heading in this direction for some time, where it's appropriate, and we will continue to do so, as we have great capabilities overseas, and now people are able to handle shipping to customers. So we would rather do that whenever possible instead of funneling through our DCs. And it also helps us to keep our costs down. And long term, our intention is not to add any DC capacity in the US but, as we grow, to do more and more direct shipping to make sure that we make more money, frankly.

Makes a lot of sense. Can't fault the logic there.

The last question, wanted to talk about the product innovation and the dynamics of having the -- maybe the increased pipeline of ideas from the outside with the 1,000 inventions having come in. Because I think Proctor does something similar. Are your -- I guess the inventors that you have in your network, are they kind of -- I guess I'm just trying to figure out how the relationship works. Are they more or less betrothed to you, or are they kind of shopping their ideas kind of to anybody that'll listen? Sort of just illuminate us on how the process works maybe a little bit.

These are independent inventors. They're not -- you could call them garage inventors in some cases. But in some cases, they're retired engineers and designers who just want to keep working and, instead of working for one company, they now just work from home and invent products.

We've somewhat formalized this network. We have someone who works almost full time with us going around the country meeting with these inventors, meeting with groups, speaking. He's the head of the -- I forget the name of the inventor counsel, but there's some national group of inventors. He's the head of that group. And he goes around speaking and represents us -- he exclusively represents us and the world that we're in. So though the inventors are not exclusive to us, we have a much broader network than anyone that I know of within our world.

Great. One last one, on the -- I know this will be in the Q, but just preemptively, were the shares related to the convertibles -- I assume that they would've been anti-dilutive, and so they're not included. Is that correct?

That's correct.

Okay. Thank you. Congratulations.

Thanks.

Our next question is from Derek Leckow with Barrington Research.

Good morning, guys. This is actual Mike Ruggirello in for Derek.

Good morning. How you doing?

We were also excited about what we saw at the Housewares Show here in Chicago, like you guys were, and we're specifically interested in hearing about the water bottle category.

Okay. It's very rapidly growing with us. Percentage wise, it's the fastest growing business that we have, but it's a small business. It's getting to be a larger business this year. We won't give out numbers on it, but we have terrific commitments from retailers for the fall on water bottles, much more than we would've expected and some very, very unique product.

It's also -- it's not only water bottles. It's also -- what do you call it -- coffee mugs, which are travel mugs, coffee travel mugs. Both are growing very rapidly for us. We have some very unique products. We were not in this business a couple of years ago, two years ago. We're now considered a real player. We're dealing with most of the majors. It's a great growth business for us.

We had a big display in Chicago, as you probably know, [if you were there.] And it's something that is very much on consumers' minds today because of the environment and the issues with plastic water bottles. So it's something that is -- for us, we anticipate to be a growth business for quite some time.

So what's the growth opportunity that you guys are looking for there? I mean, it seems like it's a huge -- already a pretty huge market.

It is a huge market. We don't want to put a number on it. We do have one internally. But I could tell you it's, for us, a significant growth opportunity.

Okay. And it's -- I mean, I know it's a new category for you guys, but just in general how are the margins compared to your corporate margin, corporate average?

They're excellent, but that's because we have some very unique products that we've applied [some hands] on.

All right, perfect. Good quarter, guys.

Thank you.

Thanks.

Our next question comes from Gary Giblin with Quint, Miller.

Hi. Good morning, and great results for the quarter.

Thanks, Gary.

On the free shipping promotion, was there a promotionality increase beyond that or was that the extent of the increased promotionality of the direct DTC segment?

No, I -- let me answer that. In the role of Internet marketing, free shipping is becoming much more of a standard than it was before. And in -- with our products, since we are the direct source, we're able to cover it. So we are following the trend.

Okay. So is there any other increased promotional activity beyond that or is that's what --?

No, that's -- there's normal promotional activity but nothing increased, and the free shipping is becoming a big thing and offered by many Internet retailers today.

Yes, okay. And I mean, more broadly on DTC, are you satisfied with that year-over-year sales for the quarter, and is the segment where you expected it to be, excluding the brick-and-mortar retail stores? But I mean, is your -- the current composition of your DTC, is that where you wanted it to be when you made some management changes and so forth, 12, 18 months ago?

No. The idea of making management changes was to make that a profitable business, which we expect it will be. But our focus was -- will continue to be our wholesale business, primarily our wholesale business.

The DTC business for us has other functions but not only in selling to consumers. And again, I'll give you a few of them because they're very important. One is that we found that -- we have a Mikasa Web site and most consumers who go through the Web site use us -- understand the patterns, see how to use them properly, how to set tables, and they go on to buy the same Mikasa patterns from our customers, from -- whether it be Macy's or any store like that, which is very important to us because it helps to drive sales.

In addition, the infrastructure that we have for our DTC business helps us to serve our retailers where we're performing shipping to their consumers for their Web business. So if a major retailer sells a product to a consumer, very often we actually do the shipping from our warehouse if it's our product. And it's a very important and very fast growing part of our business.

Okay, thanks for that. That was an important explanation. And the -- just would you say destocking is completely over or just 80% over, I mean, if you had a --?

As far as I'm concerned, it's completely over. We don't see it happening anywhere anymore and not in any of the major customers we deal with.

Okay. And then, thanks, final question is, in the previous conference call, you were kind enough to at least give a little -- enough color to say that you thought probably first quarter would be EPS-positive. So care to venture yes or no on EPS-positive for the second quarter?

We had a little head start last quarter because of the timing. We were two months into the quarter. Now we're only one month into the quarter. Certainly, the dramatic improvement you saw in this first quarter versus '09 won't happen in the second quarter. The second quarter last year was pretty good. We had good margins. So I think you'll probably see something in the second quarter pan closer to what you saw in this quarter.

Yes.

Okay. That's very helpful. Thanks a lot.

Our next question is from Neil Goldman with Goldman Capital.

Good morning, guys.

Good morning.

Good morning.

First question, you had a great quarter of Vasconia, and one thing, you were up -- you had, like, 600,000, but your investment went up by 1.8. Could you explain that difference?

Yes, the -- it's because of the peso strengthening.

Okay, which is probably now reversed. But that's just an item on the quarterly end? It doesn't affect earnings, right?

It goes through what's called other comprehensive income.

Right.

The benefit goes directly to shareholders' equity.

Okay. Number 2, I was -- based on the history, you always started growing inventory entering the second quarter for third quarter shipments, especially since we're importing. And this quarter it continued to shrink again. So, A, what do you think is your low point of borrowing based on your new sales forecast for the year, and what would be your peak borrowings on your bank line right now?

The low point is probably around now. And what is our -- is it --?

Well, it's below $20 million.

It's below $20 million right now. And that is the low point. And the high point -- we're focused on turns so that I don't expect it -- it's not going to have a dramatic increase. The inventory will certainly go up in the third quarter, not -- the second quarter we probably will hold inventory at very similar levels to this. We'll go up slightly in the third quarter. And as it goes up, we will have more borrowings. But -- and Larry, do you want to -- have a different number or what do you think?

I mean, and of course also the borrowings. Of course, inventory is a big factor but also of course is the level of business. If we have strong business, we can have more receivables and we're going to have, obviously, more borrowings under the facility. So it gets to what do we think our results will be in Q3 and into Q4. And then other times you'll say -- I mean, an easy one to say, it's certainly going to be substantially less than we've had outstanding this time last year -- well a comparable period from '09. But I -- it's not something I want to venture out because then it gets into where we think business levels will be.

Your borrowing capability under this line is how much today?

About $45 million.

Okay. So you have $120 million total availability between -- right now. And when you look out at refinancing the debt, what kind of -- you're looking for the same kind of capacity overall, forget the mix of long and short?

Yes, we do need the same kind of capacity. We expect to be cash positive, so we have no reason to increase it.

Right.

But of course, the mix may be different, but it will be about the same.

Okay. And based on current talks or with the lenders, if you're right now round numbers have 1.7 based on that question, quarterly, which is 6.8 in interest, would it approximate that even though our current rates on the long term are very low?

I didn't hear all the words you just said.

Well, I mean, my question would be, on a going-forward, once you refinance, okay, given the current use of cash, would the total interest costs run around the same right now?

Well, I could tell you what the costs would be -- if we're sure, then I could tell you that. I mean, we don't think it'll be -- the rate will be materially different than where we are from a blended basis today. But until we have a -- until we are complete and successful with our refinancing, I really can't say anymore.

Okay. Great. You also -- in the first quarter last year, did you include the sales of the Canadian business? Was it -- it was direct --

No.

-- and this you year you didn't or it's the same this year and last year?

It's comparable in both periods.

Yes. This year, it would be -- we have a true comp.

Okay. All right. Great numbers, guys. Keep it up, and good luck. Thank you.

Thank you.

(Operator instructions.)

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

Thanks again for joining us. We look forward to speaking to you again on our next call. Thank you.

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