Lifetime Brands Inc (LCUT) 2010 Q2 法說會逐字稿

Welcome to the Lifetime Brands Second Quarter 2010 Earnings Results Conference Call. (Operator instructions)

I would now like to turn the Conference over to Ms. Harriet Fried. Please go ahead.

Morning, everyone, and thank you for joining Lifetime Brands' Second 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 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 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 SEC. 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.

Thanks, Harriet.

Good morning, and thank you for joining us as we review our second quarter 2010 results. On today's call, I'll be joined by Larry Winoker, our Chief Financial Officer, who will go over the financial results in detail.

I think you're all aware that in June we refinanced our bank credit agreement, arranged new financing to provide for the repayment of our convertible notes, and repurchased approximately $51 million worth of our converts. The new credit facilities mature in five years and provide us with access to capital on favorable terms sufficient to grow our business and to satisfy our obligations, including the $24 million worth of convertible notes that remain outstanding. And we will pay that off when they become due next July.

The costs associated with these transactions -- most of which, in any event, are noncash -- mask the significant improvements in our results over last year. Excluding the effects of these transactions, we would've reported a net income of $0.03 per share for the quarter. As it is, we actually reported a loss of $0.08 per share, as compared to a loss of $0.10 in the 2009 period.

EBITDA for the quarter was $6.1 million, up from $4.3 million last year. The Company's improved performance reflects modest growth in our top line, a meaningful increase in wholesale gross margin, continued reductions in the number of total SKUs, and -- in our overall inventory levels, and tight control over all expense categories.

Although we remain focused on maintaining lower inventories, we've been concerned about lengthening lead times at a number of our suppliers and about possible shortages of containers and ships coming from Asia. As a result, we decided it would be prudent to have our suppliers speed up production and to bring goods in earlier than we normally would. This way, we have tried to ensure that we would be able to fulfill customers' orders this fall in a timely manner. I expect that this -- we will carry somewhat higher-than-normal inventory levels until late 2010, when we expect that the container issue subsides.

The key focus of the Company continues to be to increase market share in each of our product categories. To achieve these market share gains, we are committed to lead the industry in product development, brands, and unique sourcing and manufacturing initiatives.

Our almost 100 in-house designers, engineers and artists have created approximately 5,500 new products that are being introduced in 2010. In order to continue our expected growth, we will add additional designers and engineers as needed. And we are expanding our efforts to reach out to an increasing number of independent inventors.

As you can see from today's release, we're also focused on controlling SG&A. And we would continue to do so, even as our sales increase, as we expect they will in the coming months. Our current projections are that each of our businesses -- food preparation, tabletop, home dcor, and direct-to-consumer -- will have sales increases for the full year, and each will be profitable. We are especially pleased with the great strides that have been made in our tabletop businesses. Overall, we continue to expect that our sales for 2010 would exceed last year by 4% to 8%.

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

Thanks, Jeff.

As we reported earlier this morning, net loss for the current quarter was $1 million, or $0.08 per share; as compared to a loss of $1.3 million, or $0.10 per share in 2009. Income from operations was $2.5 million in 2010, compared to $771,000 excluding effects of restructuring in the 2009 period.

EBITDA, which is a non-GAAP measure and is defined in our release, was $39 million for the trailing 12-month period ended June 30th, 2010; versus $20.5 million for the comparable period in 2009. For the 2010 quarter, EBITDA was $6.1 million, versus $4.3 million in 2009.

Looking at our wholesale segment -- net sales in the quarter were $81.5 million, an increase of $600,000 over 2009. The 2009 period includes $1.3 million of sales from the 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 120 basis points in the second quarter from 37.2, primarily due to favorable product mix. Wholesale distribution expenses as a percent of net sales was 9.9% in 2010 period compared to 9.7% in 2009. The 2010 period included expenses for the implementation of a new warehouse system in our West Coast distribution facility.

Wholesale SG&A in the second quarter was $16.6 million, 20.4% of sales; down from $17.7 million, 21.9% of sales last year. This decrease is attributable to the benefits of the 2009 restructuring activities and our continuing efforts to rationalize expenses.

Looking at our direct-to-consumer segment -- net sales were $5.4 million in the 2010 period, compared to $4.4 million in 2009. This increase was due to the performance of our Pfaltzgraff and Mikasa websites and the additional sales from our New Lifetime Sterling website. The increase was partially offset by lower shipping income from free-shipping promotions. Direct-to-consumer gross margin decreased to 66.8% from 70.8% in 2009, primarily due to promotional activities and the increase in free shipping.

Distribution expenses for the segment were approximately 27.6% for the current quarter compared to 37.9% last year. This significant improvement is due to the efficiencies realized from exiting the York, Pennsylvania distribution facility during July of last year. The segment's SG&A in 2010 increased to $2.4 million from $2 million, reflecting additional expenses incurred to support its sales growth.

With respect to non-segment items -- unallocated corporate expenses were $2.8 million, compared to $2.3 million in 2009. The 2010 period included certain expenses associated with the new debt financing and higher stock compensation expense.

Interest expense declined to $2.6 million from $2.9 million on lower average borrowings. The income tax provision reflects an expense for certain deferred tax assets that reversed as a result of repurchase of convertible notes, which was partially offset by a benefit for the current-period loss.

Grupo Vasconia, our 30%-owned investee, continues to deliver solid results. Lifetime's share of its earnings was approximately $500,000 in each of the periods. During the quarter, we received an annual cash dividend -- approximately $400,000.

Now turning to our financial position -- as reported, on June 9th, we entered into a $125 million asset-based revolving credit agreement with a bank group led by JPMorgan Chase to replace our prior credit facility. And currently, we entered into a $40 million second-lien term loan agreement with Citibank.

With respect to the term loan -- we drew $10 million at close and withdraw the balance today. We're very pleased with these new financing arrangements, as we believe they provide ample liquidity and operating flexibility to drive our business forward.

During the quarter, we utilized a portion of the liquidity provided by the new loan facilities to purchase $50.9 million principal amount of our convertible notes, thereby reducing the outstanding principal amount to $24.1 million. As of June 30th, the availability under the new revolving credit facility and the undrawn portion of the second-lien term loan was $58.2 million.

Looking at the balance of the year -- as we've said, we expect wholesale sales volumes to be up 4% to 8% for the full year, which means an increase of 7% to 14% for the second half of the year versus the comparable 2009 period.

We expect wholesale gross margin to be in line with the first half of 2010, and distribution expenses as a percent of sales to be 1% to 2% lower due to the expected volume increases. SG&A should be somewhat higher than for the first half on higher sales volume and incentive compensation accruals.

We are estimating an effective income tax rate for the second half of 40%. But it could change based upon an assessment of the valuation allowance we have against our net deferred tax assets. And finally, capital expenditures, which were $1.3 million through June, should be approximately $4 million for the full year.

Operator, we are now ready for questions.

(Operator instructions) Per Ostlund, Jefferies & Company.

Thanks. Good morning, guys.

Question on the -- I guess, looking at the wholesale business, looking at -- up 7% to 14% in the second half -- is kind of the order -- I guess, maybe give us a magnitude of sort of what kind of window you have into the order flow right now. And then maybe also kind of just, if you could, elaborate on having sped up the production process. Was that triggered by pretty much known need, or expected need, of product?

The visibility we have -- the only orders we have in-house are the longer-range orders. And that's a combination of orders that we direct-ship from the Orient and also promotions that are planned. We don't get from retailers advance basic orders -- reorders, in other words.

So there's two parts to that. The -- analyze -- for us to analyze the potential reorders depends on our shelf placement and the work that our sales force does with the retail planners at each of the retailers we do business with. So it's a combination of the two. Our advance orders are up dramatically over last year -- the orders that we get for direct shipment and for promotions -- so for the fall -- they're up dramatically. I don't want to give a number, but I can tell you it's a dramatic [one].

Fair enough.

The basic orders have to come as the year goes on. So we can't do that.

As far as why we accelerated the orders -- for the most part, it's for the -- from planned promotions and direct shipment, but also what we're pretty certain that we need, not the extra.

Not --

We're very conservative on our inventories. We've been very careful on inventories. Our intension is to end the year at a very low inventory. We still believe that way. But based on what we see, and the visibility we had, we felt that we had to place advanced orders, and rather substantial ones, to bring goods in early, to cover our needs for this fall.

Okay. That makes sense.

Speaking of the inventory levels there, are you seeing increased -- I don't know if we'd go all the way to say restocking, but sort of a loosening of inventory policy at retail? We've kind of heard some other companies that seem to be suggesting that retailers are maybe more concerned about stock-outs this season. Is that something consistent with what you're seeing?

Varies by retailer. There is no consistency to it. We --

Okay.

-- have some retailers that are very concerned about outs. In the last week especially, we've had a number of discussions with retailers who are scrambling to get extra goods for the fourth quarter. In some cases, we can accommodate them; in some cases, we can't. It's too late. But that's over and above what we anticipated getting.

So there's no one way to look at it. I would say there are a number of retailers who are concerned and are really wanting to ensure that we have the goods. And others are still being very, very conservative on inventory.

Okay. Is the tight shipping capacity -- is there kind of relief on the horizon there, or is that looked at as being pretty tight for awhile yet?

Our anticipation -- and this is after having numerous discussions with the steamship lines and people who are rather expert in the field -- is that it will be tight through October. So far, it has not affected us because we've brought goods in early enough. But shipments are definitely being delayed. We have enough of a cushion so the delays aren't hurting us.

But it will remain tight for a number of reasons. Mostly, there are less ships in service than is needed right now, and there's certainly less containers. Containers have to be replaced. And in 2008 and 2009, not many were built. So there is a shortage of containers.

Okay.

One last housekeeping question for Larry -- can you tell us what the APB 14 contribution to the interest expense line was in the quarter?

Quarter, it was approximately $700,000.

Okay, great. Thank you very much.

[Welcome].

(Operator instructions) Gary Giblen, Quint Miller.

Morning, Jeff and Larry.

Morning.

Hi, Gary.

In Larry's prepared remarks, he mentioned favorable product mix, leading to gross margin expansion in wholesale. So is that product mix enrichment -- is that due to, would you say, the economy, or more people trading up, or just your own flow of innovative product, new product?

It's mostly -- it's the new products that are selling well. And some of them, we've had some unique patented new products that are -- we can achieve a slightly higher margin on than we normally do. I guess that's the best part of it. And we expect that to continue.

Okay. So it sounds like it's driven by your product flow, more than a change in consumer sentiment, per se.

Yes, it is. It's not a change in consumer sentiment.

Okay, great.

And then, I noticed that Grupo Vasconia, the -- your equity interest in Grupo Vasconia was slightly down quarter-over-quarter, where it -- I mean, it's normally up quite a bit. So is that just a kind of accidental feature of the calendar? Or is anything changing in the Mexican --

Yes. I mean, some of it's currency of -- remember last quarter the peso strengthened, and this quarter it pulled back a bit.

Okay. Would you say that the selling of the Mexican -- or the Hispanic [type] product into US -- is that accelerating, or just continuing at a solid level?

It's continuing. It's still not a major part of our business. It's rather small for us. But it's something that we believe in long term. So we will certainly continue to use that product line in the US. And their business in Mexico -- I can tell you, we expect it to be up nicely in the fall.

Okay.

Couple more -- Canada, with your new arrangement there -- is that accelerating, or just moving along solidly again, or --?

That's doing well. It is accelerating. It's a very good business right now. We don't report it separately as far as the sales, which we won't do. But the business is good, and it's an arrangement that we're very happy with.

Great.

Final question is -- on the free shipping, on your direct-to-customer -- were there any offsets in terms of your other pricing? Or was that just a promotional cost that was dictated by competition, and then you had to absorb it?

It's -- yes, it is a promotional cost that -- it's becoming pretty common, if you shop in the Internet, to get free shipping. And consumers respond to it. Fortunately, our margins are very high in that business. So we can afford to do that, and we will continue to do that. It's a way of driving that business.

I mean, there's no -- there really was no offset, it's just -- in other words, it was just -- whatever it was, you had to absorb it out of the ample margin you had? Is that --

That's correct.

Okay.

Okay. And great fortune in the second half for you. Thanks.

Thank you.

(Operator instructions)

And there are no further questions at this time. Please proceed with any closing remarks.

Thanks for joining us on this call. We certainly look forward to speaking to you again after the third quarter. And we're -- I can tell you that everyone in this company is very enthused with the way our business is going, the direction. And the most -- the thing that really I enjoy, more than anything else, is that every one of our businesses seems to be going the right direction -- something that we haven't had for a long time.

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.