Lifetime Brands Inc (LCUT) 2011 Q1 法說會逐字稿

Welcome to the Lifetime Brands first-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, May 5, 2011.

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

Good morning, everyone, and thank you for joining Lifetime Brands' first-quarter 2011 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 agreements; the availability of funding under those credit agreements; 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 effective competition on the Company's markets; and other risks detailed in Lifetime's filings with the Securities and Exchange Commission. 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 would like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thanks, Harriet. Good morning, everyone. While the Company's financial results for this year's first quarter were not as strong as we would've liked, we remain confident that Lifetime can achieve both top-line growth and an increase in profitability for the full year of 2011.

Without the doubt, the current business environment's challenging, with many consumers straining to make ends meet in the face of high unemployment, increasing costs for food, clothing, gasoline. At the same time, businesses are facing substantially higher input costs and are being forced to pass along these price increases to maintain margins.

Despite these challenges, we expect to grow our top line through market share gains. Consistent with our market share strategy, we identified several key important opportunities to gain additional space at certain key retailers. In some cases, this required us to temporarily reduce prices to gain this extra space.

While this had a negative impact on our margins in the first quarter and also will affect margins in the second quarter, the additional volume that we expect to generate at these retailers, beginning in the second quarter and building to a higher level in the third and fourth quarters, will for the full year more than make up for any shortfalls in the first quarter.

Our top line also will benefit from sales of new products. In March 2011, we once again participated in the International Home & Housewares Show, where we introduced more new products than at any time in our history and exhibited several new product categories, line extensions, and ideas, all of which have great potential for us.

I am happy to report that our offerings, all designed to provide innovative solutions to improve everyday tasks, were very well received. Retailers understand that a key part of maintaining their own margins is for them to embrace new products, such as those Lifetime introduces each year.

A new product category that we introduced at the show is food storage, which we have been developing for several years and is finally ready for shipment this year. Food storage is a significant category, larger even than the kitchen gadget category that is Lifetime's biggest business.

While food storage is an established [and credit] category, our ongoing commitment to innovation has enabled us to create new products that offer consumers superior performance that sets our new Microban and Perfect Seal collections apart from the rest of the field.

By adding Microban to polypropylene in our entry price point products, we add antibacterial properties without increasing the price. At better price points, our Perfect Seal food storage entry, made from Eastman Tritan, a naturally break-resistant material that resists odors and stains, features a unique, patent-pending lid-locking system that's easy to open and close.

In an important extension of our cutlery category, one of our largest businesses, wherein we're already the number one supplier in North America, we introduced a vastly expanded selection of ceramic knives. We believe that ceramic knives have the potential to expand the market for better kitchen cutlery.

Sharper than even the best metal knives -- and with our latest introductions, quite durable -- ceramic cutlery has been gaining consumer acceptance at every level. We have already introduced ceramic cutlery under the Farberware, Cuisinart, KitchenAid, and Sabatier brands, and more lines are on the way. All were enthusiastically received, and we obtained commitments from several key retailers to add these lines in the third and fourth quarters of 2011.

In addition, we exhibited enamel on cast-iron cookware, an upper-moderate niche that is perfect for Lifetime; and showed a new line of whimsical kitchen gadgets that complement our other kitchen gadget lines. These, too, were placed at several key accounts for full delivery.

In dinnerware, we introduced several hundred new designs in our highly successful hand-painted reactive glaze collections. We were the first to really capitalize on this style of tableware, and as a result, we now have a commanding market share. Just about every retailer that's been carrying these lines has added additional patterns in second-, third-, and fourth-quarter shipping.

In flatware, we continue to roll out new lines of Mikasa-branded product, which have been extremely successful at retail. When we acquired Mikasa, we thought it would be our fastest-growing tabletop brand, and we have not been disappointed. It is by far the Company's fastest-growing brand. But we believe we have only scratched the surface with its potential.

Before turning over the call to Larry, I'd like to assure you that we know how to manage through difficult economic cycles. We remain fixed on controlling costs and are protecting our margins and those of our retail partners. Our top-line growth should more than offset any margin erosion resulting from the market share strategy I described earlier, changes in product mix, as well as the impact of input cost increases. Larry?

Thanks, Jeff. As we reported earlier this morning, net loss for the first quarter of 2011 was $949,000, $0.08 per diluted share, as compared to net income of $729,000, $0.06 per diluted share in the 2010 period. Loss from operations was $23,000 in the first quarter of 2011, versus income from operations of $2.5 million for 2010.

Consolidated EBITDA, a non-GAAP measure that is defined and reconciled to net income loss in our earnings loss, was $2.7 million for the first quarter of 2011, versus $5.7 million in the 2010 period. Consolidated EBITDA for the trailing four quarters in the 2011 period was $39.9 million, versus $37.2 million for the same period in 2010.

For our wholesale segment, net sales in the first quarter of '11 increased $2.8 million to $84.9 million. Wholesale segment gross margin declined to 34% in the quarter, compared to 37% for the corresponding period in 2010. The decline reflects temporary price reductions related to marketing initiatives that, among other things, will provide us with additional retail shelf space later in the year, low-margin sales of excess inventory, and changes in product mix.

Wholesale distribution expenses as a percent of net sales increased to 10.6%, from 10%, on higher operating expenses and some shift in customer mix. Wholesale segment's SG&A expenses in the first quarter of 2011 was $17 million, versus $17.1 million in 2010, and, as a percentage of net sales, improved to 20% from 20.8%. The improvement reflects lower debt fees and lower bad debt losses.

For our retail direct segment, net sales were $6.9 million in the 2011 quarter, versus $6.6 million in the 2010 quarter. The increase came from our Housewares Deals website, which was launched in the third quarter of last year.

Retail direct's gross margin was 66.4% in the first quarter of 2011, versus 66.6% in the 2010 period. Retail direct expenses for the 2011 quarter were in line with the 2010 period. As a percent of sales, distribution expenses were approximately 28.7% and 28.6%, respectively. And SG&A expenses were $2.7 million and $2.6 million, respectively.

For non-segment items, unallocated corporate expenses increased to $2.8 million in the 2011 period, from $2.4 million last year, due to higher professional fees and employee-related expenses, including stock compensation.

Interest expense declined to $2 million in 2011, from $2.4 million last year. The decrease was attributable to lower average borrowings and lower interest rates. The rate decline is primarily due to the purchase of a substantial portion of our convertible senior notes in June of last year with proceeds from lower-rate borrowings.

The effective income tax rate for the first quarter was 29.4%, versus 39.8% for the 2010 period. The estimated effective tax rate for the full year is approximately 40%, excluding any change to the valuation allowance/reserve.

Grupo Vasconia, our 30% owned investee, reported net income of $2.1 million in the 2011 period, compared to $2.3 million in the 2010 period. The decrease is due to lower gross margin on sales in its aluminum disk business, reflecting the higher cost of aluminum, an effect of US dollar-based revenue.

This is partially offset by a higher gross margin in kitchenware product sales. The decline was also partially offset by the benefit of translating results from Mexican peso into a weakened US dollar.

With respect to our financial position, at March 31, 2011, the outstanding balance on our revolving credit facility was $17 million. And availability under the facility was $61.2 million, which was net of the reserve to repay the remaining $24.1 million principal amount of the convertible notes in July.

The leverage ratio -- that is, total indebtedness to EBITDA -- was 2.0 at quarter-end, compared to 2.6 a year ago.

Looking at the balance of 2011, we continue to expect that the US housewares industry will grow at approximately a 3% rate this year. But we believe that we can grow our wholesale business at a substantially faster rate, perhaps as high as 7%.

As we all know, input costs have increased significantly. But as we've said, we expect to be able to offset the financial impact of these increases through our product development, sourcing capabilities, and price increases.

Notwithstanding that our wholesale gross margin for the quarter lacked our full-year expectation, we believe the overall strength of our business will enable us to increase our income from operations over the 2010 level.

Capital expenditures, which were $1 million for the quarter of 2011, are expected to be approximately $4 million for the full year.

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

Operator?

(Operator Instructions). Your first question comes from Lee Giordano with Imperial Capital.

Thanks. Good morning, everyone.

Hi, Lee.

Hi. My first question is on the price reductions. Can you talk a little bit about what categories you focused those reductions on? And also talk a little bit about the marketing initiatives. Any detail on that would be helpful. Thanks.

That was -- it was in the food prep category for us. I'm not going to mention any retailers. But it was a unique opportunity to gain more space and to gain better-located space within one of the stores, and we took advantage of it. We look at things on an annual basis. If we have to sacrifice a little bit for the better good, which is a year, we'll do it, and we did do it this quarter.

Okay. And on the gross margin, can you break down the 300-basis-point decline? What percentage of that was from the marketing initiatives, and what percent was from the excess inventory and the changes in product mix?

Lee, it's Larry. I'd like to comment on it based on where we thought the year would be, which is 36%, so I like to think of that as really 2 points off our expectation. About 0.75 point relates to the excess inventory. About 1 point is the price, so the balance is some mix.

We had some things that happened last year that resulted in 37%, but as I said and we said in the recent past, 36% is where we think is a reasonable level for our -- [had been] for our wholesale margins.

Okay, great. And then just going forward, how are inventory levels currently? Do you still have a large excess inventory position? Hello? Hello?

One moment, please. Ladies and gentlemen, this is the operator. Today's conference call will resume momentarily. Until that time, your lines will be placed back on music hold. Thank you for your patience.

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

Please begin.

Hello, this is Mr. Siegel again. We had a power surge that knocked us off for a second, but we're back. Are there any further questions?

(Operator Instructions). Your next question's from Gary Giblen with Aegis Capital.

Hi. Good morning, everybody.

Hi, Gary.

On the gross margin decline matter, to what extent was direct shipping a factor in that as it has been in previous --?

Gary, it really wasn't significant. It was an impact, but it was not significant [to any point].

Okay. And I realize that there's no guidance in the release. How do you feel about the consensus numbers that are floating around out there, about $467 million of sales and $1.40 of EPS?

Gary, it's Larry again. What we said in this call and I think what we continue to say is that we feel good about the business. We think our profitability will grow overall, but we're not going to give necessarily direction on a top-line number or a gross margin percentage.

Okay, understood. Just to clarify, was the temporary price reduction talked about earlier -- was that an opportunity at one main retailer, or was it two retailers?

It's at two retailers, and it's a good opportunity for us. It's something that we were very happy to see.

Okay. And was that a matter of you absorbing some lower margins or just lower-priced products that have lower margins? Was it a mix or --?

No, it's not lower-priced products. We just had the opportunity to -- we knew what we wanted from these two retailers, and our division presidents who met with them offered low -- a better margin for them for the spring season in return for a payback for us in the fall. That's what it came down to.

Okay. And is it your expectation that you'll maintain that additional space, that better space, for the foreseeable future (multiple speakers)?

Well, if the space performs, we'll maintain -- they'll let us keep it. It should be a good thing for us. It should be a very good thing for us.

Okay, and then just a general question. What do you think is happening with the consumer? I mean, some of the April and early May data has been mixed, showing maybe some further bump in the road of the recovery, but what do you sense out there?

We see good sell-throughs of our product, so I think things are not horrible, though there's certainly -- especially at the blue-collar level, the consumer is stressed. We don't see the step-up areas at all. We just see things going well. And second quarter seems to be going in a very good direction for us, so we're very pleased right now, I tell you. We're not pleased with the first quarter's results, bottom-line results, but we're very pleased with the direction of sales that we see right now.

Okay. And since there wasn't that much commentary on the -- other than Larry giving the pure numbers on the direct retail. I mean, anything in particular -- any initiatives building there?

Yes, we're on budget with that business for this year. The business is improving as far as we're concerned, and we expect to see the year -- an improvement this year over last year. It's not a very big business for us, as you know, but it's there and we want to make sure that it makes money.

Okay. Thanks. Good luck in the second quarter.

Thank you.

Your next question is from Per Ostlund with Jefferies & Company.

Thanks. Good morning, Jeff and Larry. A couple questions, actually, if I could. The first one -- actually, when the power surge hit, I think Lee's question was about sort of the inventory levels on your books and at retail, and the surge hit right then. And so if you did answer the question, I didn't hear it. Could you comment on inventory levels?

Yes, sure. On our level, they're just about where they were last year, almost exactly the same as last year at this time. And I don't think it's going to go down to lower levels than last year going through the year, only because we expect our business to go up. And therefore, we think we might need a little more inventory, obviously, to support the increase in sales. So we expect it to go up a little bit because of that.

As far as inventories at retail, they're on the low side. Retailers, as everyone knows, have become very focused on maintaining low inventories, especially in the spring season. And they're continuing to do that, so inventories in general are on the low side. It's a much better business environment when it comes to that, as far as we're concerned, than going back to the old ways in 2006, 2007. It was crazy that we were carrying inventories that didn't make any sense, and they were always asking for markdown money and things like that. And now it's a much healthier business. It's easier for us to run our business, and certainly easier for them to run their business.

Good, good, that's good to hear. So as far as the impact to gross margin in first quarter from sort of working off excess inventory, you would feel pretty comfortable that you've worked off the excess at this point?

Yes. A lot of that was in our sterling silver business. We had excess, and with the rise in the price of silver, we had an opportunity to get rid of that excess without taking a loss, so we took advantage of that. And that's a one-time thing; it's not going to reoccur.

Okay. Not to go to the well on the TPR situation here again, but maybe just asking the question a little bit differently. When you saw the opportunity to get that additional space, you mentioned that it was sort of the food prep category. So is it safe to say that this was maybe more you going out with an expanded offering to get expanded offerings sort of in core categories? Or was there any opportunity to utilize the TPRs to introduce some of the new categories that you're trying to get into maybe a little bit more aggressively?

It was not for the new categories; it was for existing categories. It was for expansion of our placement in existing categories.

Okay. On the gross margin front in the first quarter -- so you did, I think, pretty good detail as far as the impacts there. So is it safe to assume that, really, the reason input cost didn't hit was just length of supply chain?

Yes, the -- we had -- exactly right. We had -- the input costs -- as everyone knows, many costs are going up, whether it be raw materials, labor, whatever it is. Costs are going up. We've done a really good job in mitigating that going forward. For the most part -- and it's really interesting. We've had, in some cases, no increase; in some cases, increases as much as 12%. On average, I'd say right now it's probably, looking forward, going forward, after this year, around 4%. But that's an average, and it does vary within different categories of product.

The retailers know what's going on. They know what the costs are. This is not a unique Lifetime situation; it's an everything situation. And we've passed on the increases, worked with the retailers. We've changed a lot of product. We've introduced a lot of new -- a bigger percentage of new than we normally do, because the new product has new pricing. And we've moved from certain suppliers that were a little too expensive to lower-cost suppliers.

But overall, we don't expect the higher input costs to have very much effect, if any effect, on our business. Retailers have accepted the increases. I'd say 99% of them have accepted the increases.

That's very good to hear. One last question from me and I'll jump out of the queue. As far as Housewares Corporation of Asia -- there was the reference in the press release there. For the uninitiated, can you give us an idea of how material is that right now, and how does that hit -- the activity there, how does it hit the P&L? Does it hit fully as a top line in expense impact, or is it sort of like an other income piece?

On that front, in accounting it's going to be in other, because we won't have control. It would be a joint venture.

It's not going to be material this year. It's something that's starting to build. And it's really an opportunity for us to get business that we would not normally have. It's business that would be a lower margin, and we wouldn't normally accept that business. So this is almost like an entirely separate business from Lifetime.

Okay. Fair enough. Thank you very much.

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

Thank you. Thanks again for joining us today. As we introduce new products, enter important new categories, and develop new ways of working with retailers, we believe 2011 will be a successful year for Lifetime, with growth in both our top and bottom lines. I hope you'll join us again for an update in August, when we report our second-quarter results. Thank you.

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