Lifetime Brands Inc (LCUT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lifetime Brands' second-quarter 2011 earnings call. My name is Crystal and I will be your Operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Harriet Fried of LHA. Please proceed.

Good morning, everyone, and thank you for joining Lifetime Brands' second-quarter 2011 conference call. With us today for 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 prepayment 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'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 through 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, and good morning, everyone. I trust you've had the opportunity to review the earnings release we issued earlier this morning.

Net income of $2.1 million and earnings per share of $0.17 represents the best second-quarter performance in the Company's history. As always, our success derives from our continued focus on and commitment to our brands, our products, our retailer partners, and especially for the consumers who buy and use our products in their homes.

Our results of the quarter were led by strong gains in food prep items, especially in our Kitchen Tool and Gadgets category, our largest and most profitable classification, where sales rose by 17%. As I discussed in last quarter's call, this was an area where we had identified several promising opportunities to gain additional space at key retailers. Although we had to reduce prices temporarily to gain that extra space, our actions started paying off in the second quarter, and we expect this to continue throughout the rest of the year.

Sales of tabletop products, dinnerware, glassware, and flatware, also recorded strong gains, especially in our Housewares Dinnerware classification, where we've become the market leader in reactive glazed dinnerware, the most popular dinnerware on the market today. And in the flatware classification as well, where Mikasa and Gourmet Basics by Mikasa rapidly are becoming our leading brands.

The sales growth in these categories is all organic and is driven by our continuing commitment to innovation and to gaining market share. Our strategy of marketing our products under many brands and at all price points allows us to provide many products that are unique to each of our retailer partners, and to target the entire spectrum of consumers. It also enables us to take advantage of opportunities in those segments of the retail market that are performing better than others at any given time.

Our results for the quarter also reflect our ongoing focus on controlling expenses. SG&A in the second quarter declined, both in absolute terms of $21.8 million to $20.4 million, and as a percentage of net sales from 25.1% to 22.6%.

Last quarter, I mentioned that a number of new products that we had introduced at the International Home and Housewares Show had already won placement with several important retailers. In Food Storage, a new category for Lifetime, and one that is very significant in size -- larger even than the Kitchen Gadget category -- we began shipping our unique Microban collection, which features patented antimicrobial protection at popular price points. Our first result at a major retailer -- major national retailer -- were excellent, with the retailer's sell-through that far exceeded our projections.

Also very pleased with our emerging cookware business. At the Housewares Show, we exhibited enamel on cast iron cookware, an upward moderate niche that's perfect for Lifetime. Cast iron is one of the best cooking materials available, since it absorbs and then spreads evenly. The porcelain enamel interior and exterior also allows for easy clean-up. The showing of the collection, which includes casseroles, grill pans, baked goods, a fondue pot and more, to a major retailer under a private label program, and to other key retailers under the Sabatier brand.

Earlier, I referenced our strategy of marketing our products under many brands and at many price points. It's interesting to note that approximately two-thirds of our sales come from proprietary owned brands rather than from licensed brands. This proportion, which reflects the importance of our Farberware, Pfaltzgraff, Mikasa, Wallace, Towle, Kamenstein, Design for Living, Elements, and Melannco brands, has been relatively constant for the last few years.

I also want to highlight the growing importance of Lifetimes' international business. In the US, Housewares categories grow at rates roughly equivalent to the growth of GDP. But even when we achieve our target market share gains, the opportunities to post significant topline increases in the United States are somewhat limited. Recognizing this, in 2006, we began looking closely at international markets, and in 2007, we made an investment in Grupo Vasconia, Mexico's largest housewares company. And in 2008, we joined with Accent-Fairchild Group, to form Lifetime Brands Canada.

We help our partners grow their business by providing access to our brands; our product portfolio, consisting of over 16,000 SKUs; our product design staff; and by sharing best practices. We also furnish our partner companies with access to our global sourcing organization, which enables them to acquire goods from our suppliers at the same price that Lifetime pays. As a result, in the short time since we've made our initial investments, both Grupo Vasconia and Lifetime Brands Canada have seen explosive growth. In fact, this year, their combined revenues should exceed $180 million. These investments also contribute significantly to our bottom line.

Elsewhere, we continue to look for opportunities to develop partnerships with strong companies in markets, where our key retail partners are already well-established or have announced plans to expand. We're also looking to make additional investments in emerging markets, especially in Asia and Latin America, and where there are rapidly-expanding middle class that has the resources and the desire to buy products marketed under our global brands. Selling into these markets makes Lifetime Brands an important global resource to our retailer partners, and offers Lifetime the opportunity to accelerate growth at a fast -- a rate far faster than we're experiencing here in the United States.

I'll now turn the call over to Larry for a more detailed review of our financial results.

Thanks, Jeff. As we reported earlier this morning, net income for the second quarter of 2011 was $2.1 million, or $0.17 per diluted share as compared to a loss of $1 million or $0.08 per diluted share in the 2010 period. As I'm sure you noticed, we provided a cash flow statement with this morning's release, and will continue to do so with future releases.

Income from operations was $4.4 million in the second quarter of 2011 compared to $2.5 million for 2010. Consolidated EBITDA, a non-GAAP measure that is defined and reconciled to net income in our earnings release, was $7.5 million for the second quarter of 2011 versus $6.1 million in the 2010 period. Consolidated EBITDA for the trailing four quarters in the 2011 period was $41.3 million versus $39 million for the 2010 period, where our Wholesale segment net sales in the second quarter of 2011 increased 5.9% to $86.3 million.

Volume increases from kitchenware and tabletop reflect the success of new programs and promotions, which more than offset the home decor decline at certain 2010 sales programs were not repeated. Wholesale segment gross margin was 36.2% in the 2011 quarter compared to 37.2% last year. This reflects a change in product mix. Wholesale distribution expenses, as a percentage of sales, shift from the Company's domestic warehouses were approximately 10.4% in both periods. Wholesale segment's SG&A in the second quarter of 2011 was $16 million versus $16.6 million in 2010, and as a percent of net sales, improved to 18.5% from 20.4%. This improvement is primarily attributable to lower office-related expenses.

For our Retail Direct segment, net sales were $4.1 million in the 2011 quarter compared to $5.4 million in 2010. The decrease is a result of lower promotional activities and the Company's decision to terminate its print consumer catalog. Retail Direct's gross margin increased to 68% from 66.8% last year, due to the reduced promotional activities. As a percentage of sales, distribution expenses were approximately 29.7% and 27.6% for the 2011 and 2010 quarters, respectively. Retail Direct SG&A expenses were $1.9 million in the 2011 quarter and $2.4 million in the 2010 quarter. This reduction primarily reflects savings from the termination of the print consumer catalog.

For our non-segment items, unallocated corporate expenses decreased to $2.5 million from -- in 2011 from $2.8 million last year. This reflects lower professional fees. Interest expense declined to $2 million from $2.6 million last year. This decrease was attributable to lower average borrowings and lower interest rates.

Income tax expense for the second quarter of this year reflects interim loss in a foreign jurisdiction without tax benefit. We anticipate this will not occur for the full year. The estimated effective tax rate for the full year is approximately 40%, excluding any change to the valuation allowance. The equity in earnings from Grupo Vasconia increased 14% in 2011 to $500,000. Sales increased approximately 22%, which more than offset a decline in gross margin percentage. The decrease in gross margin percent is from the aluminum disk business, reflecting the higher cost of aluminum and the effect of US dollar-based revenue. Equity and earnings also includes a $315,000 catch-up adjustment related to a small investment we have in Asia.

Looking at our financial position, at June 30, 2011, the outstanding balance on the revolving credit facility was $17.4 million, and availability under the facility was $72.6 million. On July 15, we retired the remaining $24.1 million principal amount of outstanding convertible notes. This has no effect on our liquidity, as that amount was reserved for under the credit facility. The leverage ratio that is total indebtedness to EBITDA was 2.0 times at quarter-end compared to 2.4 times a year ago.

While inventory levels are 4 million lower than last year at this time, it is higher than we had planned. This relates to certain of our very popular reactive glazed dinnerware products, for which we want to be certain there is adequate stock for the selling season. In addition, we expect year-end 2011 inventory levels to be higher than planned as well. This is to address the earlier-than-normal Chinese New Year, when factories close to celebrate.

Looking at the balance of 2011, we expect that the US housewares industry will grow at approximately 2.5% rate, but we believe that we can grow our Wholesale business at a substantially faster rate, perhaps as high as 7%. Our Wholesale gross margin percent recovered substantially from the first quarter, and we believe it will stabilize, as raw material prices have begun to decline. We continue our efforts to maintain margins through our product development and resourcing capabilities. Notwithstanding the current economic environment, we continue to believe that the overall strength of our business will enable us to increase our income from operations for 2011 over the 2010 level.

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

(Operator Instructions). Lee Giordano, Imperial Capital.

My question is on the Retail Direct business. I was wondering if you could talk about the long-term strategy and the opportunity for that business you see? And then also what led to the decision to terminate the print catalog. Thanks.

Yes. The Retail Direct business for us is -- we look at it as something that enhances our Wholesale business. It's not going to be -- we're not turning our company into a Direct To Consumer company; we are a wholesale company and we really make use of the Retail Direct business to just enhance other parts of our business.

I'll give you an example. If a consumer is shopping for Mikasa -- and they do -- and they search online, they very often go to our site. They look through all the patterns; they look through the site; and then they go to our retail partners. They'll go and buy the product at Macy's or Bed Bath & Beyond or any other retailer that carries it. We don't want to become a retailer, put it that way.

Yes, Lee, on the decision to eliminate printing that catalog, the catalog is a legacy of ours that came with the stores, but we could see over time that catalog business declines. You can't see precisely, because someone can get a catalog and go on the Web -- not necessarily make a phone call; but we look at some activity following a catalog and we see what kind of lift we get. And based on that, we think that the catalogs -- the cost of printing the catalogs -- printing them, designing them, the mailing costs -- is greater than the profit we would earn otherwise.

So it loses a marginal amount, and furthermore, it becomes a distraction. [So there's] a decline over time, so we'll lose even more, but it's a distraction for the Retail Direct management team. So it was pretty -- it made a lot of sense to do that, and that was the reason.

Great. And then, secondly, on SG&A, you've done a good job of controlling costs. Is there still room to cut SG&A further? And should we think about SG&A being below last year's levels in the back half on a dollar amount -- dollar basis?

I can't answer the second part of the question because I don't have the information in my head, but I know it's -- we are doing -- we have been doing a lot of savings; we've negotiated some of the service-type contracts, IT and things of that sort, to make them -- to get us just better pricing. And we'll continue to do that where it's possible.

Most of the things we've done -- we can do, we've done. But it becomes something of, in our DNA, if you will, to continuously look for ways to do things that are less expensive, more efficient, being careful about headcount increases. So -- but I think SG&A probably -- we don't -- also, in the second half of the year, is when we accrue our incentive compensation, so that will drive it up; but with respect to last year, it will be pretty close.

Great. Thanks a lot.

(Operator Instructions). [Simon Baruch], private investor.

I believe you said there was an adjustment of about $350,000 or so in the equity and earnings. Was that a positive adjustment? And what was that figure exactly?

It was $315,000 and it was positive -- it was income.

So, three-one-five.

Correct.

Thank you.

We have no further questions at this time. I would like to hand it back to Mr. Siegel for closing remarks.

Okay. Well, in closing, I'd like to reiterate that Lifetime is on target to achieve topline growth and increase profitability in 2011, despite the tough retailer environment, which we don't expect to improve much this year. Many of our biggest initiatives will start kicking-in in the third quarter, so we're really looking forward to our next update in November. Enjoy the rest of your summer.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect and have a great day.