Lifetime Brands Inc (LCUT) 2011 Q3 法說會逐字稿

Welcome to the third-quarter 2011 Lifetime Brands earnings conference call. My name is Jeremy, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session a little bit later on in the call. (Operator Instructions)

At this time, I would like to turn the conference over to your host for today, Ms. Harriet Fried of LHA. You may proceed, ma'am.

Good morning, everyone, and thank you for joining Lifetime Brands 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 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 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 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. And good morning, everyone. I hope you've had a chance to review our earnings announcement that was issued this morning. I also hope you saw the release we issued earlier this week about our acquisition of Creative Tops, a leading provider of tableware and kitchenware products in the UK, and its Hong Kong-based sourcing affiliate, Creative Tops Far East Limited. Clearly, the acquisition is a very exciting move for our Company, and one which establishes Lifetime as a global leader in the housewares business. We believe it provides an outstanding platform from which we can build our shareholder value for years to come. This morning, after I review the highlights of our third quarter, I'll provide more details on the Creative Tops acquisition and the abundance of opportunities it offers.

Go first to the third quarter -- despite persistent economic headwinds, we executed well in the period. Our new kitchenware and tabletop programs and promotions were successful, and drove an increase in net sales in our Wholesale segment. In particular, our kitchen tool and gadget, and flatware businesses were up double digits for the quarter. Our weakest area of business was home decor, one of our smaller businesses. Many of our retailer partners have indicated that their home decor business has been soft across the board, and we believe that our results are in line with what is happening in those categories at retail.

Without home decor, our Wholesale business would have been up approximately 4% for the quarter. The new management we installed in the home decor business is moving us away from lower and unbranded products that were the focus of our prior home decor management team to better quality products branded with the Mikasa, Pfaltzgraff and Studio Nova brands. Consumer response to the new branded products has been excellent, and we will accelerate introductions to rebuild that business.

Second, we continued our ongoing focus on controlling expenses, reducing SG&A both in absolute terms from $24.6 million to $23.6 million, and as a percentage of net sales from 19.7% to 18.9%. Our interest expense declined once again, and our existing international efforts, Grupo Vasconia and Lifetime Brands Canada, continued to turn in strong results. Combined with our strong operating performance, this produced record third-quarter earnings of $0.60 per diluted share.

Now, turning to our acquisition of Creative Tops. In last quarter's call, I highlighted the growing importance of Lifetime's international business. We entered these markets in 2007 through our investment in Grupo Vasconia, Mexico's largest housewares company. In 2008, we joined with Accent Fairchild Group to form Lifetime Brands Canada. In the few years since we made our initial investments, both Grupo Vasconia and Lifetime Brands Canada have seen explosive growth, largely due to both companies having access to our product lines, our brands, and our sourcing. These investments have also contributed significantly to Lifetime's bottom line.

As I mentioned last quarter, we've been looking for additional opportunities to acquire or partner with strong companies in markets where our key retail partners are already well established or have announced plans to expand. The Creative Tops acquisition fits these criteria perfectly. In addition, Creative Tops dinnerware sourcing operation, including its new showroom space, offers us the opportunity to expand and broaden the scope of Lifetime's existing Asia sourcing infrastructure, which up to now has been predominantly focused on sourcing kitchenware products, and to a lesser extent, on stainless steel flatware.

Creative Tops was established in 1996, and its product portfolio encompasses a large collection of private label and branded tableware and kitchenware items. It had some of the UK's most widely known heritage brands, including the Victorian and Albert Museum and the Royal Botanical Gardens Kew. In addition to marketing its products to a wide array of retailers in the UK, it has a growing customer base outside the UK, selling to retailers in many countries. For its fiscal year ended March 31, 2011, Creative Tops had net sales of more than $42 million.

The acquisition offers a multitude of benefits, and leverages the strengths of both Lifetime and Creative Tops. It enables us to accelerate our plans to introduce Lifetime's leading tabletop brands, including Mikasa, Pfaltzgraff, Gorham, International Silver, Towle Silversmiths, and Wallace, into key markets around the world where Creative Tops has strong relationships with local retailers. It enables Creative Tops to increase its growth and profitability by using our experience in designing, sourcing, and merchandising kitchenware products to provide its customers with new assortments of branded and private label kitchenware programs. It allows Creative Tops to expand into new marketing channels by levering Lifetime's B2B and B2C internet infrastructure. It enables Lifetime and our existing international partners, Grupo Vasconia and Lifetime Brands Canada, to introduce Creative Tops' successful lines of dinnerware, mugs, table mats, coasters, trays, gift sets, and textiles into retailers in North and Central America. And it allows Lifetime to become a more effective global resource to our key retailer partners.

As I noted in our recent release, we have been very impressed with the quality, commitment, and passion of Creative Tops management. And we believe the company's culture and management are very similar to Lifetime's. We expect the continuing management team, under the leadership of Patricia Dawson, to integrate seamlessly into our operating structure. All of us look forward to working with our new colleagues.

Finally, I'd like to note that we're continuing to look into additional investments in key rapidly growing markets, especially in Asia and Latin America where an expanding middle class has both the resources and the desire to own products marketed under our well known global brands. I hope to have an update for you regarding these new markets in the very near future.

Now I'll turn the call over to Larry for more details on our third quarter financial results.

Thanks, Jeff. As reported earlier this morning, net income for the third quarter of 2011 was $7.5 million or $0.60 per diluted share, as compared to $6.6 million or $0.52 per diluted share in the 2010 period. The results for the 2011 quarter included $500,000 of acquisition related expenses, which reduced per share income by $0.025. As you probably know, since 2009, ASC Topic number 805, business combinations, requires acquisition costs which prior there to are capitalized to be expensed as incurred.

Income from operations for the third quarter of 2011 was $10.3 million, which reflects the $500,000 charge for acquisition expenses, as compared to $10.2 million for the 2010 period. Consolidated EBITDA, a non-GAAP measure that is defined and reconciled to net income in our earnings release, was $13.5 million for both the third quarter of 2011 and 2010. Consolidated EBITDA for the trailing 4 quarters ended in the 2011 period, was $41.3 million versus $40.9 million for the same period in 2010.

For our Wholesale Segment, net sales in the 2011 quarter increased 1.7% to $120.8 million. Our Core Business categories, kitchenware and tabletop, increased by almost 4%, which more than offset the decline in portions of our home decor category and non-core business, in which many retailers have experienced weakness. Wholesale Segment gross margin was 34.5% in the quarter, compared to 35.6% in the 2010 quarter. The lower margin reflects higher promotional allowances and product mix.

Wholesale distribution expenses as a percentage of sales shipped from the Company's warehouses, were approximately 9.1% in the 2011 quarter versus 9.5% in 2010. In the 2010 period, we incurred expenses to upgrade the warehouse management system for our West Coast facility. Wholesale SG&A expenses were $18.4 million in both third quarters of 2011 and '10. As a percentage of net sales, SG&A declined to 15.2% from 15.5%. The decrease, as a percentage of sales, primarily reflects the significant fixed component of these expenses.

For our Retail Direct segment, net sales was $3.9 million in the 2011 quarter, as compared to $6.1 million last year. The decrease is a result of a change in our marketing approach, which emphasizes significantly reduced promotional activity, as well as the Company's decision to terminate its print consumer catalog earlier this year. Reduced promotional activity enabled Retail Direct gross margin to increase to 65.4% in 2011 quarter from 63.3%. As a percentage of net sales, distribution expenses were approximately 30% for each of the quarters in both years. Retail Direct SG&A expenses were $1.8 million in the quarter, and $2.6 million in the 2010 quarter. This reduction reflects savings from the Company's decision to terminate its print consumer catalog.

With respect to non-segment items, unallocated corporate expenses in the 2011 quarter were $3.4 million, which included $500,000 of acquisition related expenses versus $3.6 million in 2010. The decline reflects lower compensation related expenses and professional fees, partially offset by the acquisition expenses. Interest expense declined to $1.8 million from $2.1 million. The decrease is due to lower average borrowing rates from the retirement of the Company's convertible senior notes, and to a lesser extent, lower average borrowings.

The effective income tax rate for the third quarter of 2011 was 24.6% versus 29.4% last year. The effective tax rates of both periods varies from the expected statutory rate due to reductions in valuation allowances of certain deferred tax assets. The Company's marginal tax rate on its US income is approximately 40%.

Grupo Vasconia, our 30%-owned investee, reported income from operations for the third quarter of 2011 of $5.3 million as compared to $4.2 million in 2010, and net income of $3.8 million this year versus $3 million last year. These increases reflect higher sales of kitchenware products, and the stronger Mexican peso in the 2011 period.

Turning to our financial position -- at September 30, 2011, the outstanding balance of our revolving credit facility was $66.7 million, and availability was $56.8 million. Also at September 30, the leverage ratio, that is total indebtedness to EBITDA, was 2.6 times.

On October 28, in anticipation of the acquisition of Creative Tops, we entered into an amended and restated credit agreement, which, among other things, increased the facility commitment by $25 million to $150 million, increased the borrowing base limit for certain eligible trademarks, and extended the maturity date to October 28, 2016, subject to certain conditions. The cash portion of the Creative Tops acquisition, which was GPB13.1 million or approximately $21 million, was funded with increased borrowing capacity under the facility. In addition, the facility will be available to Creative Tops for its working capital needs.

Simultaneously with the amendment of the credit facility, we amended our term loan agreement to, among other things, permit the acquisition of Creative Tops, increase the minimum EBITDA covenant, and restrict future acquisitions. The amendments were filed with the Securities and Exchange Commission on form 8-K on November 3. This concludes our prepared comments.

Operator, we're ready for questions.

(Operator Instructions) At this time, we have the first question from the line of Steve Shaw with Sidoti & Company.

Can you talk about when the deal will close, and if the acquisition expenses will continue forward until that point at the same amount.

The deal has closed already.

Oh, it's completely done?

We closed on Friday. I couldn't quite follow -- what was the second part?

Additional acquisition expense.

Yes, there will be in the fourth quarter.

All right. Thank you.

And your next question comes from the line of Lee Giordano with Imperial Capital. Go ahead.

Thanks, good morning, everybody. I have a question on Creative Tops, and just wondering how has the growth been at the company over the past few years, and do you expect that growth (inaudible - technical difficulties).

The growth is -- they've had a very good growth rate, and we expect it to accelerate. They have now the opportunities of going into product lines that they were unable to do before. And one is, should be a very easy one for them -- they're in the table top business, primarily in dinnerware. They have not been able to go into the stainless flatware business because they don't have the ability to source it. And now they have a very strong ability to source it. So, they're looking forward to that, and they certainly will be going into kitchenware areas and many other areas. It should certainly help to accelerate their growth. Their response from the retailers that they deal with, which is all the key retailers in the UK, has been extremely positive.

Great. And how do the operating margins at Creative Tops (inaudible - technical difficulties).

Lee, it's Larry. Their business is largely -- a large portion of it, about half, is direct import FOB business. So, half the business doesn't go through the warehouse. Their gross margins are closer to around 30%. But, of course, they save on the distribution, and their SG&A is low.

Got you. Great. And I guess just a question on the consumer in general. Have you seen any changes in the consumer behavior out there? People trading up or down? What is your overall sense of the external environment heading into Q4?

As I said, our businesses, other than the home decor business, which has been a business that's suffered, so far, quite a bit this year, it's pretty steady. It's not -- there are certainly headwinds out there. The retailers are very nervous. But we've been compensating for that by getting additional placement in stores. I can't say it's a robust retail environment right now; it's certainly not. As I led into my remarks, there are headwinds out there, and there certainly are headwinds out there. But we're doing what we can to compensate for it. And the interesting thing is, those headwinds don't seem to exist in some of the other places we do business like Mexico, Canada, and hopefully, won't exist in the UK. And so, just a little bit different. It hasn't been easy. We've been performing well in a very difficult environment.

Great. That's helpful. And just lastly, Larry, do you have the diluted share count for the quarter?

Sorry. You're breaking up. Are you asking the shares outstanding?

Yes. Diluted shares outstanding.

Let me turn to that. For the quarter, it's 12.642 million; that's diluted. The basic is 12.089 million, and diluted is 12.642 million.

Great, thank you very much.

You're welcome.

Your next question will come from the line of Brian Freckmann with LS Capital. Go ahead.

How are you? A couple of questions on Creative Tops. I guess I missed it, what did you guys pay for that?

We paid -- it was GBP15 million, of which GBP13.1 million was cash and GBP1.9 million was in Lifetime stock.

GBP1.9 million in Lifetime stock. Okay. And just best guess, I mean what's the multiple on that? I think you said 30% gross profit margins. How do we look at that on a multiple basis?

We haven't disclosed that, and we don't plan to.

Okay. Maybe to another question -- care to tell us what their revenues were last year, just so we understand the trajectory here?

They're on a March fiscal year. So, for fiscal year ended March of '11, it was approximately GBP26.3 million, about $42 million.

And what was it the prior year?

It was -- I don't have it off hand, but it was about $38 million.

So, last year was about $38 million?

That would be March of '10.

Right. Okay. Is there anything, as we model this thing out, is there anything that you can think of that wouldn't be -- any of their business lines that you would be taking out, per se? So, if we took your revenues and our expectations of your revenues, would it be fair to at least model $42 million? Or is there something you guys are pulling out that make apples to apples?

Nothing is being pulled out. Anything that we do that would be done with Lifetime, would be layered above what they do.

Okay. And then finally, on the last call back in August, you guys touched on gross margins would be down at the expense of taking share. Can you -- and I think your comments were more bigger picture, not just 1 quarter, but multiple quarters. Can you maybe reaffirm that that is in fact happening or not happening, and maybe as we get a little closer, where you're taking share or where you thought you were taking share? A little more clarity?

Okay. It's certainly going to happen, and you're right, it's not looking at 1 quarter. I think you're going to see more of it after the first quarter of next year. We are already, obviously, we're already working with retailers into 2012, as far as placement goes. And I can tell you in some key retailers, the most important retailers we do business, we have significant increased placement for 2012, as a result of some good things we did this year and the way we performed for them this year to help them in a tough retail climate. It will be largely -- a large part will be in the tabletop area -- .

Yes.

-- which is an area that we've had very good growth in, in general, and will continue to have. And we would expect to have additional growth in our kitchenware areas. A large part of it came in the area -- will come in the area of tabletop. I don't want to mention customers, but more of our biggest customers.

Okay. That's encouraging. Well, any information we can get on the multiple would be great, or maybe on the next call -- understand what was added from Creative Tops would be very helpful as we -- maybe on the fourth quarter call, giving us a little guidance for the next year would be helpful.

Yes, we will. We'll talk more about Creative Tops as we get into it, and we see how quickly we can accelerate their growth.

Okay, guys. You guys have done well on your other acquisitions, so I look forward to hearing more about Creative Tops. Thank you so much.

Thank you.

Your next question will be from the line of Gary Giblen with Aegis Capital. You may proceed.

Good morning, Jeff and Larry. Looking at the quarter, if you take the 110 basis point reduction in Wholesale gross margin, was most of that promo, and less of it mix, or roughly, which were the 2 bigger factors?

It was more mix than anything else, Gary. With us, mix can change. Certain things can affect gross margin that have nothing -- because costs have not been going up. Costs have leveled, for now anyway; long term, no one knows. But costs certainly have leveled overseas. So, that's not an issue.

What we're finding is mix changes, sometimes -- our margins on all customers are not exactly the same, they vary. Hopefully, the profitability is the same on all customers are very similar. But certain customers are more expensive to do business with, for different reasons, and we have to have a higher gross margin. If we shift in a quarter, that changes it. A lot of factors that change it.

But I have to tell you, in general, raw materials have pretty much steadied. They've been steady now for about 6 months. In some cases, like stainless steel, and the better grades of stainless steel that have nickel, have actually come down quite a bit. They're down below where they were in the beginning of the year. There's still long term -- we see long term labor rates going up in the Orient. Not at any spectacular rate or anything like that, but they are certainly going up on the long-term trend. And it's one of the reasons we've accelerated product development to compensate for it, and we will continue to do that. We will continue to accelerate product development to avoid what might come in the future, not what's happening now.

Okay. Understood. And are you happy with your inventory level, which is just a few million dollars less than the third quarter of last year.

Yes, we are. What's going to affect our inventory, going to the end of the year -- in 2012, Chinese New Year is falling about the earliest time it ever falls. It comes in the middle of January, which is 3 or 4 weeks earlier than normal, which means we have to bring in goods earlier in order to cover our first quarter. And in addition, we're anticipating in some of our areas a very, very strong growth in the first quarter. So, we have to bring in more inventory to cover that growth as well.

At the end of the year, I would expect our inventories will be higher, just necessary to do it this year. And it's certainly not going to be any problem as far as our credit lines or anything like that, no where near that. I'm talking about relatively small increases, maybe 10%. But we will need to bring in goods earlier. And some of it will come in in December, and some will be shipped in January, but early January, in the first 2 weeks of January. If we don't do that, we'll miss the first quarter, so we must do that.

Okay, yes. So, it's the early Chinese New Year effect, basically. And last question on Creative Tops -- in the categories that they're active in, do they have a competitive cost of goods?

They do. They're very good at what they do. Very professional organization. They're sourcing operation is pretty fantastic when it comes to tabletop. Our tabletop people have been to their operations overseas -- very, very impressed with the people and the way they run their business. I think they do have it. They seem to be winning just about every battle in private label in the UK. And you don't do that unless you're right on price, and right on style and service. And they're phenomenal on service, and also on style. We had an outside firm do a survey of their retailers, a customer care survey to make sure that their relationships were strong. And I have to tell you, it was pretty amazing what came back from the survey. They're very highly regarded by their customers.

Okay. That helps a lot. Good luck with Creative Tops.

Thank you.

(Operator Instructions) Your next question will be from Neal Goldman with Goldman Capital Management. Go ahead.

Good morning, guys. Did they have any debt on their balance sheet -- Creative?

Neal, the transaction was debt free, cash free.

Okay. And when you're planning for next year, what do you think your peak borrowing will be, given their inventory needs and the acquisition costs, et cetera, plus your own growth that you're talking about?

All I have, which we don't discuss in detail, is a bank model, which shows we are going to be fine. We are actually -- this is the time of year we're actually going through our budget process, and you can imagine there are a number of integration matters to deal with Creative Tops, one of which is getting their detailed budget. So, I really can't give you anything specific now, but perhaps in the fourth quarter, after the fourth quarter call.

Okay. Very good, thank you.

And at this time with no further questions in queue, I'd like to turn the call back to Jeff for closing remarks.

Thanks for joining us today to go over our recent financial results, and our very exciting acquisition, which will boost Lifetime's development and expansion into both existing and new international markets. I look forward to speaking to you on our next conference call. Thanks, again.

Thank you very much, ladies and gentlemen. This does conclude your conference for today, and we thank you for your participation. You may now disconnect. Have yourselves a great day.