Lifetime Brands Inc (LCUT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Lifetime Brands earnings conference call. My name is Tony, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Harriet Fried of LHA. Please proceed, ma'am.

Good morning, everyone, and thank you for joining Lifetime Brands' conference call. With us today from management are Jeff Siegel, President, Chairman and Chief Executive Officer; and Larry Winoker, Senior Vice President and Chief Financial Officer.

Before we begin, I will 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 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 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 would like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thanks, Harriet, and good morning, everyone. Joining on call today is our CFO, Larry Winoker.

During the quarter ended June 30, Lifetime's business reflected the continuing uncertainty over the state of the economy, which restricted retail sales and caused retailers to maintain the extremely cautious position with respect to inventories that has continued since 2008.

Despite the weak retail environment, for the quarter ended June 30, Lifetime's net Wholesale sales increased by 5.6%. These gains reflect the inclusion of Creative Tops, our UK business that we acquired in November; and an increase in our Kitchenware category. We saw gains in each of our major classifications -- tools and gadgets, cutlery and cookware.

Our Kitchenware business continues to be a real standout. For the quarter, US net Wholesale sales of kitchen products increased by 6.5% and gross margin expanded by 160 basis points, both driven principally by the success of new kitchen tool and gadget and cutlery programs we launched in the first quarter.

Sales in the second quarter were negatively impacted by the increasingly conservative inventory and promotional posture retailers have been taking in the second quarter of the year. A good example is with our sales to one of our largest customers. For the quarter, our sales to this customer are off by 40% from the same period last year. However, for the full year 2012, we are confident that our sales to this customer will be up significantly over last year. This is a customer that's easy for us to predict sales on. In the third and fourth quarters, we're going to roll out a number of exciting new programs, including our Guy Fieri line of fry pans, skillets and stainless steel, aluminum and cast-iron cookware, all designed to carry on and to build on Guy's wide appeal and top-rated shows on the Food Network. We will also be launching our Savora line of kitchen tools and gadgets, which was covered in the New York Times Homes section earlier this year. These revolutionary new culinary tools combine great looks and great quality with exceptional functionality. This is our first super-premium line geared towards a segment of the trade that we have not addressed up to now. We'll begin shipping them to key upscale customers -- retailers in the US and several foreign countries this year. Over time, we expect Savora to become one of our key global brands.

Our Tabletop and Home Solutions categories did not perform as well in the quarter as the Kitchenware. In Tabletop, we were impacted by the well-publicized upheaval at a major retailer that has long been an important customer for our Tabletop products, and by timing of new promotions. Overall, our Tabletop business is very healthy and we look forward to a good rebound in the second half.

Our Home Solutions product category, especially in the home decor classification, continues to require our attention. Those of you who have walked retailers' home decor departments will have noticed that every major retailer has sharply reduced the floor space devoted to this category. One of our key customers reduced their home decor space by 50%, and two others have eliminated the frame departments entirely. Though we are having success with Mikasa and Pfaltzgraff branded home decor, that success has not yet offset the decline at lower price points in the home decor lines. We will continue to work at this throughout the remainder of this year and into 2013.

Turning to our expanding international side of our business, in this important arena things have been going very well indeed, reinforcing our strategy of establishing Lifetime as a global leader in the housewares business. This is the second full quarter since we acquired Creative Tops, a leading UK supplier of private label and branded Tableware and Kitchenware products. Creative Tops generated net sales of $7.8 million for the quarter and $19.1 million in the first half. This is in line with our expectations and slightly better than for the same periods in 2011, notwithstanding difficult economic conditions in the UK. We are very much in a period of investments at Creative Tops, allocating additional people and other resources for the business so that we can add a significant Kitchenware component to the business and use it as a platform for expanding our Tabletop business throughout Europe. Obviously, it will take some time for all of these initiatives to bear full fruit, but we're seeing strong interest from retailers in the products. These are products that Lifetime has developed with Creative Tops and their team for distribution in the United Kingdom. We're all pleased and encouraged with the progress we're making.

Lifetime Brands Canada and our partner companies in Mexico, Brazil and China all performed to expectation or above in the second quarter. Businesses in Canada and Mexico, whose national economies have been steadier than that in the US, continues to be especially robust with a lot of positive momentum in those parts of our business.

During the quarter, Lifetime's strong liquidity position enabled us to repay $10 million of our second lien term note. More recently, we expanded our bank facility and refinanced the remaining balance of the second lien term loan. Larry will go over the advantages of the new financing and provide you and give you more details of our Q2 results. Larry?

Thanks, Jeff. As we reported earlier this morning, net income for the second quarter of 2012 was approximately $600,000 or $0.04 per diluted share as compared to $2.1 million or $0.17 per diluted share in the 2011 period. Adjusted net income for the quarter was $1 million or $0.08 per diluted share compared to $1.7 million or $0.14 per diluted share in 2011.

Adjusted net income in the 2012 period excludes the loss on early retirement of debt related to the repayment of $10 million to the Company's term loan and an expense related to retirement benefit obligations. Adjusted net income in 2011 excludes the equity and earnings of an entity that discontinued the sale of products in late 2011. Income from operations was $2.2 million for the 2012 quarter as compared to $4.4 million last year.

Consolidated EBITDA, a non-GAAP measure that is defined and reconciled to net income in our earnings release, was $5.6 million for the current quarter and $7.5 million for the period in 2011. Consolidated EBITDA for the trailing four quarters ended in the 2012 period was $39.7 million versus $41.3 million in 2011.

For our Wholesale segment, net sales in the second quarter of 2012 increased 5.6% to $91.1 million. The increase reflects the inclusion of Creative Tops, our UK business acquired last November, and the success of our Kitchenware programs. These increases were partially offset primarily from a decrease in the Home Solutions product category. This decline is largely attributable to an industry-wide reduction in floor shelf space allocated to home decor products, which are included in Home Solutions. In addition, sales of Tabletop products also declined. Wholesale segment gross margin was 36% in the 2012 quarter compared to 36.2% in 2011. Improved margin in the Kitchenware category was offset by lower margin in Home Solutions. In addition, Creative Tops' margins generally lower than for our overall US Wholesale business.

Wholesale distribution expense as a percent of sales shipped from our US warehouses was approximately 10.5% and 10.4% in the 2012 and 2011 quarter respectively. Wholesale SG&A expenses were $18.8 million in the second quarter of 2012 and $16 million in 2011. As a percentage of net sales, SG&A increased to 20.6% from 18.5% last year. The increase in dollars and as a percent of sales reflects higher expenses incurred by Creative Tops to support its business expansion plans.

For our Retail Direct segment, net sales were $3.8 million and gross margin was 68.8% in the 2012, quarter as compared to $4.1 million and 68%, 68.0%, in 2011. The decrease in sales and increase in gross margin percent is attributable to the decline in promotional activities. As a percentage of net sales for the Retail Direct segment, distribution expenses were approximately 29.3% and 29.7% for 2012 and 2011 quarters, respectively. Retail Direct SG&A was substantially unchanged at $1.8 million in 2012 and $1.9 million in 2011.

With respect to non-segment items, unallocated corporate increased to $3.3 million for the second quarter of 2012 from $2.5 million last year, reflecting nonrecurring compensation expense related to retirement obligation and increased professional fees. Interest expense is $1.7 million in the 2012 period versus $2 million for the 2011 period. The effect of average higher borrowings to finance recent business acquisitions was more than offset by lower average interest rates due to the retirement of the Company's convertible notes in July of last year. In June we repaid $10 million of our second lien term loan, which at the time reduced the balance to $30 million. In connection therewith, the Company wrote off debt issuance costs of approximately $300,000.

Equity in earnings of unconsolidated businesses declined to $523,000 from approximately $860,000 last year. However, excluding the equity of entity at discontinued sales products in late last year, the comparison would have been $523,000 this year versus $544,000 last year. Our proportional share of Grupo Vasconia's earnings increased 6.5% in US dollar terms, 22% in local currency. This increase was offset by small losses for some of our new foreign investments, which is expected during the earlier ownership periods.

Looking at our financial position, at June 30 of 2012, the outstanding balance of our revolving credit facility was $63.4 million and our leverage ratio, which total is indebtedness to EBITDA, was 2.4 times. Availability under the facility was $66 million. On July 27, we amended the revolving credit facility to increase the maximum commitment to $175 million from $150 million and extended the maturity to July 2017. In addition, we refinanced the second lien term loan with a $35 million senior secured term loan due July 2018. The new term loan bears interest that LIBOR plus 5%, which on a pro forma basis reduces our annual interest expense by approximately $2 million. The loan amortizes 10% in each of the first two years, 15% in each of the third and fourth year, 20% in the fifth and 30% in the sixth. The new term loan is better aligned with our business strategy and, among other things, from its acquisitions of up to $35 million per year subject to the same permitted acquisition test as under the revolving credit agreement.

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

(Operator instructions) Nick Halen, Sidoti & Company.

First question I had was just in terms of the jump in SG&A. I know you mentioned higher expenses tied to Creative Tops expansion plan. I was wondering if you could elaborate on that a little bit. And what exactly are you guys were going on with Creative Tops, and how you plan on building up that business right now?

Yes, we are very, very happy with the management of Creative Tops and the direction that they are going. The business in general is very strong for us. We are making several investments. Besides the fact that we instituted an SAP system, which we very successfully did at the beginning of July with no hiccups and it's running perfectly. In addition to that, we are moving into another warehouse, adding an additional warehouse that they will need over the next couple of years, but we felt it was prudent to do it now. And in addition to that, we are investing in a number of people and travel. Their business up to now has been primarily a tabletop business, and we want to make them more of a company more like Lifetime US and build food prep end of the business, which is the biggest part of our business and the most profitable part of our business. And we are investing in people and systems and everything else to do that.

We are getting good results. We are getting placement of food prep items into the retail trade there that they never had before, and it's looking like a very, very good move. But it is taking quite a bit of investments on our part.

Okay, and now on the Savora line, I know on the last call, you mentioned that shipments were going to begin probably in the third quarter. But it's looking like now maybe towards the end of the year. Is that fair to say? And what made you change the time line of that?

No, there is no change in the time line. It will begin in the third quarter, in the US and several other -- some retailers outside the US, we have -- for instance, in Creative Tops has secured a major program at John Lewis, which is the largest department store chain in the UK. That's going to be a -- over time, we believe it will be a very important line for us on an international basis. We intend to run it all over the world, actually. And in addition, the Guy Fieri line, which is going to be very important to us in the US -- we also will begin it late in the third quarter to ship that line.

Okay, and just lastly from me, the jump in inventory in the quarter -- is that mainly due to the new product rollouts that are going to be coming out in the next two quarters?

Yes, it is. We have a lot going on and a lot of new lines and we need the inventory to support that.

Okay, great, thanks, guys.

Lee Giordano, Imperial Capital.

You mentioned on the call that your sales in the quarter were off by about 40% from one of your largest customers. Can you just clarify; was this a timing shift? It sounds like they are being conservative on their inventory buys, but should we see that ramp back up in Q3 and Q4? I just wanted to get some clarity on that.

Yes, it's absolutely a timing shift. If their business was the same in Q2 as it was last year, there would be a significant difference in our earnings. But unfortunately, they shifted. This particular customer is one that we have a very, very good handle on the rest of the year. We will be up substantially, for the year, substantially with this customer, even though we were down 40% for the quarter. This will probably be the largest increasing customer we have in the year.

Great, okay.

It's timing.

Got you, okay. And just secondly, on the home decor business, it sounds like the retailers are exiting the space or shrinking it significantly. What is your overall long-term view on home decor? Is this a business that you're going to maintain and look to grow, or is it really just to stabilize -- what is your overall view of that longer-term?

Well, we don't expect near-term growth; that's for sure. But what we are doing with the business, which we have said in a number of calls -- we're converting the business to more of a branded business using the Mikasa and the Pfaltzgraff brands. It has been very successful where we have placed it. Now we have to expand it a bit to really go on with that.

The area that we are suffering in is the unbranded home decor or branded with brands that are not important to consumers. We have an Elements brand and a Melannco brand that consumers really don't know. Retailers know it, but the consumers don't know those brands. And that's less expensive home decor, a very competitive, crowded field and a shrinking retail base. So it's really just not a good place to be. So our goal with that business is to move it up a couple of price points, which we have been doing with the Mikasa and Pfaltzgraff brands and to expand that distribution not only in the US, but around the world using those brands. It's a different type of home decor business that we are heading towards.

Got it. And then, Larry, just the equity in earnings of World Alliance -- when was that discontinued last year, what month?

It was November.

Okay, so we are still going to comp against that in the third quarter?

Yes. I think we picked up almost all of it in the fourth quarter, so I'm not sure there was anything (inaudible).

I don't think it was significant, though, was it?

It was up 300.

In the fourth quarter?

Yes.

About $300,000 in the fourth quarter.

$300,000 in the fourth quarter? Okay, nothing in the third, you are saying?

I think that's correct. I could check, but I think we picked it all up then.

Okay, great, thank you.

Gary Giblen, Aegis Capital.

Building one of the previous questions, are you thinking that the holiday season will be less good than you did three months ago? Or is it all just timing factors such as what we discussed in that one particular case where you were down 40% with a customer that you are going to be up handsomely with for the year?

It's strictly timing, Gary. Our expectation right now is that the holiday season will be considerably stronger than last year for us. The overall economy, I don't know. But it looks right now that we will have a very strong holiday season.

Okay, so even though retailers have pulled back on the de-stocks somewhat even beyond home decor, you don't think that will determine what they do for the holidays?

No, we are seeing -- this pattern has gone on for a couple of years now. The second quarter we have been seeing at retailers, they are holding back. It's not a quarter that's very important to them. They don't want to make investments in that quarter, and they don't do it. In the first quarter, you get the rollouts of new programs. Very few new programs roll out in the second quarter at any retailer. And in the third quarter, you get additional rollouts of new programs for the fall season, and then you have the fourth quarter, which is Christmas. So really the one that's left behind is the second quarter. We could chase more business in the second quarter, but it's not a profitable thing to do, so we don't do that. The retailers don't want to invest their money in promotions in that quarter, and they would be very happy if we were willing to do that and they would buy more goods to support it. But it won't be a profitable way to do it, so we won't do that.

Okay, understood. And then with the particular retailer whose well-publicized disruption has disrupted a lot of people, I guess, including your Tabletop business -- is that problem resolved now, or is it to be resolved?

No, there is one large retailer in the United States -- I don't want to name names, but they are having a difficult time and we are suffering along with them. The good thing, I guess, for Lifetime is that it's less than a 3% customer for us overall, so it's not a disaster. And we will hopefully make it up next year. But I would not count on making it up this year.

Okay, understood. Well, thank you. Good luck for the season coming up.

(Operator instructions) Brian Freckmann, LS Capital.

I may have jumped on just slightly late. The customer you referred to that was down 40% -- could you put into any sort of dollar terms what that was?

Almost $3 million.

$3 million, okay, of top line, got it. Second question -- it was discussed the inventory levels were up, and your statement was at -- in preparedness for third and fourth quarter. Care to discuss maybe what the gross margin expectations should be, given what's in that inventory, given what you have talked about, certain products having lower margins, certain having higher ones? What are your expectations for the inventory right now? Should they be in line with current quarters or historical?

I think -- it looks like our margins are going in the right direction. Part of the inventory increase is at Creative Tops also; keep that in mind. That's $6 million of the increase, is inventory at Creative Tops which we didn't own last year. So there's -- obviously, it's a business that needs its inventory, like any other business. But our margins are looking pretty good. Our margins in Home Decor were weak in the quarter, but our margins in the key areas are the most important areas for us, in Kitchenware and food prep items, were up considerably, doing very well.

Okay.

But me clarify. We're up -- excluding Creative Tops, the inventory is up 4%.

Okay.

(multiple speakers) last year.

Right, and that sort of tracks revenue and so on and so forth. On the operating margin, someone did ask you -- or on the expense line, someone did ask you about that line item. Care to discuss the leverage in that? You guys are making some investments now. How should we think about that? Is it just to grow the business in general senses, and then that will continue to go on from that level? Or do you expect to leverage that 2012 investment in 2013, getting margins back up to the numbers you've talked about in prior calls?

Yes. No, we do expect to continue making investments in Creative Tops this year. But we expect those investments to bear fruit in 2013.

Okay, so we should probably see that number settle off, and you guys can probably leverage the margin (multiple speakers)?

We're doing things to build this into a sizable business. Like I said, we are very, very happy with this acquisition and we want to make sure that it continues to go in the direction that's we like it's going in right now.

Finally, on the back half of the year, as you guys are more in the execution stage of filling for a holiday. Sort of to that same question, you talked about strong holiday season, we'll wait and see, but you guys sound hopeful. Is there going to be a pretty solid amount of SG&A for expansion? Or if we were modeling revenues up in the third and fourth quarter year-over-year, should we see some of that drop to the bottom line in a greater fashion than we didn't see last quarter -- or this current quarter? Or how should we think about in general modeling? You've given us a hint as to the top line. I'm looking for a little bit of hint as to the bottom line.

You're talking about the US business now. Right?

Yes. You've talked about strong holiday, your revenues are up year-over-year. Obviously, you can make an assumption that, given what you've said about this customer, this $3 million plus some in the third quarter adding strong holiday, I can make an assumption, only mine, that the fourth quarter, at least on the revenue line, is up. Obviously, in the second quarter you guys spent a little bit more than I was expecting on the SG&A line. So I'm just curious as to how should we think about specifically the SG&A line potential in the third and fourth quarter.

So let's put aside Creative Tops, look at the US business. We should see a pattern similar to prior years. Our SG&A is largely fixed. We don't have a lot of what I call brand support. It's mostly in the top line, money that we give to our customers. So you just see -- it goes up because we have more incentive compensation we accrue, so maybe some more travel, UPS, those types of expenses. But you're not going to see -- we get the benefit of leverage, you won't see a big -- you'll just see the seasonal movement of SG&A, which is fairly modest relative to the substantial increase you will see in top line.

Okay, okay. And then finally, you guys have started to pay down some debt, which is nice. And I'm thinking in 2013, if your investments pay off, your EBITDA should start to reaccelerate. How should we think about, given your probably leverage ratio hopefully in 2013 will even be below 2.4, what are you guys comfortable with? What do you think about leverage ratio, the debt, so on and so forth?

Well, we're quite comfortable. I think you can see from the pricing of the transaction, our lenders are also -- we have historically generated, I think, a reasonably good level of cash flow, and we use that cash flow temporarily to reduce the revolving credit facility. We've talked about growth and how we grow this Company, and Jeff has talked a lot about international opportunities. So we would certainly not pay out the term loan any faster than is required.

Okay, thanks, guys.

There are no further questions at this time from the listening audience, sir.

Well, thank you for joining our call today. Despite the weakened and continuing weak economic environment, we look forward to a good second half based on already confirmed rollouts of new Kitchenware, country, cookware and Tabletop programs. It would be nice if consumer confidence improves. However, we believe we are well positioned to deliver improved performance in the second half of the year, even if it does not. We hope you enjoy the rest of your summer and look forward to giving you another update this fall. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now all disconnect and have a great week.