Lifetime Brands Inc (LCUT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2012 conference call. My name is Stephanie, and I will be your operator for today. At this time, all participants are in a listen-only mode and we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes. And now, I'd like to hand the conference over to 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, Chairman, President 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 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 the 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. Good morning, and thank you for joining us to discuss our fourth-quarter and full-year 2012 results. Joining me on today's call is our CFO, Larry Winoker.

If you've had a chance to review the earnings release we issued this morning, you will have noticed that our fourth-quarter and full-year financial statements contain a fair bit of noise due to a bargain purchase gain in Grupo Vasconia, a reduction of the Company's deferred tax liability and other non-operating items.

The table at the end of the earnings release provides a bridge between the $1.64 diluted earnings per share that we reported on a GAAP basis and the $1.26 adjusted earnings per share that we think more accurately reflects the Company's performance in 2012. Larry will provide greater detail on the principle non-operating items during his remarks.

Looking at the year, you will also note that our business and financial results varied significantly from quarter to quarter. These fluctuations in part reflect the timing of seasonal promotions and annual planogram changes, which are part of a normal retail calendar. Quarter-to-quarter shifts also are the results of the impact of shipments to certain large retailers, such as Costco and Sam's Club, that do not follow predictable cycles. The best I can say is these fluctuations are part of our business and one should look at our business on an annual basis, and not be too surprised if one or two quarters are out of line with published forecasts.

That said, 2012 ended on a very strong note. For the quarter, consolidated net sales were $155 million, up 12.5% on an actual basis and 8.6% on an organic basis. Our Kitchenware business was especially strong, posting a 25% increase over the prior year's fourth quarter and a 19% gain for the year. This growth was achieved by rolling out new products and programs, including our innovative lines of ceramic and resin-coated kitchen knives and our new Guy Fieri cookware line, as well as an expansion of our very successful line of sinkware. As I've said in past calls, the growth in this category is due to innovation and newness, which no one does better than Lifetime.

The strong gains recorded by our Kitchenware division more than offset decreases in our Tabletop and Home Solutions product categories. In our last call, I talked about the Home Decor business, which is included in our Home Solutions product category. The Home Decor category has been suffering industrywide for some time. Our strategy for mitigating declining sales of Home Decor products has been to transition a portion of our decor business to higher-quality branded products sold under our Mikasa and Pfaltzgraff brands. By refocusing our product assortments on more upscale offerings, we believe we will ultimately make better returns on less volume. We also have introduced a new line of accent furniture, which has been very well-received by our retail partners.

Our Tabletop sales volume in 2012 also was affected by our decision not to sell Mikasa dinnerware to Internet-only retailers and by the problems at JCPenney.

Let me highlight a few other important developments in the fourth quarter. In late December, we announced the acquisition of Fred & Friends, which designs and markets novelty housewares and other products under the Fred Brand. Fred products include innovative and fun kitchen tools, tabletop accessories, party goods, personal accessories and desk and tech products. Fred products are primarily distributed through independent specialty stores and selected major retailers and small chains, primarily in the US and Canada.

Readers of The New York Times may have seen one of its products covered in a March 7th article on the International Home & Housewares Show in Chicago. They also got good coverage on the Today Show and various other TV programs.

We believe Lifetime's access to international markets provides opportunities to introduce Fred products into new markets and distribution channels. At the same time, we expect Lifetime to benefit from Fred & Friends' strong relationships with independent specialty stores. These relationships should enable Lifetime to increase distribution of our recently-introduced Savora line of high-performance, high-style kitchen tools and gadgets, which is targeted to this retail segment.

As you will recall, we launched Savora late last year and got strong initial reception in the UK, where the products debuted at a major retailer. We introduced it on a limited basis in the US this winter, where it also did quite well. Based on this success, we are dramatically expanding the line for 2013. We will be adding at least 12 additional items, each of which will be available in eight great colors. We continue to expect Savora to be a key brand for us going forward.

Earlier this month, we presented the new Savora products along with many other kitchenware items at the annual Housewares Show in Chicago. The reaction to our new product lineup was overwhelmingly positive, and as always, our focus was on innovative designs, featuring new technologies that deliver a five-star experience to the consumer. This focus keeps us ahead of the curve on the ever-evolving kitchenware industry.

Another highlight of the Housewares Show was our introduction of the Guy Fieri cutlery. We currently hold the license for Guy Fieri kitchenware, cutting boards, bakeware, tabletop products and cookware, and will debut many more in these categories in 2013. We already have a great partnership with Guy, so we are very excited to be able to offer customers new lines of top-performing cutlery from that collection. We'll be shipping the cutlery to retail customers in July.

Our International business increasingly is becoming a major area of focus for Lifetime. Creative Tops, our 100%-owned UK subsidiary, which we acquired in November 2011, contributed net sales of $12.5 million in the quarter and $42.6 million for the year. In addition with -- and this is in line with our expectations -- despite a difficult economy in the UK and certainly elsewhere in Europe.

Our minority-owned partner companies in Mexico and Brazil and our joint venture in China all performed to expectations. Lifetime Brands Canada also has continued to do well, reflecting the steady Canadian economy. There is a lot of positive momentum in those parts of our business.

As we mentioned in this morning's press release, we expect 2013 to be another good year. Although economic conditions around the globe are far from ideal, we expect our overall business to increase by 4% to 6%. As an indication of our confidence, on Tuesday, Lifetime's Board of Directors declared a quarterly dividend of 0.3125, 3 1/8 cents, per share, representing a 25% increase to the annual rate of $00.125 per share. Clearly, this increase marks another step in the progress of our Company and the strengthening of our operations and balance sheet. I am delighted that we could reward our shareholders in this way.

Lifetime today is one of the largest and most diversified housewares companies in the world, with 10 domestic business units and a growing international presence. Larry will now give you more details on our fourth-quarter financial results. Larry.

Thank you, Jeff. As we reported earlier this morning, net income for the fourth quarter of 2012 was $15.2 million or $1.19 per diluted share, as compared to $5.4 million or $0.43 per diluted share in the 2011 period. Adjusted net income was $8.7 million or $0.67 per diluted share in the 2012 period, as compared to $6.5 million or $0.52 per diluted share in the 2011 period. Adjusted net income is a non-GAAP measure that is reconciled to net income in our earnings release.

Income from operations was $14.5 million in the 2012 quarter compared to $10 million in 2011. Consolidated EBITDA, also a non-GAAP measure that is defined and reconciled to net income in our earnings release, was $17.9 million for the current quarter and $14.3 million for the 2011 quarter. Consolidated EBITDA was $41.2 million for the full year of 2012 versus $38.1 million last year.

For our Wholesale segment, net sales in the 2012 quarter increased 13.6% to $146.6 million. This was primarily due to an increase in the Company's kitchenware product category due to successful new programs and the introduction of new, innovative styles and designs, including the new Guy Fieri lines of cookware products. This was partially offset by decreases in both Tabletop and Home Solutions products categories due to general weakness in the home category at retail, including the adverse effect of JCPenney's new pricing strategy and certain sales programs in 2011 not repeated in 2012.

Wholesale segment gross margin was 34.4% in the 2012 quarter compared to 34.8% in 2011. In our US Wholesale business, gross margin was 35.1%, an increase of 40 basis points from 34.7% last year. Total gross margin percent declined, reflecting lower gross margin percentages for Creative Tops, which has historically averaged approximately 30%.

Wholesale distribution expense as a percentage of sales shipped from our US warehouses was approximately 6.8% and 7.2% in the 2012 and 2011 quarters, respectively. This improvement, which continues a trend throughout 2012, resulted from significant improvements in labor management and other operating expense savings. The overall decline in distribution expense on higher sales, as reported in our consolidated fourth-quarter 2012 P&L, was also due to an increase in products shipped directly to customers from Asia. Direct shipments from Asia was not significantly higher for the full year of 2012 versus 2011.

Wholesale SG&A expenses were $22.4 million in the fourth quarter of 2012 and $20.1 million in the 2011 period. The increase related to expenses associated with the higher sales volume and income in the 2012 period and the inclusion of Creative Tops for a full quarter. As a percentage of net sales, Wholesale SG&A decreased to 15.3% from 15.6% last year.

For our Retail Direct segment, net sales were $8.2 million in the 2012 quarter as compared to $8.5 million in the 2011 period. Retail gross margin increased to 68.9% from 67.6% last year, reflecting product mix changes and reduced promotional activities. As a percentage of net sales, retail distribution expense was approximately 27.3% in the 2012 quarter versus 30.7% last year. As noted, for US wholesale, the improvement comes from better labor management and operating expense savings.

Retail Direct SG&A was $2.5 million in the 2012 quarter and $2.7 million last year. This reduction primarily reflects better-selling support expense management, including lower search fees.

With respect to non-segment items, unallocated corporate expenses were unchanged at $4.6 million for both periods. Interest expense declined to $1.3 million in the 2012 quarter from $2 million last year. The decrease for the 2012 period was primarily due to the benefits of lower average borrowing rates from refinancing the term loan last July.

The effective income tax rate for the fourth quarter of 2012 was 19.5% versus 43.9% for the corresponding period in 2011. The low effective tax rate for 2012 is due to a $2.3 million deferred tax liability reduction related to the prior year. Excluding this reduction, the effective tax rate would have been 36.7%. The effective tax rate for the 2011 quarter reflects the non-deductibility of certain acquisition expenses.

Equity in earnings increased to $4.5 million in the fourth quarter of this year -- of 2012 from $900,000 for the corresponding period in 2011. During the quarter, there were certain unusual items that increased our equity in earnings in Grupo Vasconia, including a bargain purchase gain of $4.1 million net of tax and a $1.1 million non-cash tax benefit related to Vasconia's acquisition of a business. This was partially offset by a charge of $1.3 million net of tax to reduce our carrying value of the investment fair value.

Looking at our financial position at December 31, 2012, leverage ratio -- that is total indebtedness to EBITDA -- was 2.3 times and availability under the revolving credit facility was $77.7 million.

Looking at our expectations for the full year of 2013, we currently project sales to increase by 4% to 6% over 2012, with gross margin percent and distribution expense in line -- as a percentage of sales in line with 2012.

SG&A is expected to increase by approximately 6%, which includes the impact of the Fred & Friends acquisition. Of our total indebtedness at year-end 2012, approximately two thirds is variable at LIBOR plus 2.5%, and one third has been swapped to fixed at a rate of approximately 6% beginning in the second quarter of 2013.

Our income tax rate is expected to be approximately 40%, and capital expenditures should be in the $5 million to $6 million range. For the full year of 2013, diluted weighted average shares outstanding are projected to be 13.1 million.

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

(Operator Instructions) Lee Giordano, Imperial Capital.

This is Robin for Lee. Can you talk about your gross margin expectations going forward? We are still seeing some pressure on that line item. Maybe talk about if we are going to see some expansion in the first quarter and into 2013. Thanks.

I'll just comment on historical. As I mentioned, there was some diminution because of Creative Tops, which historically has lower gross margins than the US business, and we have had them in now for the full year.

But other than that, our gross margins, in fact for the full year in the US business, actually increased for the quarter and it increased by about 30 basis points for the full year.

As we said, going forward, we are anticipating that to be, in 2013, certainly in line with what we had for the full year of 2012.

Thank you. On the Fred & Friends acquisition, can you guys talk about maybe incremental revenue that we saw in the quarter from that, and then possibly going forward, and maybe what kind of margins those kind of products carry?

For the quarter, it was very small volume. We closed on it about the 20th of the month, 20th of December. So there was nothing really there. For 2013, their margins tend to be higher than our margins. But the volume is small, so it's not going to have a major effect on Lifetime's overall margins, not until we build the volume of that business, which will take us at least a year to really get it ramped up.

Thank you. And then you guys said Guy Fieri seems to be doing well. You're introducing a bunch of new products. How is that being received by consumers so far?

So far, so good. It has done well at retail. That's why we are expanding on it. We added the cutlery category, which should be a very strong one for us because it is something we really know well. And the line is selling.

He's quite a personality. He draws a huge crowd at the Housewares Show, and consumers watch him all the time. He is the number-one-rated show on Food Network.

Great. Thanks. I'll jump back in the queue.

(Operator Instructions) Lee Giordano, Imperial Capital.

Sorry about that, guys. Can you give us your general view on the overall retail environment? We are seeing the payroll taxes, higher gas prices, delayed tax returns, everything is pointing negative, but it seems that consumers are still going out and spending. What are you guys seeing from retailers and their buying patterns?

At the Housewares Show, there was certainly a lot of talk about the three points that you just mentioned affecting business. But the overall attitude is very good. The retailers -- pretty much universally, the retailers we dealt with at the show felt that 2013 was going to be overall stronger than 2012. So they all expected a slow start, especially the first two months of the year. Other than that -- which are not very important months for them for the most part. But after that, they do expect to have a better retail year than 2012, which was a good thing to see.

Great, thanks. And then I guess quickly just on the housekeeping front, can you give us the average diluted share count for the quarter -- fourth quarter?

It is 12.8 million.

12.8 million again? All right. Thanks, guys.

There no more questions at the moment.

If there are no more questions, then I'd like to thank everyone for joining us for today's update. I am glad you could share in our good news and on our strong prospects for 2013. This year, we are going to continue our initiatives to build our key brands, both domestically and internationally, increase our market share and make strategic investments.

I look forward to keeping you informed about these initiatives on our next call. Thank you.

I'd like to thank you, ladies and gentlemen. That concludes the presentation for your call. You may now disconnect, and have a good day.