Lifetime Brands Inc (LCUT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Lifetime Brands, Incorporated, earnings conference call. My name is Kathryn and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Harriet Fried of LHA. Please proceed, ma'am.

Thank you for joining Lifetime Brands' conference call this morning. 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 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 Lifetime's filings with the Securities and Exchange Commission. The Company undertakes no obligation to update these forward-looking statements.

The Company's release this morning 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 and thank you for joining us to discuss our first-quarter 2013 results. Joining me on today's call is our CFO, Larry Winoker.

As I noted in our year-end 2012 conference call in March, Lifetime's business and financial results may vary significantly from quarter to quarter. Some of these fluctuations reflect the timing of seasonal promotions and annual planogram changes, which are part of our normal retail calendar. Quarter-to-quarter shifts can also result from the impact of shipments to certain large retailers such as Costco and Sam's Club that do not follow predictable cycles.

And I have previously said, while not the easiest to predict -- our model of this Company is not -- these fluctuations are part of our business. What I want to emphasize this morning is that Lifetime's first-quarter financial results, with net sales of $99 million and a net loss of $0.05 per share, were in line with our expectations.

The decrease from the 2012 quarter primarily reflects a decline in private-label programs at a particular retailer in the US. This was due mainly to line rollouts in the first quarter of 2012 that were not repeated in this year's first quarter.

In addition, we had a decline in our UK business caused by the imposition of significantly increased duties on ceramics from China and the general weakness in the UK economy. It is going to take the UK retailers and consumer several months to adjust to the higher retail prices caused by the increased duties. In the UK, we have begun to have success in adding the kitchenware segment to our business there, and as this builds it should help us offset any weakness in ceramics sales.

Nonetheless we are expecting a strong year overall, benefiting from the rollout of many new programs and promotions that we have planned for early in the second half of the year. Based on these rollouts in the inclusion of Fred & Friends, which we acquired in December 2012, we expect Wholesale sales for 2013 to increase by 4% to 6% over last year's sales.

As I noted in our last call, our kitchenware business performed extremely well in 2012, and we expect that for 2013 that business will continue to perform well. At the April Tabletop Show, our tabletop offerings were very well received by retailers; and based on commitments we expect our tabletop business to perform considerably better in 2013 than it did in 2012. On another positive note, our home decor business is also improving, as we are having success in moving this business from an unbranded commodity business to one that has both great brands and greatly improved products.

I should also mention that our performance in 2013 and beyond will be assisted by two important Corporate initiatives we undertook in 2012. The first is Lifetime Mix, a strategic initiative designed to refocus our efforts in areas such as product design, branding, inventory, inventory management, and customer service in order to ensure that we achieved our short- and long-term goals.

The second is Lifetime QM, a truly revolutionary tablet-based quality assurance system that has the potential to make significant impact on the quality of our products and our packaging. These initiatives will help drive our growth and profitability in 2013 and in the years to come.

Since expanding into international markets has been an important part of our strategy since 2007, I would also like to spend some time on that part of our business. Our partner company model has been very successful, and we expect that to continue in 2013 and beyond. It combines Lifetime's strength in branding, product design, sourcing, and marketing with the market knowledge and expertise of seasoned local management teams that have significant economic stakes in the enterprises.

Grupo Vasconia had a somewhat weak first quarter, as was anticipated, due to a premium promotion in 2012 that was not repeated this year. However, it is expected that Grupo Vasconia will be even more profitable in 2013 than they were in 2012. GSI Brazil and Lifetime Brands Canada all performed according to plan in the first quarter, and we expect all three to continue to grow in 2013.

Finally, I am pleased to note that Lifetime's Board of Directors has authorized a program to repurchase up to $10 million worth of the Company's common stock. The repurchases are enabled by our strong, consistent cash flow and will serve as an important way of returning value to Lifetime's shareholders. They also demonstrate our confidence in our ability to generate long-term, profitable growth.

Lifetime's overall strategy remains constant and steadfast -- to develop our brands, deliver innovative new products, and constantly improve our systems and pursue acquisitions that add new product categories that will provide opportunities to expand into promising new international markets. At this point I will turn the call over to Larry to give you more detail on our Q1 financial results. Larry?

Thanks, Jeff. As we reported earlier this morning, net loss in the first quarter of 2013 was approximately $600,000 or $0.05 per diluted share, as compared to net income of $1.3 million or $0.11 per diluted share in the 2012 period. Loss from operations was $100,000 for the 2013 quarter compared to income from operations of $3.2 million for the quarter in 2012.

Consolidated EBITDA, a non-GAAP measures that is defined and reconciled to net income in our earnings release, was $3.1 million for the quarter and $6.2 million for the 2012 quarter. Consolidated EBITDA for the trailing four quarters ended in the 2013 period was $38.1 million compared to $41.6 million in the 2012 period.

For our Wholesale segment, net sales in the 2013 quarter decreased by 9.9% to $93.1 million. When comparing first-quarter 2013 with first-quarter 2012, I want you to take into account that the 2012 quarter was exceptionally strong due to a large number of promotions and new product rollouts that did not repeat in the 2013 quarter.

Kitchenware volume was down, also reflecting slower retail sales in February and March. Tabletop sales declined primarily at Creative Tops from significant weakness in the UK economy and the impact of higher import duties on ceramic products from China imposed by the EU. Home solution sales decreased from a decline in closeout activity and lower volume at a warehouse club customer.

Wholesale segment gross margin was 34.9% in the 2013 quarter, compared to 35.4% for the period in 2012. This decrease in gross margin is primarily due to pricing pressure in the UK, which was partially offset by the inclusion of the higher-margin Fred & Friends business.

Wholesale distribution expense as a percent of sales shipped from our warehouses was approximately 10.2% in 2013 quarter versus 10.5% in 2012. This improvement resulted from continued improved labor management and other expense efficiencies, which more than offset the effect of lower shipments.

Wholesale SG&A expenses were $20.8 million in the first quarter of '13 and $20.4 million in the 2012 quarter. The increase was primarily due to the inclusion of Fred & Friends, partially offset by a decrease in employee-related expenses. As a percentage of net sales, Wholesale SG&A increased to 22.3% from 19.7% in 2012.

For our Retail Direct segment, net sales were $5.6 million in the 2013 quarter versus $5.7 million in the 2012 period. Retail Direct gross margin was 68.6% in both periods.

As a percentage of net sales, Retail Direct distribution expense was approximately 30.4% in the 2013 quarter versus 30.6% in the 2012 period. As I noted for Wholesale, the improvement comes from better labor management and other operating expense savings.

Retail Direct's SG&A was $2.1 million for the 2013 quarter compared to $2.2 million in the 2012 quarter. The decrease was attributable to lower paid search expense.

With respect to non-segment items, unallocated corporate expenses decreased to $2.7 million from $2.9 million in the 2012 quarter, reflecting a decrease in employee-related expenses and lower acquisition expenses, partially offset by higher professional fees.

Interest expense declined to $1.2 million in 2013 quarter from $1.7 million last year's quarter. The decrease in 2013 was due to lower average interest rates from refinancing the term loan last July and lower average borrowings.

The effective income tax rate for the first quarter of 2013 was 31.2% versus 38.3% in 2012. The lower rate for the 2013 quarter was primarily due to the impact on deferred tax assets of a reduction in certain state tax rate factors, which partially offset the current period income tax benefit.

Equity and earnings decreased to $200,000 in the first quarter from $400,000 in 2012. This reduction resulted from lower margins for Grupo Vasconia's aluminum business.

Turning to our financial position, at March 31, 2013, the leverage ratio -- that is, total indebtedness to EBITDA -- was 1.9 times; and availability under the revolving credit facility was $75 million. As noted in our earnings release, we are reaffirming our full-year sales guidance of 4% to 6%. We are projecting that our gross margin percentage and distribution expense percentage will be in line with 2012.

SG&A is expected to increase by approximately 6%, which includes the impact of the Fred & Friends acquisition. And our income tax rate is expected to be approximately 39%.

Capital expenditures should be $5 million to $6 million. And for the full-year 2013 diluted weighted average shares are projected to be approximately 13.1 million, which does not consider the impact of any stock repurchases. Based upon our current financial position, projected results, and confidence in our business strategy, we believe that the new stock purchase program will not adversely affect our ability to reinvest in our existing business or to pursue acquisitions.

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

(Operator Instructions) Lee Giordano, Imperial Capital.

Thank you. Good morning, everybody. As far as Creative Tops goes, can you talk a little bit about the higher duties on ceramics? How much of the decrease was due to the higher duties? And at what point do you think that normalizes? Thanks.

Most of the decrease was due to the higher duties. The economy is on the weak side there; but without the increase in the higher duties, I think they would have still had somewhat of an increase in sales.

The duties are -- they are dramatically higher. They have gone from about 12% to almost 30%, and it takes a while for both the retailers there and the consumers to adjust to it. What happened was the retailers knew that the higher duties were coming into effect, and they didn't plan any promotions for the first half of the year.

They didn't know what to do. You take an item and all of a sudden it is a dramatically higher retail price, so they weren't sure what to do.

It normalizes. This normalizes. It takes a while, it takes several months, but they are certainly doing better. They appear to be doing better now, and they certainly expect to do much better in the fall.

We also are rolling out some kitchenware programs which have nothing to do with ceramics into some of the retailers. This was planned in advance anyway. And that should compensate for any of the losses due to higher duties going forward. But it is a challenge when your prices go up so dramatically and your costs go up so dramatically.

Got it. It sounds like there were some promotions you did not repeat this year in the first quarter. Are there any other significant promotions that you did last year that you will not be repeating again in 2013 that we should think about over the next few quarters?

There are always, especially with the clubs, promotions that we don't repeat. But we always get other ones. We have been fortunate over the years to have a very good business in all the clubs, the warehouse clubs.

So, we don't repeat the promotion. We get a different promotion. It falls in different quarters.

That is why we warned everyone on the last call, and we are saying it again now, don't look at us on a quarterly basis. We expect to have a very good year this year. Every indication is there that we will have that.

But overall, we always lose a few, gain a few. Net is about the same on promotions.

Okay. Then on product cost, can you talk about the trend you are seeing in product cost?

Yes, we are seeing no increase, at least in the US market, because there is no duty differences. We are seeing no real changes in product costs.

There is a much -- I see much less pricing pressure then I saw in previous years. Any increase in cost has to be approved by me in this Company, and I don't think I have approved half a dozen of them the last three months.

Okay. Then a housekeeping on the tax rate. What should we assume for the remainder of the year for tax rate?

Yes, we did a little planning and that is why I brought it down from 40% to 39%. It could be a little better, but I would plan it around 39% for the full year.

Great. I will get back in the queue. Thanks.

Brandon Osten, Venator.

Sorry, just going through some of your prior conference calls, I think you guys talked a bit about the turmoil that JCPenney was going through, and their home department was closed and hadn't reopened. And I guess their home department has reopened. Are you guys seeing any return to business there relative to what would have happened last year?

Yes, very much. In the last 30 days especially we have finalized several promotions for the fall and put back things that were taken out. Their team seems to be very energized right now, where they were very depressed in the last year.

But they are energized. They are going back to the ways that they were, as far as merchandise. And, frankly, it is a pleasure and we should definitely get the benefit of that in the second six months of this year.

Do you know what -- so what were your historical, like three or four years ago, what percentage of your revenues was JCPenney back then, relative to what it went down to last year?

Okay, we don't give out what the total is, but we have many customers like Penney's that run around 2% to 3% of our volume.

Okay, cool. And when I am going through your presentation and you guys talk about your longer-term goals for the business and for margins, and you guys talk about I think it is 13% pretax margins, the big delta there seems to be the move on SG&A from -- last year it was like 20%, 21%, and you think that it can be 16% at some point in the future, which is a fairly big move given that your operating margins currently are in the 9% range.

Is that something -- I'm try to get a sense of -- like, is that an active program? Or do you plan on getting their through certain efficiencies, cost-cutting, rationalizations? Or is it a number that you are hoping to grow into and therefore SG&A just remains flat while you grow it whatever percent a year?

First, you can't look at just the quarter because --

No, no, sorry. I'm not. Sorry, honestly I am not looking at the quarter. I am thinking on an annual basis. It has nothing to do with this quarter.

If you look on an annual basis we are actually quite close. The point I was making was that because our SG&A is largely fixed, in a quarter where we have seasonal low sales it is going to look very high; and when you get to the third and fourth quarter we will recover that.

So I don't have the number in front of me, what we had for the full year. But we are actually quite close. On a US Wholesale basis, we are actually quite close to that goal.

On a fully --? Because I thought last year it was actually higher. But -- like it closer to 20%. Was it closer to 20% last year or have I missed out on my --?

I don't think so, but we've --

If you're looking at the presentation, which I don't have in front of me, it actually shows what it was for the full year. But the point is -- I want to make another point -- is that it's something, yes, we actively look at. We have done -- over the last five years, four years we have done a lot of work.

I won't -- there is not a lot of opportunity to decrease the actual dollars, but we have a pretty robust infrastructure. So what we said is we continue to believe, is that if we can get reasonable growth on the top line our SG&A will grow very slowly by comparison. And that is how we will be able to achieve that goal and perhaps maybe even exceed it.

The goal is --

Let me give you an example of what we are doing. As you know, we acquired Fred & Friends at the end of December of last year. We are in the process right now of moving their distribution into our distribution facility, where we can very easily absorb what they have without even adding a person.

Okay.

So things like that will benefit us going forward.

Okay, but the plan is to get to 13% op margins from the current number of, I guess, 9% or 10%?

Remember, that's the -- remember if you look at the heading in that presentation, that says US Wholesale.

Oh, US Wholesale? Okay, so that is not Corporate wide.

Correct.

Okay. Is there a goal that is Corporate wide, or no?

We haven't published --

We haven't published it; we do have one, certainly.

Okay, okay. Thanks a lot, guys.

Lee Giordano.

Thanks. Just a couple of follow-ups. Can you just remind me the annual run rate sales for Fred & Friends, and then what type of growth rate you are assuming for that business?

Yes, it is in the high teens, approaching $20 million. We haven't broken out what we are going to have for 2013 total, but I would say that we are being fairly conservative about it at this point till we get a better understanding of the business and develop growth plans.

Okay, thanks. Then just can you provide an update on Savora, how that's going? And then also the Guy Fieri line, how that is going as well. Thanks.

Sure. Savora is going according to plan. We are still keeping it in the specialty stores and only higher-end stores. We will roll out about 20 new SKUs this year, so we are more than tripling the number of SKUs on the line, and a much larger amount in 2014.

That is not going to have a big impact this year, as we said. It is going -- this is something more for the future. It is more for 2014/2015 where we get some nice growth out of that line.

As far as the Guy Fieri, we just ran a promotion in Canada at one of the largest retailers in Canada, Canadian Tire, that was spectacular on Guy Fieri. And we are scrambling now to get enough goods to them.

So it is going the way we expected it to go. It is a good, solid line for us.

Thanks. Then just quickly can you up date us on Grupo Vasconia? It sounds like aluminum prices are hurting that business a little bit. Can you talk about that? Thanks.

Well, the biggest issue they had in the first quarter is they do some premium business, actually with banks; and they didn't anniversary a promotion with the banks. But they expect -- and that was a significant drop in their volume. Even with that, they expect by the end of April to be even with last year.

So they are really -- the rest of their business is doing well. It is just this one promotion that was off. They expect to have a -- they had a great year last year. They made a lot of money, and they expect to do better this year.

Great. Thanks.

(Operator Instructions) Dominic Marshall, Pacific Ridge Capital.

Good morning. Just was hoping you could comment on your intentions with this new share buyback in terms of -- I know you can't start buying till next week, but at the current price, how aggressive you intend to be.

I don't think we are going to tip our hand on that, signal it --

I guess said another way, was the plan put in place with the assumption that the stock would be around these levels and that you would be buying around these levels?

Yes, it was. Yes.

We see that as a good investment and that's why we said -- I made a comment that that in no way changes our strategy to seek out the right types of acquisitions we can do, both given our -- the cash -- our current financial position, and the expected cash flow based on a successful 2013.

Any limitations from your debt facilities in terms of how much you are able to buy back?

It is subject to covenant tests, restricted payment baskets. But the amount that the Board has allowed us to repurchase, up to $10 million, we can do within our existing agreement.

Great. Glad to see it.

Brandon Osten, Venator.

Hi, guys. Sorry, I am relatively new to the story, so I am just trying to dig in a little bit here. On the -- in terms of Wholesale/Retail, what is the higher-margin business for you?

Well, the Retail is a higher gross margin business but carries a higher SG&A.

Right, okay. But what is the higher op margin business for you?

I'm sorry, what --?

A higher off margin business? I guess -- are you talking about off-price? Or what do you mean by off margin?

What do you mean? Yes.

Sorry, operating margin. Operating margin.

Oh, the higher operating margin. That would be the Wholesale business.

The Wholesale business is the higher operating margin; okay.

Yes, yes, definitely.

Okay, thank you.

Let me just -- since you are back on the line and I was able to pull up a presentation, the SG&A goal is 16%. For the full year -- and remember I said it was the US Wholesale -- the full-year 2012 it was 17.2%.

Yes, sorry, I didn't notice it was US Wholesale segment. I don't know if I just assumed or didn't notice. I thought that was a Corporate-wide goal, so --

Okay.

Thanks.

Thank you for your question. I would now like to turn the call over to Mr. Jeff Siegel for closing remarks.

Okay. Thank you for joining us today for today's update. For those of you who are attending the B. Riley conference in Santa Monica later this month, Lifetime will be presenting on Monday, May 20. I hope to have the opportunity to speak with you at that time. Thank you.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a very good day.