Lifetime Brands Inc (LCUT) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 Lifetime Brands earnings call. My name is Tracy and I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now I'd like to turn the call 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 is Jeff Siegel, Chairman and Chief Executive 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 requirements of its credit agreement; the availability of funding under those credit agreements; the Company's ability to maintain adequate liquidity and financing resources 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 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 third-quarter results. Larry Winoker, our CFO, is not here today. So I'll cover his area as well in my remarks.

Let me begin by noting that as you may have seen in the press release we issued on Monday, Lifetime's Board of Directors recently elected Dennis Reaves as a Director of the Company. Dennis has been a strategic advisor to Lifetime for many years and we're indeed fortunate that his time commitments now are such that he is able to join our Board. Dennis' experience spans the breadth of retail, including having been Senior Vice President and General Merchandise Manager of Wal-Mart Stores, where he was responsible for $18 billion of sales. He has also been a Senior Consultant to Big Lots, and The Gap, and the Jarden Corporation.

Turning now to the quarter, from an operating perspective, it was a great quarter, reflecting good gains in both sales and margins. We expect these gains to continue as we move into the holiday season. Lifetime's overall 11% sales growth was the result of two primary drivers, first, the rollout of new merchandise and new wholesale programs and promotions, and second, the very successful Fred & Friends acquisition we made in December 2012. Fred's wide range of novelty products is selling strongly and we're starting to benefit from the network of relationships with independent specialty stores that they have, a relatively new and underpenetrated channel for Lifetime. The Fred acquisition also contributed nicely to our margin increase for the period.

In our wholesale segment, net sales in the quarter increased 11.9% to $138.5 million reflecting increases in both our kitchenware and home solutions product categories. Sales of kitchenware products increased by $13 million, of which $4.8 million came from Fred & Friends, and the balance from new programs in kitchen tools and gadgets, and in cutlery.

Our kitchenware business benefited by increased efforts by our marketing teams to develop unique new and appealing ways to display kitchen tools and gadgets, and cutlery, which helped consumers to visualize how our colorful products will look in their own homes. Based on the continued rollout of successful new programs such as these, we expect kitchenware to fuel our growth in the fourth quarter and beyond. Cutlery also turned in a strong showing with ceramic knife sets leading the way.

On the tabletop side of our business, sales were down slightly, as this category has been struggling at retail. However, we believe we have gained market share, especially in the casual everyday part of the business. At the October Tabletop Show, we showed a new retail display concept combining matching offerings of dinnerware and flatware, which was very well received. This is a concept that's highly successful in Europe. Several retailers have committed to the concept in the US and we'll begin shipping in the first quarter of 2014.

Our home solutions business increased by almost $3 million over the third quarter of 2012, primarily due to our successful introduction of some new wall decor and lighting products, as well as a strong [club] promotion. We've also gained new placement for our home decor at a retail chain based in California, and we're continuing our efforts to move this category from an unbranded commodity business to one that offers top brands and great products. The Bombay line of home decor products that we successfully previewed at the Atlanta gift show is now beginning to arrive in stores and we'll have more out in 2014.

Overall, wholesale segment gross margin was 35.1% in 2013 quarter, compared to 33.9% in the 2012 quarter. We were able to achieve better margins in several product categories in addition to the margin improvement attributable to including Fred & Friends into the mix.

Wholesale distribution expenses as a percentage of sales shipped from our US warehouses for the quarter were approximately 8.6% as compared to 9.1% in the 2012 quarter. The improvement reflects the benefit of distributing Fred & Friends products through our Robbinsville, New Jersey facility and the continuing progress in realizing labor efficiencies.

Wholesale SG&A expenses were $23.6 million in the third quarter of 2013 and $20.8 million in the third quarter of 2012. The increase was due to the inclusion of Fred & Friends of $1.3 million, and an increase in selling and employee-related expenses. As a percentage of net sales, wholesale SG&A increased to 17% in the 2013 period from 16.8% in the 2012 period.

For our retail direct segment, net sales were $3.7 million in the 2013 quarter as compared to $4.3 million in the 2012 period. Retail direct gross margin was 70.8% in the 2013 quarter as compared to 67.8% in the 2012 quarter. The lower sales and improved margin reflect the elimination of multiple coupon use per transaction. As a percentage of net sales, retail direct distribution expenses were approximately 29.5% and 29.4% for the 2013 and 2012 quarters, respectively. Retail direct SG&A expenses were $1.8 million in the 2013 period and $1.9 million in the 2012 period.

On a consolidated basis, income from operations was $11.7 million for the 2013 quarter, a 58% increase as compared to $7.4 million in the 2012 quarter. Consolidated EBITDA, a non-GAAP measure that is reconciled into our GAAP results in this morning's release, was $15.1 million equal to 10.6% of net sales for the current quarter and $11.6 million or 9% of net sales for the period in 2012. Consolidated EBITDA for the trailing four quarters ended in the 2013 period was $40.3 million compared to $37.7 million in the 2012 period.

Adjusted net income for the quarter was $6.1 million or $0.47 per diluted share as compared to adjusted net income of $5.1 million or $0.40 per diluted share in 2012. A table which reconciles this non-GAAP measure to reported results, was included in this morning's release.

During the quarter, recorded market price of shares of Grupo Vasconia on the Mexican Stock Exchange declined from MXN18.27 per share to MXN14.90 per share. While we're not at all troubled by this decline, which was based on minimal volume, we nevertheless wrote down our investment in Grupo Vasconia to reflect the market price of the Vasconia shares as of September 30. You may recall that we were required to write up the value of our investments in Vasconia at year end to accounts for Vasconia's bargain purchase of Almexa in 2012, and this write-down essentially reverses that write-up. Shares of Vasconia's capital stock currently are quoted at approximately MXN15.65 per share.

As a result, consolidated net income for the third quarter of 2013 was $1.1 million or $0.08 per diluted share as compared to net income of $3.9 million or $0.30 per diluted share in the 2012 period. With respect to nonsegment items, unallocated corporate expenses increased by $300,000 to $3.5 million in the 2013 period reflecting an increase in professional fees and employee-related expenses.

Interest expense was $1.3 million in each of the quarters and the effective income tax rate declined by 50 basis points due to a lower tax rate in the UK and favorable adjustments in certain other jurisdictions. At September 30, 2013, the outstanding balance on our revolving credit facility was $65.1 million. Our leverage ratio, that is total indebtedness to LTM EBITDA, was 2.4 times, and availability under the revolving credit facility was in excess of $100 million.

Reflecting the Company's strong financial condition, our Board of Directors recently approved an increase to our annual dividend from $0.12 per share to $0.15 per share.

In each quarter's call, I spend some time on international initiatives because that's such an important part of our business ethics and our long-term strategic plan. Creative Tops achieved a sales increase despite the continued difficult economy in the UK and the anti-dumping duty that was implemented late last year.

I'm also pleased to announce that we've just received a trading license in China that will enable us to supply Walmart China. Obviously, China offers a great opportunity for growth and Walmart is a superb partner. It has some 400 stores in China's biggest urban centers already, and has announced plans to ramp up operations in smaller cities over the next few years. We're delighted that this retail giant has turned to Lifetime to analyze and potentially supply its gadgets and kitchenware section. The infrastructure that we're developing in China will enable us to also pursue business with other major retailers in this rapidly growing economy.

As always, we've been expanding our licensing agreements with prominent brands. Last quarter, we announced new partnerships with the Bombay Company and Debbie Meyer. And today, I'll mention still another. This one is with, Mossy Oak, which is known for out- -- it's known by outdoor enthusiasts across the United States for its very, very strong-selling camouflage products. We showed the initial offerings under this brand at the Tabletop show to rave reviews.

In 2014, we'll be shipping a large variety of Mossy Oak dinnerware, flatware, kitchenware, hydration and pantryware items. We'll also bring to market Guy Fieri branded cutlery to complement the cookware and other items we already offer. As always, we'll provide technical excellence along with a special look that reflects Guy's unique personality and his bold style.

Looking forward, the fourth quarter is developing well for Lifetime and we're expecting growth across all our divisions. In total, we're now anticipating sales growth of about 3% to 5% in 2013. This is somewhat below our full-year guidance that we provided in August reflecting some published speculation as to the kinds of products that consumers likely will spend their money on during the holiday shopping season. We expect our gross margin percent to improve modestly and comparable to the year-to-date increase.

Distribution expense is expected to be in line with 2012. SG&A is expected to increase by 6% to 7%, which includes the impact of the Fred & Friends acquisition. Our income tax rate is expected to be approximately 40%. Equity in earnings, excluding the impact of the impairment charge, is not expected to be significant.

For the full year, weighted average shares are projected to be approximately 13 million, which does not consider additional stock repurchases. Capital expenditures for the year are expected to be approximately $4 million.

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

Thank you. (Operator Instructions) Your first question is from the line of Alexander Renker from Sidoti.

Jeff, I was wondering if you could give a little more color on the tabletop business and the difficulties you're seeing there, and in particular with Creative Tops?

Well, Creative Tops had a good quarter. We're not seeing the difficulties at Creative Tops. Earlier in the year, Creative Tops did have a more difficult time when they first imposed the anti-dumping duties and the, I guess, the sticker shock at the higher prices [offered by] by all -- everyone in the market. But their business is back on track. In the US, we're seeing a little weakness at the very upper end of dinnerware, the very formal. The market has been shifting and it's continuing to shift to the more casual end of the business. We're doing things to make sure that we are the ones that end up on top when that happens.

So we're quite optimistic with that business. We had a very good tabletop show last month, which is really for sales in 2014. We introduced this Mossy Oak, which is very, very well accepted in dinnerware. And we will definitely be placing it, I can guarantee that, in some major retailers, some of the biggest retailers we deal with, in the second and third -- mostly in the second quarter and going into the third quarter of 2014.

And we had a concept, which I mentioned in my prepared remarks, of open stock, it's really open stock dinnerware and flatware match. It's plastic handle flatware and dinnerware with patterns that are all the same. It's a very big concept in Europe. It's not commonly done in the US. But we came up with a very good display method and there were several of our biggest customers that committed to it. So we expect that to be good. So in general, the tabletop business is not dead. It's just that there is weakness in the formal upper end of the business.

Right. And you'd see that business picking up a little bit in 2014, given some of the shifts you guys are making in terms of strategy there?

Yes, we do. We see that business increasing positively in 2014.

Okay. Great. Thank you.

Thank you for your question. Your next question from the line of Brian Freckmann from LS Capital. Please proceed.

Good morning. Just really quickly, a little more color on the buyback program, just kind of discuss maybe kind of holistically your thoughts there, maybe over a sort of a 12-, 18-month period sort of how you think about your use of cash there?

Well, we did buy back some stock in the quarter. We have not been that aggressive. Our stock has gone up as you know and we're watching it. And our Board and us will consider it and going forward see what we're going to do. We're kind of happy with our results and we might be buying back more stock. We certainly have the authorization to do so and we'll see what we do going forward.

Did you say how much you bought back and at what price?

We bought back a few hundred thousand. I think it was in the release, I believe.

Was it? Did I miss it? I'm sorry.

If you look at the cash flow analysis, it's there.

Maybe you can just -- if you'd read it for me, what was the number? Or what was the average price maybe that you paid?

Hold on a second. I have to find it. Larry is not in. Larry Winoker, by the way, will be back tomorrow if anyone has any questions for him. So I'm having to do his job as well. I have to just find these things if I can. Maybe I'll come back to that. Right now, I don't have it.

Okay. And then finally just --

Approximately, a little over $3 million worth of stock we bought back.

Okay. But you don't have the average price.

That's not the quarter. That's the nine months to date, by the way.

Right, okay. And then just a little more color on the international expansions. I know that has been area for you guys over the last two years, especially with some acquisitions. Just kind of a general color of South America and then just a little more color on what you're seeing in Europe as well?

We're happy with what we have internationally, and we really want to add to that. Our strategic plan definitely calls for us to increase our presence outside the United States as well as growing in the United States. We see opportunities. We're looking at opportunities. As soon as we finalize them, we'll certainly tell everyone about them, if they are finalized, obviously. But we do see opportunities to grow in Europe, and in South America, and Brazil. Our Brazilian business is very much on track, the investment we made in GS International. They are beginning to ship to Wal-Mart Stores for the first time, with a gadget line and -- I believe in this quarter. So things are going in the right direction and we want to continue to grow internationally (inaudible).

And refresh my memory, the on track for Brazil, what's sort of a best guess expectation for like the 2014 revenue from that business?

It's small yet and we haven't given that number out. We only own 40% of the company. The company we made the investment in is a relatively small company and it's going to take several years for it to grow to be a larger company. But we are on track going in the right direction. We have the right people in place there. We believe that company can become a sizable company in Brazil over the next few years. I'm very enthused, as I mentioned in my prepared remarks, about our opportunities in China. So this is going to be something that hopefully can be significant for Lifetime in 2014.

What's your current revenue in China?

Almost nothing. This is really -- it's really new for us. We do have a joint venture that we have in place for dinnerware, Mikasa, but that's only a joint venture. The new venture that we're doing with Walmart is not a joint venture; it's all Lifetime.

Okay. I'll get back in queue. Thanks.

(Operator Instructions) And your next question from the line of Neal Goldman from Goldman Capital Management. Please proceed.

Hi, Jeff. Could you just -- separate from the write-off from the market value on the Mexican operation, you still showed a significant swing in profitability from profit last year to a loss. I know you had issues in the first half on the tariffs. What's happening currently?

They're having a somewhat difficult year. We were down there recently to meet with them. They've identified whatever issues they had. It was some sales issues both on the metals end of business. I'll go into it really quick. Their business is split in two. Half of it is housewares, or part of it is housewares, and the other part is in the aluminum business where they own smelters and [rolling] mills.

In the smelter and aluminum part of the business, they acquired last year this company, Almexa, and they thought the integration would go much more quickly than it's going. It's taken much, much longer and it's set them back. They will not be complete with the integration for several more months, maybe three or four more months.

On the housewares end of the business, there was some very low end products came into Mexico earlier this year that affected their business. They know how to counter it. They will counter it and their business should turn around. It might not turn around in the fourth quarter but it will turn around certainly, in our opinion, in 2014.

Okay. So you expect a fairly significant swing in 2014 on that?

Yes, in 2014. There should be a great improvement in 2014. From what they've told us, what they've told their board, they expect it to be dramatically improved in 2014.

Great. Thank you.

Thank you for your question. I would now like to turn the call over to Jeff Siegel, Chief Executive Officer, for closing remarks.

Thank you. Thank you, all, for your time today. As you've heard, we're seizing on many opportunities to introduce new products and increase our penetration of existing distribution channels and expand internationally. We'll give you another update on these initiatives when our full-year results are in. For anyone with any specific financial questions, Larry should be in the office tomorrow and should be able to answers your questions then. Thank you, all, for joining us.

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