Lifetime Brands Inc (LCUT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lifetime Brands fourth-quarter 2013 earnings call. My name is Jo and I'll 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. Go ahead, please.

Good morning, everyone, and thank you for joining Lifetime Brands' conference call. With us today from management are Jeff Siegel, Chairman 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 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 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. Good morning, everyone. Thank you for joining us to discuss our fourth-quarter results. Stripping out the accounting noise caused by the write-ups and write-downs in the value of our investment in Grupo Vasconia, we delivered another strong quarter with sales up 6.5% and gross margin increasing to 38.4%.

I'll run through the highlights of the quarter quickly this morning, focusing on our Wholesale segment, since that represents the vast majority share of our sales and profits. After that, I'll turn to the many exciting things we have underway for 2014, including the three acquisitions we've already announced this year.

In our third-quarter call last November, I said that we expected kitchenware to fuel our growth in the fourth quarter, and that was the case. The consistent growth in this category is due to innovation and newness, which no one does better than Lifetime. The talents of Lifetime's own 120-plus designers, artists, and engineers are supplemented by our open innovation network, which enables independent inventors to submit ideas that Lifetime works with them to enhance and bring to market.

The new kitchenware programs we rolled out in early 2013 continued to do well, well into the fourth quarter, and we also have been able to increase our penetration of the supermarket channel bringing kitchen tools and gadgets, and programs with them, to two major new customers. The Fred & Friends acquisition we made in mid-December 2012, again, contributed nicely to our margins.

On the tabletop side of business, sales were up nicely in the quarter, even though this category as a whole has been struggling at retail, with less shelf space allocated by retailers. In both tableware and flatware, we gained ground in the more youthful casual portion of the business, though the more formal portion of the business has been weak. We are committed to growing in the tabletop category by emphasizing our strength in the casual segment.

Sales in our home solutions category were essentially flat, although we did make good inroads with two major pantryware programs. In November, we began shipping Debbie Meyer-branded storage products, which are designed to extend the life of all kinds of fresh produce, baked goods, and snacks through a proprietary technology that absorbs ethylene gas. Sales got off to a great start and we expect a very strong performance from this licensing agreement in 2014.

Turning to the international side of our business, I am pleased to report that Creative Tops had a good quarter. As we expected, the initial shock of the anti-dumping import duty, which took effect in the fourth quarter of 2012, has been wearing off, and sales with several major customers have regained their momentum. And, as we anticipated, the business is bringing us new opportunities in Europe, as well as the UK.

Lifetime Brands Canada also turned in a good performance, and GS Internacional, our Brazilian-based venture, started supplying Walmart's Brazilian operations, which include more than 550 locations. As I mentioned earlier, our investment in Grupo Vasconia did create some accounting noise during the past year, due to its acquisition of Almexa Aluminio and a movement in the share price. But we continue to have high expectations for the future of this business.

With that quick overview of last year's final quarter, I turn to the many things we have on tap for 2014. As those of you who follow our press releases know, we've already announced several important developments.

In mid-January, we acquired Kitchen Craft, a 165-year-old business and one of the UK's leading suppliers of kitchenware products and accessories. In its FY13, Kitchen Craft had net revenues of approximately $70 million. Its kitchenware products are perfectly positioned to fill in the tableware and gift assortments -- with the tableware and gift assortments marketed by Creative Tops. We expect our global presence, capabilities, and scale to boost Kitchen Craft's growth, both in sales and profitably.

We also expect Kitchen Craft's gross profit and EBITDA margins to enhance Lifetime's future performance. The Kitchen Craft acquisition was followed in quick succession by two smaller ones, Built NY and La Cafetiere.

Built is a designer and distributor of highly colored, uniquely patterned neoprene products, including lunch bags, totes, cases, and baby products. Those products and distinctive look bring a new dimension to our portfolio and its great customer base will enhance our distribution to fine retailers worldwide.

Then, just this week, we acquired La Cafetiere, which designs and distributes products for brewing and serving coffee and tea under the La Cafetiere and Randwyck brands. This latest addition to Lifetime's global platform further strengthens our presence in the UK and continental Europe.

La Cafetiere has assembly and distribution facilities in the Netherlands that will be very useful to us as we expand our international business. In addition, we believe we can greatly expand the distribution of their products in North America.

Acquisitions have always been a major part of Lifetime's growth strategy, but we have other meaningful growth initiatives in the works for 2014, too. As you recall, last year we received a trading license in China that enables us to directly supply Walmart China. Beginning in May, we'll begin supplying Walmart China's approximately 400 stores with kitchen tools and gadgets, cutlery, cutting boards, dinnerware, flatware, thermal mugs, water bottles, and other items -- in other words, a very extensive assortment.

I already mentioned that our pantryware partnership with Debbie Meyers has had a strong start, and at next week's International Home and Housewares Show in Chicago we'll launch our Mossy Oak-branded collection of beverageware, food prep, tabletop, and home decor products. Mossy Oak is one of the country's most recognized camouflage brands and we've already seen an enthusiastic reception from retailers who have seen the line.

Another significant debut we're planning for the houseware show is our new Brick Oven brand, which will provide all the tools consumers need to recreate the gourmet pizza experience at home. We've seen a big increase in demand for specialty products that enable people to replicate professional food experience in their own kitchens. We believe pizza offers a great opportunity at retail and our Brick Oven brand is designed to fill the void in that market.

Finally, we're continuing to expand our international presence with the launch of Reo, a global collection of kitchenware products that provide simple and functional solutions for food prep. Reo reflects our strategy of developing new brands that Lifetime can control and use on a wide range of products all over the world.

Reo features intuitive designs of trend-right colors and inviting forms to make cooking more enjoyable. The products will be available at retail beginning in the summer of 2014.

If you are at the Home and Housewares Show next week, please stop by our booth and we'll give you a preview. With that overview, I'll turn the call over to Larry to give you more details on our fourth-quarter and full-year financial results, as well as our guidance for 2014. Larry?

Thanks, Jeff. As we reported earlier this morning, net income for the fourth quarter of 2013 was $9.4 million, or $0.72 per diluted share, as compared to net income of $15.2 million, or $1.19 per diluted share, in 2012 period. Adjusted net income for the quarter was $10 million, $0.76 per diluted share, as compared to adjusted net income of $8.7 million, $0.67 per diluted share, in 2012. A table which reconciles this non-GAAP measure to reported results was included in this morning's release.

Income from operations was $16.6 million for the 2013 quarter, compared to $14.5 million in 2012. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $21 million for the current quarter and $17.9 million for the period in 2012. And consolidated EBITDA was $43.5 million for the full year 2013 and $41.2 million for 2012.

Looking at our Wholesale segment, net sales in the 2013 quarter increased by 7.9%, to $158.2 million. The increase reflects an increase in kitchenware and tableware sales. Home solutions was essentially unchanged.

Kitchenware's increase was $7.4 million, primarily due to the inclusion of the Fred & Friends business acquired in December of 2012. The tableware increase of $4.6 million was attributable to higher volume for dinnerware in the US and UK, partially offset by lower flatware sales.

Wholesale segment gross margin was 37.4% in the 2013 quarter, up from 34.4% in the 2012 quarter. The improvement reflects favorable product mix, including the expected improvement due to the inclusion of Fred & Friends.

Wholesale distribution expenses as a percentage of sales shipped from our US warehouses was approximately 7.6% in both 2013 and 2012 quarters. For our UK operations, the expense ratio improved on higher volume and better labor management.

Wholesale SG&A expenses were $25.9 million in the fourth quarter of 2013 versus $22.4 million in 2012. This increase was due to the inclusion of Fred & Friends and an increase in selling expenses and timing of certain other expenses.

For our Retail Direct segment, net sales were $7.7 million and gross margin was 66.8% in the 2013 quarter versus net sales of $8.2 million and gross margin of 68.9% in the 2012 quarter. As a percentage of net sales, Retail Direct distribution expenses were approximately $29.3 million and $27.3 million in 2013 and 2012 quarters, respectively. The increase was due to lower sales volume and higher freight rates.

Retail Direct SG&A expenses were $2.4 million in 2013 quarter and $2.5 million in the 2012 period. Looking at non-segment items, unallocated corporate expenses increased by $900,000 to $5.5 million in 2013 period, which was primarily due to acquisition fees and expenses. Interest expense was $1.3 million in both quarters.

The effective income tax rate increased to 40.6% from 19.5% in the 2012 quarter. The low effective tax rate in the 2012 quarter was due to a $2.3 million deferred tax liability reduction related to 2011.

Excluding this reduction, the effective tax rate in the 2012 quarter would have been 36.7% and for the full year 37.5%. For the full year of 2013, the effective tax rate was 39.5%.

Equity in earnings was $300,000 in 2013 quarter as compared to $4.5 million in the 2012 quarter. Excluding certain unusual items related to Grupo Vasconia in the 2012 quarter, equity and earnings in the 2012 quarter would have been $600,000. These unusual items are reflected in the table that reconciles net income to adjusted net income.

Turning to our financial position, at December 31, 2013, the outstanding balance on our revolving credit facility was $49.2 million and senior term loan balance was $20.6 million, as we prepaid a portion of that loan in anticipation of our debt refinancing. Our leverage ratio, that is total indebtedness to trailing 12-months EBITDA, was 1.6 times. And availability under the revolving credit facility was $91.6 million.

In January, we refinanced our debt and used a significant portion of the credit facility availability to fund the acquisition of Kitchen Craft. Looking at the full year of 2014, we currently project sales to increase by approximately 5% organically and approximately 15% from the recently announced acquisitions. Gross margin percentage and distribution expense percentage are expected to be in line with 2013.

For SG&A, recent acquisition activities that will result in purchase accounting amortization and integration expenses, which have yet to be determined, make it difficult to forecast at this time. I'll provide more color on our next earnings call.

Our income tax rate is expected to be 37% to 39%. Capital expenditures should be in the range of $4 million to $6 million, subject to acquisition-related integration costs. And for the full year of 2014, diluted weighted average shares outstanding are projected at $14 million.

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

(Operator Instructions)

Brian Freckmann, LS Capital.

Hello, guys, how are you? Congrats on a good quarter.

Thank you.

Just a quick question on that last comment about your guidance. You guys write in the press release roughly $100 million in net sales to increase. Your comments on the call were 5% organic, which I'm assuming is off a base of the $502 million you just reported. And then, your comment about 50%, could you clarify that? I'm not sure what you're referring to.

Maybe I don't speak very clearly. I was saying 15 -- one five. So, together it's 20%, which is approximately that $100 million.

Oh, okay. Perfect. That explains it. Thank you very much.

Laura Champine, Canaccord.

Thanks. So my question's also on the guidance for growth through acquisitions. Is the -- how much of -- what are the trailing revenues of the two smaller acquisitions that you've already done this year? And would you expect organic growth from those acquisitions, or is there some risk that sales decline in the transition?

The two other acquisitions are relatively small and we do very definitely expect organic growth in both of them, to be honest with you.

There also is that -- one of the reasons we didn't announce the price, it is relatively small. And they're going through some change, changes that we're going to reflect. So, having their historical result is really not that relevant. It's what we're going to do with those two businesses going forward.

We're going to change them dramatically and really, hopefully, improve them dramatically.

Unlike with Kitchen Craft, the business we're taking -- we acquired with management in place, will grow. These businesses are smaller and we're not taking a full management organization. Basically we're just going to run these businesses with our other businesses. So, we're going to make substantial changes to them.

And you mentioned that Fred & Friends was accretive to margins. Is there any meaningful impact to margins from these acquisitions that you've made or from the Kitchen Craft acquisition?

The only comment I'll make on the other ones, the two small ones, on the Kitchen Craft -- Kitchen Craft is a kitchenware business, like our business, and generally that business has higher margins than some of our other businesses that we said in the past like tabletop and home solutions. Therefore, it'll be -- when you look at our Wholesale business, the Kitchen Craft business should be a little higher than the average for our Wholesale business.

Got it. Thank you.

There are no further questions.

(Operator Instructions)

Alexander Renker, Sidoti.

Good morning.

Good morning.

I was wondering if you could elaborate a little bit on how gross margin was able to kind of stay up and grow, in fact, given that this was, by all accounts, a pretty promotional holiday season for retailers.

Some of the quarter has to do with some mix in timing. For the year, overall our gross margins were up 90 basis points.

Fred & Friends does have a significantly higher margin than the rest of our business, but I wouldn't take that the margin that we achieved increase in the fourth quarter is indicative of what's going to happen. I think you have to smooth it out and look at the full year, which is up only -- well, it's up nicely, but it's up 90 basis points compared to a couple of hundred basis points for the quarter.

Okay. Thank you. And then, how would I -- guess the two smaller acquisitions compare to the Fred & Friends acquisition?

I mean, they look -- without having financial terms, obviously, they look comparable in the sense that these are niche brands that Lifetime might be able to help with distribution. Maybe if you could give us an idea of how these two small ones would relate to something like Fred & Friends?

Yes, they -- Built in particular is very similar, and the distribution will overlap worldwide to some degree with Fred & Friends. And, hopefully, we'll get that business up to the level of -- current level of Built -- excuse me, of Fred & Friends within the year.

La Cafetiere is a different business, which we're combining with our own coffee and tea products to make a much stronger statement. That's smaller, but does have a big potential long term. As you know coffee especially is a very big thing and growing worldwide, so we're very enthused with that. There will be a tremendous amount of synergies between all of the companies. And, the good thing about it is these acquisitions will not cannibalize any other business that we have.

Okay. Thank you.

Neal Goldman, Goldman Capital Management.

Can you discuss Grupo Vasconia, true operationally this year versus last year was -- what was your share?

You talking about with, let's say, without the impact of some of the unusual items?

Right.

This year there was a -- I'm just looking at some notes I have. There was a small loss this year compared to a couple million dollars of profit in 2012.

Right. They were the ones who were primarily affected by these tariffs, correct?

No. No. They had two separate issues. One issue was -- had to do with their difficulty in combining two businesses in the aluminum business. And then they had a few issues earlier in the year, especially with their housewares business, which seem to be improving, but they stumbled for the year. But we feel that they're going to come back and do very decently in 2014.

Do you expect them to get back to the level of 2012 on your share?

I don't think they'll get back in 2014 to 2012. They feel they will, but we don't believe that, that's going to happen.

But I think there will be good improvement. And another year after that they get back to 2012. But they'll be -- (multiple speakers)

That's a very significant swing on the bottom line, just from that interest alone. Okay.

Say that again, Neal?

I said that's a very significant swing on the bottom line just from the improvement in Vasconia.

And it should be. Yes, it was -- we obviously had a difficult year with them. It hurt our bottom line in 2013.

Okay. Thank you.

Alexander Renker, Sidoti.

Hello, guys. Sorry, one more. Do you have Creative Top's sales for 2013 versus 2012? Is that something you can share?

Sure. Their sales were off. They did about $42.5 million terms last year and --

Creative, pounds.

I'm giving him dollars.

That works, but it would be more than $42 million. Oh, I'm sorry, Creative Tops. I thought you said Kitchen Craft. I'm sorry, you're right.

So about $42.5 million in 2012 and about $39 million this past year. That's dollar terms.

Dollar terms. Okay. Fantastic.

I thought you were talking about Kitchen Craft.

We get that.

They had a very weak first half due to the anti-dumping duties.

Right. I was just trying to estimate the impact there. Okay. Thank you.

But they did -- and it was in the comments that they were up in the fourth quarter, which I know they mentioned, the comment about dinnerware being up in the UK.

Right. So you'd expect growth off that $39 million base for 2013?

Yes. In the fourth quarter.

We expect growth in 2014 as well.

Right. Okay. Great. Thank you.

Thank you for your questions. I would now like to turn the call over to Jeff Siegel of -- CEO of Lifetime for closing remarks.

Thank you. Thanks, everyone, for your time today. We are, as a Company, laser-focused in executing our strategic plan and have spent the last few years setting the platform to do so.

As you can see, we're continuing to leverage our brands with market-leading product innovation and international expansion. We think it's a winning strategy for our Company and our shareholders.

In 2006, our business was almost 100% in two countries -- the US and Canada. And now, just eight years later, we'll be doing business in over 70 countries this year with the goal to increase that to 90 countries in the next 18 months.

We have a good direction. We're very comfortable with where we're going and we hope to have a great year. Thank you.

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