Lifetime Brands Inc (LCUT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Lifetime Brands earnings conference call. My name is Katina and I will be your coordinator for today.

At this time, all participants are in listen-only mode. Later, we will facilitate a question and answer session. (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.

Good morning, everyone, and thank you for joining Lifetime Brands' third-quarter 2014 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 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 uncertainty, including the Company's ability to comply with the requirements of its credit agreement; 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 volatilities 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, and thank you for joining us to go over our third-quarter 2014 results.

As I mentioned on our last call, we have been making significant investments this year to expand our business aggressively on a global basis. The importance of this focus on acquisitions and international expansion benefited us in the third quarter when we were able to post record sales and EBITDA, despite the difficult retail environment that continues to prevail in the US.

For the quarter, net sales rose by $20 million, or 14%, to a record of $162 million. The acquisition we made in the first half of 2014, Kitchen Craft, Built, and La Cafetiere, generated almost $21 million in sales.

As you recall, our acquisition of Kitchen Craft in mid-January was designed to expand our existing UK housewares assortment and to make us a more effective global resource for retailers. Our Acquisition of Built in March provided us with exciting new product classifications to sell to upscale retailers worldwide. And our acquisition of La Cafetiere, also just six months ago, La Cafetiere also just six months ago expanded our reach into a wide range of products, prepared coffee and tea. We expect to see significant sales growth in both Built and La Cafetiere starting in 2015. We are pleased with the way all of these businesses are performing and the contributions they will be making to Lifetime's product platform, sales, and profitability.

In addition, higher sales at our UK-based Creative Tops and sales to Walmart China, whose 400 stores we started supplying in the second quarter, contributed to our revenue gain in the third quarter. We now have several truly global brands, including Farberware, Sabatier, Mikasa, Savora, Fred & Friends, Built, and La Cafetiere, that are available today at retailers in over 100 countries in which we do business.

Of course, as we discussed last quarter, gearing up with all these new brands, products, and geographies, comes at a cost. We have been making significant investments to build our global business in a way that will, over time, enable us to leverage our core capabilities and infrastructure. In the meantime, we believe our worldwide scope is enhancing our standing with our retail customers.

In addition, our product design groups, which are among the best in the industry, are helping us bring new ideas to market, and our entire organization is collaborating in sales and marketing efforts, adopting best practices in all areas of our business.

Larry will give you further details on our financial performance and his section of our call. I will go through the highlights of the quarter quickly, focusing on our all-important wholesale segment.

In kitchenware, though we have been steadily making market share gains, our business with warehouse clubs was down considerably from the prior year. In this segment of trade, it is not unusual for us to have significant quarterly swings in business.

In last year's third quarter, we had some standout kitchenware programs that did not repeat this year. In addition, some new programs we had planned for the third quarter moved back to the fourth.

On a positive note, we recently began shipping our Guy Fieri cookware, gadgets, and cutlery to a major US retailer and are beginning to see some very nice results there. The Guy Fieri end cap program I mentioned last quarter, which involves three divisions, is an example of how we can secure business due to the multiple categories we can offer to retailers under the same brand.

In tableware, the third quarter was strong and in contrast to kitchenware, our club business did very well. Unfortunately, our margins in dinnerware are low lower than our margins in kitchenware and this affected overall margins for the quarter.

At the recently concluded Tabletop market, we introduced a considerable number of dinnerware and flatware patterns that are focused on young, contemporary consumers, and they were extremely well received. In addition, our new mug program with mugs that feature inspirational sayings, new designs and really interesting glazes was also very well received. Based on retailers' acceptance of our new offerings, I would have to say that this was the best Tabletop show we have had in very many years.

We also introduced a new Tabletop collection featuring Kim Parker's original floral designs. Kim is an award-winning lifestyle designer. She's a designer, an artist, an author, and we have been collaborating to create vibrant collections of tableware for consumers who have an affinity for the bold and colorful modern prints that she does. In total, we launched six different Kim Parker dinnerware collections at that Tabletop Market and the line has already been committed to one of our largest customers.

In home solutions, sales were stable on a quarter-over-quarter basis, reflecting the addition of Built, whose lunch bags, wine totes, and baby accessories are selling well, though we have been somewhat limited in stock up to now. We should be fully in stock by the end of the fourth quarter.

We recently launched our Built New York City -- NYC website, so I invite you to take a look at our innovative and eye-catching collection there. We think this business has a great future and have been expanding our infrastructure to capitalize on these capabilities.

In the home decor products category, however, sales and profits have been weak for some time. As I noted on prior calls, we have decided to refocus this business on higher-end products under the key brands of Mikasa, Pfaltzgraff, and Bombay. Our branding efforts have begun to help us gain back ground and we have deemphasized the Elements and Melannco brands. So we took a $3.4 million non-cash impairment charge with respect to the Elements and Melannco brands this quarter.

Turning now to international, I have already mentioned how our expansion efforts there have provided new opportunities at a time when consumer demand in the US is basically flat. And, as we have noted before, we firmly believe that our most significant growth going forward will be outside of the United States.

Kitchen Craft has been a particular standout. It is a business very much like our US kitchenware business, but with a decidedly European flair. We are quickly moving to add several of their product lines to our US distribution and, at the same time, we are adding several of our US lines into their distribution.

Creative Tops, through which we originally introduced Lifetime's tabletop product lines to the UK, has been doing very nicely. They recorded organic growth of approximately 37% in local currency year-over-year. In 2013, they were facing an uphill battle when the European Union imposed dumping duties on ceramics from China. It took six months for UK retailers and consumers to get over the sticker shock of considerably higher retail prices. Everything is now going extremely well at Creative Tops and Kitchen Craft together have been working to really integrate the two businesses, which are highly complementary.

Grupo Vasconia, our partner company in Mexico, is also performing considerably better than they did in 2013. Their cookware business is doing extremely well and they announced successfully integrating their two aluminum businesses.

In Brazil, our partner company, GS International, has been moving forward with these initiatives to transform the company from a distributor to a marketer of proprietary products under key brands. And, as a result, they were recently appointed the category -- as the category advisor for kitchenware, cutlery, and cutting boards in one of Brazil's largest mass-market retailers. We believe in the long-term potential of our investment in GSI, but with the headwinds fought provided by Brazil's current economic conditions, it will take some time to realize. Accordingly, we took a non-cash charge of $5.2 million in the quarter to reduce the carrying value of our investment.

Moving now to Asia, as you know, we have been gearing up all year to supply kitchenware and tabletop products to almost 400 Walmart Supercenters in China. Our efforts included bringing in a team of new managers to oversee the development of this business as well as with other retailers in China as we move further along. Some adjustments were required, but the business is now moving along nicely.

In addition, our 12,000 square foot showroom recently opened in Hong Kong, offering a great way to showcase our many brands. In the first week the show room was open, we met with 15 important customers, primarily from Asian countries. This is another example of the sizable investments we have made in the future of our international growth.

With that review, I will turn the call over to Larry, who will give you more details on our third-quarter financial results and the guidance update mentioned in this morning's release. Larry?

Thanks, Jeff. As we reported earlier this morning, the net loss for the third quarter of 2014 was $1.6 million or $0.12 per diluted share as compared to a profit of $1.1 million or $0.08 per diluted share in the 2013 period. Adjusted net income for the quarter was $5.7 million or $0.41 as compared to adjusted net income of $6.1 million or $0.47 in 2013. The table which reconciles this non-GAAP measure to reported results was included in this morning's release.

Income from operations before intangible asset impairment and restructuring expenses was $11.8 million in both of the 2014 and 2013 periods. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $16.5 million for the current quarter and $15.1 million for the period of 2013. And consolidated EBITDA for the trailing four quarters in the 2014 period was $42.6 million compared to $40.3 million in the 2013 period.

For our US wholesale segment, net sales in the 2014 quarter decreased 2.2% to $125.3 million. The decrease was due to lower sales to warehouse clubs for kitchenware and pantryware products, partially offset by higher sales of tableware products to the clubs. In addition, there was a decline in sales of home decor products. The quarter also reflects the inclusion of Built, which was acquired in March of this year.

The US wholesale segment gross margin was 34.9% in the 2014 quarter compared to 35.5% in the 2013 quarter. The decrease reflects an increase in the proportion of tableware products sales and an increase in promotional activities to support the introduction of new brands and products.

US wholesale distribution expense, as a percentage of sales shipped from our US warehouses, was approximately 8.8% in the 2014 quarter and 8.2% in the third quarter of 2013. This increase reflects the effect of lower sales, increased labor from lower revenue per carton shipped, and the impact of a longshoreman's work slowdown on the West Coast.

US wholesale SG&A expenses were $21.1 million, which is 16.8% of net sales in third quarter of 2014, and $21.4 million, which is 16.8% of net sales in the third quarter of last year. As we discussed last quarter, we incurred certain expenses related to our growth and acquisition activities, which for the current quarter were offset by a net reduction in regular activities, primarily due to the timing of incentive compensation expense.

In the current quarter, there was a $3.4 million impairment charge for Elements and Melannco's home decor trade names. The home decor products category, as we said, has experienced a decline in sales and profits in recent years. We believe that the most significant factor was a reduction in retail space allocated to the category, which has also contributed to pricing pressure. The Company has been rebranding a portion of its hope decor products under its Mikasa and Pfaltzgraff trade names and more recently through the Bombay license and deemphasizing the Elements and Melannco trade names. Accordingly, the charge relates to these trade names.

For our international segment, net sales in the 2014 quarter increased to $33.2 million from $10.4 million in the third quarter of last year. Of this increase, $18.7 million represented sales from kitchen Craft and La Cafetiere, which were acquired in the first quarter of this year.

Organic sales for the quarter increased 39.7% or 30.7% in local currency on higher volume from Creative Tops. The 2013 period was adversely affected by the dumping duties imposed by the EU on Chinese ceramics. The sales for Creative Tops in the three- and nine-month periods in 2014 even exceeded those of 2012, which they proceeded the imposition of these punitive duties.

International segment gross margin was 35.2% in the 2014 quarter compared to 30.8% in the 2013 quarter. The increase resulted from the inclusion of Kitchen Craft whose products carry a higher margin than other product categories in the segment.

International distribution expenses as a percentage of sales shipped from warehouses were approximately 10.8% in 2014 quarter and 15.5% last year. This improvement was primarily due to increased volume and the use of more competitive pricing -- competitive priced freight carriers.

International SG&A expenses were $6.6 million in the third quarter of 2014 and $2.1 million in the third quarter of 2013. The increase is primarily due to the inclusion of Kitchen Craft and La Cafetiere. Creative Tops increased on volume driven expenses and integration expenses related to La Cafetiere. As a percentage of net sales, SG&A was 19.9% in 2014 period and 20.2% in 2013.

For our retail direct segment, net sales were $3.7 million in the 2014 and in the 2013 quarter. And its gross margins were 69.3% in 2014 as compared to 70.8% in 2013, reflecting increased promotional discounting in the current period.

As a percentage of net sales, retail direct's distribution expense increased 29.7% from 29.5% in 2013 on higher freight rates, while SG&A remained the same at $1.8 million.

Now moving -- looking at our non-segment items, unallocated corporate expenses decreased by $200,000 to $3.3 million in the period. This is attributable to the timing of accruals for short-term incentives compensation partially offset by higher professional fees.

Interest expense increased to $1.7 million from $1.3 million last year, and this increase in 2014 was due to higher average borrowings attributable to the recent acquisitions, which interest was partially offset by lower rates from the January debt financing.

The effective tax rate for the quarter was 46.5% compared to 37.2% last year. The 2014 rate reflects the impact of a rate reduction on Puerto Rico NOLs. Excluding this one-time rate adjustment for Puerto Rico, the effective tax rate would have been 37.5%.

Equity and losses was $5.2 million in 2014 quarter as compared to $5.5 million last year. For Grupo Vasconia, equity and earnings was $300,000 for the current quarter versus a loss of $5.3 million last year, which included a $5 million charge for the reduction in fair value. Grupo Vasconia's income from operations, however, was $1.7 million in the current quarter versus a loss of $100,000 last year.

Equity and loss of GS International was $5.5 million, including a charge of $5.2 million for the reduction in its fair value as compared to an equity loss of $132,000 last year. The charge was precipitated by GS's operating losses in the current and forecasted near-term business environment in Brazil. While we are supportive of the business and management of GSI and the wisdom of building a strong presence in Brazil, the relevant technical accounting guidance required us to conclude the decline in a GSI's value was other than temporary.

Now turning to our financial position, at September 30 this year, the pro forma leverage, that is as if Kitchen Craft was included from the beginning of the LTM EBITDA period, was 3.68 and at quarter end, our liquidity was $33.1 million.

As noted in our earnings release, we revised our projected full-year sales guidance to approximately $590 million, of which $80 million of the increase over 2013 is estimated to be from consummated acquisitions.

Gross margin is expected to be approximately 36.5% versus 37.2% last year. Higher gross margin for the acquisitions, particularly Kitchen Craft, was more than offset by lower margin from our US wholesale segment. The lower gross margin in the US which is expected as due to the reasons I cited earlier with respect to third-quarter results.

Distribution expense as a percent of net sales is expected to increase modestly from 2013 as low organic growth is not expected to keep pace with expense increases.

SG&A as a percent of sales is expected to be approximately 50 basis points above 2013.

Our effective income tax rate for the full year is currently projected to be between 35% and 37%. Capital expenditures are planned at $5 million to $6 million. And for the full year, dilutive weighted average shares outstanding are projected to be 14 million.

This concludes our prepared comments. Operator, please open the line for questions.

(Operator Instructions). Laura Champine, Canaccord Genuity.

Larry, just a clarification. On the SG&A expense guidance, did you say it is 50 basis points expected to increase on the rate?

Correct.

Okay. Can you comment? So inventories were up substantially more than sales. Of that, I think it was a 28% increase. How much of that was due to slower sales than you had expected and how much of it was a purposeful inventory build?

Very little is due to slower sales because we do manage our inventory very carefully. But, there was --

(inaudible)

I would say no more than about $2 million was due to lower sales slower, which will correct itself, certainly, in the next quarter. A large part of it, that we brought goods in early in anticipation of issues on the West Coast with the docs. I don't know if you have been reading what has been going on there, but there has been a tremendous slowdown in getting things out of the ports on the West Coast. We anticipated that in July and advanced shipments in order to compensate for that.

And, Laura, also, that $24 million, if you're looking at it versus September of last year, comparable period, $24 million of it is from acquisitions and small pieces, Walmart China, but it is basically Kitchen Craft and La Cafetiere.

Got it. And then, you called out distribution expense and said that the rate would increase this year. And, of course, this quarter and last quarter, distribution expenses have been growing faster than sales. Can you attribute that for us and let us know when it gets back in line with sales in your view?

I mean, well, pretty close to the end -- so it would be up modestly because of the large component of fixed costs in our warehouse. So low organic growth is hard to overcome, like cutting expenses. But if we grow at the 3% to 4% or more that we've talked about in the past, it will certainly be in line. In fact, at 5%, it should improve.

Great. Thank you.

(Operator Instructions). Frank Camma, Sidoti and Company.

Just real quickly, I am having trouble tying out to the $0.41 here. On the last page of the press release, you are backing -- you are adding back the intangible asset impairment of $2 million. But on the income statement, it is $3.3 million. So I was just wondering, is that after-tax? Is that --

All the numbers in the table of that are net of cash.

Okay. All right. Okay. That makes sense. I did have a follow-up to the fourth quarter here on what you had -- I was writing it down, but I don't think I caught it -- on the gross margin side, the commentary you made on that.

Yes. So, I had said that we expect gross margins to be approximately 36.5% versus what we had last year of 37.2%. And it is basically the reasons that I cited in the third quarter, that the tableware is growing faster than kitchenware, which, as you know, is a lower margin business. And then some activity because -- all the activity we talked about -- new brands, new licenses we have. We have done some other -- I'll describe it as promotional to get placed with those new products.

Okay. And I guess the other question I wanted to ask kind of ties into the inventory question here. But are you seeing retailers -- other companies I follow, the categories are clearly the retailers are paring back on inventory levels. So, are you feeling that as well?

Let me answer that. To a small degree. They seem to go in spurts. Some of them -- one of the largest retailers that we deal with for about two weeks was very slow in placing orders and then they opened up.

I think, in general, retailers are very cautious on inventory. That goes -- not only our classifications, in all classifications, they are being very cautious, bringing in goods much closer to need and watching sell-throughs.

I think there are some issues that, from what we perceive, there are some issues that we see in retailers in the shift of business shift to their Internet sales. All the brick and mortar retailers, as you know, also have Internet sites that are growing at a much more rapid rate than the brick-and-mortar stores. As the business shifts rapidly shifts towards the Internet, which it is, I think they are having a little more difficulty understanding their inventory needs in brick and mortar versus Internet.

Yes. Sure. Okay. And, last question is just on the -- now that you have the growing international component, is there -- are you at much risk here on FX in the final quarter of the year?

Well, of course, there is always translation, recording translation. But, on the FX, yes, there is exposure. Kitchen Craft has a hedging program to address that. La Cafetiere is quite small, but that -- La Cafetiere has been really folded into Creative Tops. So just as a business who has international operations, especially where we do business, because everybody pays Chinese vendors in dollars, whether they be in the US, Brazil, or Canada or the UK. So, yes, they do have a hedging program to address that.

Okay, great. Thanks.

With no further questions at this time, I would now like to turn the call back to Mr. Jeff Siegel for closing remarks.

Thank you all for joining us on the call and we look forward to our next call when we review the full year's performance and discuss our initiatives for 2015. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.