Lifetime Brands Inc (LCUT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Lifetime Brands earnings conference call. My name is Sue, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Miss Harriet Fried of LHA. Please proceed.

Good morning, everyone, and thank you for joining Lifetime Brands' fourth-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 uncertainties, including the Company's ability to comply with the requirements of its credit agreements, the availability of funding under those credit agreements, the Company's ability to maintain adequate liquidity and financing sources and an appropriate level of debt, changes in general economic conditions which could affect customer payment practices or consumer spending, changes in demand for the Company's products, shortages of and price volatility for certain commodities, the effect of competition on the Company's markets, and other risks detailed in 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 propagated 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, everyone, and thank you for joining us to go over our fourth-quarter 2014 results.

As you know, throughout 2014, we made significant investments to expand Lifetime's business on a global basis. These investments reflected our assessment that there are more promising opportunities to grow internationally than domestically. The benefits of this focus were clear in the third quarter when we posted record sales and EBITDA despite a difficult retail environment in North America. And they were demonstrated again in the fourth quarter as our net sales increased by $25 million, or 15%, to $190 million. The acquisitions we made in the first half of 2014, Kitchen Craft, BUILT and La Cafetiere, provided almost $23 million in sales.

For the full year, consolidated net sales topped $586 million, an increase of $83 million or close to 17%. The three acquired businesses contributed almost $78 million to that number. Of course, as I mentioned last quarter, gearing up with many new brands, products and geographies does cover the cost. We have been making significant investments, including an international sales team with a 12,000 square foot -- to 12,000 square-foot showroom in Hong Kong in order to build our global business in a way that will, over time, enable us to leverage our core capabilities and infrastructure.

We see many favorable trends that we expect to benefit our business in 2015. These sought with the forecast for continued economic growth and stable employment rates, which are now at a six-year high in the US. Low oil prices are also increasing the purchasing power of consumers and reducing the cost of some of our materials. Let me take a moment to talk about this change and the way it will help us in 2015.

As you saw in the release, our margins declined to 2014. In midyear, we began to address the decline by working with our suppliers to automate labor-intensive processes and redesigning products to reduce costs without impacting the value of the products. This is a monumental task for a company that markets over 15,000 products in the US alone.

While we were making steady progress, the cost reduction progress greatly accelerated when the price of oil collapsed. As you know, we use a considerable amount of plastic resin in our products and the spot prices for resin has dropped by more than 25% since last September. As we turn our inventory over the next two quarters, we expect to see great improvement in the margins in our core business, core US business.

There are also many trends that I would call lifestyles on the lifestyle side that are very positive for our business. These include a recovering housing market and the return of new household formations to pre-recession levels of approximately $1 million per year. The movement of Gen Y or Millennials out of their parents' homes and into their own homes as their incomes increase and Housing Affordability Index improves, a greater focus by many households on food prep, cooking, fresh food and home entertaining, smaller home and household sizes as well as other trends that emphasize good design, affordability, flexible spaces and storage space, a notable trend in housewares giftables reflecting the positive attitudes of that at-home food prep and baking. We have deliberately positioned Lifetime to take advantage of these trends and to address a younger, more design-savvy market with brands like Savora, Reo, Farberware Colourworks and Mikasa, which put us in a solid position to attract first-time and new homeowners.

At this week's International Home and Housewares Show in Chicago, we unveiled two comprehensive branded solutions for retailers who want to target the Millennial consumer. Every major retailer we've met with in the last three months is targeting this consumer, and I believe we offer the best solutions in both kitchenware and tabletop to capture this segment of the population. The Millennial population is considerably larger than the Gen X population that came before them and even larger than the outsized baby boomer population.

The first line targeting Millennials was Farberware Colourworks, a comprehensive line of high design, high function kitchen tools, gadgets, cutlery and pantryware. This attractive and affordable collection features vibrant colors and contemporary styling and was influenced by Kitchen Craft's highly successful collection. It's an example of synergies between the two geographic sides of our business. We began showing this line in January, and we have already secured placement for 2015 in several major retailers.

We also greatly expanded our Millennial focused Reo collection, an innovative line of kitchenware, cutlery and cookware, to provide simple and functional solutions designed to make food preparation fun. We've spent a considerable amount of time and money over the past two years developing this line. And based on meetings we have had with major retailers before and during the housewares show, we have very high expectations for this line in 2015.

Other significant programs we launched included a unique line of neoprene lunch products under our new BUILT brand, and an extensive assortment of our upscale Sabatier cookware, cutlery, kitchen tools and gadgets. In addition, we added to our high performance, high style Savora tool and gadget line, introducing a cutlery collection which we think will be the crown jewel of the line. We are very proud of its unique look and the functionality of the line.

Another innovation we unveiled across several brands, including both -- actually more than two, including Farberware, Sabatier and Reo, is a knife storage sheath that sharpens blades -- that sharpens the blade as the user inserts or pulls out a knife. This is a very unique item and there has never been anything like it on the market. This unique feature received an especially enthusiastic reception at the Housewares show. It was invented at Lifetime and we've applied for both utility and design patents for the concept.

We've also added many new patents to our dinnerware products to appeal to the Millennial customer emphasizing a more youthful casual look rather than formal patterns. While it's still early in the year, so far in 2015, these new dinnerware patterns are selling briskly. We are fortunate that our Mikasa brand has always focused on younger, more contemporary looks as opposed to the formal looks of our upstairs dinnerware competitors.

Another important strategy for increasing sales is to gain greater penetration into online retail. As I indicated earlier, the retail universe has changed significantly with the growth of eCommerce giving consumers a host of new ways to shop. Adapting to these trends by penetrating online retail offers a promising way to combat the reduction in floorspace in both tabletop and home decor. In 2014, we invested in a dedicated staff working with outside consultants to rapidly advance our efforts in this area. This team has been meeting with our major customers for several months to assist them in putting as many of our 15,000 SKUs as possible online as well as providing copy that greatly enhances the salability of our products online. We are confident this will give us great topline sales improvement on our online sales of our products in 2015.

In addition to making a corporate-wide effort to improve gross margins as discussed earlier, we are also exploring ways to mitigate increases in distribution costs, which rose in 2014 as retailers pushed for smaller case packs that are considerably more expensive to process. The price increases we instituted for smaller packs are now coming into effect. We are also improving processes in our distribution centers, which, in addition to lowering shipping costs for smaller case packs, will also help us to service those retailers moving to omni-channel. This is combining stores and .com into a single operation which requires that we fulfill warehouses and dropship orders with increased efficiency.

In February, we announced that we have agreed with Reed & Barton to become the stocking course bidder in the bankruptcy sale of Reed & Barton's flatware and giftware business. We expect the court to hold an auction in late April. The addition of the Reed & Barton brand will add to our already very strong lineup of great flatware and giftware brands.

I will now turn the call over to Larry to give you more detail on our fourth-quarter and full-year financial results. He will also provide additional commentary on our guidance for 2015. Larry?

Thanks Jeff. Just before I get into prepared remarks, we transmitted our earnings release this morning properly and there was some glitch I guess in how is transmitted, how the wire picked it up, so if you've looked at the table on EBITDA, you may have noticed that the three months 2014 are the same as the full-year 2014. The three months is incorrect. It's about $20 million. We'll have that retransmitted, if not already, sometime later this morning.

So as we reported earlier this morning, the net income for the fourth quarter of 2014 was $9.3 million, or $0.66 per diluted share, as compared to $9.4 million, or $0.72 per diluted share, in the 2013 period. Adjusted net income for the quarter was $8.3 million, $0.59 per diluted share, compared to $10 million, or $0.76 per diluted share, in 2013. The table which reconciles this non-GAAP measures to reported results was included in this morning's release.

Income from operations was $18.3 million for the 2014 quarter compared to $16.6 million in 2013. Included in the current period was a credit to adjusted fair value with contingent consideration for the 2012 acquisition of Fred & Friends. While the Fred & Friends business remains profitable, it is not expected to achieve the very high hurdle we set in the earnout.

Consolidated EBITDA non-GAAP measure as reconciled to our GAAP results in the release was $20.9 million for the current quarter and $21 million for the period in 2013. Consolidated EBITDA was $42.5 million for the full year of 2014 and $43.5 million last year.

For our wholesale segment, net sales in the 2014 quarter increased $1.5 million to $145.1 million. The increase was from future wave of new product offerings and extended programs at certain retailers. The increase in kitchenware products was partially offset by a modest decline in tableware.

Home solutions products declined as 2013 included a warehouse club program that we didn't have in 2014, and that was partially offset by the addition of the BUILT New York business we required early in 2014.

US wholesale segment gross margin was 35.4% in the 2014 quarter compared to 38% last year. The decrease reflects the cost of promotional activities to support the introduction of new brands and products and some sales through the off-price channel. US wholesale distribution expense as a percentage of sales shift from our US warehouses were 8% in the 2014 quarter versus 7.6% in 2013, primarily reflecting the impact of labor costs to handle smaller case stacks. US wholesale SG&A expense was $19.3 million, or 13.2% of sales, $23.5 million, or 16.2% of sales excluding the contingent consideration adjustment. And that's in 2014. That compares to $23.3 million or also 16.2% of sales in the fourth quarter of last year. Lower employee incentive compensation was offset by expenses related to our growth in acquisition activities.

For our international segment, net sales in the 2014 quarter increased to $37.3 million from $13.5 million in last year's quarter. Of this increase, $22.3 million represents sales of Kitchen Craft and La Cafetiere which were acquired during the first quarter of 2014. Organic sales increased 20%, 18.5% local currency, and higher volume from Creative Tops for the 2013 period was adversely affected by that anti-dumping duties imposed by the EU on Chinese Ceramics.

International segment gross margin was 35.3% in the 2014 quarter compared to 26.9% in the 2013 period. The increase resulted from the inclusion of Kitchen Craft whose product carried higher margin than other product categories in the segment as well as less close-out volume for tableware products.

International distribution expenses as a percentage of sales shift in warehouses was approximately 11.7% in the 2014 quarter and 11.8% last year. An improvement from use of more competitively priced freight carriers and a benefit from higher volume tableware was offset by Kitchen Craft, which has many small independent customers.

International SG&A was $7.1 million in the fourth quarter of 2014 and $2.6 million in 2013. The decrease was primarily due to the inclusion of Kitchen Craft and La Cafetiere. Creative Tops increased on volume driven selling and integration expenses related to La Cafetiere. As a percentage of net sales, SG&A improved to 19% in 2014 from 19.5%.

For our retail direct segment, net sales was $7.6 million in the 2014 quarter and $7.7 million last year. Gross margin increased to $67.8 million from $66.8 million in 2013, reflecting the benefit of fewer promotional events. As a percentage of net sales, retail distribution expenses remained even at 29.3% for both periods. Retail direct SG&A expenses were $2.9 million in the 2014 period and $2.4 million in 2013, reflecting a revised allocation and redundancies related to the consolidation of our customer service support.

Before turning to non-segment, it's worth noting that, for the full year, total SG&A, excluding the credit for the adjustment of contingent consideration and acquisition transaction expenses on a consolidated basis, was 23.2% in 2014 versus 22.6% in 2013. That's an increase of 60 basis points, which incurred despite flat year-over-year volume in the US and the benefits of the increased activities not fully realized in calendar 2014.

Now looking at non-segment items, unallocated corporate expenses increased by $600,000 to $6.1 million in the 2014 period, which is primarily attributable to the timing of accruals for short-term incentive compensation. Interest expense decreased to $1.7 million in the 2014 quarter from $1.3 million last year. The increase was primarily due to higher average borrowings attributable to the 2014 acquisitions, which were partially offset by lower interest rates in the January 2014 debt refinancing. During the recent 2014 quarter, the Company also incurred $700,000 of expenses related to a financing of indebtedness that the Company chose not to complete.

The effective tax rate for 2014 quarter was 34.5% compared to 40.6% last year. The 2014 rate reflects the benefit of income derived from the UK, which has a substantially lower tax rate than the US. Equity and losses was $1.1 million in the 2014 quarter as compared to earnings of $300,000 last year.

For Grupo Vasconia, equity earnings before US deferred taxes in the 2014 quarter was $1.1 million and a loss of approximately $300,000 net of tax. The deferred tax relates to the foreign currency translation loss which was recorded in other comprehensive income. Equity income of Grupo Vasconia was $1 million before US deferred taxes and $600,000 net of taxes in 2013. For the full year, Grupo Vasconia's income from operations increased 43% on an 18% increase in net sales. The improvement came from both its futureware and aluminum businesses.

Also in the fourth quarter, the Company purchased 40% of a newly issued common stock of GSI worth BRL2 million, which is approximately $800,000. As we commented on our last call, we remain supportive of the business and management of GSI and the wisdom of building a strong presence in Brazil but the relevant technical accounting guidance requires us to conclude that the decline in value is other than temporary, so we expensed additional investment in equity and losses.

In February of this year, we amended our credit agreement. The primary chain must allow for a more gradual reduction of the senior leverage ratio covenant governing the term loan. The maximum leverage beginning in March of 2015 is now 4 times versus 3.5 and declining to 3.25 versus 2.5 at March 31, 2016. At December 31, 2014, the senior leverage ratio was 3.3% and therefore liquidity was approximately $45 million.

Looking at 2015, we have projected full-year sales of 3% to 6%. As noted in our earnings release and in Jeff's comment, gives us great opportunity to reduce cost. We expect to realize benefits in 2013. We will be more specific on full-year 2015 on our first-quarter earnings call.

That concludes our prepared comments. We are ready for questions. Operator?

(Operator Instructions). Frank Camma, Sidoti.

Good morning guys. A couple of questions here. Is the Reed & Barton potential acquisition, is that part of your sales guidance of 3% to 6%?

No, it's not. It's a 363 auction, which means there is certainly no certainty that we would get it.

Sure. No, I was just wondering if we should be counting on it. So I guess the question then begs 3% to 6% is actually pretty good organic growth for your categories, especially if you look at what you did last year. Especially in this recent quarter, I'm calculating about 1% if I've done that right. So can you kind of -- I mean I know you've got some consumer demand. You pointed out some macro issues, but you're talking about basically a 3X improvement in organic growth. Can you just -- on the low end. I mean is that reasonable?

Yes, it is. In 2014, the biggest decrease we had was in the Cuisinart cutlery. That was a $6 million decrease. We are now emphasizing more brands that we own or control, and especially Farberware and Sabatier in cutlery. It's a much better thing for us in the long-term though. There was a bit of short-term pain, so you take that out of the mix and the loan is a $6 million wing.

In addition, this team that we put together to improve our online business, which is primarily at brick-and-mortar retailers as well as some online only retailers, is having great results. And I think that's going to be very positive for us.

And lastly, some of the businesses that were lagging a bit for us last year have turned around and should become much better in 2015, especially since we just came from the show. And what happened at the show was very, very positive for us. So, I'm confident that we are certainly going to at least fit those numbers on. I'm kind of optimistic that we will do a lot better than that, but we'll see.

Okay, fair enough. Just to follow up on the Cuisinart, because I'm not familiar with it, could you just explain -- so did you stop making Cuisinart cutlery, or is it the license --?

Right. It was a license, and we are no longer -- in 2014, we were not marketing Cuisinart cutlery. Like I said, our cutlery business is moving more towards brands that we control.

In-house, or owned. Okay.

Farberware was our fastest-growing brand within the Company by far followed by Sabatier. So those are the two that we really emphasizing.

Okay. And is Farberware still being positively impacted by its rollout in China? Is that one of the reasons?

That's a small part of it. It's actually rolling out into many new customers in the US. Nothing that really helped us. The only accurate data that's available within our industry comes from a company called NPD. And the retailers all buy the NPD data and the data that came out from NPD showed that Farberware was the fastest-growing and the number one cutlery brand in America. And some retailers who previously did not carry the brand have added it for 2015.

Okay. And so, on the expense side, obviously you've got a couple of things flowing positively in your direction. How long does that take, though, to actually hit? Like is it a quarter? Is it two quarters? You have resin. You have steel. I mean you do have existing inventory, so I was just wondering. Does it --

As I mentioned, we have to work through our inventory because we do carry a substantial inventory (technical difficulty) supply chain. We'll start getting a benefit in the second quarter, and we'll get obviously a much greater benefit in the third and fourth quarter.

Right, which is actually your more meaningful --

(multiple speakers) in the second quarter.

Okay. And finally if I could just -- I'm having trouble just modeling questions here on the adjustments. Contingent consideration comes out of SG&A, right? Or we would add that to the SG&A.

Yes.

Okay. So -- because Larry, I thought you said there was a meaningful improvement in the SG&A year-over-year. But --

What I said was that it's despite year-over-year flat results in the US, and many of the investments and initiatives we talked about during the year, as we said, they didn't hit the beginning of the year. They're starting to hit the businesses we purchased with BUILT and divesting in the showroom in Hong Kong. So despite that SG&A and taking out the Fred & Friends adjustment, taking out acquisition transaction expenses, deal expenses, the SG&A is up 60 basis points. I took that to mean it's good, considering, as I mentioned, the flat sales and the transaction expenses.

Okay, all right. I'm sorry. I misheard. Okay, that's it. Thanks.

John Sullivan, Olstein Capital Management.

One other testament for me being an owner of the business is that you guys seem to generate a lot of cash relative to your earnings over time. And it just seems like, this year, you kind of got hit on pretty much every account, both on paying bills early and receivables inventory on that end. I was just wondering. What were some of the impacts in there and if there are some timing things that are going to be reversing out early on in 2015, or what the cash flows might look like going forward.

One obviously was a disappointing year, so that obviously hurts cash flow. Some of it is timing. You can see our -- as you see, looking at cash flow, our receivables are up, and that's timing. The business hasn't grown. But the fourth quarter as you know is a big part of our year. And depending on when we ship in the fourth quarter and which customers we ship to can have an impact on receivables. Things like inventory we manage, we'll bring that back into line. So those are the big things that I think really affected our cash for the period.

Okay. I mean I would imagine 2015 then we should be positive cash flow to the tune better than earnings with the amount of depreciation and amortization you guys have relative to capital spending.

We've been pretty consistent over the years, consistently generating I should say cash in excess of the earnings because of the high depreciation here.

Okay, great. Thank you.

(Operator Instructions). Brian Freckmann, L.S. Capital.

A quick question. What percent of COGS is resin and steel? I guess I'm trying to understand how I could model this.

Okay. It obviously varies by product line. In our most important categories, which are kitchen tools and gadgets and cutlery, those are the biggest volume categories we have. It's quite significant. And it's not at all significant in tabletop, so you have two different parts of the business.

Again, it also varies by product. So, I can't give you a really firm answer on this. It's not quite that simple. The savings could be -- on a product could be anywhere from a typical kitchenware product or a typical kitchen nice product could be anywhere from 5% to 20%, but usually more in the range of -- the bulk of it will be in the 5% to 10% range in those products.

We also have some other savings that I didn't mention. The only thing that we source from Europe really is crystal. The Mikasa business, a substantial part of our Mikasa business which is our tabletop business, is crystal, is stemware, wineglasses and so forth. They come from Europe and they're bought in euros. As you know, right now, the euro is very weak, so we are getting a substantial benefit on that end as well. I just can't give you a real number. I apologize for that on the cost of products overall because it varies so much by the different parts of our business.

Okay. I don't know if I heard this. Did you guys give -- typically we kind of go over international retails direct wholesale. I think I may have missed that. What were those numbers in the fourth quarter?

Yes, we did it by segment. What's your question?

What was international?

International sales?

Yes.

For the quarter, they were $37.3 million.

Okay, $37.3 million, thank you. And then just so I'm clear there, what was the -- the Fred & Friends adjustment was what number?

$4.2 million.

$4.2 million?

Yes.

Okay. And then just a reminder, the financing, that $700 million, what was that towards?

We were looking to do a big financing. This we've talked about. I don't know if you're new to the story, but we've talking about, a lot about, where we are internationally and where we want to be in terms of size. And we had given some serious, obviously serious thought about doing a financing really to have adequate capacity to do some significant transactions. And so we went down the path. We weren't happy with the market call it back in the fall. The market was very strong for us, just generally everyone in the summer. And just as luck would have it, as we're moving through with it, the markets were going against us. So we decided that we couldn't do this major financing and we'll probably for now stick to doing -- we'll continue to discuss it but we'll stick to let's say doing it transaction by transaction. The market improves for B credits, small size and unseasoned issuers like us.

Okay. So you guys have sort of -- you've given us an outlook on 2015 for sales. Obviously, we don't know the acquisitions. You know, it sounds like you're implying that margins will increase, given all the reversals and all the other things. Any help there? I'm trying to figure out what kind of EBITDA margin you think we should be looking at. I mean you given us revenue.

We had thought about it and we really want to wait until -- the call is only late April or early May (multiple speakers).

At the first-quarter call, we'll give more detail on that.

So you guys are going to give us some sort of operating income or EBITDA in the first quarter?

We'll certainly give more guidance than we have given -- significantly more guidance than we have given you today.

All right. Thank you.

Thank you for your questions, ladies and gentlemen. I would now like to turn the call over to Mr. Jeff Siegel for closing remarks.

Thank you for joining us this morning.

In closing, I'd like to emphasize that we believe the general trends in the housewares business favor companies like Lifetime. We are large in the industry. We are financially stable and we have many brands targeted to the different customer groups, consumer groups. Also, we have advanced design capabilities, which is really helping us right now in many ways, and this is building a better internal dropship distribution capability, which will greatly enhance our ability to sell products online, through our brick-and-mortar partners and online only retailers. We look forward to giving you another report after the first quarter is finished. Thank you.

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