Lifetime Brands Inc (LCUT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 Lifetime Brands earnings conference call. My name is Tony, and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please proceed.

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 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 market, and other risks detailed in Lifetime's filing 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. Thank you for joining us to discuss our second-quarter 2015 results.

Despite continued headwinds from foreign exchange, we delivered results that were substantially in line with our internal plans and well above last year's period. Before talking in detail about the quarter, let me touch on two areas that are likely to be of increasing importance to us as well as for many companies in the years ahead: foreign exchange and e-commerce.

Over the past several years, we have made a concerted effort to expand our footprint outside of the United States. Through our global distribution system consisting of Lifetime and its wholly-owned subsidiaries in the UK; our partner companies in Canada, Mexico, Brazil, and India; our joint ventures in China; and our network of international distributors, our products are now available in over 100 countries worldwide. This breadth of distribution exposes us to foreign exchange fluctuations that, in this year, have and will continue to dampen our results when sales in certain foreign currencies are converted into US dollars. To provide a clearer picture of how our non-US operations are performing, consistent with how we evaluate our performance, we have presented our net sales both in an as-reported and in a constant-currency basis.

The constant currency presentation excludes the impact of fluctuations in foreign currency exchange rates. We calculate constant currency percentages by converting our prior-period local currency financial results using the current period exchange rates and comparing these adjusted amounts to our current-period reported results.

The strong US dollar has also had an impact on the cost of purchases in China by our non-US partners, as such purchases generally are denominated in US dollars. This has had a negative impact of the gross margin percentages achieved by KitchenCraft and Creative Tops in the UK, and our partner companies in Canada, Mexico, and Brazil.

There can be no question that the rapid and accelerating growth of e-commerce is a phenomenon that affects all retailers and their suppliers worldwide. To service both brick-and-mortar retail partners, all of which have some form of e-commerce, and our Internet-only customers, we have made significant investments in people and systems that have positioned us to become an insightful and proactive partner and to build collaborative e-commerce relationships with our major retail customers.

Now to the quarter. Our growth in sales and earnings performance is a result of our increased emphasis on product innovation in our continuing pursuit of productivity gains. In addition, the quarter was positively impacted by club rollouts, as anticipated earlier in the year. Let me run through some of the highlights of our second quarter as well as some of the key product offerings we have on tap for the second half of 2015.

Starting with our US wholesale segment, total net sales were up 11% for the quarter, with a solid increase in our kitchenware category and an outstanding jump in our tabletop category. These increases were offset slightly by a decrease in our home solutions product categories, but there are timing of shipments -- there, the timing of shipments has impacted our sales.

Looking first to kitchenware, as I mentioned last quarter, we have been implementing a fundamental shift in our brand strategy centered on bringing a fresh new contemporary look to our Farberware brand, which is both our largest and fastest-growing brand. That's been paying off with new placements at many -- multiple retailers. Our new line of Farberware Colorworks, a full collection of high-design, high-function kitchen tools and gadgets, cutlery, and pantries that were successfully pioneered by our KitchenCraft division, has now been placed with several retailers here in the United States. All of the products are designed with vibrant colors and contemporary styling to appeal more to millennials. As you know, millennials represent a very big and growing group of consumers for Lifetime.

Our new brand strategy in cutlery, where we have developed a number of innovative new products, is doing equally well. The Farberware Edgekeeper, our knife storage sheath with built-in sharpening mechanism, has been getting especially good placement with a broad spectrum of customers. The unique and patent-pending Edgekeeper technology will be appearing on our other cutlery brands as well. You'll see them in stores near you very shortly.

Another brand that is getting great new placement in cutlery as well as in kitchen tools and gadgets and bakeware is Sabatier. Sabatier has a rich history; more than 200 years, in fact, of fine cutlery. We have undertaken a collaborative effort across our divisions and are bringing the name to new categories with great success.

Turning to tableware, as I predicted in the last quarter's call, we had an exceptional quarter, with virtually all divisions in this segment contributing to our good results. Our strong showing reflects substantially decreased placement with several important customers. Growth is coming especially Micasa white bone china, great novelty mug assortments, as well as increased placement of flatware patterns.

In home solutions, sales were down, primarily reflecting a decrease in pantry ware products due to the timing of programs at warehouse clubs. We expect to make this up later in the year, and have some very encouraging developments underway.

Sales in home decor, which has been a drag on our US business for several years, has finally turned the corner. And in the second quarter, our home decor sales were up 14%.

In addition, our home decor division has been successful in getting promising floor placements, including a program at a major drugstore chain, which will be devoting a section to Bombay giftables in all of its stores. This is a first for Lifetime.

We are also introducing some beautiful new designs and truly innovative technology to our La Cafetiere French presses. Coffee has grown in importance, but there's been no innovation in the category for years. Our new French presses are the first on the market that are easy to clean. We will be distributing these new French presses both in the United States and in Europe.

Now moving to the international segment. The foreign exchange rate is still posing challenges, with an 8% swing against us to the British pound in this year's second quarter as compared to 2014. The strong dollar hurts the UK businesses in that they must purchase in dollars in China and sell in pounds in the UK. This has forced their costs up 8%, and they've been raising prices correspondingly.

We are excited, however, by how well KitchenCraft and Creative Tops are now working together to create new opportunities for each business, as well as by the success of some of our new e-commerce initiatives in Europe. They are also leading the way for us to expand our businesses in those countries, where we do not have a physical presence.

Both Lifetime Brands Canada and Grupo Vasconia performed well in the quarter in spite of the dramatic depreciation of the Mexican peso and the Canadian dollar. At Grupo Vasconia, where their main business is aluminum cookware and other aluminum products, since they purchased Royal Aluminum in US dollars and so much of their out-clip of aluminum products in US dollars, the currency swings have been less of an impact on the business in local currency. At Lifetime Brands Canada, the weak Canadian dollar has had much more of an impact on the cost of their products. However, through aggressive sourcing and raising selling prices, they have managed to improve their bottom line.

In our retail-direct segment, overall, our results were right on target. This is the team that has also been working with many of our major customers to help them put as many of our 15,000 SKUs as possible online and have really provided great copy in order to enhance the salability of our products online. This is a priority for Lifetime, and we expect to see online sales of our products grow at an extremely fast rate as the year progresses.

As you know, our seasonally larger quarters are in the second half of this year -- of the year. And I'm happy to report that our retail partners are showing confidence in a strong holiday selling season. Based on strong bookings and placements for products to be delivered in the second half of the year, we continue to have a high level of confidence in our ability to achieve our consolidated full-year 2015 financial goals. In constant currency, we expect to achieve a near 6% net sales growth for the year, the high end of our guidance. However, we expect the strong US dollar to continue to dampen foreign operating results during the second half of the year. Hence, on a reported basis, we currently forecast full-year 2015 net sales to increase by 3% to 6%, reaffirming the guidance we have provided on our first-quarter conference call.

Also, we continue to expect our operating margin to be in the range of 4.5% to 5.5%. In addition, reflecting on the strong momentum in our business and our confidence in this continuing, we increased our annual dividend by 13% to $0.17 per share.

I will now turn the call over to Larry Winoker for his detailed financial review. Larry?

Thanks, Jeff. As we reported earlier this morning, net loss for the second quarter of 2015 was $1.7 million, or $0.12 per diluted share, as compared to a loss of $3.2 million, or $0.24 per share, in the 2014 period. Adjusted net loss for the quarter was $600,000, or a loss of $0.04 per share, as compared to a loss as adjusted last year of $3.1 million, or $0.23 per share. A table which reconciles this non-GAAP measure to reported results was included in this morning's release.

Loss from operations was $1 million for the 2015 quarter compared to a loss of $3.2 million last year. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $4.4 million for the current quarter, $1.5 million for the period in 2014. And consolidated EBITDA for the trailing 12 months ended June 30 of this year was $44.3 million versus $41.2 million in the same period last year.

For our US wholesale segment, net sales in the 2015 quarter increased 11% to $94.6 million. Higher volumes of kitchenware and tableware was partially offset in the home solutions group. Kitchenware's increase was primarily due to the strength of cutlery volume, while the increase in tableware came from all product categories. Home solutions decline was due to lower pantry ware sales, which was attributable to the timing of its Warehouse Club program.

US wholesale segment gross margin was 35.5% in the 2015 quarter compared to 35.2% in 2014. The increase reflects better margin for certain product categories and higher sales from our more profitable product category. US wholesale distribution expense as a percentage of sales shift from our US warehouses was 10.2% in both periods. The benefit of higher shipments in the current period was primarily offset by increased costs associated with smaller caseback shipments to certain wholesale customers. US wholesale SG&A expenses were $20.2 million, or 21.4% of net sales, in the 2015 quarter and $20.6 million, or 24.2% of net sales, last year. The improvement is attributable to cost-savings initiatives offsetting an increase in expense related to the Company's export operations, which began in the last part of 2014.

For our international segment, net sales for the quarter were $22.5 million, a decrease of 15.4% on an as-reported basis, or a decrease of 4% in constant currency terms. The decrease in constant currency was due to tableware sales decline for Creative Tops partially offset by increases -- increase in kitchenware sales for our KitchenCraft. International segment gross margin was 32.3% in the 2015 quarter compared to 32.2% in the 2014 quarter. Gross margin in 2014 included a charge related to step-up in fair value of KitchenCraft's inventory in the acquisition. Excluding this charge, gross margin would've been 33.9% last year. Gross margin declined as products are sought in US dollars, which strengthened versus the pound sterling. In addition, the euro weakened very significantly against the pound sterling, hurting reported sales from the continental Europe and Ireland, which was partially offset by increases in selling prices.

International distribution expense as a percentage of sales shipped from warehouses was approximately 13.8% in the 2015 quarter. Distribution expense for the 2014 quarter includes a reclassification attributable to KitchenCraft to conform to reporting in our US presentation. Excluding the effects of this re-class, distribution expense as a percentage of sales shipped from the Company's UK warehouses was 13.4%. This increase reflects lower sales volume in the UK and an increase in drop-ship volume. International SG&A expenses were $7.8 million in the second quarter of 2015 and $6.1 million in 2014. This increase was primarily attributable to a charge related to change in fair value of contingent consideration attributable to the KitchenCraft acquisition offset by a decrease reflecting the weakness in the pound sterling compared to the dollar.

For our retail-direct segment, net sales were $3.9 million in the current quarter versus $3.6 million in the 2014 quarter. Gross margin decreased to $68.4 million from $69.7 million last year, reflecting an increase in promotional events. However, overall, the increase in sales more than offset the gross margin percent decline.

As a percentage of net sales, retail distribution expense was 31.4% in 2015 and 28.6% for 2014. The increase in expenses was due to higher freight rates. We are in the process of implementing great shopping software and have established relationships with other carriers to help mitigate the impact of this increase. Retail-direct SG&A was $1.8 million this year versus $1.9 million in the comparable quarter last year.

With respect to non-segment items, unallocated corporate expenses decreased by $600,000 to $2.2 million in the 2015 period, which was primarily due to a reimbursement of expenses incurred from acquisitions not completed. Interest expense was $1.5 million in 2015 versus $1.7 million last year as average borrowings decreased during the current period, including scheduled repayments of the term loan. The effective tax rate in the current period was 29.3% versus 32.8% last year. This lower effective tax rate benefit for 2015 was due to certain permanent items and losses without benefit, offset by the benefit derived from our operations in the UK, which has a more favorable corporate tax regime.

Equity and earnings was $2,000 in 2015 compared to $41,000 last year. The earnings is primarily attributable to our Grupo Vasconia's earnings which before US income taxes doubled for up to $671,000 from $338,000 last year. However, the decline in the Mexican peso against the dollar required the Company to the report a significant deferred tax expense. At June 30, our leverage ratio was 3.01 times and our liquidity was approximately $71 million. Looking at the balance of 2015, as we said, we project full-year sales to increase 3% to 6% over 2014 and our gross margins to increase approximately 50 basis points over last year. Based on expected sales volumes, distribution expense should be approximately 9% of net sales; SG&A should be in line with 2014 at about 23.5%.

Our effective income tax rate for the full year is projected to be 38%, as our US business is expected to perform better than our UK business, where tax rates are lower. Capital spending is planned to be approximately $6 million, and, for the full year, average shares outstanding projected at $14.3 million.

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

(Operator Instructions) Frank Camma, Sidoti.

Hey, can you talk about the timing of the dividend increase a little bit? Is that typical for you midway through the year? Most of my companies are beginning the year, after results for the year. Just kind of curious.

Well, we think -- it's something we talk about, obviously, at all our Board meetings. And we just assess where we think the business will do -- how healthy it is. And obviously here, we had a pretty good quarter, and we want to demonstrate that we are pretty confident about our success and continued success. So we did it at this time. But we don't necessarily set the date or particular period in which we will adjust the dividend.

Let me add that we had quite a long discussion with our Board on this. And the feeling is, because our business looks like it's really going in the direction we want it to go in, both in the last quarter and going forward, we felt it was the right thing to do.

Okay. The other thing is you kind of stated some of this, but I just -- a little surprised on the -- when you adjust for FX, the lack of growth internationally. Was that -- was it because you had increased prices or if there was lack of demand? I was just wondering if you could get a little more into that.

Yes, and it's a -- we were talking specifically about the UK. As Larry mentioned, the KitchenCraft business did have increases -- did increase. The decreases were in Creative Tops, which -- Creative Tops is more of the ceramic end of the business. The KitchenCraft business -- the increase of the lower price of oil that we were able to negotiate from lower cost of products, and also the fact that they -- KitchenCraft sales to the smaller retailers where it's easier to raise products quickly -- the independent retailers. The Creative Tops sales to the majors, which takes a much longer time to get a price increase.

So it's not that the demand is really down, but the prices are up quite a bit and they are also both having difficulties selling into Continental Europe because of the exchange rate differential between the pound and the euro. It makes their products more expensive in Continental Europe and also as a margin challenge. But we are raising prices in Continental Europe to the independents. We just -- it was actually done in July. And we expect to see definitely improvement in the UK business in the second half of the year.

Okay. And we talked a little bit last time about the -- your input costs, both oil-based resins and steel down year over year. When do we start to see that flow through to the P&L?

We have started to see it. As Larry mentioned, that we expect to have improvements in our margins, and we expect that to continue. We are definitely -- we are seeing that, and it's something that I think is going to continue for the foreseeable future.

Okay. And final question, just on cash flow, can you -- traditionally, you have actually produced pretty good free cash flow with the exception of last year. I was just wondering if you could maybe touch on cash from operations and if you can kind of help us out there modeling that this year.

No, we -- our cash flow should pretty much follow growth in our business and EBITDA across less -- calculate the taxes and the interest. The other factor that can be always significant in operating cash flow with working capital and we don't foresee that increasing in any significant way. Our business is growing 3% to 6%. Perhaps that increases also. So it should be --

Okay.

Last year was an anomaly. We did have some payments after we acquired KitchenCraft. There was some timing of payment that came out of that business. I believe it was a pension and some other things that caught us last year to be lower than it has been historically.

Okay.

But we should see so much more predictability, and our CapEx spending should be in the $6 million range. Our dividend will continue -- we raised it, but it's not gone up significantly. So from about $2.1 million to about $2.3 million or $2.4 million. And we're going to continue to reuse the excess cash flow to pay down debt. We have fairly significant amortization of term loan, which we can handle, and the rate on the term loan is higher than on the revolver. So we had an interest rate benefit there as well.

Okay. Thank you.

(Operator Instructions) There are no further questions in the queue at this time. I would like to turn the call back over to Mr. Jeff Siegel for any and all closing remarks. Please proceed.

Thanks again for joining us today. You can see from our new revenue guidance and increased dividend that we are moving into the second half of 2015 with a high degree of confidence in our strategy and our products. We look forward to talking to you again after the third quarter. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your patience. You may now disconnect and everyone have a great day.