Lifetime Brands Inc (LCUT) 2015 Q3 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the third-quarter 2015 Lifetime Brands earnings conference call. My name is Katina, and I will be your coordinator for today. (Operator Instructions)

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's third-quarter 2015 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; the impact of foreign exchange fluctuation; 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.

Thank you, Harriet, and good morning, everyone. Lifetime's third-quarter results generally met what we expected, despite the impact of foreign currency exchange rate fluctuations on our international business, which has reduced our reported net sales revenue by approximately $3.6 million or 2.3% year-over-year and had a negative effect on our margins.

In the US, where foreign exchange is not an issue, our wholesale business increased 4.2% year-over-year, with growth in each of our three product categories: kitchenware, tabletop, and home solutions. Most exciting was the double-digit jump in home solutions, up 22% overall.

The home decor area has been a drag on our US business for several years. However, as I predicted last quarter, it has finally turned the corner. A key contributor is a large new program at a major pharmacy chain which is devoting a section to Bombay giftables in all their US stores. Bombay has been a great specialty brand for over 30 years and ranks among the top recognizable home decor brands in America. We expect the Bombay giftable program and our recent penetration into the drugstore channel to continue to be an important source of growth for this division.

In kitchenware, the largest component of our US wholesale segment, sales were up, albeit slightly, with increases in cutlery and Fred & Friends, partially offset by declines in other areas, including tools and gadgets. Kitchenware sales were hurt by the bankruptcies of two midsize retailers, A&P and Anna's Linens; and a comparison of year-over-year performance must take into account strong sales in Costco in last year's quarter that didn't occur this year as Costco shifted its emphasis to other categories, such as pantryware and tabletop, which were reflected in the results of those divisions.

In tableware, sales were up, reflecting good growth in Mikasa branded dinnerware and flatware, as well as strong sales of novelty mug assortment. Our retail direct segment produced results that were right on target. Although this segment currently constitutes a small percentage of Lifetime's sales, we see many opportunities for growth, both with Internet-only customers and with brick-and-mortar retailers who are working hard to grow their online sales. We have made a significant investment in developing the proper infrastructure to enable us to properly service business done over the Internet.

Moving to the international segment, where our broad distribution, which encompasses over 100 countries, exposes us to foreign exchange fluctuations that this year has dampened our results: net sales decreased 13.3%. However, on a constant currency basis, the decline was only 3.2%.

The depreciation of local currencies against the dollar increases the cost of goods imported from Asia where the purchases are not denominated in dollars. This impacts margins and slows sales when higher prices are passed along to customers and consumers. Ultimately, these exchange rate fluctuations produce unfavorable comparison when the results of our non-US businesses are translated into US dollars.

In the UK at Kitchen Craft, we appointed Garry Biggs to succeed Andrew Plant, who is retiring as Managing Director. Garry comes to us from Denby, a well-known dinnerware company, where he led a management buyout in 2004, affecting a turnaround. Prior to this, Garry worked for United Biscuits, holding a number of general management and marketing directorships.

We continue to be pleased by how well Kitchen Craft and Creative Tops are working together to create new opportunities for each business. Creative Tops's sales are predominantly to major retailers, while Kitchen Craft's sales are primarily through a network of independent retailers, and each has a well-developed international sales channel. The two businesses are taking steps to build on each other's networks and take advantage of global synergies that are not available to our competitors.

Looking at the nonfinancial side of our business, we are happy to have entered the second half of the year, which seasonally is always our strongest. We are off to a solid start, especially here in the US, where our business is a net beneficiary of lower commodity prices and a weaker Chinese yuan, which should help our margins beginning in the fourth quarter this year and considerably more so in 2016. We have several major initiatives underway that will change the way we do business.

First, we are building our e-commerce strategy to keep pace with the rapidly changing face of the digital marketplace. This market is taking many twists and turns as new Internet-only retailers appear and traditional brick-and-mortar customers develop their Web and omnichannel strategies. To stay ahead of the game, as I noted, we are making significant investments in people and systems to build our expertise and capability in this area. We believe our efforts are moving us in the right direction.

In the third quarter, responses from our customers to our early sales efforts have been encouraging. We are gradually discovering what programs and products to empathize in the future. In addition, we recently have put in place a new agreement that enables Lifetime to serve as a third-party marketplace seller for certain exclusive products that do not compete with those offered by our traditional and brick-and-mortar retailers.

Secondly, our new brand strategy includes developing new brands in the kitchenware category that we think will pay off starting in 2016 and bringing fresh new contemporary looks to some of our key brands. An example is our new line of Farberware Colourworks, a full collection of high-design, high-function kitchen tools and gadgets as well as cutlery which were successfully pioneered by the UK Kitchen Craft division.

Colourworks started shipping in the US in the third quarter; and while it is still early in the process, it appears to be gaining very good traction here. All of the products are designed with the vibrant colors and contemporary styling to appeal to Millennials, who represent an important group of consumers for Lifetime. We are looking for solid results from this new line in the fourth quarter as well in 2016.

The Farberware EdgeKeeper, the knife storage sheath with a built-in sharpening mechanism that we discussed last quarter, also came to retail recently. And based on strong placement, we have high hopes for this new concept.

Another important effort is our relaunch and expansion of our upscale Sabatier brand, which was inspired by the demands of fine French cuisine and includes a wide array of styles ranging from traditional to the contemporary. Based on the success we are having with this brand, we are expanding Sabatier from cutlery to new categories, including kitchen tools and gadgets and bakeware.

To complement our presence in major US retailers, where we are already well represented, we are working to build an independent store strategy. We think independent specialty stores offer an important opportunity to expand our distribution and are placing several of our key brands in a number of regional showrooms to help us penetrate this market segment. In addition, we have invested in a specialized sales team to develop this effort further in 2016.

For 2016, our sales force has targeted several new customer opportunities beyond our traditional retail partners. We will report on these efforts for you next year as they develop further.

Finally, at last month's Tabletop show here in New York, the new items we introduced for our Mikasa Italian Countryside were an especially big hit. This is a 23-year-old line, the Italian Countryside, that is actually growing quite nicely for us. We expanded the collection by adding four new colors and three patterns, all sold in sets of four to attract Millennials, who seek products that are visually engaging as well as functional. We also added colored glassware and colored dinnerware, also sold in the same configurations.

As we move into the holiday season, I am happy to report that, as expected, our retail partners have geared up for a strong selling season with us. I will now turn it over for the -- the call to Larry for detailed financial review.

Thanks, Jeff. As we reported this morning, net income for the third quarter of 2015 was $5.1 million or $0.36 per diluted share as compared to a net loss of $1.6 million or $0.12 per diluted share in the 2014 period. Adjusted net income for the quarter was $5.9 million or $0.41 per diluted share as compared to $5.7 million, also $0.41, in 2014. A table which reconciles this non-GAAP measure with reported results was included in the release.

Income from operations was $9.8 million compared to $8.4 million in 2014. Excluding the impact of an impairment charge in 2014, income from operations was $11.8 million. Consolidated EBITDA, a non-GAAP measure that is reconciled to our results in the release, was $14.1 million for the current quarter and $16.5 million for the 2014 period. Consolidated EBITDA was $41.9 million for the 12 months ended September 30 of 2015, and $42.6 million for the same period last year.

For our US wholesale segment, net sales in the 2015 quarter increased 4.2% to $130.6 million on growth in all our business categories: kitchenware, tableware, and home solutions. Kitchenware's increase was modest, as growth from cutlery and Fred & Friends products more than offset lower volume in the other lines. Tableware's increase came from Mikasa and flatware, while home solutions reported a very strong quarter on home decor's Bombay product line and pantryware's volume in the warehouse channel club.

US segment gross margin was 34.3% in the 2015 quarter compared to 34.9% in 2014. The decline in gross margin reflects faster growth in lower-margin product categories and sales channel mix. However, through the nine months of the year, US gross margin is up 20 basis points to 35.4%.

US wholesale distribution expense as a percentage of sales shipped from our warehouses improved to 8.4% in the quarter from 8.8% last year. The benefit of higher shipments in the current period was in part offset by labor costs associated with smaller case pack shipments and other services for our retail customers.

US wholesale SG&A expenses were $22.1 million, which is 16.9% of net sales, versus $21.1 million -- 16.8% of net sales -- in 2014. The increase is attributable to expenses related to the Company's export operations, which began in the latter part of 2014, and the timing of short-term incentive compensation, offset by a cost savings initiative.

For our international segment, net sales in the current quarter were $28.8 million, a decrease of 13.3% on a reported basis but a decrease of 3.2% in constant currency terms. The decrease in constant currency was due to tableware's sales decline for Creative Tops. Kitchen Craft sales were even with the prior year.

International segment gross margin was 33.2% in 2015 compared to 35.2% in 2014. Gross margin declined as products are sourced in US dollars, which strengthened versus the pound sterling. In addition, euro weakness against the pound sterling adversely affected reported sales from Continental Europe and Ireland.

International distribution expenses as a percentage of sales shipped from warehouses was approximately 12.8% in 2015 compared to 10.8% in the 2014 quarter. The increase reflects the lower sales volume and an increase in warehouse labor costs from dropship volume. International's SG&A expenses were $6.1 million in 2015 quarter versus $6.6 million in 2014, reflecting the decline in the pound sterling.

Now for our retail direct segment. Net sales were $3.8 million in the current quarter versus $3.7 million last year, and gross margin was 69.2% in 2015 versus 69.3% in 2014. As a percentage of net sales, retail direct distribution expenses were 32.6% for 2015 versus 29.7% for 2014. The increase was due to higher freight expense. We are in the process of implementing rate-shopping software to mitigate this higher expense. And retail direct SG&A was $1.7 million in the current period versus $1.8 million for the prior-year quarter.

Looking at the non-segment area, unallocated corporate expenses increased by $600,000 to $3.9 million in the current period, which was primarily attributable to an increase in professional fees and employee expense. Interest expense declined to $1.5 million, primarily due to scheduled prepayments of the term loan.

Our effective tax rate for the 2015 quarter was 33% compared to 46.4% last year. This lower rate was due to the reduction of discrete items that we reported in the prior period.

Equity in losses was $459,000 in the 2015 quarter compared to equity loss of $5.2 million in the 2014 quarter. The 2015 loss is primarily attributable to our share of Grupo Vasconia's earnings which, before US income taxes, was a profit of $337,000 in the 2015 period.

However, the decline in the Mexican peso against the US dollar required the Company to record a significant deferred tax expense. Grupo Vasconia's equity and earnings for the 2014 quarter was $326,000. In Mexican peso terms, Grupo Vasconia's net sales and net income increased for the 2015 quarter by [17]% and 29% respectively. But the 20% decline in the Mexican peso significantly [reduced] the reported results in US dollars. The 2014 equity in loss also reflected an impairment charge of $5.5 million related to our investment in GS Internacional.

At September 30 our debt leverage ratio was 3.75 times, and our liquidity was approximately $48.2 million. Looking at the balance of 2015, we project full-year sales to increase 2% to 3% and gross margin to improve slightly over 2014.

Expected sales and gross margin increase in our US dollar business is expected to be largely offset by a decline for our UK-based business. And as we said, the decline in the UK is from higher sourcing costs due to the US dollar strength and also some economic weakness we see in Europe.

We expect operating margins to be in the 4% to 4.5% range. Our effective income tax rate for the full-year is projected at 39% as our US business is expected to outperform our UK business, where tax rates are significantly lower. Capital expenditures are planned at approximately $6 million, and for the full-year, weighted average shares are projected at 14.3 million.

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

(Operator Instructions) Frank Camma, Sidoti.

Good morning. You stated that you have confidence in the holiday season, and I'm trying to figure out what that is based on, based on what I hear from other companies and retailers. Can you give us a little more color on that?

It is based on placement, frankly, and what -- we have what we call our flex plan, which is our internal plan which is updated on a monthly basis for sales. We begin the year with a budget and then adjust it each month based on whatever changes happen at different retailers.

And based on what's going on, we still have a high level of confidence. Our biggest drag, as we've noted, is in international, where though the businesses are doing well, the translation is hurting us. That is going to continue.

But international was actually down, even if you ignore translation.

It is down at only one place, which is Creative Tops. Creative Tops is the ceramics part of our UK business. Besides the exchange differential, which is about 15%, they also have a 25% anti-dumping duty, which came into place over the last two years. So their retail prices -- the prices at retail of their products has gone up close to 40%.

It has dampened sales to some degree. It seems to be turning around, because they are converting their business and moving away from the pure ceramic items to more of the accessory items that they can get a higher margin on.

Okay. With respect to -- you know, understanding your relatively slow inventory term -- we are still not -- in the quarter, at least, we didn't see any improvement on commodity costs, it looks like, the input costs. I was wondering if you can address that a little further. You said maybe Q4 of next year. Can you talk to that?

You should see it substantially better in Q4 of this year. Again, I am talking about the US business. You still have the drag on international. But the US business -- there should be a substantial improvement starting in Q4 and certainly going into 2016. The commodities -- the main commodities that we use are down dramatically. We certainly are getting cost decreases overseas.

At what point does your retail partners, though -- do they push against you, knowing that?

They do, to some degree. Not all of them, but some of them do. But, that is -- overall we still expect to be a little bit better off. We are not going to be -- like, for instance, in one case, cold rolled steel, which is down from $550 a ton in January to under $350 a ton right now, and we use a lot of that in our bakeware; we are getting lower costs, but we have also lowered some of the retails, because folks expect it. But overall, we still will be improving our margins.

Okay. Larry outlined some issues on why the distribution costs continue to go up. I am not as clear on why SG&A goes up, both on absolute basis and relative to revenue as a percent basis. I was just wondering if you can give us a little clarity on that?

I thought it was about in line with what it was last year as a percentage of sales.

SG&A?

And the other thing that I mentioned is about the timing of when we record our short-term compensation -- incentive compensation -- not ratably throughout the year, depending on where the profits are. And there was a little shift versus last year. So we recorded more of it earlier this year than we did last year.

But by and large, our expenses have been, I think, fairly well controlled. We have a number of initiatives to control and reduce costs. So I think for the year, we should be okay relative to where sales are.

Okay. And last question: how does this impact -- obviously you are bringing down numbers for this year. How does this impact your view on longer-term growth rates?

It really doesn't have much of an impact on longer-term. We still feel organically we can grow in the 3% to 5% range, and we will layer on acquisitions above that. We still feel the same way. There is no change in our feeling. Hopefully the exchange doesn't get much worse than it is now, because that is certainly pulling us back. Our US organic growth rate in the quarter was over 4%.

Okay. Oh, and I'm sorry; just one clarification. Larry, did you say your full-year tax rate was going to be 39%?

Yes.

Wouldn't that imply a very high fourth-quarter tax rate, if I'm doing the math right? Because --.

Well, yes, and that is because of how performance overseas is -- so, where -- you know, our rates here, our US rate, 35% plus state taxes; and then international, or the UK, it is below 20%. But because of what is happening internationally, it is driving up our effective tax rate.

Oh, I understand that. But you would have to have a statutory rate above 40% to make that.

Okay. Well, that is how it is going to fall, I guess.

Okay. All right, thanks, guys.

(Operator Instructions) With no further questions at this time, I would now like to hand the call back to Mr. Jeff Siegel for any closing remarks.

Thanks for joining us today. As you've heard, we have a multitude of efforts underway at Lifetime to create new and innovative products that make household tasks easier, more exciting, and more fun for consumers. We are optimistic about our results for the holiday period and look forward to giving you an update after the fourth quarter. 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.