Lifetime Brands Inc (LCUT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lifetime Brands fourth-quarter 2015 financial results. At this time all participants are in listen-only mode. (Operator Instructions).

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

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 demands 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 fluctuations, 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. Go ahead please, Jeff.

Thanks, Harriet, and good morning everyone and thank you for joining us to discuss our fourth-quarter and year-end results.

For the year as a whole, we had good sales growth in our US wholesale segment with sales of kitchenware, tableware and home solution products all rising. Unfortunately this growth was offset by various currency challenges in the UK which both increased our cost of goods and hurt our export sales. Nonetheless through improved operating margin, we achieved a 5.5% increase in our consolidated EBITDA which rose to $44.9 million and we undertook a wide variety of product and business initiatives that are important for positioning our Company for further growth and increased profitability in 2016 and beyond.

To give you a good perspective on our outlook for the business, let's take a closer look at the important trends that took place during the fourth quarter focusing on the wholesale segment which accounts for the vast majority of our sales and profits.

Starting with our US operations, here the most exciting development was the significant improvement in our home solutions business providing proof that this division whose performance was impacted in recent years by significant cutbacks and retail floor space devoted to the category has truly turned the corner. The home decor portion of this business is now focused on branded giftables and functional decor, two areas of home decor that are growing. This new focus enabled us to launch a large program with a major pharmacy chain, our first significant foray into this retail class and it has been going very well.

In kitchenware, the largest component of our US wholesale segment, sales were down slightly for the fourth quarter although up for the year as a whole. Part of the decline was timing though a significant portion was the loss of two customers who went out of business, A&P and Anna's Linens. We generated good increases in cutlery reflecting continued growth in our Farberware branded products from a wide variety of retailers. Farberware is by far our biggest brand and last year sales under this brand increased by 9%.

I am happy to report that we have seen good early success with Farberware Color Works, our first line that is specifically targeted toward millennials. Color Works is a comprehensive line of kitchen tools, gadgets, cutlery and pantry ware that features vibrant colors and contemporary styling. It was influenced by a highly successful collection at our UK subsidiary Kitchen Craft, so it is an excellent example of the synergy we can achieve through different geographical sides of our business.

This synergy will be an important factor in our success in coming years. In 2016, we are expanding the Color Works collection through the introduction of cookware.

Another key growth initiative is our expansion of the Sabatier brand which is our fastest-growing major brand. Our sales under the Sabatier brand in 2015 were almost double what they were in 2014. Earlier this week we launched several hundred new Sabatier branded items at the International Home and Houseware Show in Chicago. They were enthusiastically received by retailers.

There are very few brands in our industry with a 200-plus year history of providing high-quality food preparation products and we wanted to leverage the history by showcasing significant Sabatier introductions in all product categories including cutlery, cutting boards, cookware, bakeware, kitchen tools and gadgets and sinkware

We also expanded our contemporary Savora brand for 2016 building up a sweet collection of tools and gadgets introducing a full wok (inaudible) program and building on our successful cutlery and cutting board collections and adding a full line of quality wood and metal serve ware. Savora provides outstanding design at superior value with products positioned for the upper tier retail channels.

Turning now to tableware, sales were up for both the fourth quarter and the full year and margins also grew in 2015. We successfully launched several new Mikasa programs and the Moscow Mule copper mugs we introduced earlier this year -- earlier last year I'm sorry -- continued their strong showing in the fourth quarter as did our line of wire accessories.

Mikasa is our most important tableware brand and sales under this brand increased by 17% in 2015. We will be expanding all of these programs in 2016 targeting new retailers and product expansions.

We are also bringing our kitchenware and tableware products bringing to the market our kitchenware and tableware products that utilize Mossy Oaks camouflage pattern. We are bringing them to sporting-goods retailers for the first time as well which we think will be a great combination for us and we are increasing the distribution of our Kim Parker collection which features her signature style modern florals and big bold designs.

Moving to the international segments as we describe in this morning's press release, currency challenges in the UK dampened our results throughout the year. For the full-year, sales fell by 14% although on a constant currency basis the decline was only 6%. The most significant part of this decline was our ceramics business which is impacted both by the unfavorable exchange rates and anti-dumping duties on ceramics. Fortunately we have great teams at both of our UK businesses and they have a clear understanding of what is needed to improve the business.

In the face of these challenges as well as the economic uncertainty in some of our key international markets, Kitchen Craft and Creative Tops are continuing to work together to build on each other's network and to create new opportunities for their businesses.

As you recall, Creative Top sells primarily to major retailers while Kitchen Craft sales predominantly to independent retailers, a channel we are working hard to strengthen for Creative Tops. In addition, with e-commerce sales growing nicely at Kitchen Craft, we are working to bring some of those lessons and practices to Creative Tops.

Other current initiatives includes moving the distribution of our Fred & Friends brand from an outside distributor to Kitchen Craft and introducing the Paul Hollywood bakeware brand. Paul is an English baker and a celebrity chef who is quite famous on TV in the UK and as well as in magazines. He drew a tremendous crowd at the Birmingham Fair which I was at.

Before I turn the call over to Larry, I would like to comment on the in-depth review of our business that we mentioned at this morning's announcement. We believe that we can significantly benefit by having a world-class international consulting firm conduct an in-depth review of our US wholesale business to make sure we have the right structure and portfolio of brands and products to grow and improve our profitability in today's complex business environment. The study they have undertaken is very comprehensive. It began with an evaluation of our divisional organization and are now looking at our product pipeline and brand management as well as Lifetime's SKUs and our SG&A spending.

We have already made several structural changes in the wholesale division as a result of their review consolidating certain areas, realigning responsibilities and reducing headcount where needed.

We are being very thoughtful in our approach and the review will provide a strategic framework and a roadmap for increasing our organization's efficiency and effectiveness. When we have finished implementing that framework, we are confident that Lifetime will be in an even stronger position to achieve future growth and improved profitability while at the same time continuing to lead the housewares industry worldwide with great products, designs and functionality.

I will now turn the call over to Larry for his detailed financial discussion.

Thanks, Jeff. As we reported this morning, net income for the fourth quarter 2015 was $11 million or $0.77 per diluted share compared to $9.3 million or $0.66 per diluted share in the 2014 period. Adjusted net income for the quarter was $10.8 million, $0.75 per share as compared to $9.4 million or $0.66 per share in 2014. The table which reconciles this non-GAAP measure to reported results was included in the release.

Reported income from operations was $17.6 million in the 2015 quarter versus $18.3 million in 2014. However, excluding adjustments for acquisition contingent consideration and restructuring expenses, income from operations increased to $17.3 million in the 2015 quarter from $14.1 million last year.

Consolidated EBITDA, a non-GAAP measure reconciled to our GAAP results in the release was $23.9 million for the current quarter -- and $23.9 million for the current quarter and $20.9 million for the period in 2014. Consolidated EBITDA was $44.9 million for the full-year 2015 and $42.5 million for last year.

For our US wholesale segment, net sales in the 2015 quarter increased $1.7 million to $146.9 million as growth for our tableware and home solutions business categories more than offset a small decline in the kitchenware category. Tableware's increase came from all product lines while home solutions had a very strong quarter on home decor's Bombay products and pantry wares volume in the warehouse club channel. Kitchenware strength for cutlery and boards did not quite offset lower volume in categories of other product lines.

US wholesale segment gross margin was 36.2% in the 2015 quarter compared to 35.4% in 2014. The increase reflects the benefit of margin increases at certain retailers and product mix.

US wholesale distribution expense as a percent of sales shipped from our warehouses improved to 7.7% from 8% last year's quarter as lower fuel costs reduced freight expense. The US wholesale SG&A was $21.5 million which is 14.6% of net sales in this past 2015 quarter versus $23.5 million which is 16.2% of net sales in 2014. These numbers exclude the contingent consideration adjustments for acquisitions. This decrease is attributable to timing of accruals for incentive compensation and lower selling expenses.

For our international segment, net sales in 2015 quarter decreased to $31.4 million from $37.3 million in the fourth quarter of 2014. In constant currencies, net sales for the quarter decreased 12.1%. This decrease is due to weak UK holiday sales at retail, some lingering effects of anti-dumping duties as some retailers source directly, and the currency effect of a weaker euro as compared to pound sterling on export sales.

International segment gross margin was 34.5% in the 2015 quarter compared to 35.3% in the 2014 quarter. Gross margin declined as products are sourced in US dollars but strengthened versus pound sterling. In addition euro weakness against the pound sterling adversely affected reported sales in Continental Europe and Ireland.

International distribution expense as a percentage of sales shipped from warehouses was approximately 11.7% in the 2015 and 2014 quarters. Warehouse storage expense savings versus 2014 was offset by an increase in warehouse labor costs from higher drop shipped volume and lower sales volume.

International SG&A was $6.2 million in the 2015 quarter and $7.1 million last year. The decline reflects the effect of currency translation. In constant currency, SG&A was about even with the prior year.

Now for our retail segment, net sales was approximately $7.6 million in both periods. Gross margin decreased to 66.1% from 67.8%. This decrease was due to promotional pricing of our exclusive Pfaltzgraff patterns. As a percentage of net sales, retail distribution expense increased from 29.3 in 2014 to 30.4 in 2015. The increase was due to higher warehouse and freight expense. The higher freight expense leads to larger packaging to reduce product damages. The benefit of this expense will be realized by fewer replacement orders in the future.

Retail direct SG&A was $2.5 million in the 2015 period and $2.9 million in the 2014 period reflecting the savings from consolidating customer service with wholesale operations and lower paid search fees.

With respect to non-segment items, unallocated corporate expenses decreased by $800,000 to $5.3 million in the 2015 period which was primarily due to a decrease in professional and acquisition fees.

Interest expense declined to $1.4 million in the 2015 quarter from $1.7 million as operating cash flow was reduced (technical difficulty). The effective tax rate for the 2015 quarter was 36.7% compared to 34.5% last year. The 2015 rate reflects a decrease in income in the UK which has a lower tax rate than in the US. The effective tax rate for the year was 36.2% which reflects a reduction of deferred tax liability in the UK as a result of its rate reduction. This compares to 42% full-year rate for 2014 which was affected by nondeductible transaction expenses and a reduction in deferred tax assets in Puerto Rico as a result of their rate reductions.

Equity and earnings of $743,000 in the 2015 quarter as compared to a loss of $1.1 million last year in constant currency terms, Grupo Vasconia's net income increased by 16% to $2.6 million in 2015 but was offset by a decline in the US dollar/Mexican peso exchange rate. Equity and earnings in the 2014 quarter was more than offset by a deferred tax expense related to Grupo Vasconia and an impairment charge related to our investment in GSI in Brazil.

Looking at our balance sheet and cash flow, during 2015 our operating cash flow was $47 million versus only $5 million in 2014. This increase is a result of higher profits in 2015 and a significant reduction in working capital. Some of the reduction was some active management but much was from normal timing factors for customer collection and supply of payments. Over the last five years our average operating cash flow has been approximately $25 million.

We used the 2015 operating cash flow primarily to reduce our indebtedness by approximately $37 million of which $10 million was a permanent reduction of the term loan. At December 31, 2015, the leverage ratio was 2.3 times and our liquidity was approximately $93 million.

Finally looking at 2016, we are projecting full-year sales to increase in the low to mid single-digit range and for gross margin to increase by approximately 50 basis points based upon expected sales volume, distribution and SG&A expenses as a percent of sales should be in line with 2015.

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

(Operator Instructions). Frank Camma, Sidoti.

Good morning, guys. I apologize; I missed the very beginning you may have commented on this. But I just want to ask about one of the things that you had pointed out last call was sort of product placements going into holiday season. Just wonder if you could review for us kind of -- obviously you had good product placements and how they met your expectations on the sellthrough?

Sellthroughs were not great in the fourth quarter. We found retail in general to be a bit challenging though it is starting to pick up again but it definitely was challenging at the end of last year. As you have all read, there has been a monumental shift in business, heavily shifting towards the Internet, both to brick-and-mortar retailers and to Internet only retailers and this will continue and we have positioned Lifetime to really capitalize on it as much as possible. We've set our systems up so that we can profitably ship direct to consumers for our retail partners again whether it be brick-and-mortar retail partners our Internet only retail partners and we have built a very large team that is focused on building sales of our products on the Internet through our customers.

You spoke pretty prominently about the Color Works. I was just -- could you remind us when and I know you have new products coming in 2016 but when did Color Works -- when did you launch that initially? I can't remember.

The first shipments were in July, it is a line that we picked up from the UK and we are now marketing in this country and we are gaining much more placement this year.

And do those products, mostly like, the knives, are those mostly use ceramics too or are those -- I know they are colorful?

Most of them are just colorful. The blades are what they call the resin coated blades that you slip on the blade itself. But they are just very popular with young people, it is a very colorful line. So by the way it is branded Farberware Color Works which helps us to enhance the Farberware brand.

I see. You mentioned retailers, it is obviously not surprising based all the other companies I follow. Can you comment on sort of the inventory levels at the retailers, how do you feel they are? I know you are coming off of your season here so if you could just kind of give us an idea how well stocked up they are?

They are fairly light. We had our houseware show in Chicago that ended on Tuesday, this Tuesday. And at that show we met with every one of our major customers over a four-day period and there is quite a bit of enthusiasm. I have to tell you we were extremely busy every day of the show and the attitudes are good and inventories I think are a little on the low side within our categories through they are not from what the retailers are telling me, there are some other categories that are rather high.

Okay. And obviously you had a pickup in the margins. And Larry, you mentioned some of that was from the retailers and also the product mix. What about input costs? I mean were those input costs kind of offset by the currency issues because you also mentioned those as kind of a take away especially you said you source in dollars but you sell in the pound so I just wondering if you can comment about that?

Yes. For our US business, the input costs have come down but we still have to cycle through the inventories. We carry about a six-month inventory but inputs costs -- the inputs have come down for a number of reasons, raw materials have come down and the exchange-rate between a dollar and the Chinese RMB has become a bit favorable towards us. Now of course the retailers want part of that and we have to give them part of that. We will retain some certainly.

In the case of the UK, the offset of their exchanges is far greater than the lower input costs so their costs have come up. It has certainly slowed their business.

We have good teams there and they know how to fix it. They are raising their prices which it is a competitive world but the competitors are also raising their prices. We will start getting the benefit of the higher prices in 2016, the higher selling prices. But it is certainly a step back in 2015.

Okay, and some of those commodity costs -- favorable commodity costs on the Chinese currency is clearly what I assume both into your comment about the 50 basis point improvement in gross margin. Am I correct about that?

That is correct.

Okay, great. Thanks, guys.

(Operator Instructions). I would like to turn the call back over to Jeff for closing remarks.

Thank you. Thanks for joining us today. As you heard, we had many areas of success in 2015. We also have many efforts underway to enhance Lifetime's performance in 2016 and beyond. We see exciting growth potential as a result of the changes we are making and look forward to giving you an update on our first-quarter call. Thank you.

Again, ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.