Lifetime Brands Inc (LCUT) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Lifetime Brands Q2 2016 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please go ahead.

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 agreement, the availability of funding under those credit agreements, the Company's ability to maintain adequate liquidity and financing sources and an appropriate level of debt, changes in general economic conditions which could affect customer payment practices or consumer spending, changes in demand for the Company's products, shortages of and price 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 SEC.

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. Good morning everyone and thank you for joining us today to discuss our second-quarter 2016 results.

Before I go into a detailed review of this quarter, I would like to update you on the restructuring program we undertook with a major international consulting firm last year to assess the opportunities to drive growth in our revenue, gross margin, operating profit and cash flow.

We completed a Phase 1 earlier this year. Among other things, it identified various opportunities for effectiveness and efficiency savings including organizational realignment, brand management, SKU management and indirect spend management.

Based on those findings, we realigned the US wholesale divisions and our organizational structure, reduced headcount and incurred restructuring expenses. For this quarter, restructuring expenses amounted to $1.1 million following restructuring expenses of $640,000 for Q1.

As you may recall, SG&A started coming down last quarter and we were able to bring it down again in Q2 by implementing just a small portion of the study's findings.

We recently completed Phase 2 of the consulting project which focuses on designing and executing solutions to increase efficiency on the front end by for example reducing secondary SKUs, strengthening brand management and reducing complexity throughout the organization. The consultants have given us a clear roadmap and we have begun implementing the changes they have laid out. The entire process will take about 18 months and we believe the changes to our organization will contribute to growth in sales and even more so to profitability especially as we enter 2017.

I will also report on a few other important trends in our business. First, we are seeing shifts in consumer spending that we expect to continue for the foreseeable future and we are positioning ourselves to capitalize on those shifts. Through that the most notable are the shift to spending online versus the brick and mortar stores and the growing influence of millennial consumers. The percentage of our products sold by both the online sites of our traditional retailers as well as sold at pure play online retailers is growing at an extremely rapid rate. Though this is mainly offsetting a reduction in business at traditional stores.

We have been positioning Lifetime to capitalize on this shift by developing a first-class team that understands how to drive this business.

The skill set needed to do this is quite different than the skill set needed to drive business through traditional retailers. This has been a major investment for Lifetime over the last several years and the investment is beginning to show important results which will be quite evident both in the second half of this year as well as in 2017.

The second major shift is the growing importance of millennials. Brand that we have positioned specifically for millennials are among our fastest-growing brands. Farberware Color Works, Built New York and Mikasa are three that are showing the greatest growth.

Though Farberware is a brand that is well over 100 years old, we revitalized the brand with the addition of the Color Works line that was developed by our UK subsidiary. This has proven to be a real winner that has enabled us to get significant net placement for the brand.

In the case of Built, we are getting tremendous placement for our stainless steel water bottles and coffee mugs. Based on orders that have already been confirmed, this is a business that will be very important for us in the second half of this year.

For over 60 years Mikasa has steadfastly focused on consumers that are younger and millennials are developing a significant purchasing power now. Mikasa has become our most important brand for dinnerware, glassware and flatware.

I would also like to mention our direct outreach program which if you recall is designed to help support our independent retailers, a channel that offers promising opportunities for growth. Earlier this year we structured our territories and selected independent rep groups to provide coverage, attend the right trade shows, and make sure we were offering the right brands and inventory for the channel.

More recently we invited all the reps to Garden City taking them around our showroom, posting presentations from all our divisions and giving them details on all our products and their features. This is a really good step, closer relationship and additional sales from this new channel and we expect to get those and plan to repeat it in future years.

With that high-level background, let me run through some of the specifics of our second quarter by division. Our results for the second quarter were generally in line with our expectations. For the period, we reported a very modest decrease in net sales, about 2%, which primarily reflected the timing of shipments.

I want to emphasize that we are not a company that lives in 90 day quarters and we don't invest in 90 day quarters. Our business plans are for a full-year and though this causes shifts in quarterly results, we will not chase businesses in a particular quarter that are not in the best interest of our full-year results.

Now moving to the US wholesale segment, total sales were down 2% largely due to the timing of some retailer programs. We had many businesses that showed great strength, in particular kitchen tools and gadgets, metals and as I had mentioned, Built New York. We had an outstanding quarter in our flagship kitchen tool and gadget area where we leveraged the new end cap program at one of our big customers and had strong sales in preparation for the back-to-school period.

We expect a slight decrease in the US wholesale segment to reverse in the second half of 2016 particularly as we progress with Color Works and our successful EdgeKeeper cutlery program as well as an expected strong second tabletop business and the continued growth of our wire storage business.

I mentioned last quarter that Color Works is a full collection of high function, high design kitchen tools and gadgets, pantryware and cutlery targeted to millennials to millennials' taste and spending patterns has been one of the fastest-growing product lines in our Company's history. It has been picked up by top retailers and big-box stores across the country. Many of them reported that it is one of their most successful lines in all of housewares.

In the second quarter, we continued to push ahead successfully with our efforts to expand distribution in those retailers where Color Works tested well. We have also been making headway with additional retailers. We are getting good indications from some big accounts who responded to the impactful and unique use of color and design.

We have also been continuing to get good response to our patent pending EdgeKeeper line of products which have built-in sharpness that automatically keep knives sharp for optimal performance. We expect EdgeKeeper to be a key driver for our cutlery lines.

Farberware, which is now the largest brand as well as the fastest-growing brand in our portfolio, continues to gain market share in just about every place of business we are in. It is a brand that resonates well with all customers of all ages.

Moving on to tableware, here sales were down but still higher than our internal expectations. As I mentioned, we have great expectations for tabletop in the second half of the year. Our tabletop division has done an outstanding job of developing wire storage and organization programs to compensate for the declining space retailers have devoted to tableware products. These continue to do well and we are expanding them in the second half of 2016 as well as growing our distribution of colorful Kim Parker ceramic tableware products.

Our flatware line of products also turned in a strong performance in the second quarter where we are building on a selection of giftables we introduced after our acquisition of Empire Silver in 2014.

As we expected, Empire has been a great addition to our family of brands. In addition, our newly acquired Wilton Armetale brand has begun shipping and retailers are highly enthusiastic about this line of contemporary serving products.

Finally, turning to home solutions, the third and smallest category in our US wholesale segment, sales were down slightly in part due to the slow home decor market but we expect things to pick up in this category in the coming quarter especially as we begin shipping the significant new program I mentioned under the Built New York brand. As part of our restructuring, Built has been tasked with accelerating development of our hydration and food storage businesses, designed to make today's what we call life on the go easier and more enjoyable. Our first new hydration offering is an outcome of that effort. And as I mentioned based on the orders we have in hand, it will have a strong impact on our second half performance.

Among the most popular new products is the extra large insulated tumbler, a double walled vacuum sealed cup that keeps cold beverages cold and hot beverages hot for several hours so it is perfect for road trips, camping, fishing and more.

Built also has been introducing new solutions for outdoor dining and lunch packing and storage for both kids and adults as they go to work, school or the beach.

Turning now to our international segment, we reported a modest 1% increase in net sales in local currency. Despite the challenging European economy, our Kitchen Craft business has been growing very nicely, well ahead of our internal expectations and is also solidly profitable.

As I mentioned last quarter in addition to being strong with independence, Kitchen Craft leaves their mark with a very robust sales at online retailers and that has been growing double digits.

Other promising initiatives are our introduction of Fred & Friends brand into Kitchen Craft earlier this year which received an excellent response at recent trade shows. We also believe we are well-positioned for the second half with our Paul Hollywood branded baking line. Kitchen Craft will also begin distribution of Fred & Friends products in Continental Europe starting in 2017.

In the international arena, one overarching question is whether the Brexit referendum will have any effect on our UK subsidiaries. Their net sales account for approximately 19% of our consolidated net sales. In the short term, we expect any effect to be modest as Creative Top and Kitchen Craft have both hedged a portion of their anticipated US dollar purchases and by selling inventory that was purchased earlier in the year at a more favorable exchange rate.

In the future, we anticipate that by relying on Lifetime's global sourcing infrastructure, Creative Tops and Kitchen Craft should be able to source products at lower cost than their smaller competitors. However, longer-term a prolonged decline in the value of the British pound could negatively affect the translation of financial results into US dollars.

As you know, our business is very weighted to the second half of the year so a seasonally more significant period for Lifetime is the second half.

I am happy to say that we currently foresee a healthy holiday shipping season with topline growth in the second half as a result of the expansion of our assortment particularly the Color Works and Built products I described and increased store count.

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

Thanks, Jeff. As we reported this morning, the net loss of the second quarter 2016 was $1.2 million, $0.08 per diluted share as compared to a net loss of $1.7 million or $0.12 per diluted share in the 2015 period.

Adjusted net income for the quarter was $90,000 or $0.01 per share as compared to an adjusted net loss of $600,000 or $0.04 per diluted share in 2015. The table which reconciles this non-GAAP measure to reported results was included in this morning's release.

Loss from operations was $300,000 for the 2016 quarter compared to a loss of $1 million for the 2015 period.

Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release was $5.2 million for the current quarter and $4.4 million for the period in 2015. Consolidated EBITDA was $43.5 million for the 12 months ended June 30, 2016 and $44.3 million for the same period in 2015.

For our US wholesale segment, net sales in the 2016 quarter decreased $1.9 million or 2% to $92.7 million. The decrease reflects the timing of program launches particularly for dinnerware and home decor. US wholesale segment gross margin was 35.6% in the 2016 quarter compared to 35.5% in the 2015 quarter. This increase reflects an improvement in product margin partially offset by the impact of product mix.

US wholesale distribution expense as a percentage of sales shipped from our US warehouses were 10.3% in the 2016 quarter versus 10.2% in 2015. The increase reflects the effect of a decrease in sales shipped from warehouses partially offset by a reduction in certain variable expenses.

US wholesale SG&A expenses were $20 million in the 2016 quarter, a decline from $20.2 million in the prior year's quarter.

For our international segment, on a reported basis net sales in the 2016 quarter were $21.6 million versus $22.5 million last year. In constant currency terms, net sales in the 2016 quarter increased by 1.2%.

Growth from kitchenware, e-commerce and export sales more than offset a decline in tableware sales.

International segment gross margin was 34.8 in 2016 quarter compared to 32.3 in the 2015 quarter. Gross margin increased as a result of a reduction in promotional activities for the tableware business which more than offset its sales decline and a favorable change in customer mix for kitchenware products.

International distribution expense as a percentage of sales shipped from warehouses were approximately 13.4 in the 2016 quarter versus 13.8 last year. The improvement reflects an increase in sales shipped from our UK warehouses.

I will continue -- there's a fire drill but I will continue anyway.

International SG&A expenses were $5.3 million in the quarter of 2016 and $7.8 million in 2015. The 2015 period included a charge of $1.5 million related to the change in fair value of contingent consideration attributable to the Kitchen Craft acquisition. The decrease in expense is also due to the foreign currency transaction gains resulting from hedging activity and foreign currency translation rate changes.

For our retail direct segment, net sales were $3.8 million in the 2016 quarter versus $3.9 million in the 2015 quarter. Gross margin decrease of 65.9% in 2016 from 68.4% last year reflecting additional costs to reduce shipment breakage and higher royalty expense.

As a percentage of net sales, retail direct distribution expenses were 28.9 versus 31.4 last year. The improvement reflects a reduction in shipping expenses from fewer product rate case replacements.

Retail direct SG&A expenses were $1.3 million as compared to $1.8 million last year. The decrease in expense was due to a headcount reduction and also a reduction in selling expenses.

With respect to non-segment items, unallocated corporate expenses were 3.2 in the 2016 period versus 2.2 last year. The increase in 2016 was primarily due to acquisition related expenses whereas the 2015 period included reimbursement of expenses for an acquisition not completed.

Interest expense declined to $1.1 million in 2016 from $1.5 million last year as average borrowings decreased and the average borrowing rate decreased due to term loan repayments. The effective tax rate for the quarter was 28.1% compared to 29.3% last year. The lower effective tax rate benefit for 2016 was due to capitalized acquisition costs partially offset by lower taxes outside the US.

Equity and earnings was insignificant for the 2016 and 2015 quarters. In the 2016 quarter a $200,000 gain on sale of the investment in GSI was offset by an equity loss for Grupo Vasconia. Grupo Vasconia reported income from operations of $2.1 million in the current quarter versus $3.9 million last year. The 2016 results primarily reflect a decline in the aluminum division's results.

At June 30, 2016, the leverage ratio was 2.8 times and our liquidity was approximately $58 million.

Looking at the balance of 2016, we currently project full-year sales to grow approximately 3% excluding foreign currency impact. Based upon this expected sales volume, gross margin and distribution as a percentage of sales should be in line with 2015 with a modest improvement in SG&A expenses.

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

(Operator Instructions). Frank Camma, Sidoti.

Good morning, guys. What kind of feedback are you getting from the retailers? You said you are expecting a pretty healthy holiday season so you must be obviously -- it sounds like you are getting good orders there and I was just wondering if you can comment on that?

It is true. Looking at our order flow and looking at our projections, we are very confident on the second half of the year as I mentioned. In general things are okay, the brick-and-mortar retailers are certainly having -- some are having a tough time. This is compensated for by their shift that both they have and by the pure online retailers growing. We are gaining share on the online part of it so we are quite happy about that.

But in general, I wouldn't say retailing is robust by any means. We are still expecting to have a good second half, a really good second half.

Correct me if I'm wrong but their inventory levels are obviously pretty in check. I mean you wouldn't expect them to be heavy on any of these categories I would expect. Over the last couple of years they have been pretty conservative with their levels. Is that still true?

Yes, retailers are certainly conservative with their inventory levels and that hasn't changed. But they certainly expect the suppliers like Lifetime to be able to ship basically next day and we do. We have learned how to do it the right way. We have done it without increasing our inventories. If anything we have been decreasing our inventories by better management and frankly the consulting firm that we have worked with has given us the tools and the ability to significantly reduce inventory even more going forward over the next couple of years without affecting our business and we are certainly going to make use of those tools.

Okay. And just a comment because you mentioned the millennials obviously growing here as a portion which is important in housing numbers obviously are actually pretty good. So ultimately that has got to help you as well, right? As the housing formation assuming rates stay low, have got to help housewares in general. Is that inconsistent with what you have seen in the past?

Yes, historically as new household formations increase, our business and the rest of our industry increases as well. And as you also know, millennials up until now have not been moving out of their parent's homes. So that has been a negative over the last couple of years for us. But they will start breaking out obviously and we see it by the kind of products that are being bought now. They have been projected to be a big force as a consumer over time and I think we are finally seeing that start.

So I think we are kind of enthused not only for this year but really into 2017, 2018, there should be some significant increases in new household formations and that should certainly be beneficial.

Good. My last question just on obviously part of your plan -- I actually don't know how big of your plan is on SKU rationalization. But how much if you look at it -- I'm just talking longer-term, not near-term -- but as you take out those SKUs, how much will that kind of negatively impact your ability for revenue growth because obviously you are going to be taking some out. I'm just wondering if you can comment on that?

We don't expect it to negatively impact growth at all. It is largely just having the right tools put in place to be able to not overlap with SKUs that are not necessary. I mean we have to be. This is something that obviously has to be very carefully done and we recognize that and we will do it.

But as a very quick example, if we have a kitchen tool and gadget program at a retailer, a retailer that is only in the south and we have a program of just tools and gadgets at a retailer that is only in the north, there is no reason why they can't have the same program with maybe some slight tweaks. In the past, we have had different programs so we are not doing that going forward. We are being more insistent on one program and so far there has been no negative out there from the retailers on doing that. They recognize that it will be easier for us to maintain inventories properly for them. Also there is cost saves involved because if we buy one item in bigger quantity it is better for the manufacturer and we get a better cost. So we pass some of that on to the retailers. So it is really all a positive.

We are not looking to lop off part of our business with SKUs just because they are a little bit unprofitable because we have always believed in all of our SKUs being profitable. That is not the case, it is just lopping off the SKUs that we don't need frankly.

Okay, great. Thanks, guys.

(Operator Instructions). I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Siegel for closing remarks.

Thanks everyone for joining us today and as you have heard, we have a lot of plans and product offerings underway to make the second half of the year a really good one as well as to position ourselves really well for 2017 and going forward.

Enjoy the rest of the summer and we look forward to giving you an update in three months. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.