Lifetime Brands Inc (LCUT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lifetime Brands, Inc. third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference 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 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 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. Good morning everyone, and thank you for joining us today to discuss our third-quarter 2016 results. We're pleased to have entered the second half of the year, which seasonally is always our strongest. We are off to a very good start and, in fact, we've achieved record third-quarter revenue, record adjusted net income, and record EBITDA. We did this despite an uncertain economic climate in the US and also unfavorable exchange rate fluctuation which impacted the results of our UK subsidiaries, as well as our partner companies in Canada and Mexico.

Our record third-quarter results reflect several major initiatives we have underway that are finally beginning to favorably affect the fundamental way we do business. Since I expect each of these to benefit us even more dramatically in the future, I will run through these first before turning to the details of the quarter. First is the acquisitions that we've already completed this year. We're focusing on acquiring companies with strong brands that are in the same businesses in adjacent categories, or with deep penetration in a specific category, to support our growth.

Since April, we have acquired five brands, all in categories where Lifetime is already well established, with disciplined and (inaudible) approach, and careful not to add to our SG&A. In fact, for all of the acquisitions we've done this year, we've brought on staff a total of only two people. We're rapidly integrating each of the acquisitions and expect them to all be accretive beginning in the fourth quarter. And add even more so in 2017 and beyond as we achieve lower prices from existing factories or by moving production to lower course vendors.

To give you a quick rundown, our first acquisition in April, was Wilton Armetale, which has long been known for its metal serving pieces that are sold in department stores and specialty stores throughout the US and internationally. This brand is a great addition to our portfolio of tableware products and we see many opportunities to accelerate the development of new products under the Armetale name. This 114-year-old brand has been fully integrated into our tableware business and is already growing at a very rapid rate.

In September, we acquired three brands: Amco Houseworks, Chicago Metallic, and Swing-A-Way. Chicago Metallic has been a leader in upper-end bakeware for more than 100 years and provides us with a strong consumer brand and established retail placement in a category where we lacked a strong brand. Amco Houseworks provides us with an established line of stainless steel tools and gadgets which complements our already strong kitchen tool and gadget business. And the addition of Swing-A-Way, a leading brand of can openers for over 50 years, is another great addition to our business. All of these have been fully integrated into our business.

Finally, just last month, we acquired Copco's line of beverageware, tea kettles, and kitchen organization products. Copco is a leader in high-end design and innovation in the important thermal hydration beverageware category, which will add to our strength in a category which is showing explosive growth. In addition, Copco is the largest vendor of tea kettles in North America. This business will be fully integrated by the end of this November, this month.

Second, let me talk a bit about our European operations. At Kitchen Craft, we hired Matthew Canwell, to be managing Director of Kitchen Craft. Matthew, who has been on board for about one month, formerly was the Buying Director at Lakelands, one of the most forward-thinking and innovative housewares retailers in the UK. At Creative Tops, we promoted Peter Murphy, formerly Creative Tops Finance Director, to the role of Managing Director of that business. Matthew and Peter really complement each other and are working together to build the combined businesses.

The sharp decline in the value of the British pound versus the US dollar following the Brexit referendum in June, has hurt the reported performance of both Kitchen Craft and Creative Tops. Both because their purchases are denominated in US dollars, which increases their cost of goods sold, and because for reporting purposes we translate their results into dollars at the current rate of exchange. As noted in our press release, their sales decreased by approximately 7% in the quarter, when reported in dollars, but increased by approximately 5% in constant currency. In time, we expect their financial performance to normalize, however it is impossible to forecast when that might occur.

We're in the midst of integrating our two UK businesses to reduce costs and to accelerate synergies between the two organizations. This has been something we've been planning for a while but we have accelerated the process due to the weakening of the pound. We are in the process of integrating the Management Teams now, a task that we expect to have completed in the first quarter next year. Our next step will be to put the companies on the same SAP platform, which will occur before the fall of 2017. We will be combining certain back-office functions, while keeping each company's customer-facing identity. The last step will be combining warehouses, which is now well into the planning process.

The third, but actually by far the most significant initiative we are pushing ahead with, is Lifetime Next, our drive to accelerate profitability by realigning operating divisions, eliminating complexity, and reducing SG&A. As I've mentioned, we've brought in a prominent management consulting firm to assist us in this project. And in my many years at Lifetime, I think this is the single most important effort we've ever undertaken. It will dramatically improve how we do business and have a significant positive effect on the bottom line.

As you know, we bring to market approximately 5,000 SKUs a year, a very large number for a company our size. We've always been good at managing our products' lifecycle, but by the end of this year we will have in place the methodology and systems to more efficiently manage that process. We will have the ability to better rationalize SKUs and focus more on higher-value, higher-profitability products. We expect a significant return on this undertaking by mid-2017, with full completion by year end.

With that high-level background, I will run through some of our specifics in the third quarter by division. In constant currency, we reported a 6.4% increase in net sales for the period, as many of the programs we described to you in our last two earnings calls began to ship. In the US Wholesale segment, total sales were up almost 7%. And within our different divisions, we had many businesses that really showed great strength. In kitchen tools and gadgets, our largest business, we continue to gain market share, especially with our most important brand Farberware.

In cutlery, our successful patent-pending EdgeKeeper line of products, which are sold under the Farberware and Sabatier brands, and which features sheaths that automatically sharpen knife blades for optimal performance, is doing extremely well. We continue to expect EdgeKeeper to be a key driver for our cutlery business and, in this quarter, we're introducing knife blocks with the same technology built in.

In tableware, we saw exceptional growth in our wire storage and Mikasa dinnerware and flatware programs in the quarter. As I mentioned in our last call, this division has done an outstanding job of developing storage and organization programs that compensate to the declining space retailers have devoted to tableware products.

Finally, in home solutions, our greatest success in the quarter was our growth in insulated water bottles. Hydration is the fastest-growing component of the home solutions division and we're expanding the collection with additional tumblers, bottles, and neoprene totes in our BUILT collection. We're also planning to introduce products that have been successful here in the US into other countries where we think they will do equally as well. As I just mentioned, the Copco acquisition will position us to add even more growth and really makes us an important player in this category.

Turning now to our International segment, sales growth was approximately 5% in constant currency. Despite the challenging European economy and concerns about the Brexit Referendum, both our Kitchen Craft and Creative Tops businesses grew nicely. Interestingly for Kitchen Craft, sales to Germany, France, Italy, and other European countries were very strong, a trend that we expect to continue as sales to online retailers were also robust. In fact, in the UK, a top e-commerce retailer, is our single biggest customer now and has been growing at an extremely rapid rate.

Both overseas and in the US we've been continuing to build our e-commerce strategy to take advantage of the rapidly growing digital marketplace. We have expanded our expertise and capabilities in this area and are beginning to see the fruit of those efforts, which we think will be even more important in years to come.

In conclusion, I'm happy to say that we foresee a very active holiday shopping season, with continued top-line growth in the fourth quarter as a result of our growing brands and product assortment. I will now turn the call over to Larry Winoker for his detailed financial review. Larry?

Thanks, Jeff. As we reported this morning, net income for the third quarter of 2016 was $6.5 million, or up $0.44 per diluted share, a better net income of $5.1 million, or $0.36 per diluted share, in the 2015 period. Adjusted net income for the quarter was $7.5 million, or $0.51 per diluted share, compared to $5.9 million, $0.41 per diluted share, in 2015. The difference between net income and adjusted net income for the 2016 period primarily reflects noncash (inaudible) of $1.3 million, approximately $800,000 net of tax, or $0.05 per diluted share, recorded in this quarter to correct an error in the accumulated appreciation balance related to lease-hold improvements for one of our US warehouses. The table which reconciles this non-GAAP measure to reported was included in this morning's release.

Income from operations was $10.8 million for the 2016 quarter, compared to $9.8 million for 2015. Consolidated EBITDA non-GAAP measure that is reconciled to our GAAP results in the release was $16.7 million for the current quarter and $14.1 million last year. Consolidated EBITDA was $46 million 12 months in as of September 2016, $41.9 million for the same period last year.

Now looking at our US Wholesale segment, net sales in the quarter increased $9 million, or 6.9%, to $139.6 million. The increase reflects an increase in tableware and home solutions products categories, partially offset by declines in the kitchenware product categories. US Wholesale's segment gross margin was 33.8% in 2016 quarter, compared with 34.3% in 2015. The decrease reflects a change of product mix and a shift in product category growth.

As I mentioned, in the current quarter, the Company identified a (inaudible) error in accumulated appreciation balance related to certain lease-hold improvements. Accordingly, distribution expense in 2016 included $1.3 million of additional depreciation expense to properly reflect the accumulated balance. Excluding this expense, US Wholesale distribution expense as a percentage of sales shipped from our warehouses in the US was 8% in the 2016 quarter versus 8.4% last year. This improvement reflects the effect of an increase in sales shipped from the warehouses. US Wholesale SG&A expense was $22 million, 15.8% of net sales in the quarter of 2016 as compared to 22.1%, or 16.9%, in the prior year's quarter. This improvement primarily reflects lower employee-related expenses.

For our International segment, on a reported basis, net sales in the quarter was $26.7 million versus $28.8 million the last year. But in constant currency, net sales in the 2016 quarter increased by 4.8% on growth from kitchenware to e-commerce retailers and export sales, and to a lesser extent higher tableware sales. International segment gross margin was 32.4% in the 2016 quarter, compared to 33.2% in 2015. Gross margin decreased reflecting the weakened pound sterling and, to a lesser extent, customer mix with kitchenware products.

International distribution expense as a percentage of sales shipped from warehouses was approximately 9.7% in 2016 quarter versus 10.1% in the 2015 quarter. This improvement reflects a reduction in freight rates. International SG&A was $5 million in the second quarter of 2016, versus $6.1 million in 2015. This decrease was due to foreign currency transaction gains from hedging activities and the effect of foreign currency translation of the weakened pound sterling.

Now looking at our Retail Direct segment, net sales were approximately $3.8 million in both quarters. Gross margin decreased to 66.9% from 69.2% in 2015 reflecting some shift in product mix. As a percentage of net sales, Retail Direct's distribution expense was 31.6% versus 32.6% last year, an improvement which reflects a reduction in shipping expense from fewer product breakage replacements. Retail Direct's SG&A declined to $1.5 million from $1.8 million last year, reflecting a headcount reduction and lower selling expenses.

Finally, looking at non-segment items, unallocated expense increased to $4.5 million in the 2016 period from $3.9 million last year, primarily due to acquisition-related expenses. Interest expense declined to $1.2 million from $1.5 million last year as average borrowings decreased and the average borrowing rate decreased since the term loan repayments. The effective tax rate for 2016 quarter was 31% compared to 33% last year. This lower effective rate was due to lower corporate income tax rates in the UK as well as a lower blended state income tax rate. Equity in loss was $138,000 in 2016 quarter and $459,000 in 2015. Grupo Vasconia's reported income from operations was $630,000 in this quarter versus $2.1 million in 2015. The 2016 results primarily reflect the decline for its aluminum division's results.

At September 30, 2016, the debt leverage ratio was 3.1 and our liquidity was 49.8 million. And the aggregate (technical difficulty) approximately $21 million under our credit facility financed the acquisition of the three brands from focus in September and Copco product lines in early October. This amount approximates our average annual free cash flow over the past three fiscal years. Looking at the balance of 2016, we currently project sales to grow approximately 3.5% excluding foreign currency impact. Based on these projected sales, gross margin is expected to be 35% to 35.5%. As a percentage of sales we expect distribution should be in line with 2015 and expect a modest improvement in SG&A. This concludes our prepared comments. Operator, we're ready for questions.

(Operator Instructions)

Our first question comes from Frank Camma with Sidoti.

Good morning guys, congratulations on the quarter.

Thanks.

Could you talk about the sales from the incremental acquisition so that we can get the true organic growth number?

Nothing, obviously from Copco, because it is in the (inaudible). It was a fairly small focus product on brands we started -- we acquired in September, the middle of September. So small. It is in the range of about seven less than $1 million. $770 to $750.

- Okay.

And a small amount also for the Wilton Armetale for the period. So, it doesn't really moved the numbers much. Obviously we'll see in the fourth quarter, cause we'll have almost the entire quarter for Copco and we'll have the entire quarter for Focus. We are feeling good about them. Get results.

Okay. Can you tell me about the accounts receivable is a little bit of a spike beyond what I had modeled. Is there a timing issue there? Any color on that?

There is actually a few things. One is a couple of timing issues. One is the timing of when we meet sales in the quarter. If we make them in early August versus September that has impact. If you book some of them in July. The other thing is back in 2014 our collections were lower at the end of the year than they typically were. So we have seen significant -- higher than normal cash collections in 2015.

The third factor that we talked about Frank, you know this, is that Walmart has gone to all of it's Vendors and adjusted terms back almost a year now, ours got extended a bit and that has affected the balance at the end of September. All of it is timing. Most of it is good because volume is up. I can tell you that there's no concern about it. Talked to all the healthiest customers you know that we sell to.

Okay great, I remember that now. As far as the inventory, you're not really seeing any commodity pressures anyway. But you're finally starting to see the benefits of that right? But probably a little offset from these newer product mix might be the lower margins wonder if you can talk about that, or the FX impact?

The new acquisitions that we've made this year we are working on reducing the course and improving margins. But initially our margins are lower than our normal margins. They're still decent, but they are lower than our normal margins. But we should give them normalized at the same margins of a lifetime mix.

So it will probably take six months, because you have to cycle through the inventory. But we will certainly get that done. In general, as you know, commodity prices have declined. They have not been going up at all. We're starting to see some benefit in individual product lines from actions that we took earlier in the year. So our margins in some areas are going up, so we have a mix -- the mix sometimes changes as far as customers, and also in some quarters we have more direct shipments from the Orient directly to customers that bypass our warehouse and we work on a little bit lower margin because those are not through our warehouse. It just changes a bit by quarter but we don't see any pressure on prices right now.

Okay, my last question, Jeff you had mentioned it sounds like you've had a pretty active holiday season. Is that what you are hearing? Is that consistent with what you're hearing from the retailers?

In general retail is not robust, but we've gotten some significant new placement and we expect our business to be strong. Personally, I think the retailers will have a fair season. I don't think they'll have a terrible season, I don't think they'll have a great season, I think they'll have a fair season. There is quite a shift, as everyone knows in business, to online business both for the brick-and-mortar retailers and the pure plate online retailers, this is something we are making sure that we don't miss out on. We're on the forefront of making sure we get at least our share, and maybe more than our share of business as it shifts toward the Internet.

We've proven that we can do it in the UK, which is more advanced than the US in internet penetration. We believe we have the right resources, the team, and the understanding of that to do the same in the US going forward.

Okay thanks guys.

(Operator Instructions)

Thank you ladies and gentlemen.

(Operator Instructions)

I am showing no further questions. I would like to turn the call back over to Jeff Siegel for closing remarks.

Thank you for joining us today. As you've heard we had a multitude of efforts underway at lifetime to expand our array of products and brands and to drive growth and efficiency. We're optimistic about our results for the holiday period and we look forward to giving you an update after the fourth quarter. Thank you.

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