Lifetime Brands Inc (LCUT) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Lifetime Brands' First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Harriet Fried, from LHA. Please begin.

Good morning, everyone, and thank you for joining Lifetime Brands' First Quarter 2017 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'll read the Safe Harbor statements 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 under 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 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'd like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thanks, Harriet. Good morning, everyone, and thank you for joining us today. The first quarter of 2017 was another successful period for Lifetime Brands. In constant currency, which excludes the impact of foreign exchange fluctuations, our consolidated net sales rose 5.5% compared to last year's period. Our gross margin increased 220 basis points to 38.8%. Lifetime's strong first quarter results were in line with our expectations and reflect the ability of our portfolio of businesses to perform well in a rapidly evolving retail environment.

The investments we made in the first-class e-commerce team and systems over the last several years has enabled us to deliver strong results, even with the impact of lower store traffic and relatively soft consumer spending at traditional brick-and-mortar retailers. We are pleased we made these investments early as the cost of playing catch-up in the world of e-commerce is extremely high. We intend to continue to upgrade our IT and distribution systems to be able to capitalize on this continuing shift in consumer spending.

I'm excited to say that we are beginning to see the strategic and financial benefits of a number of initiatives designed to accelerate our growth and improve our profitability. Lifetime Next is an important strategic initiative designed to assure that every part of our U.S. business is aligned with our goals. Conceived in late 2015 and implemented beginning in mid-2016, when fully implemented later this year, this program is expected to result in higher gross margins, reduced SG&A expenses per dollar of sales and a more optimal level of working capital. We already have realigned a number of our divisions, reorganized our sales organization, reduced management layers, simplified processes and relocated several key product engineering positions from the United States to Asia.

We are now in the process of implementing a project management system that enables category managers to drive strategic thinking, portfolio rationalization and clarify responsibilities, including enabling the development of higher-value SKUs and the elimination of low-margin ones. We're also undertaking major improvements to our infrastructure, including plans now underway to relocate our West Coast distribution center to a new purpose-built lease facility that will be operational in early 2018 and to consolidate our European distribution from what is currently 5 locations to a new efficient single warehouse location that we expect to be completed in 2019. As we transition to these new distribution facilities, we are very mindful of the ongoing shift of business to e-commerce, and each facility has been designed to be highly efficient in direct-to-consumer shipping.

At year end, we merged our U.K. businesses, Creative Tops and Kitchen Craft, to form Lifetime Brands Europe. We successfully integrated the management of these companies. Creative Tops is already running on SAP platform, and we expect to have all of Lifetime Brands Europe on SAP by the end of the summer. While some of the benefits of these initiatives already are realized, others will be implemented over the next 18 to 24 months. When fully implemented, we expect an additional annual benefit to pretax income of $10 million to $13 million, excluding the impact of additional revenue growth.

Next are the 5 brands we acquired last year, which brought both sales and strong brands that complement our existing portfolio while adding only minimally to our SG&A. Wilton Armetale, Amco Houseworks, Chicago Metallic, Swing A-Way and Copco have all been successfully integrated and contributed nicely to both our first quarter sales and our gross margin. In the case of Chicago Metallic, which greatly expanded our bakeware offering, this great brand has also been opening new doors for Lifetime as the retailers who have long carried it became aware of and interested in our other housewares products.

As a branded consumer products company, one of Lifetime's priorities has been to increase the percentage of sales from our company-owned and controlled brands. We have seen substantial growth in this area over the past several years with sales from owned and controlled brands rising to almost 75% in 2016 as we have eliminated less significant licenses. The acquisition of the 5 brands I just mentioned will strengthen this trend even more going forward.

Our shared service structure is helping us reduce waste and inefficiencies as well as enabling us to make acquisitions with minimal added SG&A, as illustrated by the brands we acquired last year. With that high-level background, I'll run through the highlights of our first quarter by division and then mention some of the important product offerings we have on tap for this year.

Starting with the U.S. Wholesale segment. Total sales were up 6.2%. And within our different divisions, we had many businesses and products that showed good strength and good growth, both in sales and gross margin, even though the timing of some programs has shifted to later in the year, so the full impact of those is not yet apparent.

Our Kitchenware business, traditionally our largest and most profitable business, got off to an especially strong start this year, particularly with the addition of the acquired brands I just mentioned.

In tableware, sales increased slightly for the quarter, but real progress was made in gross margin, which was up across the division. Our Wilton Armetale fine serveware and grillware line made of a unique aluminum-based alloy that helps keep food hot and cold -- hot food hot and cold food cold, continues to be a great addition to our tableware products with a favorable margin. Importantly, our tableware division continued to do well with both pure-play online retailers and the online business done through our brick-and-mortar customers. As I've described in past calls, our e-commerce strategy has been an important initiative for us and results in our dedicated -- and the results of our dedicated e-commerce team's efforts have been especially effective in tableware.

We also had strong results in our home solutions division, continuing the outstanding growth in portable beverageware that we began generated -- generating in mid-2016. Portable beverageware has been the single fastest-growing component of the home solutions division. And to leverage current trends in this category, we expanded our array with a considerable number of innovative new products under various brands. In a new initiative for Lifetime Brands, we also placed a Valentine's Day home decor program at one of our customers this year, and it performed very well for us. We expect to continue these seasonal promotions in the future.

Turning now to our international segment. Sales were up slightly in local currency despite the challenging European economy and continued uncertainty about the Brexit referendum. We are seeing more activity among our major accounts and expect integration and restructuring efforts we've undertaken to have a positive impact as the year continues.

Before turning the call over to Larry, I'd like to some -- to mention some of the important product offerings we have on tap for this year, all of which involve technology -- technological introductions that leverage Lifetime's leading position in Kitchenware.

First, the patent-pending Edgekeeper technology, which we launched in 2015, has been seeing continued success. Consumers frequently have 2 complaints when it comes to their cutlery: that the knives don't stay sharp; and they don't know how to sharpen them. With Edgekeeper, we created a simple-but-effective system that automatically sharpens knives with each use. We have new Edgekeeper products at retail now and expect the collection to be a key driver for our cutlery brands, especially as we continue to build on it with additional products and innovations.

At the Housewares Show in March, we introduced another breakthrough in cutlery technology: KNIFE ARMOR cutlery. Each blade is treated with our proprietary rust-resistant coating, which makes the cutlery dishwasher safe, thereby, adding a new layer of convenience to washing cutlery. The KNIFE ARMOR blades are also forged with high-carbon Japanese steel and are weighted and balanced for optimal control.

Our third introduction, which we demonstrated at our showroom tour in New York City in March is West Blade. This is a patented new technology that revolutionizes grating by incorporating layers of recessed blades that allow consumers to grate in both directions. These new culinary tools will help reduce time spent on food preparation.

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

Thanks, Jeff. As we reported early this morning, the net loss in the first quarter of 2017 was $1.3 million or $0.09 per diluted share as compared to $4.3 million or $0.31 per diluted share in the 2016 period. Adjusted net loss for the quarter was $1.5 million or $0.11 per share compared to $3.4 million or $0.24 per diluted share in 2016. Table which reconciles this non-GAAP measure to reported results was included in this morning's release.

Loss from operations was $1.9 million as compared to $5.2 million for 2016 quarter.

Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $2.3 million for the quarter versus $300,000 for 2016 period and $49.2 million for the trailing 12 months ended March of 2017 versus $42.6 million for the 2016 period.

For our U.S. Wholesale segment, net sales in 2017 quarter increased $5.1 million from $87.4 million. The increase reflects the contribution of brands acquired during 2016. Organically increases in the home solutions category offset declines in Kitchenware and tableware category due to the timing of planned customer programs. U.S. Wholesale segment gross margin was 38.4% in 2017 quarter compared to 35% last year. The increase reflects the timing of planned customer programs and lower ocean freight rates. This improvement is expected to lessen as we go through the year.

The U.S. Wholesale distribution expense as a percentage of sales shipped from our U.S. warehouses was 11.2% in 2017 versus 11.3% last year. The improvement reflects the benefit of increased shipments, partially offset by higher freight add expense.

U.S. wholesale SG&A was $21.6 million or 24.7% of net sales in 2017 versus $20.9 million or 25.4% of net sales last year. The increase is attributable to marketing expenses, IT software to improve efficiencies and intangible amortization related to last year's acquisitions.

For our international segment, net sales in the 2017 quarter were $21.2 million, a decrease of $2.4 million. However, in constant currency, net sales increased 3.4%. This increase in constant currency was due to an increase in tableware sales to U.K. national retailers and Kitchenware export sales. International segment gross margin was 34.2% in 2017 compared to 35.5% in 2016. The decrease in margin was due to a combination of customer mix, merchandising support for our new retail program, the sell-off of a discontinued product line and the impact of a weak British pound. International distribution expense was approximately 11.9% in 2017 versus 12.5% last year. The primary factor is a reduction in facility expense from sublease rental income.

International SG&A was $6.2 million in '17 and $5.3 million in comparable 2016 quarter. The increase is primarily due to an unrealized loss in foreign currency contracts as the British pound strengthened against the dollar in the 2016 period with a comparable unrealized gain as the British pound weakened.

For our Retail Direct segment, 2017 period net sales were $4.7 million on gross margin of 66.7% versus 2016 net sales of $5 million on gross margin of 67.3%. The segment's income was unchanged at $100,000 in both periods as savings from headcount reductions and lower selling expenses offset the lower gross margin dollars.

With respect to nonsegment items, unallocated corporate expenses decreased by $700,000 to $3.1 million in the 2017 period, lower professional fees and lower acquisition-related expenses. Interest expense was $900,000 in the quarter for 2017 versus $1.2 million in last year's quarter, which is attributable to lower average borrowing rate due to term loan repayments.

The effective tax rate for 2017 quarter was 33.5% compared to 35.4% last year. This lower effective rate reflects income derived from lower -- income in low rate foreign jurisdictions as well as a reduction in the liability for an uncertain tax position.

Equity and earnings of Grupo Vasconia net of tax was $540,000 in 2017 quarter compared to equity loss of $150,000 last year. The 2017 period reflects the deferred tax benefit of $200,000, while 2016 reflects a deferred tax expense of $200,000 due to tax adjustments related to foreign currency translation gains and losses. Grupo Vasconia's reported income from operations was $2.4 million in the 2017 quarter versus $900,000 last year. At March 31, 2017, the debt leverage ratio was 1.9x, and liquidity was approximately $60 million. During April, we repaid the remaining balance of our term loan.

Looking at the balance of 2017, we currently project sales -- full year sales, excluding foreign currency impact, gross margin to improve approximately 50 basis points. And based upon expected sales volume, distribution and SG&A expenses as a percentage of net sales should be in line with 2016.

This concludes our prepared comments. Please open the line for questions.

(Operator Instructions) Our first question is from the line of Frank Camma of Sidoti.

Larry, just a question on the guidance number you just gave, real quickly. Did you say about 3% top line, right? And was it 50% year-over-year gross margin improvement -- 50 basis points? I'm sorry.

Yes, I said, yes, 3% growth in sales x foreign currency and gross margin of approximately 50 basis points.

Higher than the prior year?

5-0, yes, 50.

Yes, okay, okay. I just want to make sure. Okay. Yes. So -- and the reason -- so because you have the restructuring -- well, I guess, let's break it down to this. The gross margin was -- I think I went back to like 2012. I think this was the highest gross margin you've had in the first quarter that I could see, at least for the last 5 years or so. And so can we just stay on that for a second? How much of that gross margin was benefited by the restructuring efforts to date?

That's really not a significant factor at all.

Some of the issues that you mention, I think Jeff have called out some product mix issues and stuff like that. Because it's typically like your worst quarter for gross margin. Isn't that correct? I mean, given lower sales level?

It can be. Our gross margin is largely variable. But it -- so it's really because the first quarter tends to have a less favorable product mix than we have in later quarters.

Sure. Okay. And then, so did you mention the -- how much in the U.S. Wholesale was organic growth versus the acquisition driven of the 6%?

Yes. Organic -- in the U.S., organic was down about 1%. But overall, if you think about organic and taking out the foreign currency effect, it was about -- it was absolutely no change in the sales level.

Okay. But just looking at U.S. Wholesale, down 1%, correct?

Yes.

Okay. All right. And since it's a pretty big number, I know you don't give detailed guidance, but the $10 million to $13 million, any way you can kind of give us like a cadence of that? I know you're pretty much spelled out over the next 2 years, so '17 to '18. I mean, is that more '18? Can you just -- maybe if you can give us a little more detail on that.

Yes. I mean, as we've said, these initiatives are largely changing processes, so there's no big charge and then a run rate. So a lot of it are gradual. But 1 discrete item will be in early '18 is when we move to the new West Coast facility. That will be discrete. We'll get there -- we'll get the benefit of that run rate a little over, about $1 million, $1.5 million a year, beginning in early '18. The things that are sort of like process-driven, late '17, probably a substantial portion into '18. I can't really calendarize quarter-by-quarter. But I kind of see it, you didn't see it quarter, you won't see it next quarter. It's more likely, let's say, fourth quarter, maybe I'm being conservative here, and '18. And then by early '19, we should get the full run rate of the $10 million to $13 million.

Okay. It's good. That's very helpful. And on the warehouse issue alone, that will go flow strictly, I would assume, through the distribution line. Is that right, like we're going to model that?

Yes, Frank, that's right. Yes.

Okay. Just a couple more, if I could. What are you seeing, Jeff, like on input cost now that you've kind of benefited from that over the last couple of years, but that's obviously now, I think, been flowing through your inventory since it's now turned, I guess? So can you like comment on what just general input costs there?

They're pretty stable right now. We're not seeing any major fluctuations, either negative or positive. And you're right. We're now getting the benefit of the flow-through, which there was quite a lag time from when we are able to negotiate better prices until it comes through. And as we've mentioned on prior calls, when we make acquisitions and the brands that we acquired last year, our first step is to lower input costs, and the benefit of that really won't be seen for probably until the third quarter.

Okay, good. And probably my last question is just sort of given what's going on, you called out it's been for a while like a challenging retail environment. But how do you feel about like the retailers' inventory levels themselves as far as -- I mean, they've been kind of ratcheted down. So are they at good levels from your perspective?

In our classifications, yes, they are. They have ratcheted down, and certainly, it was somewhat of a negative drive -- a negative factor for the last 6 months or so. But that stabilizes. It is stable now. The retail business is not horrible. It's, I'll just call, a slight funk, if you want to put it that way. And the only thing that makes up for it is, of course, the shift to online business. But it's not a free fall or anything like that. It's just...

Right. It's just moving out of...

The flat to down slightly in brick and mortar, compensated for by the growth on the Internet.

(Operator Instructions) And we do have another question from the line of Chris Lafayette of The Clark Estates.

Wondered if you can talk a little bit about your capital expenditure plans. Are there cash costs that will be flowing through that line item in relation to the distribution build-out and some of the IT investments that you mentioned?

Yes. Our replenishment CapEx is $4 million. We'll probably see for this year, that number will be probably more like $8 million to $9 million, which will cover the things you just mentioned. And then a little bit -- it will be a little higher also in '18 because we'll leave some additional of that CapEx spending related to the warehouse in '19. But I mean, in '18 -- but it won't be -- it will be somewhere between the $4 million and the $8 million to $9 million.

And as far as e-commerce, you mentioned that, that has become a bigger piece of the business. Have you guys broken out how much of the business that is today?

We haven't yet. But I would tell you, it's in the order -- our total e-commerce business, including what's done, what we know what's done through our retail partners, not all of them is at forthcoming. But we believe it's totally somewhere around 14% right now, and that's up dramatically over prior years.

And at this time, I'm showing no further questions. I'd like to turn the call back over to Jeff Siegel for closing remarks.

Thank you. Thanks for joining us today. As you've heard, we have a wide array of initiatives underway to grow our brands and products, while simultaneously increasing our efficiency and profitability. We look forward to giving you an update in 3 months. Thank you, all.

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