Lifetime Brands Inc (LCUT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Lifetime Brands Earnings Conference Call. (Operator Instructions).

I would now like to turn the call over to 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'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 of its credit agreements; the availability of funding under those credit agreements; the company's ability to maintain adequate liquidity and financing sources at 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.

Thank you, Harriet. Good morning, everyone, and thank you for joining us today for an overview of Lifetime's second quarter results.

Following a robust first quarter, consolidated net sales in the second quarter grew by 1.5% in constant currency, while gross margin increased slightly to 36.5%. These numbers reflect the continuing impact of lower foot traffic in stores and soft consumer spending at traditional brick-and-mortar retailers, somewhat offset by the rapid rise of business online at both pure play online retailers as well as the online efforts of traditional retailers. As I've often said, our business can be impacted on a quarterly basis by promotional activity at our customers. Year-to-date, in constant dollars, our net sales are up approximately 3.3% and our gross margin rose 110 basis points.

As we noted in our press release, the second quarter 2017 financial results include an unrealized foreign currency loss of $1.5 million compared to a gain of $0.2 million in the 2016 quarter. These amounts represent mark-to-market adjustments on GBP versus U.S. dollar, foreign currency contracts related to purchases of inventory. The adjustments will reverse as the forward contracts are settled in the ordinary course of business and, therefore, are not expected to have a permanent economic impact.

We continue to benefit from the investments we made in the first-class e-commerce team, one with proven experience in leveraging e-commerce strategies, product data, customer insights and operational tools. These investments have enabled us to significantly grow our online business and marketplaces, an area that is very important for our future success on a global basis. Our continued implementation of Lifetime Next, our internal restructuring and transformation initiative, is also helping us adapt to the rapidly evolving trends in retail.

During the quarter, we saw further positive impacts from our strategic acquisition of several brands last year to help fill in our existing kitchenware, bakeware and hydration businesses. The increased sales from the acquired brands more than offset the decline in sales of product lines that we are exiting as part of our Lifetime Next initiative. Both in our U.S. and international businesses, we have identified product lines that don't have the potential to be profitable, as business shifts online or where margins are so low that they do not warrant continued efforts in product development.

As I mentioned last quarter, this is a continuing effort that we expect to result in higher gross margins, reduced SG&A expenses per dollar of sales, and a more optimal level of working capital.

With that background, let's review the highlights of this quarter by division. First, looking at our U.S. Wholesale segment, total sales were up 2.2% in the quarter. Our Kitchenware business, which includes kitchen tools and gadgets, cutlery, pantry-ware, cookware and bakeware, had a strong quarter with both sales and margin improvement. We have an exciting pipeline of new kitchenware products coming to market starting late this fall and continuing into 2018, which we expect will help us continue to gain market share in these businesses.

In Tabletop, sales were off in the quarter partly offset by improvements in gross margin percentage. The sales decline was primarily at department stores and a club promotion in 2016 that was not repeated. Upper end dinnerware, especially formal dinnerware, has been in the decline for several years, and as a result, we have shifted our development efforts to more moderate price levels and more contemporary styles.

Our Flatware business, which already markets many contemporary styles, continues to gain market share, and we expect this business to increase in sales momentum as we enter the fall season.

Turning to home solutions, the third category in U.S. Wholesale. Sales were up significantly, reflecting gains in a wide array of hydration products we offer, especially under our Built brand. Home decor, which is also part of the home solutions category, had a significant decline in sales, offset by greatly improved margins as we transition this business towards product lines that perform well both online and in stores and eliminate categories that do not have a strong profit potential. One particular area of strength where we believe we have a competitive advantage is in LED lighting, a fast-growing segment of home decor. Overall, we expect the home decor business to be substantially more profitable this year and in future years due to these changes.

Turning to our International segment, which we now refer to as Lifetime Brands Europe. Constant currency net sales were even year-over-year. As part of our Lifetime Next initiative, we are in the process of combining the Kitchen Craft and Creative Tops business into one entity. In doing so, we have identified product lines that are no longer viable, which has resulted in a rather large inventory reserve this quarter. The Kitchen Craft portion of this business, which is based in the U.K., grew nicely, driven by strong export sales to Continental Europe and to national accounts, which were also up, although the inventory reserve for Creative Tops put a toll on the segment's gross margin. In addition, we have taken several actions, including consolidating national account managers, sales teams and warehouse management and moving the entire organization to our SAP platform.

The Kitchen Craft SAP conversion was completed successfully last week and I'm pleased to report the system is up and running well. We have an internal team with the proven ability to move acquired companies successfully onto our SAP platform. This is quite important as we continue to believe that strategic acquisitions are an important part of our future growth. We now have what we believe is a great management team in place in the U.K., and they are currently focused on consolidating our 5 U.K. warehouses into a single considerably more efficient facility. It will take us another 12 to 18 months to fully see the impact of these changes.

I also want to give you an update on some of the initiatives we have underway to enhance our operations in the U.S. The relocation of our West Coast distribution facility is proceeding smoothly. We expect to begin moving into the new facility in late November and we expect to begin shipping on schedule in early 2018. As part of Lifetime Next, we have proceeded the rolling out of our project management system to all our U.S. divisions. This system is a very important part of our efforts to improve profitability as it will enable us to focus on the development of higher value SKUs and to better manage the life cycle of products resulting in a more optimal level of working capital.

Turning to our brands. In the first 6 months of this year, the business done under our owned and controlled brands in the United States increased to 78.6% of our net sales, up from 76.3% in the prior year. As you know, our business is very heavily weighted to the second half of the year. So seasonally, that's a certainly more important period for Lifetime. While we are optimistic about the company's performance in the second half of the year, we are increasingly mindful of the difficult retail environment in North America and Europe, and accordingly, we have made some adjustments to our guidance for 2017.

Larry will provide those updates in his section. Larry?

Thanks, Jeff. As we reported this morning, the net loss for the second quarter of 2017 is $2.1 million or $0.14 per diluted share, as compared to a net loss of $1.2 million or $0.08 per diluted share in the 2016 period. Adjusted net loss for the quarter was $800,000 or $0.05 per diluted share, as compared to adjusted net loss of $80,000 or $0.01 per share last year. The table, which reconciles this non-GAAP measure to reported results, was included in this morning's release. Loss from operations was $3.1 million for the 2017 quarter, compared to a loss of $300,000 in last year's quarter.

Consolidated adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $1.4 million for the current quarter versus $5.2 million of last year -- $5.2 million last year. Consolidated adjusted EBITDA was $45.4 million for the 12 months ended June 30, 2017 versus $43.5 million for the same period in 2016. For our U.S. Wholesale segment, net sales in the 2017 quarter increased $2 million or 2.2% to $94.8 million. Increases in Kitchenware and home solutions were partially offset by a decline in tableware. As Jeff noted, the tableware decline was due to department store weakness as well as timing of certain customer programs.

U.S. Wholesale segment gross margin increased 90 basis points to 36.5% in the 2017 quarter. This increase reflects a change in customer and product mix, in part from the timing of these certain customer programs. U.S. Wholesale distribution, expressed as a percentage of sales shipped from our U.S. warehouses, was 10.8% in the 2017 quarter versus 10.3% last year. The increase reflects the effect of an increase in facility expenses, labor cost and higher prepaid freight shipments.

U.S. Wholesale SG&A expenses were $21.6 million, which is 22.8% of net sales in the 2017 quarter, an increase from $20 million or 21.6% of net sales in the prior year's comp quarter. The increase reflects, among other things, severance expense, amortization of intangibles for the brand supplies last fall, customer credit insurance, and higher marketing expenses.

For our International segment, on a reported basis, net sales in the current quarter were $19.4 million versus $21.6 million last year's quarter, but in constant currency terms, net sales in the current period increased by approximately $150,000. Growth in Kitchenware, online and export sales more than offset a decline in tableware sales.

International segment gross margin was 31.1% in the current quarter compared to 34.8% in the 2016 quarter. Gross margin decreased due to tableware product reserves, as Jeff noted; higher customer allowance; as well as some increases for product testing and factory audits. International distribution expense as a percentage of sales shipped from warehouses were approximately 12.9% in 2017 versus 13.4% in 2016. The improvement reflects improved labor efficiency, lower freight rates and less use of third-party warehousing.

International SG&A expenses were $7.3 million in the 2017 quarter versus $5.3 million last year. As Jeff noted, a mark-to-market adjustment on foreign forward currency contracts accounted for most of the increase. In addition, there were expenses associated with Kitchen Craft's SAP implementation, which is now live.

Looking at our Retail Direct segment. Net sales were $3.3 million in the current quarter versus $3.8 million in the 2016 quarter, as we continue to refocus our attention on wholesale online sales channel. Gross margin increased to 67.4% in the 2017 period versus $65.9 million last year, reflecting a decrease in promotional activity. And as a percentage of net sales, retail distribution expenses were 33.3% for 2017 versus 28.9% for 2016, reflecting an increase in freight rates.

Retail Direct's SG&A expenses increased $100,000 to $1.4 million.

Now looking at our non-segment items. Unallocated corporate expenses were $2.8 million in the 2017 period versus $3.2 million last year. The decrease is primarily due to lower acquisition-related expenses and professional fees. Interest expense declined approximately $100,000 to $1 million in the current period as average borrowing rates decreased. The effective tax rate for the 2017 period was 39.9% compared to 28.1% last year. This effective tax rate as a percentage of quarterly losses increased due to a shift in jurisdictional mix in the full year's forecasted earnings and the benefit generated from share-based compensation, which was an accounting change. This partially offset -- was partially offset by foreign losses for which no benefit was recorded.

Equity and earnings was $450,000 in 2017 quarter compared to $18,000 in last year's quarter as Grupo Vasconia reported improved net income to $1.2 million from $500,000 last year. And at June 30, 2017, our liquidity was approximately $67 million. As noted in the earnings release, we currently expect full-year consolidated net sales growth of approximately 1.5% excluding foreign currency impact and gross margin improvement of approximately 15 basis points. Based on the sales volume, distribution and SG&A expenses as a percentage of sales should be slightly higher than in 2016.

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

(Operator Instructions) And our first question comes from the line of Andrew Walker with Rangeley.

Just the first one, if we kind of -- you did a couple of bolt-on acquisitions in the past year or so. If we ignored the bolt-on acquisitions, what would the organic growth rate for the quarter and for the full year look like?

We've looked at that. One of the challenges is that when we do some of these bolt-ons, we take some of those brands and we use those brands to replace some of our existing product brands. So it's a little hard to really do an apples-to-apples comparison.

Yes. We go both directions on that. For instance, one of our major customers was using the Copco brand, which is a brand that we acquired. We changed the brand on that product; kept the placement, but changed the brand on the product to be built, which we felt would enhance the sales. So it's very difficult for us to give you a comparison on that.

Okay. And then you guys talked about, a little bit about what drove the SG&A up during the quarter. When we talk about the full year SG&A as a percentage of sales increasing, can you just talk about the major factors driving that up?

Well, if you're familiar with our structure is there's a substantially fixed component to SG&A. There's not a lot of what I would call brand marketing support, market development funds. So to the extent that sales, let's say, were projected at 3% when we spoke last quarter, it's now 1.5%. We don't get a comparable proportional decline in the SG&A run rate. Of course, if sales grew at 5%, of course, we'd have the other impact, SG&A would fall. So it has to do with our SG&A structure. It also applies to distribution as well, where it's substantially about 2/3 of our expenses there are fixed.

And it is also, the -- we've laid off some people and there's additional expenses there as well.

That's right, and there'll be some more later in the year. Some of it qualifies for restructuring because we're eliminating positions as part of the plan. But in some cases, there are just replacements. We're just eliminating ...

Okay. So when you talk about SG&A being up as a percentage of sales on the -- for the full year, you're talking about GAAP SG&A, not kind of adjusted SG&A, because you add back those restructuring expenses in the adjusted numbers?

There's some severance expense that does not qualify as restructuring and would just be recorded in SG&A.

Okay, maybe I'll follow up offline on that. And then...

No, we don't adjust for that.

Okay. And then the last one, can you sort of walk through a little bit the -- just the acquisition pipeline? Is there anything in the works? What are you guys kind of looking at there?

There is a considerable pipeline, to be honest with you, and we're looking at a number of potential acquisitions. We can't comment on them now, but there is a considerable pipeline is all I can say.

(Operator Instructions) And I'm showing no further questions. So with that, I'd like to turn the call back over to Chairman and CEO, Jeff Siegel, for closing remarks.

Thank you again for joining us. We look forward to giving you an update on our many sales programs and operational initiatives after the third quarter. Bye.

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