Lifetime Brands Inc (LCUT) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Lifetime Brands Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Harriet Fried of LHA. Ma'am, you may begin.

Good morning, everyone, and thank you for joining Lifetime Brands' third 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 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 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, and good morning, everyone, and thank you for joining us today for an overview of Lifetime's third quarter results.

As all of you who have been watching the news and reading the quarterly announcements of other household products companies know, it's been a challenging time for brick-and-mortar retailers, which are trying to adapt to consumers' new buying habits by closing stores, reducing inventory levels and adjusting their strategies.

By contrast, pure play e-commerce retailers, led by Amazon, and those traditional retailers with robust online businesses, are doing well. The problem for wholesale suppliers like us is that e-commerce sales, while growing rapidly, are not growing fast enough to offset declines in brick-and-mortar sales. We think that will change. But until it does, there will be pain and we will experience our share as reflected in our third quarter results.

Fortunately, several years ago, we committed to building a sophisticated e-commerce platform and our investments in infrastructure, systems and people are showing great results. In fact, we are well ahead of most wholesale suppliers as evidenced by our growth in e-commerce sales, which was 59% during the quarter and 51% for the 9 months.

If we're able to sustain that rate of growth, and I believe we can, our sales to pure play e-commerce retailers and the online sites of our traditional customers will more than offset the rate of decline to traditional brick-and-mortar stores beginning in 2018.

As an aside, I can tell you that our acquisition pipeline has never been greater as many of the acquisition targets either don't know how or can't compete online, or simply cannot afford to do so.

As retailers adapt to consumers' change in buying habits, they have reduced the number of weeks on hand in stores, and that certainly had a negative effect on our sales for the quarter. In the third quarter, many of our customers reduced weeks on hand of our merchandise. Our largest customer reduced weeks on hand by 22%, even though there was no decline in retail sales.

For the fourth quarter, it appears that that particular customer is reversing the strategy and returning to a more normalized number of weeks on hand. Our expectation is that retailers will be highly focused on maintaining proper inventory levels. I will expect them, just like Lifetime, to be ready to ship products on a more frequent basis. Our distribution warehouses have been designed to do this efficiently.

Even though our gross margin rose, this changing environment impacted Lifetime's performance in the third quarter, resulting in lower revenue and earnings per share than last year's period when we turned -- last year's period when we turned in record revenue, adjusted net income and EBITDA.

In addition, in this year's period, we intentionally limited sales to certain retailers due to credit concerns and took some expensive but worthwhile steps to implement Lifetime Next, our program to simplify and strengthen the organization for growth. Year-to-date in constant dollars, our net sales were up approximately 1%. Our gross margin rose 80 basis points and earnings per share was $0.06 as compared to $0.07 in the 2016 period.

As we mentioned in this morning's release, our third quarter 2017 financial results also include an unrealized foreign currency loss of $900,000 compared to a loss of only $25,000 in the 2016 quarter. These amounts represent mark-to-market adjustments on the British pound versus the U.S. dollar for foreign currency contracts related to the purchases of inventory. The adjustments will reverse as the forward contracts are settled in the ordinary course of business and are therefore not expected to have a permanent economic impact.

Excluding the noncash mark-to-market adjustments, consolidated adjusted EBITDA for the 12 months ended September 30, 2017, was in line with the prior year. With that background, let's review the highlights of this quarter by division.

First, looking at our U.S. Wholesale segment. Although total sales were down by 1.8% in the quarter, had we shipped the orders that we held for credit reasons, our sales would've been approximately the same as the third quarter of 2016. Fortunately, we were able to ship most of those orders in November.

Our gross margin was up by 40 basis points, due primarily to a more favorable customer mix.

There were many other good areas of strength for us as well. Our Kitchenware business remains our strongest category. Even though this business was flat in the quarter, we've used the opportunity afforded to us by the acquisition of a small business in 2016 to enable us to discontinue some older product lines with limited profit and sales potential.

As part of our Lifetime Next reinvention of the company, we are much more focused on the development of products that offer us greater profit potential and, at the same time, are deleting products that offer minimal profitability. The net result over the next year will be a considerable reduction in the number of SKUs we offer, increased profitability per SKU and lower inventory level. We believe we can accomplish this while still increasing sales.

Tableware had a challenging quarter as we continue to face the declines in the amount of floor space being allocated by department stores to dinnerware. I think it's important to note that 25 years ago, approximately 80% of our total business was the department stores; while today, that figure is at 8%.

In addition, Hurricane Maria impacted our sterling silver operations in Puerto Rico where we produce our Flatware. Lifetime's facility lost power for a month. And although there was only negligible amount of damage and our employees, although thankfully are all safe, they had to deal with an immense amount of disruption. Our operations are now fully restored and we are working with the insurance companies to recover as much of the losses attributable to the storm as we can.

One very bright spot in tableware was our acquisition of Fitz and Floyd in September. Fitz and Floyd products range from decorative ceramic centerpieces to functional every day and seasonal tabletop lines. Fitz and Floyd distribution mirrors our own, plus they sell to a number of independent gift and specialty retailers.

In its opening months with Lifetime, the brand has done very well, and we continue to expect the acquisition to be accretive this year. We are pleased that Steven Baram, Fitz and Floyd's President and CEO, joined our Tabletop division.

Sales in our home solutions business, which includes home decor, lunch bags and hydration products, were essentially even with our year-over-year, although a promotion that took place in last year's third quarter shifted this year to the spring of 2017. Even though that impacted our overall results, we gained hydration penetration in the off-price and food channels through trendsetting new styles and patterns.

In order to improve the long-term profitability of the home decor business, we eliminated a large number of wall decor SKUs. As business shifts to the Internet, large wall decor pieces at low retails become unprofitable to ship. We have replaced that business with a proprietary line of realistic flame LED candles that are selling extremely well at retail.

Turning now to our international division, Lifetime Brands Europe. In constant currency, net sales were down slightly by $1.4 million as continued solid performance in Kitchen Tools & Gadgets, led by the strength of the e-commerce channel, was offset by weakness in Tabletop.

As part of our very comprehensive Lifetime Next program, we are now moving forward with a combination of our 2 U.K.-based businesses and expect to realize improvements in 2018 through many initiatives that I've mentioned before, including streamlining of product lines, consolidation of national account managers and sales teams, consolidation of 5 warehouses into a single, more efficient facility and moving Kitchen Craft to Lifetime's SAP platform.

Much of the hard work will be completed by the end of the year. The integrated sales force has already opened over 80 new customers for the Tabletop business and this is just the beginning.

Similarly in the U.S., we are moving ahead with various steps to enhance our operations, including the relocation of our West Coast distribution facility and the rollout of new project management system to all U.S. divisions.

As I've described in past calls, the new system, which is also an important part of Lifetime Next, will enable us to focus on the development of higher-value SKUs and better manage the life cycle of products, resulting in a more optimal level of working capital.

We look forward to the fourth quarter, which has always been an important period for us. In the late Fall, we began bringing in a strong pipeline of new Kitchenware products to market that we believe will contribute to a robust quarter. The initiatives include the expansion of our dishwasher-safe cutlery offerings and the launch of rust-resistant cast iron cookware under the Sabatier and Mossy Oak brands. The new cookware uses a technology that's not a coating. It's chemical free and safe to use with metal utensils and even dishwasher safe.

We've also expanded distribution of Kitchen Tools & Gadgets designed to help home cooks reduce food preparation and clean-up tasks, including easier-to-use can openers, fruit slicers, citrus squeezers and garlic presses, to name just a few. We've added Fitz and Floyd holiday collections, an electric knife sharpener to our Edgekeeper collection and a patent-pending product that makes vendor-style hot dogs in the microwave, which is perfect for both families and college students.

The retail environment is what it is and we don't have the ability to change it. What we must do is to adjust our business plans and actions so we can profitably grow in this new environment, and that's exactly what we're doing. We need to grow market share with traditional retailers while greatly accelerating our growth at e-commerce retailers. We also need to focus on margin improvement, SG&A reduction and improving cash flow.

In my tenure at Lifetime, I've seen a great many changes at retail. What's happening now is probably the most profound, but it's not the first and it's not going to be the last. As a company, we've prided ourselves on a long tradition of reinvention. There's no reason to fear change, but there's a strong reason to fear complacency.

While we're optimistic on the company's performance in the final quarter of the year, the retail environment in North America and Europe is difficult. Accordingly, we have made some adjustments to our guidance for the year. Larry will provide the updates in his section. Larry?

Thanks, Jeff. As we reported this morning, net income for the third quarter 2017 was $4.3 million or $0.29 per diluted share as compared to net income of $6.5 million or $0.44 per diluted share in the 2016 period. Adjusted net income for the quarter was $5.5 million or $0.37 per diluted share as compared to adjusted net income of $7.5 million or $0.52 per diluted share in 2016. Table, which reconciles this non-GAAP measure to reported results, was included in this morning's release.

Income from operations was $9.3 million for the 2017 quarter compared to $10.8 million for the 2016 quarter. Consolidated adjusted EBITDA, non-GAAP measure as reconciled to our GAAP results in the release, was $15.7 million for the current period and $16.7 million for the comparable period last year. Consolidated adjusted EBITDA was $45.8 million for the trailing 12 months ended September 2017 versus $45.6 million for the same period in 2016.

For our U.S. Wholesale segment, net sales in the 2017 quarter decreased $2.5 million or 1.8% to $137.1 million. The decrease reflects challenges at retail, including our delaying of shipments, and in some cases, holding shipments due to concern for certain customer's credit.

U.S. Wholesale segment gross margin was 34.2% in the 2017 quarter compared to 33.8% last year. The increase reflects better customer and product mix, partially offset by unfavorable fixed cost absorption due to a decrease in inventory purchases.

U.S. Wholesale distribution expense as a percentage of sales shipped from our warehouses was 8.4% in this 2017 quarter versus 8% last year. The increase reflects higher freight add expense on higher sales to prepay freight customers.

Wholesale -- U.S. Wholesale SG&A expense was $22.2 million, which is 16.2% of net sales, that's in this current quarter, versus 22 point -- $22 million or 15.8% of net sales in the prior year's quarter. Included in the 2017 quarter were, among other things, employee severance, amortization of the brands acquired in 2016, the inclusion of Fitz and Floyd, and expenses associated with the retail -- our retail credit concerns. This increase is partially offset by a decrease in incentive compensation expense.

Turning to the International segment. On a reported and constant currency basis, net sales in the '17 quarter were $25.3 million versus $26.7 million last year. Sales in Kitchenware products were very strong in the e-commerce channel but it was offset by a decline to the independent U.K. trade channel and for tableware products as well.

International segment gross margin was 31.2% in the current quarter compared to 32.4% in the 2016 quarter. Tableware product sales mix and clearance activity caused the decline, which was partially offset by a 60-basis-point improvement for kitchenware products.

International distribution expense as a percentage of sales shipped from warehouses was approximately 10.8% in '17 quarter versus 12.2% in 2016. This improvement reflects better utilization of temporary labor and lower freight rates.

International SG&A expenses was $6.9 million in the 2017 quarter versus $5 million last year. The 2017 results include an unrealized foreign currency loss of $900,000 versus a loss last year of only $25,000. And as we discussed earlier, this represents the mark-to-market adjustment on the exchange rate of British pounds to U.S. dollar currency contracts related to purchases of inventory. The contracts were settled in the ordinary course. Therefore, the adjustments will reverse, and that is expected to have a permanent financial impact on the company's results.

The balance of the SG&A increase primarily represents currency contract settlement payments and expenses associated with the implementation of the SAP at KitchenCraft.

For our retail direct segment, net sales were $3.5 million in the 2017 quarter versus $3.8 million in the 2016 quarter. The segment loss was $300,000 in the quarter versus a loss of $100,000 last year. This segment's performance largely reflects our focus on growing our e-commerce business through our wholesale customers whose websites garner far greater traffic and conversion than ours.

With respect to non-segment items, unallocated corporate expenses were $3.6 million, down from $4.5 million last year. This decrease was primarily due to lower incentive compensation expense. Interest expense was $1.2 million in both quarters. An increase in LIBOR was offset by the repayment of higher rate term loan debt.

Our effective tax rate for the quarter was 42.9% versus 31% last year. The effective tax rate reflects foreign losses for which no benefit was recorded, a change in jurisdictional mix and forecasted earnings for the year and expense from share-based compensation. Equity and loss was $326,000 in the '17 quarter compared to $138,000 last year. Grupo Vasconia reported a net loss of $600,000 in 2017 as compared to a $200,000 loss in 2016.

At September 30, 2017, our liquidity was approximately $48.9 million. And as noted in the earnings release, we currently expect full year consolidated net sales to be even with last year, excluding foreign currency impact, but a gross margin improvement of approximately 25 basis points. Based on the sales volume, distribution expense and SG&A expenses, excluding any FX mark-to-market adjustment 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) Our first question comes from Frank Camma from Sidoti.

I was wondering if you could quantify the impact of the -- I know they're small, but the acquisition so we can get a feel for the true organic versus nonorganic results in the quarter.

Yes. Well, Fitz and Floyd was very small, less than $2 million or around $2 million. And the others -- remember, when we make acquisitions, we sometimes use the brands. I can give you an example. With the -- one of the acquisitions we made last year, we took the brand and put it on a product that was supposed to be on another brand that we already owned a long time, so it kind of mixed with ...

[transfer on that]. Yes, I wouldn't count that. So was the Fitz and Floyd at $2 million of revenue in the quarter? Is that...

Yes, about that. It's slightly accretive but very little.

We only had that, as you know, for 1 month in the quarter.

It would have been much greater for that month, but -- in the purchase we allowed the seller to take a significant sale that was supposed to be in August and move it to September but...

Oh, I got it. Okay. I got it. I mean, you clearly were, all along -- I'm just thinking back to last quarter -- flashing continued problems. In retail, it seems like the cadence may have caught you a little bit off guard, a little bit, considering the results.

But you also made an interesting comment about the one largest customer with the weeks on hand, which clearly is going to sort of, I assume, somewhat reverse itself in the fourth quarter. Is that a fair statement, that's how you get comfort with the flat results for the year on a revenue basis?

Yes. That's exactly what's happening. It's already happening. We were kind of surprised -- and we were -- and I guess that all happened really in the month of September more than any other period. They decided to turn off the spigot and just wait. I guess maybe their overall store inventories were high, whatever it was. And so our weeks on hand went down 22%, which is a dramatic difference.

And they weren't the only one. We found that across several other retailers as well. But that situation seems to reverse itself. The weeks on hand, I can't give you a number right now. But the weeks on hand tends -- we turn very well at retail. Our products turn well, so the weeks on hand are rather small. They're not a big number. So when somebody reduces it, it's significant.

It impacts it, yes. Okay. So what gives you -- so I get the revenue. But as far as the margins given what's going on, what gives you the confidence in even like for a full year increase of 25 basis points where I have it modeled now?

If I look back at my old model, it would be kind of -- actually right -- almost exactly flat when I adjust the numbers. So what would be that delta, I guess, in the fourth quarter that would give you, whether it's mix, or it's obviously not pricing, but --

No, it's not pricing. To some degree, we've been pretty -- we're pretty good on pricing. Commodities have gone up very slightly, to be honest with you, in the commodities that we deal with. There was a period in the third quarter where some of the factories that we deal with in China were shut down temporarily because of pollution. They've all come back on. And so they're not -- they were down for several weeks, and that did slow us down a bit on some of the inventory levels.

But it's really a -- it's customer mix and -- more than anything else and a focus on eliminating SKUs that are less profitable, which is -- you're going to hear this from me for all of next year -- we are highly focused on really as part of the -- what the consultants did when they came in, they want us to focus on more high-value SKUs and really eliminate a large number of less profitable SKUs that really don't add up to anything in the long run for us. And that's what we're doing.

And Frank, as a reminder, we're -- through the 9 months, we're 80 basis points ahead of last year. So 25 says that fourth quarter will not be as good margin as fourth quarter.

We're more conservative on the fourth quarter because it's -- we just thought -- it's a strange retail environment right now.

Right. I mean, yes, it still, I guess, implies, obviously, a decline in the gross margin in the fourth quarter, I totally get that. I mean, if you're only going 25 basis points. I guess I was just thinking about it from sort of like the very current trend versus the first 2 quarters. I get that.

So I know it's a little hard to measure given that your customers probably don't break it out this way. But what do you estimate the true percentage of revenue or ballpark is currently e-commerce versus traditional bricks-and-mortar, if there was a way to kind of --

Okay. You're right. A lot of our customers don't break it out. Obviously, we do have the pure play, but we don't have the -- some of the retailers don't break it out for us. But we do talk to them about it all the time. So our belief is that it's in the mid-20s at this point.

And what's really interesting to note, if you look at a country like the U.K., which is -- has a much higher penetration of e-commerce sales versus brick-and-mortar sales than the United States, the numbers there are tremendous. We were -- we had our -- the head of our U.K. operations was here this week and he told us that John Lewis, which is the Macy's of the U.K., their online business, they announced, is now 52% of their business and quite profitable.

So there's a -- the dramatic shift that we're seeing is happening worldwide. It's certainly happening in the U.K, and we're taking advantage of it. Our growth in -- e-commerce is our most -- the most important part of our business in the U.K. is e-commerce. So it's something to really understand. And we're about to be very aggressively grow e-commerce in Germany and we're looking at France now.

So we're -- we have a lot to go. But there's no question that the growth is going to come in e-commerce, though brick-and-mortar's not going away. But I believe that e-commerce will certainly move to over 30% of our business and possibly even closer to 40% of our business over time.

That makes sense. And my last question -- then I'll hop off. Previously you had given sort of an estimated range, not really exact timing, on the impact of Lifetime Next of -- I think the savings pretax was around $10 million to $13 million. How do you feel about that number now that some time has progressed?

Well, frankly, I would have liked to see it happen much faster, and it hasn't. One of the biggest components is rolling out a system to handle the life cycle of a product. That took us much longer than we thought it would.

We had to get buy-in by the divisions and the people, which was a little difficult at first because it's a lot of work and it's sort of holding the -- tying their wrists together versus allowing them to go -- help us go for developed products.

We've gotten over that. We've made all the tweaks we had to make to the system to make it really work well and work fast. So we'll get the results in 2018. How much of the results, I'm not sure yet. But a good part of it will be in 2018.

But you think that number is sort of still a valid number based on what you're seeing, like ultimately, not really from a timing standpoint, but --

Yes, absolutely. And we've also found some other ways that we feel we can make improvements other than what was originally planned, and we're working on those as well.

(Operator Instructions) And our next question comes from Andrew Walker from Rangeley Capital.

Just following up on the last question on Lifetime Next. It's just a little surprising to me how long it's taking. I think you guys have been mentioning SKU rationalization since the 2015 earnings announcement. Like can you give me a little bit more on the timeline of when we're going to start seeing SG&A start coming down?

Yes. It's certainly frustrating to me, though. To be very honest with you, when we brought in the outside consulting firm, they did put a rather long timeline on that. We felt internally that we could move faster than what they suggested, and it turns out their timeline was more accurate. So it's going to take time.

We will get like, as I said, significant benefits in 2018. We're working on -- we're doing a lot of things now. But the major part of it, the thing that gives us the most benefit, which is really SKU rationalization and developing systems to develop the right products versus just developing too many products, those only went into -- fully into play in the last 60 days. So it's taking much longer than I thought it would. I'm not happy about that, but maybe we should have listened to them and not been so optimistic on our own.

And just to be clear, a lot of that will come through cost of sales. The substantial increase you see in SG&A year-to-date, most of that -- I mean, a lot of ups and downs -- most of that relates to foreign currency, like almost $5 million, and 3 of it's mark-to-market.

So that's not because of actual spending. There are other things going on. We've added Fitz and Floyd. We have some bad debt and other related things because of what's going on in retail: the implementation of SAP; some severance changes we're making. So some of that is nonrecurring. But this is -- what you see in these numbers through 9 months is not because of things like compensation going up and fast; it's probably flat, if not slightly down year-to-date. So this FX really distorts our expense profile.

Okay. And just quickly, speaking of the foreign currency. So I think this quarter's the first time you guys added back unrealized currency losses into your adjusted EBITDA. Is that how you're going to be reporting going forward?

Yes. In the past, it was -- certainly, last year was immaterial. We didn't focus on it. And typically -- and these are hedges. Plain and simple, they are hedges. But because of the type of contracts where they're participating, it's very hard to get on the accounting rules, hedge accounting.

So we would otherwise, and most -- probably most other companies report this in other comprehensive income. We don't qualify for it. So -- and when we entered into these contracts, we weren't worried about it because it was -- much of it was, we entered into, was pre-Brexit. And the pound was a relatively stable currency. It moved a little bit. And post-Brexit, it's been, obviously, all over the place.

And in fact, the fact that at the end of September, when we did the mark-to-market calculation, the pound was -- exchange rate was like [1.34]. And forecast, bank forecasts [during the year] were probably in the low [1.20s]. So it's been obviously a roller coaster ride. That would be expected.

But certainly, as I think you understand, the mark-to-market will just go away in time because we don't settle these -- we're not going to sell the -- all the contracts. We're going to settle them in the normal course because they actually hedge our -- for the U.K., they hedge our purchases of inventory in Asia, which is denominated in dollars.

That's fine. I was just comparing it apples-to-apples. If these were entered pre-Brexit -- I mean, that would make it seem like you're hedging inventory purchases 18 to 24 months out for these, the resultant losses now? So I don't know...

No. The answer is no. We do go out 12 months. I was just making a point that when we couldn't get hedge accounting, the thought was, okay, so what? The number's really small to call it out. We still can't get hedge accounting. But now the number -- because of the great volatility, the exchange rate really stands out in reported earnings.

Okay. I don't want to belabor the point. And then -- I mean, the last one. Just -- I'm sure you guys are focused on running the business. But as investors in the stock, you look at the stock at like 17 today. Obviously, there was on offer at 20 earlier this year, which I don't know if it fully values the company or not.

But I would just say looking at the balance sheet, once you guys generate cash in Q4, you're going to have -- you'll have a pretty nice balance sheet like some type of share repurchase program with the focus on Lifetime Next cost-cutting. I think that creates a lot of value. So I'd love to hear your thoughts on that type of capital allocation.

Well, we do have discussions on share repurchases with our board on a frequent basis. We haven't made any final decisions yet. It's something we have done in the past. I really don't want to comment on that now until we do make a decision, but it's not something that we would ignore. And if the price of the stock warrants it, we would certainly consider.

Okay. Well I'll just throw one more thought out. I mean, if you turn down an offer at 20 and you're reporting these results today, like, I think repurchasing shares at these levels are -- is in shareholders' best interest and helps justify that turning down the offer at 20. But thanks for taking the call, and I'll look forward to Q4 earnings.

And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Jeff Siegel for any closing remarks.

Thanks again for joining us. We look forward to giving you an update next year on our fourth quarter performance and the many actions we're taking to help Lifetime grow profitably in today's environment. Thank you, all.

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.