Lifetime Brands Inc (LCUT) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lifetime Brands Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

Also, as a reminder, this conference call is being recorded.

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' call. With us today from management are Jeff Siegel, Executive Chairman; Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer.

Before we begin, I'll read the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The statements regarding the company and its consolidated subsidiaries 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; the possibility of impairment to the company's goodwill; changes in U.S. or foreign tax law and policy; changes in economic conditions, which could affect customer payment practices or consumer spending; the impact of changes in general economic conditions on the company's customers; expenses and other challenges relating to the integration of the Filament Brands business and future acquisitions; changes in demand for the company's products or in the company's management team; the significant influence of the company's largest stockholder; fluctuations in foreign exchange rates; changes in U.S. trade policy or trade policies of nations in which Lifetime or its suppliers do business; shortages of and price volatility for certain commodities; significant changes in the competitive environment and the effect of competition on the company's market including the company's pricing policies, financing sources and an appropriate level of debt; and other risks detailed in Lifetime's filings with the SEC. The company undertakes no obligation to update these forward-looking statements.

The company's earnings release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. Included in this morning's release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP.

With that introduction, I'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 the call today. As we noted in this morning's press release, the integration of Filament Brands, which we acquired in March, has been proceeding very smoothly. In fact, we're ahead of schedule in both our implementation timetable and the cost savings we are realizing.

We're continuing to see the many value-creation opportunities we previously described from combining Lifetime and Filament. Over time, these include gaining access to each other's customers worldwide, offering a broader product range, expanding out innovation capabilities and realizing significant supply chain and distribution synergies. We're excited about the path we've embarked on and what it will be for our customers, shareholders and employees in the coming years.

As I said in the past, comparing results with prior quarters can be misleading as there is variability in mix and programs from year-to-year. In 2018, we will be rolling out most of our new programs and promotions in the second half, which will have a positive impact on our third and fourth quarter performance.

The retail world is rapidly changing, and we believe we are well positioned to thrive in this changing world. We have the best stable of consumer brands in the industry, which has enabled us to receive the largest single order in Lifetime's 73-year history, which we will be shipping this fall. This order represents the customer's first order of its kind for any tabletop company.

I'll now turn the call over to Rob to update you on our activities during the quarter and our financial outlook for 2018. Rob?

Thanks, Jeff. As you can imagine, the last few months have been busy ones as we took steps to create a strong and unified company. Despite the challenging retail environment, they've also been productive ones.

Our team has been focused on 2 priorities: operational integration and the identification and implementation of cost savings, which I will discuss in a moment. We've been combining the Lifetime and Filament organizations as rapidly and efficiently as possible, including reorganizing sales and marketing, streamlining our supply chain and eliminating overlapping G&A. This has been our #1 priority as we are focused on a seamless integration with no disruption to our retail customers and consumers.

With only 4 months passed since we closed on the transaction that has transformed Lifetime Brands, we are pleased to report that we are ahead of plan regarding both the amount of identified cost savings and the timing of the implementation of those savings. We are now on track to achieve $10 million annually, with the full amount to be realized in 2019. This represents an increase of 20% as compared with our original targets that we disclosed upon consummation of the transaction. Of note, this year, in 2018, we expect to realize more than $2 million of these efficiencies.

As we shift from achieving our primary goals of integration and realization of cost savings, we are working towards a repositioning of our product portfolio to improve our profitability and lay the groundwork for the many new opportunities that we believe our larger, more diversified business can take advantage of.

Additionally, we have embarked on establishing the appropriate processes and business model to both fully take advantage of growth opportunities in our existing markets and pursue enhanced growth opportunities within our sector. These efforts are focused on internal opportunities, including further penetration of the commercial and international markets, with a focus on improving the profitable growth opportunities that are within our existing channels and looking where we can expand our footprint to allow for enhanced margin and top line growth.

Additionally, our team has begun work on optimizing the overall structure and performance of our existing business. This will yield incremental synergies above the $10 million that I just discussed.

Further, while 2018 is and will continue to show a meaningful improvement in the profitability of our European operations, we are working on a plan to accelerate and improve the growth of this strategically valuable business unit, which will also become the hub of Lifetime Brands' international operations.

An example of some of the already implemented changes in our European operations is the addition of 2 established branded lines to our product offering, both of which are higher-margin and growing. Together, these 2 lines will add approximately $4 million of annual revenues and replace low-margin offerings that we are eliminating.

That brings me to the second quarter performance and our outlook for the rest of the year. The second quarter remained challenging for our business, and while our market shares have remained steady to slightly up, our shipments were soft.

Looking at our end markets, we have experienced a mixed bag. We continue to see growth in certain of our end markets, including strong growth in e-commerce and in some channels of brick-and-mortar retailers. At the same time, the trends in certain other channels of brick-and-mortar retailers have been mixed, with some channels experiencing declines.

However, considering the seasonality in our business and the concurrent timing of the many programs and promotions we're launching in the second half of 2018, we are reaffirming the outlook for the full year that we provided in May. That guidance was based on both organic growth and on top and bottom line synergies created by the combined Lifetime Brands, and we remain on track to achieve these results.

I'll now turn the call over to Larry to provide more details on our second quarter financial results.

Thanks, Rob. Net sales in the 2018 quarter increased $31.3 million to $148.7 million. The increase reflects primarily the acquisition of Filament, which added $29.3 million.

For U.S. Wholesale, organic sales were about even with the 2017 quarter. This reflects a decline in kitchenware sales, reflecting our decision to not pursue low-margin business that was done in 2017 and the planned timing of Pantryware sales. These declines were offset by the success of Built product launches and houseware Tabletop sales.

For international, sales decreased by $300,000 on a reported basis and $1.5 million in constant U.S. dollars. The decrease in constant currency reflects the closing of the Netherlands operations in 2017, which were at low margin, and some weakness at brick-and-mortar retailers. This is partially offset by an increase for e-commerce sales. Of note, while international sales declined, the impact on its contribution margin was offset by higher gross margin percentage and a benefit of the consolidation of the Netherlands business into the U.K.

Gross margin was 35% in the 2018 quarter or 35.7% excluding the step-up of Filament's inventory acquired in the acquisition. This compares to 36.5% in 2017.

U.S. Wholesale gross margin was 34.2% in the 2018 period versus 36.5% last year, reflecting strategic promotions and the sale of excess inventory in the tableware products category.

For international, gross margin improved 220 basis points to 33.3% from favorable customer and product mix. Also, in the prior year, there was a high level of inventory reserves established.

Distribution expenses as a percentage of sales shipped from our warehouses, excluding a $200,000 charge associated with the West Coast distribution center relocation and Filament expenses, were 12% in the 2018 period versus 11.8% in 2017.

For the U.S., excluding the relocation and Filament, distribution expense percent improved by 10 basis points to 10.7%, reflecting fewer prepaid freight sales and improved labor efficiency, partially offset by lower shipments from company-managed warehouses. International expenses increased on higher labor and facility expense as well as higher freight expense on increased sales from the U.K. into Continental Europe.

SG&A expenses were $40 million in the second quarter of 2018 versus $33.1 million in the 2017 period. U.S. Wholesale expenses increased by $8.3 million from the inclusion of Filament, including $2.6 million of purchase accounting amortization and $900,000 from the acquisition of Fitz and Floyd. International SG&A expenses decreased by $3.4 million, of which approximately $3.6 million is a change in the mark-to-market valuation of foreign currency contracts. In constant dollars, SG&A declined $600,000, offset by strengthening pound sterling.

Unallocated corporate expenses increased by $2.3 million from Filament acquisition expenses and high professional fees and insurance expense. Interest expense was $4.7 million in the 2018 quarter as compared to $1 million in 2017, reflecting the financing obtained to acquire Filament. The effective tax rate for the 2018 quarter was 22.1% compared to 39.9% last year. This lower effective tax rate reflects the reduced U.S. corporate statutory income tax rate, partially offset by nondeductible expenses.

We continue to generate healthy cash flow. Adjusted EBITDA was $69.2 million for the 12 months ended June 30, 2018. And as of quarter-end, liquidity under the revolving credit agreement, including cash of $6 million, was approximately $90 million.

As you know, the U.S. government has imposed tariffs on a large range of products sourced from China. While minority of our products are currently included, it is unknown exactly what will be implemented and the duration of such tariffs. However, we are proactively taking steps to mitigate any financial impact such tariffs could have on our business.

Since Lifetime is the largest customer for most of our suppliers, we believe that our vendor partners will work with us to attempt to minimize the effects of any increased tariffs. In fact, we have already begun discussions to do so with many suppliers, and we will be working with our retail customers to adjust pricing wherever necessary as well as working towards getting our warehouses bonded in order to avoid paying any duty until we ship merchandise to our customers. We are closely monitoring this situation and will take action as necessary.

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

(Operator Instructions) Our first question comes from Frank Camma of Sidoti.

I want to start on something that Larry said just so I don't forget to ask it. But what does bonded mean in the sense of the Chinese factories? And how does that help on the tariff side?

Yes. So if you look at what's called in a free trade zone, you bring goods in, you don't have to pay the duty until you actually sell it to your retail customer. So it's really just -- it's cash flow. Back when you -- some companies do, where they bring goods into , let's say, the U.S. and then ship them out of the U.S., they avoid paying the duty altogether rather than paying it and trying to obtain a refund.

So Frank, we're just getting our warehouses certified correctly so that we do not have to pay any tariffs until we actually ship them out of those warehouse to us.

I got it. Okay. So you're preparing for it. So the other question is just on the current financials. The gross margin decline was obviously a lot more than I was looking for. But then, there was the step-up you called out, Larry. So that would have been 35.7, is that correct?

Yes. Consolidated, yes.

Consolidated. So how much more of that step-up do like -- how many more quarters will it take to burn that all?

Yes. There's only -- there's about $300,000 left, and it should all be amortized in Q3. It's about $1.5 million in total. We've burned off about $1.2 million.

Okay. So that's -- so the bulk of it went through Q2?

Yes.

Okay, okay. All right. Now I know, obviously, your product mix changes quarter-to-quarter. Was there anything in Q2, though, that would have weighed, perhaps, on the gross margin as far as product mix or channel-specific? Is there any color you can give us on that?

Yes. I think, as you said, there's different parts. Of our business in terms of the mix in this quarter, we had more sales of our lower-margin part of our tableware business, which impacted the overall mix in the particular quarter. That wouldn't hold for the whole year.

Okay. But did you say the large order -- maybe I misunderstood this or misheard this, but the large order that's coming in Q3, is that also in Tabletop? Like also with...

It's a combination of dinnerware, glassware and metals.

So it's like a tableware.

It's like a set that you're selling then, obviously. So does that mean that, that will weigh on your gross margin in Q3?

It will have an impact on our gross margin in Q3. And the gross margin dollars will be very high...

Will be good, right? Not necessarily the margin. But Q3 is sometimes -- I mean, I guess, it bounces around a lot, season to season. And you'll get a benefit from -- if you look at it sequentially, you will get a benefit from you'll never longer have the step-up. I'm just trying to figure out like, given that you're reaffirming guidance, you obviously think the second half of the year is not going to be -- like the gross margin is not going to be as bad as the reported Q2 number. That's a fair statement, right?

Yes. So yes, what we're expecting to occur is consistent with when we issued guidance. So the mix is consistent with when we issued guidance.

Okay, okay. And the growth in Retail Direct, is that purely because of the Filament numbers flowing through the Retail Direct?

Yes.

Okay. And are there any new programs either at Filament or legacy Lifetime that could get the Retail Direct numbers growing organically? Like I know that's one thing that Filament worked on in the past. So are you working on those programs now?

We are very actively working on the whole e-commerce area, so not just direct, but through pure-play players and through our omni-channel partners. So that's a big growth area for us. Some of those are seeds, and some of those will have more near-term impact.

Can you talk about the growth in e-commerce during the quarter? Sometimes you call that out. I don't know if you called that out this time.

We didn't. I don't think we have.

Yes. Larry can look up the numbers.

Yes. The one thing I'll add to that, the growth in e-commerce is coming both from the pure-play and from the brick-and-mortar. In fact, one of our key brands, we were told last week at one of our largest customers, a brick-and-mortar customer, and one of our key brands, more than 50% of the sales is now online at that customer, and that's a brick-and-mortar customer.

I believe. I was in Bed, Bath & Beyond trying to order one of your products, and they directed me to the online system, which is kind of interesting, in the store, and then shipped it to my house. So I assume that counts as an online order for them when they do that.

It does.

Absolutely. And that's rapidly growing as -- if you look at -- as Jeff has pointed out in the past, department store at one point was 85% of our company, and today, it's 5% of our company. But one major department store customer of ours is growing very nicely online and our business is growing dramatically online. Further, Frank, in answer to your question, Larry did a quick math and looked it up. 18% for the quarter was e-commerce.

Yes. And that's apples-to-apples for the acquisition of Filament.

Okay. And that's percentage of sales, is that? Or is that -- okay.

Yes. That's the e-commerce growth, yes.

Oh, that's the growth rate, growth rate? Okay, okay.

No, no, that's the percentage of sales.

That is the percentage of growth?

Growth, yes. So E-commerce grew by approximately 18%. Apples-to-apples.

Organic.

Yes.

Organic. Okay. All right. Good, good. Okay. And I guess, the last question, you kind of touched on, but just sort of give us an update on, given the tariffs like what's going on with underlying input -- kind of a two-part question. First, the underlying input costs. So the steel cost, the resins, et cetera, that go into these things and like what you're seeing there in China.

The resins and metals are pretty much flat from the beginning of the year. They do go up for a while, but they came back now, so they're pretty much flat. And the U.S. dollar has gained strength against the RMB.

Right, right. So that's helping you. So that's helping you on the supply cost, right, to some extent. Do you normally -- some of these contracts are on dollars. Some are in RMB, though, right? Or is it mixed?

Yes. They're on dollars. They're all on dollars.

But you can negotiate if it drops? Or how does that work?

Yes. And with the dollar strengthening versus RMB, our cost of good declines.

Okay, got it. I guess, the last question for me and I'll hop off, is just on the truck -- just the general trends in freight for my consumer products companies are pretty steep. Everybody's kind of experienced that. I haven't heard you call out any, like, problems there. Can you talk about that a little bit?

Ocean freight you're talking about? Or is it something else?

More trucking domestic, just getting the product. Or is it because you ship direct to the warehouse of the Walmarts of the world, is that why you don't get that type of creep in your distribution?

So we have a fair amount of sales that we sell that as BI, picked up in China. That has no impact on us. And then, if you look at we ship out our warehouses in the U.S., most of that is picked up at our warehouses by the customer, so FOB warehouse. Therefore, it wouldn't impact us as well. So that's why we don't talk about it. It doesn't really have an impact on us.

(Operator Instructions) I show no further questions in the queue. At this time, I'd like to turn the call over to CEO, Rob Kay, for closing remarks. Please go ahead, sir.

Okay. Thanks, again, for joining us today. As you've heard, we're taking many steps to build a bigger, better and more profitable Lifetime Brands. We're working well as a team and are committed to realizing synergies and delivering strong growth and shareholder value. We look forward to giving you an update on our progress in our Q3 call in November. Thanks. Goodbye.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.