Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Lifetime Brands Earnings Conference Call. My name is Tony, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Harriet Fried of LHA. Please proceed, ma'am.

Good morning, everyone, and thank you for joining Lifetime Brands' conference call. With us today from management are Jeff Siegel, Chairman, President 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 and other risks detailed in Lifetime's filings with the Securities and Exchange Commission. The company undertakes no obligation to update these forward-looking statements. The company's earnings release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. Included in this morning's release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. With that introduction, I would like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thanks, Harriet. Good morning, everyone. Joining me on the call today is our CFO, Larry Winoker. During the quarter ended June 30, Lifetime's business reflected the continuing uncertainty over the state of the economy. With restricted retail sales and caused retailers to maintain the extremely cautious position with respect to inventories that has continued since 2008. Despite the weak retail environment, for the quarter ended June 30, Lifetime's net wholesale sales increased by 5.6%. These gains reflect the inclusion of Creative Tops, our U.K. business that we acquired in November and an increase in our Kitchenware category. We saw gains in each of our major classifications: Tools & Gadgets, Cutlery and Cookware. Our Kitchenware business continues to be a real standout. For the quarter, U.S. net wholesale sales of kitchen products increased by 6.5% and gross margin expanded by 160 basis points, both driven principally by the success of new Kitchen Tools & Gadgets and Cutlery programs we launched in the first quarter. Sales in the second quarter were negatively impacted by the increasingly conservative inventory and promotional posture retailers have been taking in the second quarter of the year. A good example is with our sales to one of our largest customers. For the quarter, our sales for this quarter were off by 40% from the same period last year. However, for the full year 2012, we are confident that our sales for this customer will be up significantly over last year. And this is a customer that's easy for us to predict sales on. In the third and fourth quarters, we're going to roll out a number of exciting new programs, including our Guy Fieri line of frying pans, skillets and stainless steel aluminum and cast iron cookware. All designed to carry on and to build on Guy's…

Thanks, Jeff. As we reported earlier this morning, net income for the second quarter of 2012 was approximately $600,000 or $0.04 per diluted share, as compared to $2.1 million or $0.17 per diluted share in the 2011 period. Adjusted net income for the quarter was $1 million or $0.08 per share -- diluted shares, compared to $1.7 million or $0.14 per diluted share in 2011. Adjusted net income in the 2012 period excludes a loss in early retirement of debt related to the repayment of $10 million and the company's term loan. And expense related to retirement benefit obligations. Adjusted net income in 2011 excludes the equity in earnings of an entity that discontinued the sale of products during late 2011. Income from operations was $2.2 million for the 2012 quarter as compared to $4.4 million last year. Consolidated EBITDA, a non-GAAP measure that is defined and reconciled to net income in our earnings release was $5.6 million for the current quarter, and $7.5 million for the period of 2011. Consolidated EBITDA for the trailing 4 quarters ended in 2012 period was $39.7 million versus $41.3 million in 2011. For our Wholesale segment, net sales for the second quarter of 2012 increased 5.6% to $91.1 million. The increase reflects the inclusion of Creative Tops, our U.K. business acquired last November, and the success of our Kitchenware programs. These increases are partially offset primarily from a decrease in the home solutions product category. This decline is largely attributable to an industry-wide reduction in floor shelf space allocated to home décor products, which are included in Home Solutions. In addition, sales of Tabletop products also declined. Wholesale segment gross margin was 36% in the 2012 quarter compared to 36.2% in 2011. Improved margin in the Kitchenware category was offset by lower margin…

[Operator Instructions] Your first question comes from the line of Nick Halen of Sidoti & Company.

First question I had was, just in terms of the jump in SG&A. I know you mentioned higher expenses tied to Creative Tops expansion plans. I was wondering if you can elaborate on that a little bit. And I guess, what exactly are you guys working on with Creative Tops? And I guess, how do you plan on building out that business right now?

Yes, that -- we're very, very happy with the management of Creative Tops and the direction they're going. And the business in general is very strong for us. We are making several investments besides the fact that we institute an SAP system, which we very successfully did at the beginning of July with no hiccups, and is running perfectly. In addition to that, we are moving into another warehouse adding an additional warehouse that they will need over the next couple of years but we felt it was prudent to do it now. In addition to that, we're investing in a number of people and travel. Their business, up to now, has been primarily a Tabletop business. And we want to make them more of -- a company more like Lifetime U.S. and build the Food Prep into the business, which is the biggest part of our business and the most profitable part of our business. And we are investing in people, and systems and everything else to do that. We are getting good results I mean, we're getting placements of Food Prep items into the Retail trade there, they never had before. And it's looking like a very, very good move but it is taking quite a bit of investments on our part.

Okay. And now on the Savora line I know on the last call, you mentioned that shipments were going to begin probably in the third quarter. But it's looking like, now maybe towards the end of the year, is -- I guess, is that fair to say? And I guess, what made you change the timeline of that?

No, there is no change in the timeline. It will begin in the third quarter. In the U.S. and several other retail -- several retails outside the U.S. For instance, Creative Tops has secured a major program at John Lewis, which is the largest department store chain in the U.K. That's going to be, over time we believe it will be a very important line for us on an International basis. We intend to run it all over the world, actually. And in addition, the Guy Fieri line, which is going to be very important to us in the U.S, we also will begin, late in the third quarter, to ship that line.

Okay. And now, just lastly for me. I guess, the jump in the inventory in the quarter, is that mainly due to the new product rollouts that are going to be coming out in the next 2 quarters?

Yes, it is. We have a lot going on and a lot of new lines and we need the inventory to support that.

Your next question comes from the line of -- from Lee Giordano of Imperial Capital.

You mentioned on the call that your sales, a quarter up, by about 40% from one of your largest customers. Could you just clarify, was this a timing shift? I mean, it sounds like they're being conservative on their inventory buzz. But should we see that ramp back up in Q3 and Q4? I just want to get some clarity on that.

Yes, it's absolutely a timing shift. If their business is the same in Q2 as it was last year it would be a significance difference in our earnings. But unfortunately, they shifted. This particular customer is one that we have a very, very good handle on the rest of the year. We will be up substantially and -- for the year, substantially, with this customer. And even though we were down 40% on the quarter. This will probably be the largest increasing customer we have for the year.

Great, okay. Got you. Okay. And then, just secondly on the home décor business. It sounds like the retailers are exiting in the space or shrinking it significantly. I mean, what's your overall long-term view on home décor? Is it a business that you're going to maintain and look to grow? Or is it really just to stabilize? I guess, what's your overall view of that longer-term?

Well, we don't expect near-term growth, that's for sure. But what we are doing with the business, and what we've said in a number of calls, we are converting the business into more of a branded business using the Mikasa and the Pfaltzgraff brands. It's been very successful where we've placed it, now we have to expand it a bit. To really go on with that. The area that was suffering in is the unbranded home décor or branded with brands that are not important to consumers -- that we have an Elements brand, and a Melannco brand that consumers really don't know. Retailers know it but the consumers don't know those brands. And that's less expensive home décor, very competitive crowded field and a shrinking retail base. So it's really just not a good place to be. So our goal with that business is to move it up a couple of price points -- which we've been doing with the Mikasa and Pfaltzgraff brand, and to expand that distribution. Not only in the U.S. but around the world using that -- those brands. It's a different type of home décor business that we're heading towards.

Got it. And then, Larry, just the equity and earnings of World Alliance, when did that -- when was that discontinued last year? What month?

It was November, approximately.

Okay. So we're still going to comp against that in the third quarter?

Yes. I think we picked up almost 12 in the fourth quarter. So not much, if there was anything, in the third quarter.

I don't think it was significant, though.

It was up $300,000...

Well, I think it's $300,000 for the fourth quarter.

$300,000 in the fourth quarter. And nothing in the third you're saying?

I think that's correct if you check. But I don't -- I think it could go up then.

Your next question comes from the line of Gary Giblen of Aegis Capital.

Building on one of their previous questions, I mean, are you thinking that the holiday season will be less good than you did 3 months ago? Or is it all the timing factors such as what we discussed in that one particular case where you were down 40% with a customer that you're going to be up handsomely with for the year?

Strictly timing, Gary. Our expectation right now is that the holiday season will be considerably stronger than last year for us. Overall, economy -- don't know -- but it looks right now that we will have a very strong holiday season.

Okay. So even though retailers are pulled back on -- destocked, somewhat, even beyond the home deck, you don't think that will determine what they do in -- for the holidays, right?

No, we've seen -- this pattern has gone on for a couple of years now. The second quarter we've been seeing at retailers, they're holding back. It's not a quarter that's very important for them. They don't want to make investments in that quarter, and they don't it. In the first quarter, you get the rollouts of new programs, very few new programs roll out in the second quarter at any retailer. And then in the third quarter, you get additional rollouts of new programs for the full season, and then you have the fourth quarter which is Christmas. So really, the one that's left beyond is the second quarter. We could chase more business in the second quarter, but it's not a profitable thing to do. So we don't do that. The retailers don't want to invest their money in promotions in the quarter and they would be very happy if we were willing to do that. They would buy more goods to support it, but it won't be a profitable way to do it. So we won't do that.

Okay, understood. And then, with the particular retailer whose well-publicized disruption -- that's disrupted a lot of people, I guess, including your Tabletop business. I mean, is that problem resolved now? Or is it to be resolved?

No. There is one large retailer in the United States, I don't want to name names but they're having a difficult time and we are suffering along with them. The good thing, I guess, for Lifetime is that it's less than a 3% custom for us overall. So it's not a disaster. And we'll hopefully make it up next year, but I would not count on making it up this year for that customer.

[Operator Instructions] Your next question comes from the line of Brian Freckmann of LS Capital.

I may have jumped on just slightly late. The customer you referred to that was down 40%, did you put into any sort of dollar terms what that was?

Almost $3 million.

$3 million of top line. Okay, got it. Second question that was discussed. The inventory levels were up and your statement with that sort of in preparedness for third, fourth quarter. Care to discuss, maybe kind of, what the gross margin expectation should be given what's in that inventory -- given what you've talked about certain products have lower margins, certain having higher ones. What are your expectations for that inventory right now? Should they be in line with current quarters or historical?

I think it looks like our margins are going in the right direction. A part of the inventory increase is at Creative Tops also, keep that in mind. That's $6 million of the increase, is inventory at Creative Tops, which we didn't own last year. So there's obviously, that's a business that needs inventory like any other business. Our margins are looking pretty good. We had -- our margins in home décor were weak in the quarter, but our margins in the key areas, or the most important areas for us in Kitchenware and Food Prep items were up considerably, doing very well.

Okay...

Mind if I interrupt? Excluding Creative Tops, the inventory is up 4%.

Okay, okay. X CT up 4%, got it. Okay, right, that sort of tracks for revenue and so on and so forth. On the operating margins someone did ask you -- or on the, I guess expense line, someone did ask you about that line item. Care to sort of discuss the leverage in that? I mean, you guys are making some investments now. How should we think about that? Is it just to grow the business or in general sense and then, that will continue to go on through that level or do you expect to leverage that sort of 2012 investment in 2013 getting margins back up to sort of the numbers you talked about in prior calls?

Yes -- no, we do expect to continue making investments in Creative Tops this year, but we expect those investments to bear fruit in 2013.

Okay. So we should probably see that number sort of settle off and you guys can probably leverage the margins -- okay...

We're doing things to build this into a sizable business. Like I said, we're very, very happy with this acquisition and we want to make sure that it goes, and continues to go, in the direction that we like it's going in right now.

And then finally, just kind of on the back-half of the year, you guys are sort of more in the execution stage of filling for holiday. Back, sort of, to that same question, I mean, you've talked about strong holiday season, we'll wait and see. But you guys sound hopeful. Is there going to be a pretty solid amount of SG&A for expansion? Or if we were modeling revenues up in the third and fourth quarter year-over-year, should we see some of that drop to the bottom line in a greater fashion than we didn't see last quarter -- this current quarter? Or how should we think about, kind of, in general modeling, you've given us a hint as to the top line. I'm sort of looking for a little bit of hint as to the bottom line?

I mean, so Brian, you're talking about the U.S. business now right?

Yes, yes. I mean, you've talked about a strong holiday. Your revenues are up year-over-year, obviously what -- you can make an assumption that given what you said about this customer, this $3 million plus sum in the third quarter adding strong holiday, I can make an assumption, only mine, that the fourth quarter at least on the revenue line is up. Obviously, in the second quarter, you guys spent a little bit more than I was expecting on the SG&A line. And so I'm just kind of curious as to how should we think about specifically SG&A line, potentially in the third and fourth quarter?

So let's put aside Creative Tops, look at the U.S. business, we should see a pattern similar to prior years. Our SG&A is largely fixed, we don't have a lot of what I call brand support. It's mostly in the top line, the money that we get through our customers. So you just see it goes up because we have more incentive compensation we accrue. Some maybe -- some work through Apple, UPS, those types of expenses. But you're not going to see -- we get the benefit of leverage, you won't see a big -- you'll just see the seasonal movement of SG&A, which is fairly modest relative to the substantial increase you'll see in top line.

Okay, okay. And then finally, I mean you guys have started to pay down some debt, which is nice. And I'm sort of thinking in 2013, if your investments pay off, your EBITDA should start to reaccelerate. What should we -- how should we think about giving your, probably, leverage ratio hopefully in '13, will even be below 2 4 [ph]. What are you guys comfortable with? What do you sort of think about leverage ratio, the debt, so on and so forth?

Well, we're quite comfortable, I think you can see from the pricing of the transaction, our lenders are, also. We have historically generated I think a reasonably good level of cash flow and we'll use that cash flow to temporarily reduce the revolving credit facility. We talked about growth and how we grow this company. And Jeff's talked a lot about international opportunities, so we would certainly not pay down the term loan any faster than is required.

There are no further questions at this time from the listening audience, sir.

Okay. Well, thank you for joining our call today. Despite the weakened and continuing weak economic environment, we look forward to a good second half based on the already confirmed rollouts of new Kitchenware, Cutlery, Cookware and Tabletop programs. It would be nice if consumer confidence improves, however, we believe we are well-positioned to deliver improved performance in the second half of the year even if it does not. We hope you enjoy the rest of your summer and look forward to giving you another update this fall. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now all disconnect and have a great week.