Lifetime Brands, Inc. (LCUT) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2012 Lifetime Brands, Inc.'s Earnings Conference Call. My name is Rachel and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Harriet Fried, company's Investor Relations counsel. Please proceed.

Good morning, everyone, and thank you for joining Lifetime Brands' 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 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'd like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thanks, Harriet. Good morning, and thank you for joining us to discuss our third quarter 2012 results. Hopefully, you've had a chance to review the earnings release we issued this morning. Joining me on the call today is our CFO, Larry Winoker. I'll begin by giving you an overview of some of the macroeconomic and business trends that impacted the company's financial performance during the quarter and the strategies that we are executing to mitigate and overcome certain specific challenges. I also will share some thoughts on the balance of the year and our plans for 2013. Larry then will provide a detailed breakdown of the quarter by sector. Following Larry's comments, we'll take your questions. Over the past several years, our growth strategy has been premised on building our key brands, increasing our market share, expanding our distribution into large markets in which we -- which have not yet been represented by us and making strategic investments in certain emerging markets. We have productivity, real incomes and discretionary spending are rising. Executing this strategy has allowed Lifetime to become one of the largest and most diversified housewares companies in the world, with 10 domestic business units and an international presence that includes our 100% owned U.K. subsidiary and our partially owned investee and partner companies in Mexico, Canada, Brazil and China. On a consolidated basis, Lifetime's net sales for the third quarter were $128.1 million, an increase of 2.7% over the corresponding period in 2011. This increase includes the net sales of Creative Tops, which we acquired in November 2011, and reflects strong organic growth in sales of Kitchenware products, offset by decreases in net sales of Tabletop and home décor products. The success of our strategy to build our key brands and to increase our market share is best illustrated by the performance of our core U.S. kitchenware business, which posted a 15.4% increase in net wholesale sales in the third quarter. This growth was achieved by rolling out new products and programs such as our innovative lines of Misto's sprayers, ceramic and resin-coated kitchen knives and the introduction of our new Guy Fieri cookware line. Our new line of Savora upscale kitchen tools recently debuted at a major retailer in the U.K. and will be introduced on a limited basis in the U.S. later this month. We expect that Savora will be a key brand for us going forward. As I have said on previous calls, the key to growth in these categories is innovation and newness, and no one does innovation and newness better than Lifetime. Sales of Tabletop products were negatively impacted by several factors, including a decision to restrict sales of Mikasa-branded dinnerware to customers that maintain and primarily sell through brick-and-mortar facilities. As we build Mikasa into a truly global brand, we need to ensure that consumers worldwide are provided the services necessary to understand and appreciate our product. We have found that many internet retailers fail to provide those services and that sales through primarily internet-based retailers creates a channel confusion that dilutes the Mikasa brand. Enforcing this policy will cost us several million dollars of net sales in 2012. However, it is a price we gladly will pay to protect the integrity of the Mikasa brand. Our Tabletop business in the quarter was also affected -- was affected also in the amount of several million dollars by the well-publicized problems at JCPenney. Despite these challenges, Lifetime's Tabletop business continues to be healthy, and the Mikasa and Pfaltzgraff brands have been able to achieve gains in market share within their respective categories. In our last call, I talked about home décor, a category that's been suffering industry-wide. Retailers have sharply reduced the floor space devoted to the category, which has also contributed to pricing pressure. Our strategy in mitigating the decline in sales of home décor products has been to transition a portion of our decor business to higher quality branded products sold under our Mikasa and Pfaltzgraff brands. By refocusing our product assortment on more upscale offerings, we believe we will ultimately make better returns on less volume. While our new product lines have been well received by our retailer partners, a significant turnaround in this category will not take place until 2013. As Larry will discuss more fully, we reduced the book value of our Elements trade name, resulting in a noncash impairment charge of $1.1 million in the third quarter. Let's turn to our international business, which increasingly is becoming a major area of focus for Lifetime. In the third quarter, our partner companies in Mexico, Brazil and China all performed to expectations. Lifetime Brands Canada has also continued to do well, reflecting the steadier Canadian economy. There's a lot of positive momentum in those parts of our business. In the third full quarter since we acquired Creative Tops, our 100% owned U.K. subsidiary and our launchpad for introducing many of our core products in the U.K. -- in the EU -- this is the third quarter we've owned them, Creative Tops generated net sales of $10.9 million in the quarter, in line with our expectations despite a difficult economy in the U.K. and elsewhere in Europe. In our last call, I described the investments we're making in Creative Tops, allowing additional people -- allocating additional people and other resources to the business. Those investments continued in the third quarter. Obviously, it'll take some time for all these initiatives to bear full fruit, but we've been seeing strong interest from retailers in the United Kingdom and the products Lifetime has developed with the Creative Tops team. Many of these are in the Food Prep business, leveraging Lifetime's expertise in that category. I'm very happy with the acquisition and encouraged by the progress we're making. I'm pleased to note that Lifetime's operations were only minimally disrupted by Hurricane Sandy. Our offices on Long Island and our East Coast distribution facility in New Jersey were closed for 2 days due to roads throughout the region being closed to travel. However, by Wednesday of last week, all facilities were fully staffed and operating at normal levels. I want to take this opportunity to thank the Lifetime team for their tremendous work during the disaster. All our employees pulled together and the business -- it's business as usual throughout the organization. With the election finally behind us and the impact of the hurricane beginning to wane, consumers at last can begin to focus on their holiday shopping. And with consumer confidence relatively high, interest rates low and gas prices somewhat stable, my overall sense is that consumers generally think things are getting better. I've spoken to several of our key retailer partners and they agree the holiday shopping season should be a good one. Of course, the big unknown remains how the government deals with the fiscal cliff and how this plays out in the media. It has a potential to weigh on consumer psychology in the coming months, which certainly could impact holiday sales. That said, I'm optimistic about the holiday season in general and about Lifetime's business in the fourth quarter. I have previously said that the fourth quarter would be strong and 5.5 weeks into the quarter, our business is performing up to our expectations. Based on our current bookings and orders, we believe that net sales in the fourth quarter of 2012 will be approximately 5% greater than net sales in the fourth quarter of 2011. As for 2013, there are also some good signs. The U.K. economy seems to be recovering and the prices we pay for goods coming from China has stabilized. As always, there's a lot of unknowns, especially with respect to the impact of potentially higher taxes, high cost of health insurance and of course, the government's action on the fiscal cliff. Larry is going to give you more details on our third quarter analysis. Larry?

Thanks, Jeff. As we reported early this morning, net income for the third quarter of 2012 was $3.9 million or $0.30 per diluted share as compared to $7.5 million or $0.60 per diluted share in the 2011 period. Adjusted net income for the quarter was $5.1 million or $0.40 per diluted share, as compared to $6.6 million or $0.52 per diluted share in 2011. Adjusted net income in the 2012 period exclude certain unusual and infrequent items that are detailed in the table included in the earnings release. Income from operations was $7.4 million for the 2012 quarter as compared to $10.3 million for the corresponding 2011 quarter. Consolidated EBITDA, a non-GAAP measure that's defined and reconciled for net income in our earnings release, was $11.6 million in the third quarter of 2012, versus $13.5 million in last year period. And consolidated EBITDA for the trailing 4 quarters ended in the 2012 period was $37.7 million versus $41.3 million last year. For our wholesale segment, net sales in the third quarter of 2012 increased 2.5% to $123.8 million. The increase reflects the inclusion of Creative Tops, our U.K. business acquired last November, and the success of our Kitchenware products programs. These increases were partially offset by a decrease in the Tabletop and Home Solutions product categories. For Tabletop, the decline is attributable to certain sales programs and product offerings in 2011 that were not repeated in 2012 and specific issues for certain retailers that Jeff noted earlier. For Home Solutions, as Jeff also commented, the decline was due to continuing weak consumer demand for home décor products exacerbated by retailer's sharp reduction in allocated floor space, all of which also contributed to pricing pressure. Also, segment gross margin was 33.9% in the current quarter compared to 34.5% last year. The decrease in gross margin percentage was due to home décor products as we've discussed, and in the Tabletop category on unfavorable product mix. Wholesale distribution expenses as a percentage of net sales shipped from our U.S. warehouses were approximately 8.6% and 9.1% in the 2012 and 2011 quarters respectively. This favorable trend reflects continued improvements in direct labor efficiency. Wholesale SG&A expenses were $20.8 million in the third quarter of 2012 and $18.4 million last year. As a percentage of net sales, SG&A increased to 16.8% versus 15.2% in 2011. The increase in dollars and as a percent of sales reflects higher expenses incurred by Creative Tops to support its business expansion plan. Excluding Creative Tops, SG&A decreased by approximately 3.5%, primarily due to lower compensation related expenses. As we've also discussed this morning, the home décor products category has performed poorly, driven by certain market conditions. While we believe these conditions are not permanent, following a strategic review of the business, we have decided to rebrand a portion of the home décor products under our Mikasa and Pfaltzgraff tradenames. As a result of these external factors and our decision, we recorded a noncash impairment charge of $1.1 million to reduce the book value of the Elements trade name. Now looking at our retail direct segment, net sales were $4.3 million and gross margin was 67.8% in the 2012 quarter, as compared to $3.9 million and 65.4% in the 2011 quarter. The increase in sales and gross margin percentage is primarily the result of our revised pricing strategy and a more consumer friendly web design for the Mikasa.com site. Also for Retail Direct as a percentage of net sales, distribution expenses were approximately 29.4% and 29.7% for the 2012 and 2011 quarters respectively, and SG&A expenses were $1.9 million in 2012 versus $1.8 million in 2011. Now with respect to non-segment items. Unallocated corporate expenses decreased to $3.2 million in the current quarter from $3.4 million last year, reflecting the absence in the 2012 period of acquisition-related expenses. Interest expense was $1.3 million for the current quarter and $1.8 million last year. The effect of higher average borrowings to finance the recent business acquisitions was more than offset by lower average interest rates, primarily due to the refinancing of the company's term loan this past July. And in connection with that, the term loan refinancing that is, the company wrote off debt issuance costs of $1 million in the quarter. With respect to income taxes, in the 2011 quarter, the effective tax rate was 24.6%. This low rate reflects the utilization of net operating losses in Puerto Rico, in which a tax benefit was not previously recognized. Equity and earnings declined to $700,000 in the quarter from $1.1 million in the comparable quarter last year. The decline relates to a shift in product mix for Grupo Vasconia, which had higher sales volume for aluminum foil and lower for kitchenware. Also, in the 2011 quarter, we had a catch-up income adjustment related to a joint venture investment that has since been discontinued. Turning to our financial position. At September 30, 2012, the outstanding balance on our revolving credit facility was $73.7 million and our leverage ratio totaling [indiscernible] to EBITDA was 2.9, and availability under the facility was $90.1 million. Looking at the fourth quarter, as Jeff stated, we expect net sales to increase by approximately 5% over the 2011 fourth quarter. Gross margin and distribution expense to be consistent with what we have achieved through the first 9 months of this year, that is approximately 36% and 9.5%, respectively. SG&A in the fourth quarter will increase from third quarter as it typically does for us, as that is a period in which we record the highest portion of our incentive compensation. And interest expense should decline modestly from the third quarter as we get the full benefit of the term loan refinancing. This concludes our prepared comments. Operator, we're ready for questions.

[Operator Instructions] Your first question comes from the line of Lee Giordano of Imperial Capital.

Larry, maybe we can start off by talking a little bit about gross margin expectations for the fourth quarter? Are you looking for continued pressure year-over-year on the gross margin line or do you think we could see some leverage on the higher sales?

No. I think, as you know, the fourth quarter, we sell more, proportionately the retail direct business grows a bit. So while we'll be better at wholesale because of Retail Direct has more weight, that's going to -- it will favorably impact. So I think we're going to see comparable gross margins. That's what we see now, as compared to what we achieved during the first 9 months.

Okay. And then looking at the Tabletop business, in the decision to just sell the money of brick-and-mortar retailers, are you expecting to make up those lost sales over the longer term, since there will be less cannibalization online, is that kind of one way to look at it?

Yes, it is. It's very definitely something we expect, and I think the brick-and-mortar retailers have told us that they really appreciate what we're doing. So we do expect it to really have a positive impact in 2013.

Great. And can you just talk about the reactive glaze trend, is that waning in the marketplace or is that still a big part of your business?

It's definitely slowed down from where it was. It's not falling off a cliff, by any means. It's just a little -- it's lower than it was in 2011, which is a natural progression. There's a lot of other things coming online to compensate for that. What happens in -- when a trend like that occurs in the Tabletop business, you ride it as much as you can and then you start testing other things to replace it, which is what we've been doing this year. And we have latched on to several things that will help us to replace that going forward.

Great. And then just lastly. Larry, do you have the average diluted share count for the quarter?

Yes, it's 12.8 million.

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

Jeff, following up on your comment about the slightly improving consumer purchasing confidence in some parts of the world. What about Mexico and Canada, which are Lifetime markets, and also Continental Europe, which is not much of a Lifetime market, but could be a change factor as well?

The business in Canada is strong. Their economy is a strong economy and doing well. Business in Mexico is okay. It's not as robust as it was, but it's okay. The Mexican company, Grupo Vasconia, made a rather large purchase of a competitor in the aluminum smelting business earlier this year, which changes the mix of their business a bit. It weighs it a little more heavily towards the primary aluminum smelting operations, which they are now consolidating plants and making sure that they run in a more efficient manner, but it's a very positive thing going forward for them and we like what they're doing. The Houseware business, it's a little tougher but not -- certainly not bad by any means.

Okay. So you're saying some of Grupo Vasconia's earnings are not -- I mean, a larger portion is not from housewares per se but from smelting.

I think the slightly larger part of the business is in the aluminum smelting business.

Which serves on the rent markets, you mean, having nothing to do with...

Well, it's a very strong market and they're the dominant player in Mexico and Central America.

Okay. And just any feel -- any take on Continental Europe? I realized that's not central to...

It's not really much of -- yes, you're right. It's not much of a market for Lifetime, but I've talked to a number of people who run companies in Continental Europe, that I know, and I'll tell you, business is tough there. It's really tough.

Okay. Then just my only other question is, really the visibility of your Q4 numbers, in other words to what extent can retailers still cancel orders or push out orders if changes occur in the holiday [indiscernible]?

Certainly, there's a proportion of the orders that come in on a daily basis, like from major retailers. From every regular retailer, we get a daily reorder basis. And of course, if that doesn't come in, it would affect us. But haven't heard negatives out there at retail right now. Nothing horrible is falling apart, that's for sure. And there's certain portion of the orders, which would not be canceled because they're already in route or on the way there or done in such a way that on a direct import basis, which they don't cancel, they never cancel those.

Okay. So I guess to sum that up, I mean you have solid visibility, I mean not 100%, but otherwise it would be a pretty major change if you've had significant order cancellation.

As I said, if the consumer confidence falls off a cliff, it certainly is going to affect retail sales. Assuming that doesn't happen, we expect to be up approximately 5%. So as long as nothing horrible happens.

Yes, okay. And then just housekeeping. On the tax rate, I guess, this one's for Larry. I think your comments address the catch-up on the tax rate to 37.7%. So in other words, for ongoing purposes, is 39% to 40% the right tax rate for modeling?

That's right. As we are able to have -- earn more income outside the U.S., that will go down over time as Creative Tops grows, but I would said, for this year, we should stay in that close to 40% range.

Sir, you have no questions at this time. [Operator Instructions] Okay, we have no further questions coming through at this time, so I'd like to turn the call back over to Jeff Siegel for closing remarks.

Thank you, and thanks for joining us for today's update. In summary, while we continue to face business and macroeconomic challenges in some parts of our portfolio, we continue to have good momentum, of course, much of the business, we're also executing plans to mitigate and overcome challenges where they exist. All the while we remain focused on driving sustainable growth by building our key brands, increasing our market share and making strategic investments. I look forward to speaking to you again when our fourth quarter results are in. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.