Lifetime Brands, Inc. (LCUT) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2014 Lifetime Brands Earnings Conference Call. My name is Su, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session toward the end of this conference. [Operator Instructions] As a reminder, this cal is being recorded for replay purposes. I would now like to turn the call over to Ms. Harriet Fried of LHA. Please proceed.

Good morning, everyone and thank you for joining Lifetime Brands Fourth Quarter 2014 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 me 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 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, and good morning, everyone, and thank you for joining us to go over our fourth quarter 2014 results. As you know, throughout 2014, we made significant investments to expand Lifetime’s business on a global basis. These investments reflected our assessments that there are more promising opportunities to grow internationally than domestically. The benefits of this focus was clear in the third quarter when we posted record sales and EBITDA despite a difficult retail environment in North America and they were demonstrated again in the fourth quarter as our net sales increased by $25 million or 15% to $190 million. The acquisitions we made in the first half of 2014, Kitchen Craft, Built and La Cafetière provided almost $23 million in sales. For the full year, consolidated net sales were $586.0 million, an increase of $83.3 million, or close to 17%. The three acquired businesses contributed almost $78 million to that number. Of course, as I mentioned last quarter, gearing up with many new brands, products and geographies, does counted of course. We’ve been making significant investments including in the international sales team with a 12,000 square foot showroom in Hong Kong in order to build our global business in a way that will over time enable us to leverage our core capabilities and infrastructure. We see many favorable trends that we expect to benefit our business in 2015. These start with the forecast for continued economic growth and stable unemployment rates, which are now at a six year high in the US. Low oil prices are also increasing the purchasing power – and reducing the cost of some of our materials. Let me take a moment to talk about this change and the way it will help us in 2015. As you saw in the release, our margins declined in 2014. In mid-year, we began to address this decline by working with our suppliers to automate labor-intensive process and redesigning products to reduce costs with that impacting the value of the products. This is a monumental task for a company that markets over 50,000 products in the US alone. While we were making steady progress, the cost reduction progress greatly accelerated when the price of oil collapsed. As you know, we use a considerable amount of plastic resin in our products and the spot prices for resin has dropped by more than 25% since last September. As we turn out inventory over the next few quarters, we expect to see great improvements in the margins in our core business, core US business. There are also many trends that I would call lifestyles on the lifestyle side that are very positive for our business. These include a recovering housing market and the return of new household formations to pre-recession levels of approximately $1 million per year. The movement of Gen-Y or Millennials are with their parent’s homes and into their own homes as their incomes increase and the housing affordability index improves. A greater focus by many households on food prep, cooking, fresh food and home entertaining, smaller home and household sizes as well as other trends that emphasize good design, affordability, flexible spaces and storage space, and notable trends in house with giftables reflecting the positive attitude about at home food prep and baking. We’ve deliberately positioned Lifetime to take advantage of these trends and to address a younger more design savvy market with brands like Sebora, Reo, Farberware Colorworks and the Mikasa, which put us in the solid position to attract first time and new home owners. At this week’s International Home and Housewares Show in Chicago, we unveiled two comprehensive branded solutions for retailers who want to target the millennial consumer. Every major retail we’ve met with in the last three months is targeting this consumer. And I believe we offer the best solutions in both kitchenware and tabletop to capture this segment of the population. The millennial population is considerably larger than the Gen-X population that came before them and even larger than the outsized baby boomer population. The first-line targeting millennials was Farberware Colorworks a comprehensive line of high design, high function kitchen tools gadgets, cutlery and pantry ware. This attractive and affordable collection features, vibrant colors and contemporary styling and was influenced by kitchen crafts, highly successful collection. It’s an example of synergies between the two geographic sides of that business. We began showing this line in January and we have already seen key replacements in 2015 in several major retailers. We also greatly expanded our millennial focus to Reo collection and in the date of line of kitchenware, cutlery and cookware that provides simple and functional solutions, designed to make food preparation fun. We’ve spent a considerable amount of time and money over the past two years developing this line and based on meetings we have had with major retailers before and during the Housewares show, we had very high expectations for this line in 2015. Other significant programs who launched included a unique line of Neoprene lunch products under our new Built brand and an extensive assortment of our up-scale Sabatier, cookware, cutleries, kitchen tools and gadgets. In addition, we added to our high performance, high style Sabora tool and gadget line introducing a cutlery collection which we think will be the crown jewel of line. We are very proud of its unique look and the functionality of the line. Another innovation we’ve unveiled across several brands including both, it’s actually more than two, including Farberware, Sabatier and Reo is a knife storage sheet that sharpens the blade as they use it inserts or pulls out a knife. This is a very unique item and it’s never been anything like in on the market. This unique feature received an especially enthusiastic reception at the Houseware show. It was invented at Lifetime and we’ve applied for both utility and design patents for the concept. We’ve also added many new patents to our dinnerware products appeal to the millennial customer, emphasizing a more usual, casual look, rather than formal patterns. While it’s so early in the year, so far in 2015, these new dinnerware patents are selling briskly. We are fortunate that our Mikasa brand has always focused on younger more contemporary looks as opposed to the formal looks of our upstairs dinnerware competitors. Another important strategy for increasing sales is to gain greater penetration into online retail. As I indicated earlier, the retail universe has changed significantly. With the growth of e-commerce giving consumers a host of new ways to shop, adapting to these trends by penetrating online retail offers a promising way to combat the reduction in floor space in both tabletop and home décor. In 2014, we invested in a dedicated staff working with outside consultants to rapidly advance our efforts in this area. This team has been meeting with our major customers for several months to assist them in putting as many of our 15,000 SKUs as possible online as well as providing copies the greatly enhances the salability of our products online. We are confident this will give us great top-line sales improvement on our online sales for our products in 2015. In addition to making a corporate-wide effort to improve gross margins as discussed earlier, we are also exploring ways to mitigate increases in distribution costs which rose in 2014 as retailers pushed a smaller case packs that are considerably more expensive to process. The price increases we instituted for smaller packs are now coming into effect. We are also improving processes and our distribution centers which in addition to lowering shipping cost for smaller case packs will also help us to service those retailers moving to omni channel. This is combining stores and dot com into a single operation which requires a – warehouses and drop ship orders with increased efficiency. In February, we announced that we had agreed with Reed & Barton to become the stock imports that are in the bankruptcy sale of Reed & Barton’s flatware and giftware business. We expect the court to hold an auction in late April. The addition of the Reed & Barton brand will add to our already very strong line-up of great flatware and giftware brands. I’ll now turn the call over to Larry to give you more details on our fourth quarter and full year financial results and will also provide additional commentary on our guidance for 2015. Larry?

Thanks, Jeff. Just before I get into prepared remarks, we transmitted our earnings release this morning properly and there was some glitch I guess, in how it’s transmitted, how the wire picked it up. So you probably, you’ve looked at the table on EBITDA, you may have noticed that the three months 2014 are the same as the full year 2014, the three month is incorrect, it’s about $20 million. We’ll have that be retransmitted, it’s not already, sometime later this morning. So, as we reported earlier this morning, the net income for the fourth quarter of 2014 was $9.3 million or $0.66 per diluted share, as compared to $9.4 million, or $0.72 per diluted share in the 2013 period. Adjusted net income for the quarter was $8.3 million, $0.59 per diluted share, compared to $10.0 million, or $0.76 per diluted share in 2013. Table which reconciles this non-GAAP measure to report results was included in this morning’s release. Income from operations was $18.3 million for the 2014 quarter compared to $16.6 million in 2013. Included in the current period was a credit to adjust the fair value, the contingent consideration for the 2012 acquisition of Fred & Friends. While the Fred & Friends business remains profitable, it is not expected to achieve the very high hurdle we’ve set in the earn out. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release was $20.9 million for the current quarter and $21 million for period in 2013. Consolidated EBITDA was $42.5 million for the full year of 2014 and $43.5 million last year. For our wholesale segment, net sales in 2014 quarter increased $1.5 million to $145.1 million. The increase was in Kitchenware as new product offerings and extended programs at certain retailers. The increase in Kitchenware products was partially offset by a modest decline in tableware. Home solutions products have declined as 2013 included a warehouse club program that we didn’t have in 2014 and that was partially offset by the addition of the Built side of the business we acquired early in 2014. U.S. Wholesale segment gross margin was 35.4% in the 2014 quarter compared to 38% last year. This decrease reflects cost of promotional activities to support the introduction of new brands and products and some sales through the off-price channel. U.S. wholesale distribution expense as a percentage of sales shipped from our U.S. warehouses were 8% in the 2014 quarter versus 7.6% in 2013 primarily reflecting the impact of labor cost to handle smaller case packs. U.S. wholesale SG&A expenses were $19.3 million, or 13.2% of sales. $23.5 million or 16.2% of sales excluding the contingent consideration adjustment. And that’s in 2014 and that compares to $23.3 million or also 16.2 % of sales in the fourth quarter of last year. Lower employee incentive compensation was offset by expenses related to our growth and acquisition activities. For our international segment, net sales in the 2014 quarter increased to $37.3 million from $13.5 million in last year’s quarter. Of this increase, $22.3 million represents sales of Kitchen Craft and La Cafetière, which were acquired during the first quarter of 2014. Organic sales increased 20% or 18.5% local currency on higher volume from Creative Tops. The 2013 period was adversely affected by the antidumping duties imposed by the EU on Chinese ceramics. International segment gross margin was 35.3% in the 2014 quarter, compared to 26.9% in the 2013 period. The increase resulted from the inclusion of Kitchen Craft whose products carry higher margin than other product categories in this segment as well as less close-out volume for Tableware products. International distribution expenses as a percentage of sales shipped from warehouses was approximately 11.7% in 2014 quarter and 11.8% last year. An improvement from the use of more competitively priced freight carriers and a benefit from higher volume in Tableware was offset by Kitchen Craft which has many small independent customers. International SG&A was $7.1 million in the fourth quarter of 2014 and $2.6 million in 2013. The increase was primarily due to the inclusion of Kitchen Craft and La Cafetière. Creative Tops increased on volume-driven selling and integration expenses related to La Cafetière. As a percentage of net sales, SG&A improved to 19% in 2014 from 19.5%. For our Retail Direct segment net sales was $7.6 million in the 2014 quarter and $7.7 million last year. Gross margin increased to $67.8 million from $66.8 million in 2013 reflecting the benefit of fewer promotional events. As a percentage of net sales, retail distribution expenses remained even at 29.3% in both periods. Retail Direct SG&A expenses were $2.9 million in the 2014 period and $2.4 million in 2013 reflecting a revised allocation and redundancies related to the consolidation of our customer service support. Before turning to non-segment, it’s worth noting that for the full year, total SG&A excluding the credit for the adjustments for contingent consideration and acquisition transaction expenses, on a consolidated basis was 23.2% in 2014 versus 22.6% in 2013. That’s an increase of 60 basis points which incurred despite flat year-over-year volume in the US and the benefits of the increased activities that fully realized in calendar 2014. Now looking at non-segment items, unallocated corporate expenses increased by $600,000 to $6.1 million from 2014 which is primarily attributable to the timing of accruals for short-term incentive compensation. Interest expense increased to $1.7 million in the 2014 quarter from $1.3 million last year. The increase was primarily due to higher average borrowings attributable to the 2014 acquisitions, which were partially offset by lower interest rates in the January debt of 2014 debt financing. During the recent 2014 quarter, the company also incurred $700,000 of expenses related to a financing of indebtedness that company chose not to complete. Effective tax rate for the 2014 quarter was 34.5% compared to 40.6% last year. 2014 rate reflects the benefit of income derived from the UK which has a substantially lower tax than the US. Equity in losses was $1.1 million in the 2014 quarter as compared to earnings of $300,000 last year. The Grupo Vasconia equity in earnings before US deferred taxes in 2014 quarter was $1.1 million and a loss of approximately $300,000 net of tax. The deferred tax relates to the foreign currency translational loss which is recorded in other comprehensive income. Equity income of Grupo Vasconia's was $1 million before US deferred taxes and $600,000 net of taxes in 2013. For the full year Grupo Vasconia’s income from operations increased 43% on an 18% increase in net sales. The improvement came from both Kitchen ware and aluminum businesses. Also in the fourth quarter the company purchased 40% of a newly issued common stock of GSI or 2 million Reais which is approximately $800,000. As we commented on our last call, we remain support of the business and management of GSI and the vision of building a strong presence in Brazil with the relevant technical accounting guidance requires us to conclude that the decline in value was other than temporary. So we expensed additional investment in equity in losses. In February of this year, we amended our credit agreement. Primary change with the last one was gradual reduction of the senior leverage ratio covenant governing the term loan. The maximum leverage beginning in March of 2015 is now four times versus 3.5 and declining to 3.25 versus 2.5 at March 31, 2016. At December 31, 2014, the senior leverage ratio was 3.3 and our liquidity was approximately $45 million. Looking at 2015, we have projected full year sales of 3% to 6%. As noted in our earnings release and I just comment, there is great opportunity to reduce costs. We expect to realize benefits in 2015. We will go in more specifics on full year 2015 on our first quarter earnings call. That concludes our prepared comments. We are ready for questions. Operator?

[Operator Instructions] Your first question comes from the line of Frank Camma of Sidoti. Please proceed.

Good morning guys.

Good morning.

Good morning, Frank.

Couple questions here. Is the Reed & Barton potential acquisition, is that part of your sales guidance of 3% to 6%?

No, it’s not. It’s a 363 auction which means certainly no certainty that we would get at.

Sure, no, I was just wondering if we should be counting on that. So, I guess, the question then bags, 3% to 6% is actually pretty good organic growth for your categories, especially, if you look at what you did last year, I mean, especially in this recent quarter, I am calculating about 1%, if I’ve done that right. So can you kind of – I mean, I know you’ve got some consumer demand, you pointed out some macro issues, but you are talking about basically a three time – three x improvement organic growth. Can you just – and on the low end, I mean, is that reasonable?

Yes, it is. In 2014, the biggest decrease we had was in the Cuisinart cutlery. That was a $6 million decrease. We are now emphasizing more brands that we own or control and especially Farberware and Sabatier in cutlery and it’s a much better thing for us in the long-term though. There was a bit of short-term pain. So if you take that out of the index and alone this $6 million swing, in addition, this team that we put together to improve our online business which is primarily a brick and mortar retailers as well as some online-only retailers. It’s having great results and I think that’s going to be very positive for us. And lastly, some of the businesses that were lagging a bit for us last year have turned around and should become much better in 2015, especially since, we just came from the show, and what happened in the show was very, very positive for us. So, I am confident that we are certainly going to at least hit that – those numbers. I am kind of optimistic that we’ll do a lot better than that, but we’ll see.

Okay. Fair enough. Just to follow-up on the Cuisinart because I am not familiar with. Can you just explain, so did you stop making Cusinart cutlery or is it a license?

Right, we are no longer – it was a license and we are no longer – in 2014, we were not marketing Cusinart cutlery. Like I said, our cutlery business is moving more towards brands that we control.

In-house that you owned, okay.

Farberware is our fastest growing brand within the company by far and followed by Sabatier. So, those are the two that we have really emphasizing.

Okay, and is Farberware still being positively impacted by its rollout in China, is that one of the reasons?

No, that’s a small part of it. It’s actually rolling out into many new customers in the US. One thing that really helped us, the only accurate data that’s available within our industry comes from a company called NPD. And the retailers all buy the NPD data and the data that came out from NPD showed that Farberware was the fastest growing and the number one cutlery brand in America. And some retailers who previously did not carry the brand have added this for 2015.

Okay. And so on the expense side, I mean, obviously you got a couple of things flowing positively in your direction. How long does that take though to actually hit? Is it a quarter, is it two quarters, maybe you got rising, you have still, I mean, do you have existing inventory? So I was just wondering does it…

As I mentioned, we have to work through our inventory, because we think – substantial inventory along the supply chain. It will – we will start getting a benefit in the second quarter. And we will get obviously a much greater benefit in the third and fourth quarters.

Right, which is actually you are more meaningful.

In the second quarter.

Okay, okay and finally, if I can just have a couple just modeling questions here on the adjustments. Contingent consideration comes out of SGA& right, I mean, or we would add that to the SG&A? Okay, so, a question, Larry, I thought you said that there was a meaningful improvement in the SG&A year-over-year, but I did…

What I said was that it’s – that despite year-over-year flat results in the US and with many of the investments and initiatives being passed out during the year and as we said it didn’t hit the beginning of the year the starting of it, starting to hit the – like the businesses we purchased like Built and investing in showroom in Hong Kong. Despite that, SG&A and picking out the Fred and Friends adjustment, picking out acquisition transaction expenses, fuel expenses, the SG&A is up 60 basis points. So I feel that to me, it’s good, I mean, considering, as I mentioned the flat sales and the transaction expense.

Okay, all right. I am sorry, I missed that. Okay, that’s it. Thanks.

Thank you. And your next question comes from the line of John Sullivan of Olstein Capital Management. Please go ahead.

Hi. One of the testament for me being an owner of the business is, that you guys seem to generate a lot of cash relative to your earnings over time and it just seems like this year, you kind of got hit on pretty much every account, both on paying bills early and receivables inventory on that end. And I was just wondering what were some of the impacts in there and if there is some timing things that are going to be reversing out early on in 2015 or what the cash flows might look like going forward?

Well, one obviously, it was a disappointing year, so that obviously hurt the cash flow. The other is timing, you can see – you just see the cash flow our – were up last time and the business hasn’t grown but, the fourth quarter, as you know is a big part of our year and depending on when we ship in the fourth quarter and which customers that we ship to can have impact on receivables. Things like inventory we manage, we’ll bring that back into line. So those are the big things that I think really affected our cash flow.

Okay, and I mean, I would imagine 2015 and we should be positive cash flow to the – better than earnings with the amount of depreciation and amortization you guys have relative to capital spending.

We’ve been pretty consistent over the years, consistently generating as I say cash in excess of the earnings because of the high depreciation.

Okay, great. Thank you.

Thank you. [Operator Instructions] Your next question comes from the line of Brian Freckman of LS Capital. Please proceed.

Hey guys, how are you?

Good morning, Brian.

Quick question. What percent of COGS is resin and steel? I guess, I am trying to understand the target model is.

Okay, it obviously varies by product line. In our most important categories which are kitchen tools and gadgets and cutlery, those are biggest volume categories we have. It’s quite significant and it’s not all significant in tabletops. So, we have two different parts of the business. Again, it also varies by products. So, I can’t give you a really firm answer on this. It’s not quite that simple. The savings could be on a product could be anywhere from a typical kitchenware product or typical kitchen products, could be anywhere from 5% to 20%. And usually more in the range of – the bulk of it will be in the 5% to 10% range in those products. We also have some other savings that are I didn’t mention. The only thing that we source from Europe really is crystal. The Mikasa business, a substantial part of our Mikasa business which our tabletop business is crystal, is somewhere, windless and so forth. They come from Europe and they bought in euros. As you know, right now the Euro is very weak. So we are getting a substantial benefit on that end as well. I just can’t give you a real number. I apologize for that on the cost of products overall, because it varies so much by the different parts of our business.

Okay. I don’t know if I heard this or, that you guys gave typically the kind of go over international Retail Direct wholesale, I think I may have missed that, what was those numbers in the fourth quarter?

We did it, we did it by segment, what’s your question?

What was international?

International sales?

Yes.

For the quarter, they were $37.3 million.

Okay, $37.3 million. Thank you and then just on – just clear there, what was the Fred & Friends adjustment was what number?

$4.2 million

4.2?

Yes.

Okay. And then, just to remind, the financing, that 700, what was that towards?

We were looking to do a big financing, this we’ve talked about on the historical, we’ve been talking about – a lot about grow internationally and where we want to be in terms of size and we have given some serious – obviously serious thought about doing a financing really to have adequate capacity to do the – some significant transactions. And, we went down the path. We weren’t happy with the market, followed it back in the fall, the market was very strong for us. Just generally everyone in the summer. And just as what could happen as we are moving through with the markets were going against us. So, we decided that we wouldn’t do this major financing and we’ll probably for now stick to doing – now we continue to discuss with what we stick to that they doing a transaction-by-transaction. Market improves for single B credits, small size and unseasoned issuers like us.

Okay, so, you guys have sort of – you’ve given us an outlook on 2015 for say, obviously we don’t know the acquisition. It sounds like you are implying that margins will increase, given all the reversals and all the other things, any help there? I mean, I am trying to figure out what kind of EBITDA margin will you think we should be looking at? I mean, you’ve given us revenue?

Yes, well, we have thought about it and we really want to wait until, because that is only – if we get late April, early May.

Yes, at the first quarter call, we’ll give more detail on that.

Well, so you guys are going to give us, some sort of operating income or EBITDA in the first quarter?

We’ll certainly give more guidance than we’ve given, specifically more guidance than we’ve given you today.

All right, thank you.

Thank you for your questions ladies and gentlemen. I would now like to turn the call over to Mr. Jeff Siegel for closing remarks.

Thank you for joining us this morning. In closing, I would like to emphasize that we believe the general trends in the Houseware business saver companies like Lifetime. We are large in the industry. We are financially stable and we have many brands targeted to the different customer groups, consumer groups. Also we have advance design capabilities, which is really helping us right now in many ways and this building of a better internal drop ship distribution capability which will greatly enhance our ability to sell products online through our brick and mortar partners and online-only retailers. We look forward to giving you another report after the first quarter’s finish. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining and have a very good day.