Lifetime Brands, Inc. (LCUT) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Lifetime Brands Conference Call. My name is Cathy, 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 call 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. 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 Lifetime’s call, 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 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, and good morning, everyone, and thank you for joining us today to discuss our first quarter 2015 results. Although we encountered headwinds from foreign exchange and the continued slow down of the dockworkers on the West Coast, we delivered results that were substantially in line with our internal plans. We also saw some retailer programs, primarily warehouse clubs shift from the first to the second quarter. But those are coming through now and will benefit the current quarter. As always, our seasonally larger quarters are in the latter half of the year, and based on strong bookings and placements for products to be delivered then, our retail partners are showing confidence in the strong holiday selling season. We share their confidence. Let me run through some of the highlights of our first quarter and some of the important things on tap in our product offerings for the rest of 2015. In our US wholesale segment, total net sales just inched up for the quarter, and that was because a – really because of solid increases in our kitchenware and home solutions product categories that were offset by a decrease in tableware. In kitchenware, we are benefiting from a fundamental shift in our brand strategy. [Indiscernible] bringing a fresh, new contemporary look to our Farberware brand, which is both our largest and fastest growing brand. We recently diversified and expanded our Farberware offerings through the creation of a new line named Farberware Colorworks. This is a full collection of high design, high function kitchen tools and gadgets, cutlery and pantryware. Our attractive and affordable products are specifically designed with vibrant colors and contemporary styling to target the buying habits of millennials, who constitute a very big and important growing group of consumers for us. As I mentioned in our year-end call, millennial consumers like to cook and look for products that are visually engaging as they are functional. Since they want to express themselves creatively through the products they buy, color and design are key purchase decision factors. Farberware Colorworks is specifically designed to cater to this consumer. Colorworks is sold in 83 countries worldwide and through Kitchen Craft already have significant brand exposure in the UK. So it is a very good example of synergies between the two geographic sides of our business. We have also retooled our brand strategy in cutlery, where we are emphasizing an array of colors, new concepts and new products. One example of that innovation is a knife storage sheath with a built-in sharpening mechanism that we invented and have already applied for patents. [Edgekeeper] and we unveiled of course a large variety of brands including Farberware, Sabatier and Reo. We have been getting good placement with our customers, and we think this will be a key driver for our cutlery brands. At the Chicago Houseware show, we launched nine lines of bakeware in ceramic metal under our Bakers Advantage brand that we will cross merchandise with baking related Farberware kitchen tools and gadgets. Our Kitchen Craft division in the UK is a leader in bakeware in that market and many of the products they have developed are perfect for the US market. At the Chicago show, we also introduced a line of enamel and steel cookware that we’re sourcing from Grupo Vasconia in Mexico. This line is well-designed and extremely well priced due to a substantially lower duty from Mexico on enamel and steel versus the duty from China. In home solutions, our Debbie Meyer storage items, which help preserve the freshness and prolong the life of fruits, vegetables and baked goods and snacks have been doing very well at retail, and we have expanded placement to some promising new customers. We are also pleased with the progress being made by Built New York, which we acquired in the first quarter of 2014. Here again we are branching into new product categories, including a wine statement, lunch solutions, and backpacks that use brightly colored unique patterns and neoprene material. This product expansion has been positioning us well to get some interesting new retail partners for Built. For tableware, we’re just coming off the Tabletop Show in New York, which was in mid-April. A few highlights from this show were our Mikasa [metallic] stemware and barware, which offers a fresh take on the classic Cheers collection and our Crystal giftables collection, both Celebrations by Mikasa. These make perfect [tables] for weddings, private shows and similar occasions. As noted in our release, the tableware category reported a decline in net sales as compared to last year’s first quarter. But I am pleased to note that it was almost completely due to the timing of sales with certain customers, as well as product shortages caused by the West Coast dock slowdown. The dock slowdown is over and several of the new products to retailers will be shipped in the second quarter. The net result is that our tableware division should have an excellent second-quarter. Turning to the international segment, we were buffeted by the same foreign exchange wins the hurt others last quarter as well as we witnessed in the European economy. However, we see considerable opportunities as Creative Tops and Kitchen Craft work together to develop a sales plan for the top customers. We are also seeing continued growth of web based businesses for these two parts of the Lifetime family. Finally we experienced a nice increase in our retail direct segment, where we have expanded our efforts to take advantage of the growth of e-commerce and the new options, which gives consumers the [shop]. We are continuing our work with many of our major customers to assist them in putting as many of our 15,000 SKUs as possible online, as well as providing copy to enhance the salability of our products online. We’re starting to see the top line improvement in our online sales of our products as we predicted, and we expect to see this accelerate as the year progresses. I’ll now turn the call over to Larry [Indiscernible] for his detailed financial review. Larry?

Thanks, Jeff. As we reported earlier this morning, the net loss for the first quarter of 2015 was $2.1 million or $0.15 per diluted share, as compared to $2.9 million, or $0.22 per diluted share in the 2014 period. Adjusted net loss for the quarter was $1.9 million, $0.14 per diluted share, compared to $1.7 million, or $0.13 per diluted share in 2014. The table which reconciles this non-GAAP measure to reported results was included in this morning’s release. Loss from operations was $2.2 million for the 2015 and 2014 quarters. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $2.5 million for the current quarter and $3.7 million for the period in 2014. Consolidated EBITDA was $41.4 million for the quarter ended March 31, 2015 and $44.1 million for the same period last year. For our US wholesale segment, net sales in the 2015 quarter increased $800,000 to $86.5 million. The increase was from Kitchenware new product offerings and extended programs at certain retailers, as well as for Home Solutions Debbie Meyer line, and the Built New York product line, the latter of which was acquired last year. These increases were partially offset by a decline in tableware, primarily attributable to the timing of warehouse club programs and the impact of the West Coast dock workers slow down. US segment gross margin was 37% in the 2015 quarter compared to 35.9% in 2014. The increase reflects improved margin for certain product categories and the impact of sales increases from our more profitable product categories. US wholesale distribution expenses as a percentage of sales shipped from our US warehouses were 10.5% in the 2015 period versus 10.6% in 2014. This improvement reflects the effect of an increase in sales volume, offsetting increased labor cost from smaller case pack and [Indiscernible] shipments to retailers. US wholesale SG&A expenses were $21.1 million, which was 24.4% of sales versus $19.8 million or 23.1% of net sales in the first quarter of 2014. The increase is attributable to the inclusion of Built New York, which was acquired in March of last year, high employee related expenses, including for medical costs, our new Hong Kong export operation, which opened in the latter part of last year and for which we expect to see the benefit beginning later this year, and foreign currency transaction losses. For our international segment, net sales in the 2015 quarter were $25.4 million, a decrease of $2.7 million compared to 2014 quarter. In constant currency, net sales were up approximately 1% on lower volume in continental Europe. International segment gross margin was 35.6% in the 2015 quarter, compared to 36.8% last year. The decrease in gross margin is the result of an increase in certain promotional activity and the effect of the strengthening US dollar against pound sterling. International distribution expenses as a percentage of sales shipped from the warehouses was approximately 11.9% versus 10.8% last year. This increase in expense as a percentage of warehouse sales out in the UK reflect higher labor costs and an increase in dropship volume, and a reclassification change for certain facility expenses versus the prior year quarter. International SG&A expenses were $6.9 million in the first quarter of ’15 versus $8.2 million in 2014. The decrease is due to the US dollar, pound sterling exchange rate change and the new classification of certain distribution expenses in the current period. For our Retail Direct segment net sales were $5.8 million in the 2015 quarter and $4.6 million in the 2014 quarter. The benefit of this increase more than offset the decline in gross margin percentage from 69.3% to 66.6%. As a percentage of net sales, retail distribution expenses remained even at 31% in both periods, as did SG&A expenses of $2.1 million. With respect to non-segment items, unallocated corporate expenses decreased by $600,000 to $3.5 million in the 2015 period. The 2014 period included higher acquisition expenses. Interest expense was $1.4 million in each of the reported quarters. Average borrowings under the revolving credit facility increased during the current period, which was offset by scheduled amortization of the term loan. The effective tax rate was 36.3% in 2015 quarter compared to 30.3% last year. The increase was due to a reduction of foreign income, which was taxed at a lower rate than US income, as well as adjustments to certain discrete items. Equity in earnings was $300,000 in the 2015 quarter compared to an equity loss of $200,000 in the 2014 quarter. The Grupo Vasconia reported income from operations of $2.7 million in 2015 quarter versus $1.8 million last year. At March 31, 2015, the leverage ratio was 3.14 and our liquidity was approximately $38.9 million. Looking at 2015, we have projected full year sales increase of 3% to 6%, and operating margin to improve to 4.5% to 5.5%. Our effective income tax rate for the full year is projected to be between 35% and 37%, and weighted average shares are projected at 14.3 million. Capital expenditures are planned at approximately $6 million. This concludes our prepared comments. Operator, please open the line for questions.

[Operator Instructions] Please stand by for your first question, which comes from the line of Frank Camma of Sidoti.

Good morning guys.

Good morning.

Good morning, Frank.

Just some classification here, so you were saying in your press release that your, if you add back the dock slow down and the weakness of the FX obviously, your sales would have been about 3% higher, but I was wondering if you could tell us or if it is basically the same what it would have been on a true organic apples to apples basis, if you were to exclude the acquisitions you made in the beginning of 2014?

Well, as you know the largest acquisition was Kitchen Craft, which [Indiscernible] the whole quarter. So, it is…

I thought that was at the end of January. So that was at the beginning of…

But it is very little…

Very little, okay, all right.

January 15 and there was negligible amount.

And built [Indiscernible] small businesses [Indiscernible] quite small numbers. So, I would say it is substantially all organic, very small.

Okay, all right. So that is good. So basically you are saying essentially 3%, but I guess my point is in your guidance for the year, the 3% to 6% includes the – albeit it is a small quarter for you, includes the quarter you just reported, but you are obviously signaling at least on the high end there that you have pretty good confidence in the back half of the year, is that basically from feedback on your customers, I think you mentioned that, but is it – I mean is that something you are currently seeing like more foot traffic, I just wondered if you could maybe add a little more color to that?

Yes, it is placement. In the first quarter we really finalized placement for the rest of the year with retailers. And based on the placement that we have and the things that we are confident in, we are very optimistic for the year.

Okay, good. And so on [raising bar] and obviously there had to be a disappointment, but I was wondering if you could comment anything about what you are seeing, not specifics, but as far as deal flow for smaller housewares companies?

We usually don’t comment on other housewares companies. During the course of the year there are always some that come – get put on the market. As you could see from the Reed & Barton transaction we are very disciplined. We set a value – when something is of value to us and we won’t pay more than that amount. So sometimes we have to pass on our deals, very frequently we have to pass on things, but we are still actively looking and we will be interested if the right things come along that will be accretive to our business.

Okay, and the final question just on the inventory level that you have, I mean it basically came in with where I was expecting, but did the dock situation, I guess also kind of taking that into account I would have thought it would have been a little lower, did that ease up right at the end of the quarter, is that maybe why the inventory was essentially in line with where I was predicting, just wondering how that affects you?

It has been easy. It kind of surprised us, the dock slow down surprised us in the first quarter because as you probably know they announced that – they came to terms, the union came to terms with the facilities early in the quarter, but what happened was that the new ships that came in were unloaded and those containers were delivered and the containers that were ready on the dock that were in the back were not delivered. And that was a surprise frankly. We didn’t anticipate that nor did anyone else. It has cleared. It cleared by the end of the quarter and everything is flowing on a very normal basis right now.

Okay, that is good. And I guess just as a follow-up on that question, so if it is still on the ship, but not – I’m just trying to figure out like logistically how does it – how does it hit your books, it doesn’t until you take delivery of it, right, is that…?

It is on our books when it is shipped.

When it is shipped, okay.

When it leaves the factories and the [Indiscernible]…

Okay. All right. So that would overstate your inventory then…

[Indiscernible] inventory being lower. We own the inventory that we can’t get…

Yes, okay. All right. That is really where I was going with it. Thank you.

Okay.

You have no questions. [Operator Instructions] I would now like to turn the call over to Jeff Siegel for closing remarks.

Well, thank you everyone for joining us and we look forward to speaking to you again when we announce our second quarter results. Thanks again. Bye.