Lifetime Brands, Inc. (LCUT) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 Lifetime Brands Earnings Conference Call. My name is Tony and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please proceed.

Good morning, everyone and thank you for joining Lifetime Brands 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 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'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 discuss our second quarter 2015 results. Despite continued headwinds from foreign exchange we delivered results that were substantially in line with our internal plans and well above last year’s period. Before talking in detail about the quarter let me touch on two areas that are likely to be of increasing importance to us, as well as for many companies in the years ahead; foreign exchange and e-commerce. Over the past several years we have made a concerted effort to expand our footprint outside of the United States. Through our global distribution system, consisting of Lifetime and its wholly owned subsidiaries in the UK, our partner companies in Canada, Mexico, Brazil and India, our joint ventures in China and our network of international distributors our products are now available in over 100 countries worldwide. This breadth of distribution exposes us to foreign exchange fluctuations that in this year have and will continue to dampen our results when sales in certain foreign currencies are converted into the U.S. dollars. To provide a clearer picture of how our non-U.S. operations are performing, consistent with how we evaluate our performance we have presented our net sales both in an as-reported and in a constant currency basis. The constant currency presentation excludes the impact of fluctuations in foreign currency exchange rates. We calculate constant currency percentages by converting our prior period local currency financial results, using the current period exchange rates and comparing these adjusted amounts to our current period reported results. The strong U.S. dollar has also had an impact on the cost of purchases in China by our non-U.S. partners. A [indiscernible] purchase is generally denominated in U.S. dollars. This has had a negative impact on the gross margin percentages achieved by Kitchen Craft and Creative Tops in the UK and our partner companies in Canada, Mexico and Brazil. There can be no question that the rapid and accelerating growth of e-commerce is phenomenon that affects all retailers and their suppliers worldwide. To service brick and mortar retail partners, all of which has some form of e-commerce and our Internet-only customers we have made significant investments in people and systems that have positioned us to become an insightful and proactive partner and to build collaborative e-commerce relationships with our major retail customers. Now to the quarter, our growth in sales and earnings performance is a result of our increased emphasis on product innovation and our continuing pursuit of productivity gains. In addition the quarter was positively impacted by club rollouts as anticipated earlier in the year. Let me run through some of the highlights of our second quarter as well as some of the key product offerings we have on tap for the second half of 2015. Starting with our U.S. wholesale segment, total net sales were up 11% for the quarter with a solid increase in our Kitchenware category and an outstanding job in our Tabletop category. These increases were offset slightly by a decrease in our home solutions product categories but there our timing of shipments has impacted our sales. Looking first to Kitchenware, as I mentioned last quarter, we’ve been implementing a fundamental shift in our brand strategy, centered on bringing a fresh new look contemporary look to our Farberware brand, which is both our largest and fastest growing brand, as contango [ph] of new placements at multiple retailers. Our new line of Farberware Colorworks, a full collection of high design, high function kitchen tools and gadgets, cutlery and pantry that were successfully pioneered by our Kitchen Craft division has now been placed with several retailers here in the United States. All the products are designed with vibrant colors and contemporary styling to appeal more to millennials. As you know millennials represent a very big and growing group of consumers for Lifetime. Our new brand strategy in cutlery where we’ve developed a number of innovative new products is doing equally well. The Farberware Edgekeeper [ph], our knife storage sheath with a built-in sharpening mechanism has been especially good placement with a broad spectrum of customers. The unique and patent pending Edgekeeper technology will be appearing on our other cutlery brands as well. You’ll see them in stores very shortly. Another brand that is getting great new placement in cutlery as well as in Kitchen Tools and gadgets and bake ware is Sabatier. Sabatier has a rich history, more than 200 years, in fact a fine cutlery. We’ve undertaken a collaborative effort across our divisions at bringing the name to new categories with great success. Turning to Tableware, as I predicted in the last quarter’s call we had an exceptional quarter, with virtually all divisions in this segment contributing to our good results. Our strong showing reflects substantially increased placement with several important customers. Growth is coming especially in Mikasa, Mikasa white-boned China, great novelty mug assortments as well as increased placement of flatware patterns. In home solutions sales were down, primarily reflecting a decrease in [indiscernible] ware products due to the timing of programs at warehouse close. We expect to make this up later in the year and have some very encouraging developments underway. Sales in home décor which has been a drag on our U.S. business for several years has finally turned the corner and in the second quarter home décor sales were up 14%. In addition our home décor division has been successful in getting promising four placements, including a program at a major drug store chain, which will be devoting a section to Bombay Giftables in all of its stores. This is a first for Lifetime. We’re also introducing some beautiful new designs and truly innovative technology to our La Cafetiere French presses. Coffee has grown in importance but there’s been no innovation in the category for years. Our new French presses are the first on the market, that are easily cleaned. We’ll be distributing these new French presses both in the United States and in Europe. Now moving to the international segment, the foreign exchange rate is still posing challenges with an 8% swing against us for the Bridge Count [ph] in this year’s second quarter as compared to 2014. The strong dollar hurt the UK businesses in that they must purchase in dollars in China and sell in pounds in the UK. This has forced a cost of 8% and they’ve been raising prices correspondingly. We are excited however by how well Kitchen Craft and Creative Tops are now working together to create new opportunities for each business as well as by the success of some of our new e-commerce initiatives in Europe. There are also leading the way for us to expand our business in those countries where we do not have a physical presence. Both Lifetime Brands, Canada and Grupo Vasconia performed well in the quarter in spite of the dramatic depreciation in Mexican peso and the Canadian dollar. At Grupo Vasconia where the main business is aluminum cookware and other aluminum products, since they purchased raw aluminum in U.S. dollars and sold much of their output of aluminum products in U.S. dollars the currency swings have been less of an impact on the business in local currency. At Lifetime Brands Canada, the weak Canadian dollar had much more of an impact on the cost of their products. However through aggressive sourcing and raising selling prices they have managed to improve their bottom line. In our retail direct segment overall our results were right on target. This is the team that has also been working with many of our major customers to help them put as many of our 15,000 SKUs as possible online. And that’s really providing great copy in order to enhance the salability of our products online. This is a priority for Lifetime and we expect to see online sales of our products grow at an extremely fast rate as the year progresses. As you know our seasonally larger quarters are in the second half of the year and I'm happy to report that our retail partners are showing confidence in the strong holiday selling season. Based on strong bookings and placements for products to be delivered in the second half of the year we continue to have a high level of confidence in our ability to achieve our consolidated full year 2015 financial goals. In constant currency we expect to achieve a near 6% in net sales throughout for the year, the high end of our guidance. However we expect the strong U.S. dollar to continue to dampen foreign operating results during the second half of the year. Hence on a reported basis, we currently forecast full year 2015 net sales to increase by 3% to 6% reaffirming the guidance we have provided on our first quarter conference call. Also we continue to expect our operating margin to be in the range of 4.5% to 5.5%. In addition reflecting on the strong momentum in our business and our confidence in discontinuing, we’ve increased our annual dividend by 13% to $0.17 per share. I’ll now turn the call over to Larry Winoker for his detailed financial review. Larry?

Thanks, Jeff. As we reported earlier this morning, the net loss for the second quarter of 2015 was $1.7 million or $0.12 per diluted share compared to a loss of $3.2 million, or $0.24 per share in the 2014 period. Adjusted net loss for the quarter was $600,000 or a loss of $0.04 per share as compared to a loss, as adjusted last year of $3.1 million or $0.23 per share. A table which reconciles this non-GAAP measure to reported results was included in this morning’s release. Loss from operations was $1 million for the ‘15 quarter compared to a loss of $3.2 million last year. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $4.4 million for the current quarter, $1.5 million for the period in 2014 and consolidated EBITDA for the trailing 12 months ended June of this year was $44.3 million versus $41.2 million in the same period last year. For our U.S. wholesale segment, net sales in the 2015 quarter increased 11% to $94.6 million. Higher volumes of Kitchenware and tableware was partially offset in the home solutions group. Kitchenware’s increase was primarily due to the strength of cutlery volume while the increase in tableware came from all product categories. Home solutions decline was due to lower pantry ware sales which was attributable to timing of its warehouse club program. U.S. wholesale segment gross margin was 35.5% in the 2015 quarter compared to 35.2% in 2014. The increase reflects better margin for certain product categories and higher sales from our more profitable product categories. U.S. wholesale distribution expenses as a percentage of sales shipped from our U.S. warehouses were 10.2% in both periods. The benefit of higher shipments in the current period was primarily offset by increased cost associated with smaller case pack shipments to certain wholesale customers. U.S. wholesale SG&A expenses were $20.2 million or 21.4% of net sales in 2015 quarter and $20.6 million or 24.2% of net sales last year. The improvement is attributable to cost savings initiatives offsetting, an increase in the expense related to company’s export operations which began in the later part of 2014. For our international segment, net sales for the 2015 quarter were $22.5 million, a decrease of 50.4% on an as-reported basis with a decrease of 4% in constant currency terms. The decrease in constant currency was due to tableware sales declines from Creative Tops partially offset by increase in Kitchenware sales for Kitchen Craft. International segment gross margin was 32.3% in the 2015 quarter, compared to 32.2% in the 2014 quarter. The gross margin in 2014 put a charge related to step up in fair value of Kitchen Craft’s inventory in the acquisition. Excluding this charge gross margin would have been 33.9% last year. Gross margin declined as product assortment in U.S. dollars which strengthened versus pounds sterling. In addition the euro weakened very significantly against the pound sterling hurting reported sales from Continental Europe and Ireland which was partially offset by increases in selling prices. International distribution expenses as a percentage of sales shipped from the warehouses was approximately 13.8% in the 2015 quarter. Distribution expense for the 2014 quarter includes a reclassification attributable to Kitchen Craft to conform to reporting [ph] in our U.S. presentation. Excluding the effects of this re-class, distribution expense as a percentage of sales shipped from the companies UK warehouses was 13.4%. This increase reflects lower sales volume in the UK and an increase in drop shipped volume. International SG&A expenses were $7.8 million in the second quarter of 2015 and $6.1 million in 2014. This increase was primarily attributable to a related change in fair value of contingent consideration attributable to the Kitchen Craft acquisition offset by a decrease reflecting the weakness of the pound sterling against the dollar. For our Retail Direct segment net sales were $3.9 million in the current quarter versus $3.6 in the 2014 quarter. Gross margin decreased to $68.4 from $69.7 last year reflecting increase in promotional events. However overall the increase in sales more than offset the gross margin percent decline. As a percentage of net sales, retail distribution expense was 31.4% in 2015 and 28.6% for 2014. The increase in expenses is due to higher freight rates. We’re in the process of implementing great shopping software and have established relationships with other carriers to help mitigate the impact of this increase. Retail direct SG&A was $1.8 million this year versus $1.9 million in the comparable quarter last year. With respect to non-segment items, unallocated corporate expenses decreased by $600,000 to $2.2 million in the 2015 period which was primarily due to a reimbursement of expenses incurred when acquisition is not completed. Interest expense was $1.5 million in 2015 versus $1.7 million last year as average borrowings decreased during the current period including scheduled repayments of the term loan. The effective tax rate in the current period was 29.3% versus 32.8% last year. This low effective tax rate benefit for 2015 was due to certain permitting items and losses without benefit, offset by the benefit derived from our operations in the UK which has a more favorable corporate tax regime. Equity in earnings was $2,000 in 2015 compared to $41,000 last year. The earnings is primarily attributable to our Grupo Vasconia’s earnings, which before U.S. income taxes doubled to $671,000 from $338,000 last year. However the decline in the Mexican peso against the dollar required the company to report significant deferred tax expense. At June 30th our leverage ratio was 3.01 times and our liquidity was approximately $71 million. Looking at balance of 2015, as we have said, we project full year sales to increase of 3% to 6% over 2014 and our gross margin to increase approximately 50 basis points over last year. Based on expected sales volume distribution expense should be approximately 9% of net sales and SG&A should be in line with 2014, at about 23.5%. Our effective income tax rate for the full year is projected to be 38% as our U.S. business is expected to perform better than our UK business where tax rates are lower. Capital spending is planned to be approximately $6 million and for the full year average shares outstanding projected at 14.3 million. This concludes our prepared comments. Operator, please open the line for questions.

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

Good morning guys.

Good morning Frank.

Hey can you talk about the timing of the dividend increase a little bit, is that typical for you kind of midway through the year. Most my companies are kind beginning of the year after results for the year, just kind of curious?

Well, we think -- it’s something we talk about at, obviously at all our Board meetings. I mean we just assess where we think the business will do, how healthy it is and obviously we have pretty good quarter. And we want to demonstrate that we are pretty confident about our success and continued success, so we did it this time. But we don’t necessarily set a date or particular period in which we will adjust the business.

Let me add that we had quite a long discussion with our Board on this and the feeling is because our business looks like it’s really going in the direction we want it to go in, both in the last quarter and going forward that we felt it was the right thing to do.

Okay, the other thing is you kind of stated some of this, but I just -- a little surprised on the -- when you adjust for FX, the lack of growth internationally, was it because you had to increase prices or there was a slack in demand, I was just wondering if you could get a little more into that?

Yeah, it is we talked specifically about the UK, as Larry, mentioned the Kitchen Craft business did have increases, it did increase. The decreases were in Creative Tops which -- and Creative Tops is more of a ceramic end of the business. The Kitchen Craft business because of the lower price of oil that were able to negotiate some lower cost in products and also the fact that they -- Kitchen Craft sells to the smaller retailers where it’s easier to raise products quickly, independent retailers, where Creative Tops sells to the majors which takes much longer time to get a price increase. It’s not that the demand is really down but the prices are up quite a bit and they are also both having difficulty selling into Continental Europe because of the exchange rate differential between the pound and the euro makes their products more expensive in Continental Europe and also it’s a margin challenge but we are raising prices in Continental Europe to the independents. We just -- it was actually done in July and we expect to see definitely improvement in the UK business in the second half of the year.

Okay, and we talked a little bit last time about the -- your input cost, I mean both oil based resins and steel down year-over-year, when do we start to see that kind of flow through the P&L?

As Larry has mentioned that we expect to have improvements in our margins and we expect that to continue. We are definitely we are seeing that and it’s something that I think it is going to continue for the foreseeable future.

Okay and final question just on cash flow. Can you -- traditionally you’ve actually produced pretty good free cash flow, with the exception of last year. So wonder if you could maybe touch on cash from operations and if you can kind of help us out there modeling out this year?

No, our cash flow should pretty much follow our growth in our business and EBITDA plus less calculated tax of the interest. The other factor that will be significant in operating cash flows, working capital and we don’t foresee that increasing in any significant way. Our business is growing 3% to 6% perhaps that increases also. So last year was anomaly, we did have some payments after we acquired Kitchen Craft, there were some final payments that came out of that business having to do with pension and some other things that caused last year to be lower than it has been historically. But we should see much more predictability, our CapEx spending should be in the $6 million, range, our dividend we can see it if we can raise it [ph] better, no it’s not going up significantly, so from that $2.1 million to about $2.3 million or $2.4 million and we will continue to use the excess cash flow to pay down debt. We have really significant amortization of term loan which we can handle and the rate on the term loan is higher than on the revolver so we can get interest rate benefit here as well.

Okay, thank you.

[Operator Instructions] There are no further questions in the queue at this time. I’d like to turn the call back over to Mr. Jeff Siegel for any and all closing remarks. Please proceed.

Thanks again for joining us today. You can see from our new revenue guidance and increased dividend that we are moving into the second half of 2015 with a high degree of confidence in our strategy and our products. We look forward to talking to you again after the third quarter. Thank you.

Ladies and gentlemen that concludes today’s conference call. Thank you for your patience. You may now disconnect and everyone have a great day.