Lifetime Brands, Inc. (LCUT) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2015 Lifetime Brands' Earnings Conference Call. My name is Catena and I'll be your coordinator for today. [Operator Instructions]. I would now like to turn the presentation over to your host for today's call Ms. Harriet Fried of LHA. Please proceed.

Good morning, everyone and thank you for joining Lifetime Brands third quarter 2015 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. The impact of foreign exchange fluctuations and other risk 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.

Lifetime's third quarter results generally met what we expected despite the impact of foreign currency exchange rate fluctuations on our international business which has reduced our reported net sales revenue by approximately $3.6 million or 2.3% year-over-year and had a negative effect on our margins. In the U.S. where foreign exchange is not an issue, our wholesale business increased 4.2% year-over-year with growth in each of our three product categories, kitchenware, table top and home solutions. Most exciting was a double digit jump in Home Solutions, a 22% overall. The home decor area has been a drag on our U.S. businesses several years. However as I predicted last quarter it's finally turned the corner. A key contributor is a large new program at a major pharmacy chain which is devoting a section to Bombay Giftables in all the U.S. stores. Bombay has been a great specialty brand for over 30 years and ranks among the top ranked recognizable home decor brands in America. We expect the Bombay Giftables program and our recent penetration into the drugstore channel to continue to be an important source of growth for this division. In kitchenware the largest component of our U.S. wholesale segment, sales were up slightly with increases in cutlery and [indiscernible] partially offset by declines in other areas including tools and gadgets. Kitchenware sales were hurt by the bankruptcies of to mid-sized retailers, [indiscernible] and Anna's Linen and a comparison of year-over-year performance must take into account strong sales in Costco in last year's quarter that didn't occur this year as Costco shifted its emphasis to other categories such as pantryware and table top which reflected in the results of those divisions. In tableware sales were up reflecting good growth in the Casa branded dinnerware and flatware as well as strong sales of novelty mug assortment. Our retail direct segment produced results that were right on target, all though this segment currently constitutes a small percentage of Lifetime sales. We see many opportunities for growth both with infinite only customers and with brick and mortar retailers who are working hard to grow their online sales. We've made a significant investment in developing the proper infrastructure to enable us to properly service business done over the Internet. Moving to the International segment where our broad distribution which accomplices over 100 countries exposes us to foreign exchange fluctuations that this year tampered our results. Net sales decreased 13.3% however on a constant currency basis decline was only 3.2%. The depreciation of local currencies against the dollar increases the cost of goods imported from Asia where the purchases are denominated in dollars, this impacts margins and slow sales with higher prices are passed along to customers and consumers. Ultimately these exchange rate fluctuations produce unfavorable comparison when the results of our non-U.S. businesses are translated into U.S. dollars. In the UK at Kitchen Craft we have appointed Garry Biggs to succeed Andrew Plant who is retiring as Managing Director. Garry comes to us from Denby, a well-known dinnerware company where he led a management buyout in 2004 affecting it's turnaround. Prior to this, Garry worked at United Biscuits holding a number of General Management and Marketing Directorships. We continue to be pleased by how well Kitchen Craft and Creative Tops working together to create new opportunities for these business. Creative Tops sales are a predominately to major retailers, while Kitchen Craft sales are primarily to a network of independent retailers and each has played very well developed international sales channel. The two businesses a taking steps to build on each other's networks and take advantage of global synergies that are not available to our competitiors. Looking at the nonfinancial side of our business, we’re happy to have entered the second half of the year which seasonally is always our strongest. We’re off to a solid star especially here in the U.S. where our business is [indiscernible] beneficiary of lower commodity prices and a weaker Chinese Yuan which would help our margins beginning of the fourth quarter this year and considerably more so in 2016. We have several major initiatives underway, that will change the way we do business. First, we are building ecommerce strategy to keep pace with the rapidly changing face of the digital marketplace. This market is taking many twists and turns as new Internet only retailers appear and traditional brick and mortar customers develop their web and omnichannel strategies. To stay ahead of the game as I noted we are making significant investments in people and systems to build our expertise and capability in this area and we believe our efforts are moving us in the right direction. The third quarter responses from our customers for our early sales efforts have been encouraging and we are gradually discovering what programs and products to emphasize in the future. In addition we recently put in place a new agreement that enables lifetime to service a third party marketplace seller to certain exclusive products that do not compete with those altered by our traditional and brick and mortar retailers. Secondly, our new brand strategy to clues that was developing new brands and the kitchenware category that we think will pay off starting in 2016 and bringing fresh new contemporary looks for some of our key brands, and example there's a new line of Farberware Colorworks, a full collection of high design, high function kitchen tools and gadget as well as cutlery which were successful pioneered by UK Kitchen Craft division. Colorworks started shipping in the U.S. in the third quarter, and while it's still early in the process it appears to be gaining very good traction here. All of the products are designed with vibrant colors and contemporary styling to appeal to millennial who represent an important group of consumers for a Lifetime. We’re looking for solid results on this new line of the fourth quarter as well as in 2016. The Farberware Edgekeeper the next store cheap with a built in shopping mechanism that we discussed last quarter also came to retail recently and based on strong placement we have high hopes for this new concept. Another important [indiscernible] we launched an expansion of our upscale Sabatier brand which was inspired by the demands of our Fine French cuisine and includes a wide array of styles ranging from traditional to the contemporary. Based on the success we are having with this brand we’re expanding Sabatier from cutlery, to new categories including kitchen tools and gadget and bakeware. To complement our presence in Beijing, U.S. retailers where we’re already well-represented, we’re working to build an independents store strategy. We think independent specialty stores offer an important opportunity to expand our distribution and are placing several of our keep brands in a number of regional showroom to help us penetrate this market segment. In addition we have invested in the specialized sales team to develop this effort further in 2016. The 2016 our sales force has targeted several new customer opportunities beyond our traditional retail partners. We’re reporting on these efforts to you next year as they develop further. Finally at last month's tabletop show here in New York the new items we have introduced for our Mikasa Italian [indiscernible]. This is a 23 year old line of Italian countryside that's actually growing quite nicely for us. We’ve expanded the collection by adding four new colors and three patterns also the sets of four to millennials seek products that are visually engaging as well as functional. We also have colored glassware and colored dinnerware also solid [indiscernible]. As we move into the holiday season, I'm happy to report that as expected our week to retail partners get up response selling season with us. I'll now turn over the call to Larry for his detailed financial review.

Thanks, Jeff. As we report this morning net income for the third quarter of 2015 was 5.1 million or $0.36 per diluted share as compared to net loss of 1.6 million or $0.12 per diluted share in 2014 period. Adjusted net income for the quarter was 5.9 million or $0.41 per diluted share as compared to 5.7 million also $0.41 in 2014. A table which reconciled as non-GAAP measure to reported results was included in this release. Income from operations was $9.8 million compared to 8.4 million in 2014 excluding impact of impairment charge in 2014 income from operations at 11.8. Consolidated EBITDA, a non-GAAP measure that is reconciled to our results in the release, was $14.1 million for the current quarter, and $16.5 million for the 2014 period. Consolidated EBITDA was 41.9 million for the 12 months ended September, 2015 and $42.6 million for the same period last year. For our U.S. wholesale segment, net sales in the 2015 quarter increased 4.2% to $130.6 million, growth in all our business categories, Kitchenware and tableware and home solutions. Kitchenware’s increase was modest as growth in cutlery and products more than offset lower volumes and other line, tableware's increase from Mikasa and flatware. While home solutions reported a very strong quarter on home decord's Bombay product line and pantryware's volume in the warehouse channel club. U.S. wholesale segment gross margin was 34.3% in the 2015 quarter compared to 34.9% in 2014. The decline in gross margin reflects faster growth in lower margin product categories and sales channel mix. However through the nine-months of the year, U.S. gross margin is up 20 basis points for 35.4%. U.S. distribution expense as a percentage of sales shipped from our warehouses improved 3.4% in the quarter from 8.8% last year, benefit of higher shipments in the current period was offset by labor cost associated with smaller case back shipments and another services for our retail customers. U.S. wholesale SG&A expenses were 22.1 million which is 16.9% of net sales versus 21.1 million, 16.8% of net sales in 2014, increase is attributable to expenses related to the company's export operations which began in latter part of 2014 and a timing of short term incentive compensation offset by cost savings initiative, where our international segment net sales in the current quarter were 28.8 million a decrease of 13.3% on a reported basis by a decrease of 3.2% in constant currency terms, a decrease in constant currency was due to tableware sales declined for Creative Tops, and Kitchen Craft sales were even with prior year. International segment gross margin was 33.2% in 2015 compared to 35.2% in 2014. Gross margin declined as products sourced in U.S. dollars have strengthened versus pound sterling. In addition euro weakness against the pound sterling adversely the affected the food sales from Continental Europe and Ireland. International distribution expenses as a percentage of sales shipped from warehouses was approximately 4.8% through 2015 compared to 10.8% in the 2014 quarter, increase reflects the lowest sales volume and increase in warehouse labor costs from higher drop ship volume. International's SG&A expenses were 6.1 in 2015 quarter versus 6.6 in 2014 reflecting the decline in the pound sterling. Now for our retail direct segment, net sales were 3.8 in the current quarter versus 3.7 last year, and gross margin was 69.2% in 2015 versus 69.3 in '14. As a percentage of net sales retail direct distribution expenses were 32.6% for 2015 versus 29.7 for '14. The increase was due to higher freight expenses, we are in the process of implementing rate shopping software to mitigate through these higher and retail direct SG&A was 1.7 in the current period versus 1.8 million for the prior year quarter. Now looking at the United segment area, unallocated corporate expenses increased by 600,000 to 3.9 million in the current period which was primarily attributable to an increase of professional fees and employee expense. Interest expense declined to 1.5 million primarily due to scheduled repayment and term loan. Our effective tax rate for 2015 quarter was 33% compared to 46.4 last year this lower rate was due to the reduction of discrete items that we ordered in the price period. Equity and losses was 459,000 in the 15th quarter compared to equity loss of 5.2 million in the 2014 quarter the 2015 loss is primarily attributable to our share of Grupo Vasconia earnings which before U.S. income taxes was a profit of 337%, in the 2015 period. However the decline in the Mexican peso against the U.S. dollar required the company to record a significant deferred tax expense, group of Grupo Vasconia equity and earnings for the 2014 quarter was 326,000. In Mexican peso terms, Grupo Vasconia Lubov net sales and net income increased for the 2015 by 70% and 29% and respectively but the 20% decline in Mexican peso significant due to reported results in the U.S. dollars. In 2015 equity in loss also reflected an impairment charge of 5.5 million related to our investment in GS International. At September 30, our debt leverage ratio was 3.75 times and our liquidity was approximately 48.2 million. Looking at the balance of 2015, we project full year sales to increase 2% to 3% and gross margin to improve slightly over 2014 and expected sales and gross margin increase in our U.S. dollar business is expected to be largely offset by declining for our UK based business and as we have said the decline in the UK is from higher sourcing cost due to the U.S. dollar strength and also some economic weakness we see in Europe. We expect operating margins to be in the 4% to 4.5% range, our effective income tax rate for the full year is projected at 39% as our U.S. business is expected to outperform our UK business where tax rates are significantly lower. Capital expenditures are planned at approximately 6 million and for the full year weighted average shares are 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 Frank Camma representing Sidoti. Please proceed.

You stated that you have confidence in the holiday season and I'm trying to figure what that’s based on what I hear from other companies and retailers, can you just give us some more color on the?

It's based on placement frankly. And what we have what we call our flex plan which is our internal plan which is updated on a monthly basis sales. We begin the year with a budget and then adjusted each month based on whatever changes happen at different retailers and based on what's going on we still have a high level of confidence. You know our biggest records [ph] as we've noted is in international where -- though this is doing well the translation is hurting us and that's going to continue.

But international was actually down even if you ignore translation.

It's down only at one place which is Creative Tops, Creative Tops is the ceramics part of our UK business. Besides exchange differential which is about 15%. They also have a 25% anti-dumping duty which came took place in the last two years. So their retail prices, the prices at retail of their product has gone up close to 40%. It's a dampen sales to some degree. It's it seems to be turning around because they're converting their business and moving away from the pure ceramic items to more of the accessory items that they can get a higher margin on.

With respect to you know understanding your relatively slow inventory term, we’re still not in the quarter at least if we didn’t see any improvement on commodity costs, it looks like the impact cost. I was wondering if you’re going to address that all for further you said maybe Q4 next year, can you toss it out?

If you just see it's substantially better in Q4 of this year and again I'm talking about the U.S. business [Technical Difficulty] international, the U.S. business there should be a substantial improvement starting in Q4 and certainly going into 2016 the main commodities that we use are down dramatically and we certainly are getting of course decreases overseas.

And at what point does your retail partners so do they push against you, you know knowing that?

They do to some degree, not all of them but some of them do. But that's overall ,we still expect to be a little bit better off. I mean we're not going to be, it's like a princess in one case [indiscernible] [indiscernible] steel which is down from $550 a ton in January to under $350 a ton right now and we use a lot of that in our bakeware. We’re getting lower cost, but we have also lowered some of the retailers as expected. But overall we still will be improving our margins.

Larry, outlined some issues on why the distribution cost continue to go up, it's clear on why SG&A goes up both on absolute basis and relative to revenue as a percent basis. So I was just wondering if you can give us clarity on that.

I thought it was in fact in-line with what it was last year as a percentage of sales. And yet another thing I mentioned is about the timing of when -- we even recorded our short term compensation, incentive compensation not ratably throughout the year depending on where the profits are and it was shift versus last year so we recorded it earlier, more of it earlier this year than we did last year. But by and large our [Technical Difficulty] we have a number of initiatives to control end used costs. So I think for the year we should be okay relative to their sales.

Okay and last question just see how does this impact obviously bringing down numbers for this year. How does this impact your view on longer term growth rates?

It really doesn't have much of an impact on the longer term, we still feel organically we can grow in this 3% to 5% range and will layer on acquisitions above that. We still feel the same way, there is no change in our feeling, hopefully the exchange doesn’t get much than this now because that is certainly putting us back. Our U.S. organic growth rate in the quarter was over 4%.

So just one clarification, Larry did you say your full year tax rate was going to be 39%?

Yes.

Would that imply very high fourth quarter tax rate from doing the map rate?

Yes that’s because of how performance in overseas is. So our rates here -- our U.S. rate is 35 plus state taxes and in the international or the UK it's below 20, but because of what's happening actually it's driving up our effective tax rate.

I understand that but you'd have to have a statutory rate above 40%?

That’s what is following us [ph].

[Operator Instructions]. With no further questions at this time I would now like to hand the call back to Mr. Jeff Siegel for any closing remarks.

Thanks for joining us today. As you heard we have a multitude of efforts underway at Lifetime to create new and innovative products that make household tasks easier, more exciting and more fun to consumers. We're optimistic about our results for the holiday period and look forward to giving you an update after the fourth quarter.

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