Lifetime Brands, Inc. (LCUT) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lifetime Brands Fourth Quarter 2015 Financial Results. At this time, all participants are in listen-only mode. [Operator Instructions]. I would now like to turn the call over to Harriet Fried of LHA.

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, the impact of foreign exchange fluctuations 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. Go ahead please, Jeff.

Thanks, Harriet, and good morning everyone and thank you for joining us to discuss our fourth quarter and year-end results. For the year as a whole, we had good sales growth in our U.S. wholesale segment with sales of kitchenware, tableware and home solutions products all rising. Unfortunately, this growth was offset by various currency challenges in the UK, which both increased our cost of goods and hurt our export sales. Nonetheless, through improved operating margin, we achieved the 5.5% increase in our consolidated EBITDA, which rose to $44.9 million and we undertook a wide variety of product and business initiatives that are important to positioning our company for further growth and increased profitability in 2016 and beyond. To give you a good perspective on our outlook for the business, let’s take a closer look at the important trends that took place during the fourth quarter focusing on our wholesale segment, which accounts for the vast majority of our sales and profits. Starting with our U.S. operations, here the most exciting development was the significant improvement in our home solutions business providing proof that this division whose performance was impacted in recent years by significant cutbacks in retail, floor space devoted to the category has truly turned the corner. Our home décor portion of this business is now focused on branded giftables and functional décor, two areas at home décor that are growing. This new focus enabled us to launch a large program with a major pharmacy chain, our first significant foray into this retail class and it’s been going very well. In kitchenware, the largest component of our U.S. wholesale segment, sales were down slightly for the fourth quarter, although up through the year as a whole. Part of the decline was timing though a significant portion was the loss of two customers who went out of business; A&P and [indiscernible]. We generated good increases in cutlery reflecting a continued growth in our Farberware branded products from a wide variety of retailers. Farberware is by far our biggest brand and last year sales under this brand increased by 9%. I’m happy to report that we’ve seen good early success with Farberware Color Works, our first line that’s specifically targeted towards millennials. Color Works is a comprehensive line of kitchen tools, gadgets, cutlery and pantryware that features vibrant colors and contemporary styling. It was influenced by a highly successful collection at our UK subsidiary Kitchen Craft. So it’s an excellent example of the synergy we can achieve through different geographical sites at our business. This synergy will be an important factor in our success in coming years. In 2016, we are expanding the Color Works collection through the introduction of cookware. Another key growth initiative is our expansion of the Sabatier brand, which is our fastest growing nature brand. Our sales under the Sabatier brand in 2015 were almost double what they were in 2014. Earlier this week, we launched several hundred new Sabatier branded items at the International Home and Housewares Show in Chicago. They were enthusiastically received by retailers. There are very few brands in our industry with a 200 plus year history of providing high-quality food preparation products and we wanted to leverage the history by showcasing significant Sabatier introductions in all product categories, including cutlery, cutting boards, cookware, tableware, kitchen tools and gadgets and sinkware. We also expanded our contemporary Savora brand in 2016, building up a sweet collection of tools and gadgets, introducing a full wok bowlware [ph] program and building on our successful cutlery and cutting board collection, and adding a full line of quality wood and metal serveware. Savora provides outstanding design at superior value with products positioned in the upper tier retail channels. Turning now to tableware, sales were up for both the fourth quarter and the full year and margins also grew in 2015. We successfully launched several new Mikasa programs and the Moscow Mule copper mugs we introduced earlier last Jan continued this strong selling in the fourth quarter, as in our line of wire accessories. Mikasa is our most important tableware brand and sales under this brand increased by 17% in 2015. We’ll be expanding all of these programs in 2016 targeting new retailers and product expansions. We’re also bringing to the market our kitchenware and tableware products that utilize Mossy Oak camouflage pattern. We’re bringing it to sporting goods retailers for the first time as well, which we think will be a great combination for us. And we’re increasing the distribution of our Kim Parker collection, which features our signature style of modern floral and big bowl designs. Moving to the international segment, as we described in this morning’s press release, currency challenges in the UK dampened our results throughout the year. For the full year, sales fell by 14%. Although on a constant currency basis, the decline was only 6%. The most significant part of this decline was our ceramics business, which is impacted both by the unfavorable exchange rate and anti-dumping duties on ceramics. Fortunately, we have great teams at both of our UK businesses and they have a clear understanding of what is needed to improve the business. And faced with these challenges as well as the economic uncertainty in some of our key international markets, Kitchen Craft and Creative Tops are continuing to work together to build on each other’s network and to create new opportunities for their businesses. As you recall, Creative Tops sells primarily to major retailers while Kitchen Craft sells predominately to independent retailers, a channel we are working hard to strengthen with Creative Tops. In addition, with e-commerce sales growing nicely at kitchenware, we are working to bring some of those lessons and practices to Creative Tops. Other current initiatives includes moving the distribution of our Fred & Friends brand from an outside distributor to kitchenware and introducing the Paul Hollywood bakeware brand. Paul is an English baker and a celebrity chef. He’s quite famous on TV in the UK as well as in magazines. He drew a tremendous crowd at the Birmingham Fair, which I was at. Before I turn the call over to Larry, I’d like to comment on the in-depth review of our business that we mentioned in this morning’s announcement. We believe that we could significantly benefit by having a world-class international consulting firm conduct an in-depth review of our U.S. wholesale business to make sure we have the right structure and portfolio of brands and products to grow and improve our profitability in today’s complex business environment. The study they have undertaken is very comprehensive. They began with an evaluation of our divisional organization and are now looking at our product pipeline and brand management as well as Lifetime’s SKUs and our SG&A spending. We have already made several structural changes in the wholesale division as a result of their review consolidating certain areas, realigning responsibilities and reducing headcount where needed. We have been very thoughtful in our approach and the review provides a strategic framework and a roadmap for increasing our organization’s efficiency and effectiveness. When we have finished implementing their framework, we are confident that Lifetime will be in an even stronger position to achieve future growth and improve profitability, while at the same time continuing to lead the housewares industry worldwide with great progress, designs and functionality. I’ll now turn the call over to Larry for his detailed financial discussions.

Thanks, Jeff. As we reported this morning, net income from fourth quarter 2015 was $11 million or $0.77 per diluted share compared to $9.3 million or $0.66 per diluted share in the 2014 period. Adjusted net income for the quarter was 10.8 million or $0.75 per share compared to 9.4 million or $0.66 per share in 2014. The table, which reconciles this non-GAAP measure to report results, was included in the release. Income from operations was 17.6 million in the 2015 quarter versus 18.3 million in 2014. However, excluding adjustments for acquisition contingent consideration and restructuring expenses, income from operations increased to 17.3 million in the 2015 quarter from 14.1 million last year. Consolidated EBITDA, a non-GAAP measure reconciled through our GAAP results in the release, was 23.9 million for the current quarter and 20.9 million for the period in 2014. Consolidated EBITDA was 44.9 million for the full year of 2015 and 42.5 million for last year. For our U.S. wholesale segment, net sales in the 2015 quarter increased 1.7 million to 146.9 million as growth for our tableware and home solutions business categories more than offset a small decline in the kitchenware category. Tableware’s increase came from all product lines while home solutions had a very strong quarter on home décor’s Bombay products and pantryware volume in the warehouse club channel. Kitchenware’s strength for cutlery and boards did not quite offset lower volume in categories of other product lines. U.S. wholesale segment gross margin was 36.2% in the 2015 quarter compared to 35.4% in 2014. The increase reflects the benefit of margin increases at certain retailers and product mix. U.S. wholesale distribution expense as a percent of sales shipped from our warehouses improved to 7.7% from 8% last year’s quarter, as lower fuel cost reduced freight expense. U.S. wholesale SG&A was 21.5 million, which was 14.6% of net sales in this past 2015 quarter versus 23.5 million, which was 16.2% of net sales in 2014. And these numbers exclude the contingent consideration adjustment for acquisitions. This decrease is attributable to timing of accruals for incentive compensation and lower selling expenses. For our international segment, net sales in the 2015 quarter decreased to 31.4 million from 37.3 million in fourth quarter 2014. In constant currencies, net sales for the quarter decreased 12.1%. This decrease is due to weak UK holiday sales at retail, some lingering effects of anti-dumping duties as some retailers source directly and a currency effect of a weaker euro as compared to pound sterling on export sales. International segment gross margin was 34.5% in the 2015 quarter compared to 35.3% in the 2014 quarter. Gross margin declined as products are sourced in U.S. dollars but strengthened versus pound sterling. In addition, euro weakness against the pound sterling has adversely affected reported sales in Continental Europe and Ireland. International distribution expense as a percentage of sales shipped from warehouses was approximately 11.7% in the 2015 and 2014 quarters. Warehouse storage expense savings versus 2014 was offset by an increase in warehouse labor costs from higher drop shipped volume and lower sales volume. International SG&A was 6.2 million in the 2015 quarter and 7.1 million last year. The decline reflects the effect of currency translations. In constant currency, SG&A is about even with the prior year. Now for our retail segment, net sales was approximately 7.6 million in both periods. Gross margins increased to 66.1% from 67.8%. This decrease was due to promotional pricing of our exclusive Pfaltzgraff patterns. As a percentage of net sales, retail distribution expense increased from 29.3 in 2014 to 30.4 in 2015. The increase is due to higher warehouse and freight expense. The higher freight expense was due to larger packaging to reduce product damages. The benefit of this expense will be realized by fewer replacement orders in the future. Retail direct SG&A was 2.5 million in the 2015 period and 2.9 million in the 2014 period reflecting the savings from consolidating customer service with wholesale operations and lower paid search fees. With respect to non-segment items, unallocated corporate expenses decreased by 800,000 to 5.3 million in the 2015 period. This was primarily due to a decrease in professional and acquisition fees. Interest expense declined to 1.4 million in the 2015 quarter from 1.7 million, as operating cash flow was used to reduce indebtedness. The effective tax rate for the 2015 quarter was 36.7 compared to 34.5 last year. The 2015 rate reflects a decrease in the income in the UK, which has a lower tax rate than in the U.S. The effective tax rate for the year was 36.2%, which reflects a reduction of deferred tax liability in the UK as a result of its rate reduction. This compares to 42% full year with 2014, which was affected by non-deductible transaction expenses and a reduction in deferred tax assets in Puerto Rico as a result of their rate reductions. Equity and earnings of 743,000 in the 2015 quarter as compared to a loss of 1.1 million last year. In constant currency terms, Grupo Vasconia’s net income increased by 16% to 2.6 million in 2015 but was offset by a decline in U.S. dollar and Mexican peso exchange rate. Equity and earnings of the 2014 quarter was more than offset by a deferred tax expense related to Grupo Vasconia and an impairment charge related to our investments in GSI in Brazil. Looking at our balance sheet and cash flow, during 2015 our operating cash flow was 47 million versus only 5 million in 2014. This increase was a result of higher profits in 2015 and a significant reduction in working capital. Some of the reduction was from active management but much was from normal timing factors for customer collections and supply of payments. Over the last five years, our average operating cash flow has been approximately 25 million. We used the 2015 operating cash flow primarily to reduce our indebtedness by approximately 37 million, of which 10 million was a permanent reduction of a term loan. At December 31, 2015, the leverage ratio was 2.3 times and our liquidity was approximately 93 million. Finally, looking at 2016, we have projected full year sales to increase in the low to mid-single digit range and for the gross margin to increase by approximately 50 basis points. Based upon expected sales volumes, distribution and SG&A expenses as a percent of sales should be in line with 2015. This concludes our prepared comments. Operator, please open the line for questions.

[Operator Instructions]. Our first question comes from Frank Camma from Sidoti.

Good morning, guys. How are you doing?

Hi, Frank.

Hi, Frank.

I apologize, I missed the very beginning so you may have commented on this, Jeff, but I just want to ask about one of the things that you had pointed out last call was sort of the product placements going into holiday season. Just wonder if you could review for us kind of – obviously, you had good product placements and how they met your expectations on the sell-through?

Sell-throughs were not great in the fourth quarter. We found retail in general to be a bit challenging although it’s starting to pick up again, but it definitely was challenging at the end of last year. As you’ve all read, there has been a monumental shift in business heavily shifting towards the Internet both to the brick and mortar retailers and to the Internet-only retailers and this will continue. And we’ve positioned Lifetime to really capitalize on this as much as possible. We’ve set our systems up so that we can profitably shift direct to consumers for our retail partners, again whether they be brick and mortar retail partners or Internet-only retail partners. And we have build a very large team that’s focused on building sales of our products on the Internet through our customers.

Okay. You spoke pretty prominently about the Color Works. I was just – can you just remind us when, and I know you have new products coming in 2016 but when did Color Works – when did you launch that initially? I can’t remember.

The first shipments were in July. It’s a line that we picked up from the UK and we’re now marketing in this country and we’re gaining much more placement this year.

And do those products mostly, like the knives, do those mostly use ceramics too or are those – I know they’re colorful?

Most of its colorful there. The blades are what the call a resin-coated blade that you can slip on the blade itself. But they’re just very popular with young people, it’s a very colorful line. It’s – by the way it’s branded Farberware Color Works, which helps us to enhance the Farberware brand.

I see, okay. You mentioned retailers, it’s obviously not surprising based on all the other companies I follow. Can you comment on sort of the inventory levels at the retailers, how do you feel they are? I know you’re coming off of your season here, so if you could just kind of give us an idea like how well stocked up they are?

They’re fairly light. We had our houseware show in Chicago that ended on Tuesday – this Tuesday and at that show we met with every one of our major customers over a four-day period. And there’s quite a bit of enthusiasm. I have to tell you we were extremely busy every day of the show and the attitudes were good, and inventories I think are a little on the low side within our categories though they’re not from what the retailers are telling me, there are some other categories that are rather high.

Okay. And you obviously had a pickup in the margins and Larry, you mentioned some of that was from sort of the retailers and also the product mix. What about input costs? Were those input costs kind of offset by the currency issues because you also mentioned those as kind of a takeaway especially for the – you said you source in dollars but you sell in the pound, so I just wondering if you can comment about that?

For our U.S. business, the input costs have come down but we still have to cycle through the inventories. We carry about a six-month inventory, but input cost – the inputs have come down for a number of reasons. Raw materials have come down and the exchange rate between the dollar and the Chinese RMB has become a bit favorable towards us. Now, of course, the retailers want part of that and we have to give them part of that. But we will retain some certainly. In the case of the UK, the offset of their exchanges is far greater than the lower input costs, so their costs have gone up. It has certainly slowed their business. We have good teams there and they know how to fix it. So they are raising their prices, which – it’s a competitive world but the competitors are also raising their prices. We’ll start getting the benefit of the higher prices in 2016, higher selling prices, but it’s certainly a step back in 2015.

Okay. And some of those commodity costs – favorable commodity costs in the Chinese currency is clearly what I assume both into your comment about the 50 basis point improvement in gross margin. Am I correct about that?

That’s correct.

Okay, great. Thanks, guys.

[Operator Instructions]. All right. I’d like to turn the call back over to Jeff for closing remarks.

Thank you. Thanks for joining us today. As you heard, we had many areas of success in 2015. We also have many efforts underway to enhance Lifetime’s performance in 2016 and beyond. We see exciting growth potential as a result of the changes we are making and look forward to giving you an update on our first quarter call. Thank you.

Again, ladies and gentlemen, thank you so much for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.