Lifetime Brands, Inc. (LCUT) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lifetime Brands First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder today's conference call is being recorded. I would now like to turn the coming over to Harriet Fried, LHA. Please go ahead.

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. Please go ahead, Jeff.

Thanks, Harriet, and good morning everyone and thank you for joining us today to discuss our first quarter 2016 results. The top line decline in our first quarter primarily was attributable to an inventory rationalization strategy at a major U.S. retailer. While this had an unfavorable impact on the quarter, for the full year we expect to be a net beneficiary based on an expansion of our assortment and increased store count. Sales also declined in our international segment, primarily due to currency fluctuations. In local currency terms decrease in tableware sales was essentially offset by increase in kitchenware sales. We also saw some retailer program shift out of the first into the second and third quarters. There was so, a one-time; this is also what we call a one quarter phenomenon. Those quarters and those programs are coming through now and we expect that we will benefit for the rest of the year and as the year continues we expect things to be good. As always our seasonally large quarters are in the second half of the year, and based on strong confirmed bookings and placements for products to be delivered at, we expect the coming periods to be considerably stronger. Before I go into a detailed review of the quarter I'd like to update you on three important initiatives starting with the study I had mentioned in our last call, which we undertook to -- with a major international consulting firm to assess opportunities to drive growth and revenues, gross margin, operating profit and cash flow, phase one which we recently completed reaffirmed Lifetime's strong market position, our diverse portfolio, our solid client relationships and strong divisional leadership. The diagnostic also identified various opportunities for effectiveness and efficiency savings, including an organizational realignment direct -- excuse me, indirect spend management, brand management and SKU management. To that end we realigned certain U.S. wholesale divisions in our organizational structure. In the process reducing headcount and incurring restructuring expenses of $640,000 for the quarter. We recently began phase two of the project which focuses on designing and create a roadmap to increase efficiency on the frontend like for example reducing secondary SKUs, strengthening brand management and reducing complexities throughout our organization. We're confident these actions will position us for future growth in both sales and profitability. Another important initiative is the steps we're taking to build our presence in ecommerce. In an age where more and more people are going online to shop, building a sustainable increase in online revenue is vital. Online sales are predicted to reach $327 billion this year. And to ensure that we if we seize our share of this market it's imperative that for us we enhance the consumers' online shopping experience. Our main focus for this area is the growth of sales at both online only retailers and online sales in our traditional brick and mortar retailers. The dedicated ecommerce team we established last year is constantly meeting with their counterparts in the retail community to develop joint online strategies to help accelerate our online relevance and revenue. The third key initiative is our direct outreach program designed to help support our independent retailers, another area of potential growth for Lifetime. We'd began by structuring each territory to align by region, demographics and location and then selected the right independent rep groups to provide coverage, attend the right trade shows where the independent accounts are buying and off the plans and inventory to support this channel. We think there's a lot of room for growth here. It's a plus business, something our original business model didn't include and the giftable items we've been getting through recent acquisitions complement the basic kitchen tools and gadgets, dinnerware and other products we've traditionally offered. With that high level background let me run through the specifics of our first quarter by division and also describe some of the important product offerings on half [ph] of the rest of 2016. Please keep in mind that as I talk about the kitchenware, tableware and Home Solutions categories, my remarks reflect the realignment that I had mentioned in certain of our U.S. wholesale divisions and our organizational structure. So, starting with the U.S. wholesale segment, [technical difficulty] sales were down just under 5%, largely due to the inventory rationalization program at a major customer and to the timing of some retailer programs. But we do expect this to reverse in the coming quarters particularly as we progress with two important programs in kitchenware; Colourworks and Edgekeeper. To remind everyone Colourworks is a full collection of high-function, high-design kitchen tools and gadgets, pantryware and cutlery that we launched in the U.S. last year. It started as a successful brand in the UK and Europe for Kitchen Craft and is has sold well in those markets. For its launch in the United States we cobranded it with Farberware the most recognized cutlery brand in the country. It's proven to be a significant success particularly with millennial's whose buying habits align perfectly with Colourworks great colors and affordable price points. In fact Colourworks has been one of the fastest growing product lines in our company history and it's been picked up by top retailers and big box stores across the country. Many of them have reported that its one of their most successful lines in all the housewares. It’s the only national brand to offer kitchen items that feature color and design in such an impacted way, we have high hopes of expanding distribution and those retailers who have tested it as well as several new customers in a meaningful ways as the year progresses. We had excellent success with our patent pending Edgekeeper line from the day it was launched in 2015. We have now expanded the line by offering cutlery blocks and cutting boards with build-in sharpeners. The new products were unveiled under our Sabatier, Farberware and Real Brands at the international Home & Houseware Show and were picked up by several major retailers. We think this will be a key driver for our cutlery brands. Our Edgekeeper lineup is nice and IT has sharpening rods built into each storage sheet that automatically sharpen the blade every time the user removes or replaces the knife in the sheath. The sharpening rods are aligned to really nick the blade at the correct angle, sharpen at the correct angle, eliminating guess work in helping consumers keep knife sharp for optimal performance. Moving onto tableware, we held sales steady in this area despite the decline of floor space that’s taking place at retail. Farberware products continued to do particularly well as did our colorful [indiscernible] table top drawers. We are expanding our wide storage and organization program and at the table top shop here in New York in April we introduced the Mikasa, what we call dining three concept which focuses on the way to serves, stack and store a consumers tableware in the three piece set that’s nests with easy storage. We also introduced coordinating stackable drinkware in addition we are entering the sporting goods channel with our Mossy Oak branded camouflage products and we’ll be reporting on the outcome of that in that U.S. in future quarters. We recently made an acquisition to improve our metal Serveware offerings as well as to extend our reach to specialty retailers, acquiring the brands and product portfolio of Wilton Armetale, a long established supplier of fine serveware and grillware. Armetale metals a unique aluminum based alloy that helps keep hot food hot and cold food cold making it an ideal material for contemporary cooking and entertaining. It’s a great addition to our tableware products and harnesses lifescience deep talent for innovation. We’re looking forward to accelerating the development of new products under this brand. Finally, our home solutions division turned in another sales increase. We had good success with our LED lighting programs in the first quarter and continue to do well with giftables. We are now working to expand the giftable program into new retailers and are pushing them with pursuing a lunch program to build the BUILT NY brand that features patent pending ice pick technology that helps keep food and beverages cold for several hours while eliminating the need for separate ice packs. As part of our restructuring, BUILT has been passed with accelerating development on the hydration and food storage businesses, two rather hot categories in housewares. Turning now to our international segment, on a currency adjusted basis, net sales were down slightly as the European economy continues to be challenging and we continue to be impacted by the anti-dumping duties on ceramics. We’re working to counteract this trend by building up our Creative Tops business with independence. This actually will take some time to show results. In the meantime Kitchen Craft continues to do well, interestingly in addition to be strong with independence Kitchen Craft leads their market with very robust sales and online retailers, an area which has been growing double-digit for us in every quarter. We’re working to replicate their successful practices in our other UK based businesses. We’ve also begun introducing Fred & Friends brands into Kitchen Craft, through Kitchen Craft actually, which is showing very strong initial results we’ve moving forward with our full Hollywood brand at base volume, a very same as shipped [ph] in the UK. I will now turn the call over to Laurence Winoker for his detailed financial review. Larry?

Thanks Jeff. As we reported earlier this morning, the net loss for the quarter of the first quarter 2016 was 4.3 million or $0.31 per diluted share as compared to $2.1 million or $0.15 per diluted share in 2015 period. Adjusted net loss for the quarter was 3.4 million or $0.24 per share compared to 1.9 million or $0.14 per diluted share in 2015. Table which reconciles this non-GAAP measure in the reported results was included in this morning’s release. Loss from operations was 5.2 million as compared to 2.2 million with the 2015 quarter. Consolidated EBITDA and non-GAAP measure as reconciled to our GAAP results in the release was 300,000 for the current quarter and 2.5 million for the period through 2015. Consolidated EBITDA was 42.6 million for the 12 months ended March 2016 and 41.4 million for the 12 months ended March 15. For our U.S. wholesale segment, net sales in the 2016 quarter decreased 4.2 million from 82.3, the decrease reflects the inventory rationalization strategy at a major U.S. retailer and some higher promotional expenses in the current period partially offset by home -- higher home décor products sales. The U.S. wholesale segment gross margin was 35% in the '16 quarter compared to 37% in the 2015 period. The decrease reflects the impact of the promotional expenses noted and product category mix. This is partially offset by an improvement in product margin. U.S. wholesale distribution expense as a percentage of sales shipped from our U.S. warehouses were 11.3% in 2016 quarter and 10.5% in 2015. This increase reflects the effect of a decrease in product shipped as a significant portion of our warehouse expenses are fixed and an increase in certain operating expenses including an increase in the California minimum wage on January 1st of this year. U.S. wholesale SG&A expenses were 20.9 million or 25.4% of net sales in the 2016 quarter versus 21.1 million or 24.4% of net sales in the first quarter of last year. The lower expense is attributable to a reduction in headcount as well as decreases in travel and selling expenses. Looking at our international segment, net sales for the '16 quarter were 23.7 million, a decrease of 1.7 compared to last year, but in local currency the decrease is approximately 500,000 or 2.2% due to a decline in tableware sales, largely offset by an increase in kitchenware online retail and export sales. The international segment gross margin was 35.5, versus 35.6 in the 2015 quarter. This decline in margin was a result of continued currency weakness, but substantially offset by favorable product mix. International distribution expenses as a percentage of sales shipped from the warehouses in the UK were approximately 12.5% in the 2015 quarter versus 11.9% in 2015. The increase is a result of overall decline in sales volume. International SG&A expenses were 5.3 million in the 2016 quarter versus 6.9 million last year. This decrease is primarily due to foreign currency transaction gains and the effect of foreign current translation. Our retail direct segment net sales were 5 million in the 2016 quarter versus 5.8 million in the 2015 quarter. The 2015 quarter benefited from the delayed shipments from 2014 which was adversely affected by the West Coast dock work [ph] slowdown. Gross margin increased to 67.3 from 66.6 last year, reflecting a decrease in promotional events and fewer no-charge orders from improved factory packing thereby reducing breakage. As a percentage of net sales the retail directs' distribution expenses decreased to 30% from 31.1% last year on fewer no-charge orders. Retail directs' SG&A expenses were 1.8 million in the 2015 period down from 2.1 million in 2015. The decrease in expense was due to a headcount reduction and duplicative cost incurred in 2015 during the consolidation of our customer service call center. With respect to non-segment items, unallocated corporate expenses increased by 300,000 to 3.9 million in 2016 period, reflecting an increase in acquisition related expenses. Interest expense was 1.2 million quarter as compared to 1.4 million in the quarter last year. The decrease is attributable to a reduction in total indebtedness including scheduled amortization payments of the term loan. Effective tax rate for the quarter was 35.4 compared to 36.3 last year. The lower benefit of effective rates for the period in '16 reflected change in state tax rates. Equity and earnings flash-loss was a loss of 150,000 in the quarter, the current quarter compared to earnings of 288,000 last year. The loss in the current period included a per-tax expense of 200,000 non-cash charge due to the requirement to report tax benefits for foreign currency translation losses through other comprehensive income. And there's a corresponding adjustment to deferred taxes. Grupo Vasconia’s reported income from operations was 900,000 in the current quarter versus 2.7 million last year. At March 31 of this year the leverage ratio was 2.6 times and our liquidity was approximately 64.4 million. Looking at the balance of 2016 we currently project sales, full year sales to grow approximately 3% excluding foreign currency impact and gross margin to improve approximately 50 basis points, based upon this expected sales volume distribution and SG&A expenses as a percent of sales should be in line with last year. This concludes our prepared comments. Operator we're ready for questions.

Thank you. [Operator Instructions] And our first question comes from Frank Camma of Sidoti. Your line is now open.

Just wondering if you could talk a little bit about what's going on with the input cost what you see there now that you’ve gone through some of the inventory and how that might be benefitting you on that, obviously you didn’t see it in the quarter but I was wondering if you could address that.

Yeah, as you know input cost have come down, the raw material prices have come down and the exchange rate between U.S. dollar and the RMBs has been pretty good. We are experiencing improvements in margin, frankly in gross margin on merchandize sales without a doubt and I think Larry gave you a number what we expect for the year. Frankly, I have a feeling we could do even better than that.

Okay. So obviously that’s more, that would be more 3Q, 4Q as your volumes pickup to kind of --.

Second quarter, stock in the second quarter and we’ve gone through a lot of -- we have to obviously cycle through the inventory, higher cost inventory and we get to the lower cost inventory and we’ve done that. You should see the benefits in the second quarter.

Okay. Can you talk about the color -- I know you talked about how color works, obviously it’s been a popular product and now you’re testing. Could you just give us a little more detail about like right now it’s not really launched fully in any U.S. stores, is that correct. Just trying to understand.

We’ve launched with a couple of majors. We did starting in the second half of last year, it’s been extremely successful. It’s been expanded, the first week -- I can’t give you the names, but the first detail that we put it in has almost doubled the number of stores that it’s in. It’s going really well, the second one is doing extremely well and we have a couple of other majors that are very interested going into it. The word is out in the industry that it’s an extremely successful line and the way we cobranded it with Faberware which is -- Faberware is probably the number one brand of houseware in America today. It really is helping us, it really is doing a tremendous things. So this is going to be a used line certainly for this year and going forward.

Okay. I’ll just trying to get a sense of obviously, didn’t tell me exact numbers, but like trying to -- how many doors are we talking about versus last year. Is that a multiple of two or four or can you give us a sense of that how.

By the end of the year it will be in at least four times the number of stores.

Okay.

It’s really growing at a very rapid rate. So it’s a really terrific line and crosses every level of trade, develops secondary lines and we don’t have to step over ourselves in any the retail and compete so much. It’s a winning line for us.

Okay. Great. And FX obviously, I mean you can’t control that, but you say 30% growth exclusive of that. Can you tell us sort of at the current rates though what the FX impact would be because the dollar has obviously?

The year?

Yeah, just approximately.

I don’t have it handy. Maybe just looking at, the pound obviously has weaken and we budgeted probably around low 150s.

Okay. Alright.

It’s certainly not. I don’t think it’s going to have anywhere near the effect of last year though.

Yeah, that’s where I was going.

Depending what happen with [indiscernible], it could actually be favorable.

Right, that’s right. You called out the California minimum wage which is interesting, and I don’t know if you could quantify that, but more importantly let’s say if that was to happen everywhere, how much of an impact could that have that you might not be able to --.

It’s not having much of an impact.

Okay.

[Multiple speakers] There are alternatives. I mean there is efficiencies that we can get that would counteract that and we’re very actively, even you’re talking more into the future, we’re very actively working on that to develop the efficiencies that would counteract any wage increases.

Okay. Got you. And my last area that I would like to touch on is just the retail direct, because you obviously are placing a lot of influence on e-commerce but can you just remind us on strategy there. I mean I know it’s very small component of your business but are you --.

Our retail direct is not considered by us to be a major profits center and the difference [ph] we expect to be profitable this year. Don’t get me wrong, but it’s really used more to enhance the brands, but we do expect it to be rather small but a profitable business in 2016.

So, it’s really just a branding initiative more so than it is a --.

It’s very important specially as we grow around the world, consumers go online see if brands are real, if you’re trying to sell to a consumer in China for instance, they will go online to see if an American brand is a real brand or some fake thing that someone invented and obviously having a very well done site as we do, it does help us. And in addition to that the team that handles our own e-commerce, our DTC [ph] business is same team that works with the major online retailers and brick and mortar retailers with their e-commerce strategies. So it’s a -- basically it’s a self-funding thing for us to have that team because the team is paid for by the business that is done and our own direct-to-consumer business which as they say will make a small profit this year and in addition that team is able to handle the velocity [ph].

So, it's almost like -- you almost have to have that cost anyway to some extent.

Yes, we would of course, but we didn't have our own direct team [technical difficulty].

Right, right. Appreciate it.

Thank you. [Operator Instructions] And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Siegel for closing comments.

Okay, thanks for joining us today. We're proud that Lifetime's position as one of the world's leading providers of home products. And we're taking a proactive approach to ensure that growth is sustainable for any years to come. We look forward to giving you an update in three months. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Have a great day everyone.