Lifetime Brands, Inc. (LCUT) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lifetime Brands Inc. Third 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, this conference call maybe recorded. I would now like to turn the conference call over to Harriet Fried of 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.

Thank you, Harriet. Good morning everyone and thank you for joining us today to discuss our third quarter 2016 results. We’re pleased to have entered the second half of the year which seasonally is always our strongest. We're off to a very good start and in fact, we achieved record third quarter revenue, record adjusted net income, and record EBITDA. We did this despite an uncertain economic climate in the U.S. and also unfavorable exchange rate fluctuations, which impacted the results of our U.K. subsidiaries as well as our profit companies in Canada and Mexico. Our record third quarter results reflect several major initiatives we have underway that will -- that are finally beginning to favorably affect the fundamental way we do business. Since I expect each of these to benefit us even more dramatically in the future, I'll run through these first before turning to the details of the quarter. First is the acquisitions that we've already completed this year. We're focusing on acquiring companies with strong brands that are in the same business as -- and adjacent categories or with deep penetration in this specific category to support our growth. Since April, we have acquired five brands, all in categories where Lifetime is already well-established. With this improvement in our bidding approach, I'm careful not to add to our SG&A. In fact for all the acquisitions we've done this year, we've brought on staff a total of only two people. We're rapidly integration each for the acquisitions and expect them to all be accretive beginning in the fourth quarter and add even more so in 2017 and beyond as we achieve lower prices from existing factories or by moving production to our lower core spenders. To give you a quick rundown, our first acquisition in April was Wilton Armetale, which is a long been known for its metal serving pieces that are sold in the department stores, specialty stores throughout the U.S. and internationally. This brand is a great addition to our portfolio of tableware products and we see many opportunities to accelerate the development of new products under the Wilton Armetale name. This 114-year old brand has been fully integrated into our tableware business and is already growing at a very rapid rate. In September, we acquired three brands, Amco Houseworks, Chicago Metallic, and Swing-A-Way. Chicago Metallic has been a leader in upper-end bakeware for more than 100 years and provides us with a strong consumer brand and established retail placement in a category where we lacked a strong brand. Amco Houseworks provides us with an established line of stainless steel tools and gadgets, which complements our already strong kitchen tool and gadget business. And the addition of Swing-A-Way, a leading brand of can openers for over a 50 years, another great addition to our business. All of these have been fully integrated into our business. Finally, just last month, we acquired Copco's line of beverageware, tea kettles, and kitchen organization products. Copco is leader in high end design and innovation in the important thermal hydration beverageware category, which will add to our strength in a category which is showing explosive growth. In addition Copco is the largest vendor of tea kettles in North America. This business will be fully integrated by the end of this November. Second, let me talk a bit about our European operations. At Kitchen Craft, we hired Matthew Canwell to be Managing Director of Kitchen Craft. Matthew, who has been onboard for about a month, formerly was the Buying Director of Lakeland's, one of the most forward-thinking and innovative housewares retailers in the U.K. At Creative Tops, we promoted Peter Murphy, formerly Creative Tops' Finance Director to the role of Managing Director of that business. Matthew and Peter really complement each other and are working together to build the combined businesses. The sharp decline in the value of the British pound versus the U.S. dollar following the Brexit referendum in June has hurt the reported performance of both Kitchen Craft and Creative Tops, both because their purchases are denominated in U.S. dollars, which increases their cost of goods sold and because for reporting purposes, we translate their results in dollars at the current rate of exchange. As noted in our press release, their sales decreased by approximately 7% in the quarter when reported in dollars, but increased by approximately 5% in constant currency. In time, we expect their financial performance to normalize. However, it is impossible to forecast when that might occur. We're in the midst of integrating our two U.K. businesses to reduce cost and to accelerate synergies between the two organizations. This has been something we've been planning for a while, but we've accelerated the process due to the weakening of the pound. We’re in the process of integrating the management teams now, a test that we expect to have completed in the first quarter of next year. Our next step will be to put the companies on the same SAP platform, which will occur before the fall of 2017. We will be combining certain back office functions, while each company's customer facing identity, a list that will combining warehouses, which is now well into the planning process. The third, but actually by far, the most significant initiative we're pushing ahead with is Lifetime Next. Our drive to accelerate profitability by realigning operating divisions, eliminating complexity, and reducing SG&A. As I had mentioned, we've brought in a prominent management consulting firm to assist us in this project and in my many years at Lifetime, I think this is the single most important asset we've ever undertaken. It will dramatically improve how we do business and have a significant positive effect on the bottom-line. As you know we bring to market approximately 5,000 skews a year, a very large number for a company our size. We've always been good at managing our product's lifecycle, but by the end of this year, we will have in place the methodology and the systems to more efficiently manage that process. We will have the ability to better rationalize SKUs and focus more on higher value, higher profitability products. We expect a significant return on this undertaking by mid-2017 with full completion by year end. With that high level background, I'll run through some of our specifics in the third quarter by division. In constant currency, we reported a 6.4% increase in net sales for the period as many of the programs we described to you in our last two earnings call began to shift. In the U.S. Wholesale segment, total were up almost 7% and within our different divisions, we had many businesses that really showed great strength. In kitchen tools and gadgets, our largest, we continue to gain market share, especially with our most important brand, Farberware. In cutlery, our successful patent-pending Edgekeeper line of products which are sold under the Farberware and Sabatier brands and which feature sheath that automatically sharpen knife blades for optimal performance, is doing extremely well. We continue to expect Edgekeeper to be a key driver for our cutting business and this quarter, we're introducing knife blocks with the same technology built in. In tableware, we saw exceptional growth in our wire storage and the cost of dinnerware and flatware programs in the quarter. As I mentioned in our last call, this division has done an outstanding job of developing storage and organization programs that compensate to the declining space retailers have devoted to tableware products. Finally, in home solutions, our greatest success in the quarter was our growth in insulated water bottles. Hydration is the fastest growing component of the home solutions division and we're expanding the collection with additional tumblers, bottles and neoprene totes in our BUILT collection. We're also planning to introduce products that have been successful here in the U.S. into other countries, where we think they will do equally as well. As I just mentioned, the Copco acquisition will position us to add even more growth and really makes us an important player in this category. Turning now to our international segment, sales were up approximately 5% in constant currency. Despite the challenging European economy and concerns about the Brexit referendum, both our Kitchen Craft and Creative Tops businesses grew nicely. Interestingly, for the Creative -- Kitchen Craft, sales to Germany, France, Italy and other European countries were very strong. A trend that we expect to continue to add sales to online retailers were also robust. In fact in the U.K., our top e-commerce retailer is our single biggest customer now and has been growing at an extremely rapid rate. Both overseas and in the U.S., we have been continuing to build our e-commerce strategy to take advantage of the rapidly growing additional marketplace. We have expanded our expertise and capability in this area and are beginning to see the fruit of those efforts, which we think will be even more important in the years to come. In conclusion, I'm happy to say that we foresee a very active holiday shopping season with continued topline growth in the fourth quarter as a result of our growing brands and product assortment. I'll now turn the call over to Larry Winoker for his detailed financial review. Larry?

Thanks Jeff. As we reported this morning, net income for the third quarter 2016 was $6.5 million, or $0.44 per diluted share compared to net income of $5.1 million, or $0.36 per diluted share in the 2015 period. Adjusted net income for the quarter was $7.5 million, or $0.51 per diluted share, compared to $5.9 million, $0.41 per diluted share in 2015. The difference between net income and adjusted net income for the 2016 period primarily reflects a non-cash charge of $1.3 million, approximately $800,000 net of tax or $0.05 per diluted share recorded in this quarter to correct an error and accumulated depreciation balance related to leasehold improvements for one of our U.S. brands. Table which reconciles this non-GAAP measure to reported result was included in this morning's release. Income from operations was $10.8 million for the 2016 quarter compared to $9.8 million for 2015. Consolidated EBITDA non-GAAP measure that is reconciled to our GAAP results in the release was $16.7 million for the current quarter and $14.1 million last year. Consolidated EBITDA was $46 million 12 months ended September 2016 and $41.9 million for the same period last year. Now, looking at our U.S. Wholesale segment, net sales in the quarter increased $9 million or 6.9% to $139.6 million. The increase reflects an increase in tableware and home solutions products categories, partially offset by decline in the kitchenware product category. U.S. Wholesale segment gross margin was 33.8% in 2016 quarter compared to 34.3% in 2015. The decrease reflects the change in product mix and a shift in product category growth. As I mentioned in the current quarter, the company identified and corrected an error in accumulated depreciation balance relate to certain leasehold improvements. Accordingly, distribution expense in 2016 included $1.3 million of additional depreciation expense to properly reflect the accumulated balance. Excluding this expense, U.S. Wholesale distribution expense as a percentage of sales shift from our warehouses in U.S. was 8% in the 2016 quarter versus 8.4% last year. This improvement reflects the effect of an increase in sales shift from warehouses. U.S. Wholesale SG&A expense was $22 million, 15.8% of net sales in the quarter of 2016 as compared to $22.1 million or 16.9% in the prior year's quarter. This improvement primarily reflects lower employee-related expenses. For our international segment, on a reported basis, net sales in the quarter were $26.7 million versus $28.8 million last year. But in constant currency, net sales in the 2016 quarter increased by 4.8% on growth from kitchenware to e-commerce retailers and export sales, and to a lesser extent, higher tableware sales. International segment gross margin was $32.4 million in 2016 quarter, compared to $33.2 million in 2015. Gross margin decreased reflecting the weakened pound/sterling and to a lesser extent customer mix for kitchenware products. International distribution expense as a percentage of sales shipped from warehouses was approximately 9.7% in 2016 quarter versus 10.1% in the 2015 quarter. This improvement reflects a reduction in freight rates. International SG&A was $5 million in the second quarter of 2016 versus $6.1 million in 2015. This decrease was due to foreign currency transaction gains from hedging activities and the effect of foreign currency translation of the weakened pound/sterling. Now, looking at our Retail Direct segment, net sales were approximately $3.8 million in both quarters. Gross margin decreased to $66.9 million from $69.2 million in 2015, reflecting some shift in product mix. As a percentage of net sales, Retail Direct distribution expense was $31.6 million versus 32 -- $32.6 million last year, an improvement which reflects reduction in shipping expense from fewer product rate breakage replacements. Retail Direct SG&A declined to $1.5 million from $1.8 million last year, reflecting a headcount reduction and lower selling expenses. Finally, looking at non-segment items, unallocated expenses increased to $4.5 million in the 2016 period from $3.9 million last year, primarily due to acquisition-related expense. Interest expense declined to $1.2 million from $1.5 million last year, as average borrowings decreased and the average borrowing rate decreased due to term loan repayments. The effective tax rate for 2016 quarter was 31% compared to 33% last year. This low effective rate was due to lower corporate income tax rates in the U.K. as well as a lower blended state tax rate. Equity in loss was $138,000 in 2016 quarter and $459,000 in the 2015. Grupo Vasconia is reporting income from operations of $630,000 in this quarter versus $2.1 million in 2015. The 2016 results primarily reflect the decline for its aluminum division’s results. At September 30th, 2016, the debt leverage ratio was 3.1 and our liquidity was $49.8 million. In the aggregate, we borrowed approximately $21 million under our credit facility, finance, the acquisition of the three brands from Focus in September and Copco product lines in early October. This amount approximates our average annual free cash flow over the past three fiscal years. Looking at the balance of 2016, we currently project full year sales to grow approximately 3.5%, excluding foreign currency impact. Based on these projected sales, gross margin is expected to 35% to 35.5%. As a percentage of sales, we expect distribution should be in line with 2015 and expect a modest improvement in SG&A. This concludes our prepared comments. Operator, we’re ready for questions.

[Operator Instructions] Our first question comes from Frank Camma with Sidoti. Your line is open.

Good morning guys. Congratulations on the quarter.

Thanks.

Hey, could you talk about the sales from the incremental acquisitions, just so we can get there -- true organic growth number?

Yes. Nothing obviously from Copco because it’s the current--

Right.

There's fairly small Focus Product brands we started -- we acquired in September -- middle of September, so its small. It's in the range of something about 7 -- less than $1 million, $750,000.

Okay.

And its full [ph] now also for the Wilton Armetale period [ph]. So, it doesn’t really move in up as much.

Okay.

Of course, obviously, we'll see in the fourth quarter, we will have almost an entire quarter for Copco and we will have absolutely entire quarter for Focus. We're feeling good about them -- their results.

Okay. And can you talk about the accounts receivable, it looks like a little of a spike beyond what I had modelled. Is there a timing issue there, any color on that?

Yes, this is actually -- two things; one is -- couple of timing issues, one is the timing of when we make sales in the quarter. If we make them in early -- obviously in August versus the time that it has impact. We book them sometime in July, we collect in September. The other thing is back in 2014, our collections were lower at the end of the year than they typically were, so we had some significant -- or higher than normal cash collections in 2015. And the third factor and I -- we've talked about this, I think, Frank, you know this is that Walmart has gone to all its vendors and adjusted terms, goes back almost a year now, others got extended a bit and that has affected the balance at the end of September. So, all of this is timing, most of its good because volumes are -- as far as I can tell you, there's no concern about it, so to all the healthiest customers that we sell to.

Okay, great. Yes, I remember that now. And the -- as far as the inventory, I mean you were not really not seeing a commodity pressures anyway, but you're finally starting to see I guess the benefits of that, right, but probably a little bit, you offset from maybe some of these newer -- some of these product mix might be lower margins, I just wondered if you could talk about that or the FX impact?

Well, the new acquisitions that we made this year, we're working on reducing, of course, and improving margins, but initially the margins were lower than our normal margins. But there's still decent but they are lower than our normal margins, but we should get them normalized into the same margins that Lifetime makes certainly. It will probably take six months because you have cycle through the inventory, but we'll certainly get that done. In general, as you know commodity prices have been fine, they haven’t been going up at all and we're starting to see some benefit in individual product lines from actions that we took earlier in the year. So, our margins in some areas are going up. So, we have a mix of -- the mix sometimes changes as far as customers and also there's -- in some quarters, we have more direct shipments from the orient directly to customers that bypass our warehouse and we work on a little bit lower margin because doesn’t [ph] go through our warehouse.

Right.

So, just changes a bit by quarter, but we don't see any pressure on prices right there.

Okay. And my last question is Jeff, you had mentioned that you were -- sounds like you -- sound like a pretty active holiday season, is that what you're hearing -- is that consistent with what you're hearing with from the retailers?

In general, retail is not robust, but we've gotten some significant new placement and we expect our business to be strong. I think -- personally, I think the retailers will have just a fair season, they are not going to have certainly -- I don't think they will have a terrible season, I don't think they will have a great season; they will have a fair season. There is quite a shift as everyone knows in business to online business, both from the brick-and-motor retailers and the pure play online retailers. So, that's something that we are making sure that we don't lose add [ph] on and we're in the forefront of making sure that we get a more than -- at least our share, maybe more than our share of business that has shift towards the internet. We've proven that we could do it in the U.K., which is more advanced than the U.S. and internet penetration and we believe we have the right resources, the team, and the understanding of that to do the same in the U.S. going forward.

Okay. Thanks guys.

Thanks Frank.

Thank you. [Operator Instructions] I'm showing no further questions. I'd like to turn the call back to Jeff Siegel for closing remarks.

Thank you for joining us today. As you've heard we have a multitude of assets underway at Lifetime to expand our array of products and brands and to drive growth and efficiency. We're optimistic of that -- 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 participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.