Lifetime Brands, Inc. (LCUT) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lifetime Brands Fourth 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 is being recorded. I would now like to introduce your host for today’s conference, Ms. Harriet Fried of LHA. Ma’am, you may begin.

Good morning, everyone, and thank you for joining Lifetime Brands’ fourth quarter 2016 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 press 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 and good morning everyone and thank you for joining us today to review our fourth quarter 2016 results. We delivered an outstanding quarter with record revenue and income from operations. It was a great way to end the year and we set these records despite unfavorable exchange rate fluctuations, which impacted the results of both our overseas subsidiaries and our partner companies in Canada and Mexico, as well as a general softness in retail sales at brick-and-mortar retailers. In constant currency which excludes the impact of foreign exchange fluctuations, our consolidated net sales rose 7.2% compared to last year’s period, an earnings per share jump from $0.79 to $1.03. Excluding the impact of sales from the Focus and Copco acquisitions, in constant dollars, our fourth quarter sales increased by 3.4%. Our strong fourth quarter results reflect several major initiatives we have underway that have begun to favorably affect the fundamental way we do business. I mentioned several of these in our last quarterly call, but since I expect each of them to benefit us even more dramatically in the future, I’ll run through them quickly again today, before turning to the details of the quarter. Rest of the acquisitions we completed last year, which brought sales as well as of an array of strong brands that complement those we already have while adding only minimally to our SG&A. These are strong established brands, both in categories that we are already in and several adjacent categories. We have been rapidly integrating each of the acquisitions and all of them proved accretive in the fourth quarter. We expect them to contribute even more positively beginning in 2017 as we benefit from our ability to lower input costs and increased innovation. As a reminder, the brands we acquired were Wilton Armetale which is a 115-year old brand, known for metal serving pieces for both everyday use and a great addition to our portfolio of tableware products; Amco Houseworks, which provides the line of professional level, stainless steel tools and gadgets that complemented our existing offerings; Chicago Metallic, a leader in upper-end bakeware brought a strong consumer brand and established retail placement in a category we’ve been wanting to enhance; Swing-A-Way, the leader in can openers for over 50 years; and finally, in October 2016, Copco, a leader in high-end design and innovation in the fast-growing affordable beverage category. Copco also has distinction of being North America’s largest seller of tea kettles which will help accelerate our growth in the coffee and tea category. Secondly, we’ve been successfully building our e-commerce strategy, both in the U.S. and overseas. So that within our categories, we have positioned to be a leader in the digital marketplace. Its importance to consumers is growing exponentially. We have significantly expanded Lifetime’s capability in this area and we also leveraged the online presence of our newly acquired brands. As a result, our sales to e-commerce retailers as well as the sales of our products on the e-commerce sites about brick-and-mortar retail partners had a significant increase in the fourth quarter and the full year of 2016. Several years ago, we made a sizeable investment in the team of professionals to ensure that we would be able to capitalize on the shift in consumer shopping and it’s finally beginning to pay off in a big way. This team has specialized skills needed to drive the sales of our products online. In addition, we have invested and are continuing to invest in systems to enable us to efficiently shift direct to consumers for our retail partners. Our goal is to be world-class in these capabilities. The third area I’d like to touch on is our European operations. Kitchen Craft and Creative Tops. As I mentioned in our third quarter call, we’re in the midst of integrating these two businesses to reduce costs and accelerate synergies. The kitchenware and tableware entities were legally merged as of year-end, and we’re now integrating the management teams. We’re also putting the companies on the same SAP platform, and we have started taking steps to combine their warehouses. We believe these initiatives will establish new levels of opportunity and growth in sales and profitability for the businesses, which we now refer to jointly as Lifetime Brands Europe. In the fourth quarter, the sharp decline in the value of the British pound versus the U.S. dollar, following last year’s Brexit referendum, hurt Lifetime Europe’s reported performance. But 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 into dollars for the periods at an average rate of exchange. As detailed in the tables in our fourth quarter release, however, even though Lifetime Europe sales decreased by approximately 7% for the quarter, when reported in constant dollars, they increased by 12%. The fourth but actually the single most important initiative we’re pushing ahead with is what we call Lifetime Next. It’s our drive to accelerate profitability by realigning our operating division, eliminating complexity, developing key performance indicators and reducing SG&A. As I’ve mentioned in past calls, in my many years at Lifetime, I think this is the most important and most significant effort we’ve ever undertaken. We expect it to dramatically improve how we do business, enabling us to systematically rationalize the development and the life cycle of SKUs and focus more on higher-value, higher-profitability products. As you can see from this quarter’s results, it has begun to have a very positive effect on the bottom line, and we expect considerably more benefit to come in 2017 and beyond. We’re only in the beginning stages of this journey, and right now, our teams are highly focused on implementing the changes suggested by our outside consultants. All-in-all, this has been, and continues to be an exciting and transformational effort. With that high-level background, I’ll run through some of the highlights of our fourth quarter by division. Overall, in constant currency, we’ve reported a 7.2% increase in net sales for the period as many of the programs we had untapped for the holiday season did even better than we originally anticipated. In the U.S. Wholesale segment, total sales were up 6.5%, and within our different divisions, we had many businesses that products that showed really impressive strength. One of the most exciting developments was the significant strengthening of our tableware business, which saw exceptional growth for both the quarter and the full year. A great strength in dinnerware and stainless steel flatware, under what I believe are the industry’s best brands, has certainly been an important factor in this growth. The division’s storage and organization products continued to perform well across many customers and offset the smaller amount of space retailers, now typically devoted tableware products. Our tableware division did especially well with both pure-play online retailers and the online business done through our brick-and-mortar customers. That’s a very satisfying development. We also had good success in our home solutions division, continuing the remarkable growth in portable beverageware that we generated in the third quarter. Portable beverageware has been the single fastest-growing component of the home solutions division. To take advantage of current trends in this category, we’ve expanded our array with considerably -- a considerable of innovative new products under the BUILT, BUILT New York, Copco and mostly off [ph] brands. Our great brands and innovative products have positioned us to become a really important player in this category. In 2017, we expect to see great growth in portable beverageware. Our kitchen tool and gadget business had another great year. This is our largest business, and over the years, has always been our most profitable business. The addition of the Amco, Copco and Swing-A-Way businesses, three well-established brands in the category, should help to increase the rate of growth in this business in 2017 and beyond. In addition, the synergies between our U.S. kitchen tool and gadget business and their Lifetime Brands Europe counterpart have proven invaluable. The cutlery and cutting board business has taken especially good progress with our patent pending Edgekeeper line of products sold under both the Farberware and Sabatier brands. According to recent surveys and feedback from online reviews, the main complaints consumers have about their cutlery is it’s difficult to sharpen, and they want to be able to put it in the dishwasher. Our Edgekeeper collection addresses the sharpening problem, and this week, at the International Home and Housewares Show, we will be introducing dishwasher safe cutlery. For our cookware and pantryware businesses, 2016 has been a transition year. With the addition of the Chicago Metallic bakeware business, we are transitioning this business away from most cookware lines and concentrating on building on the great strength of the Chicago Metallic brand and bakeware. Turning now to our International segment. Their sales were up almost 12% in local currency, despite the challenging European economy and concerns about the Brexit referendum. Our Lifetime Brands Europe team has told us that they believe they are gaining considerable market share, even though the overall market is rather weak. The team there really rose to the occasion and posted both strong sales and greatly improved profitability in spite of the strong headwinds, with both the economy and the significant depreciation of the British pound. Before I turn the call over to Larry Winoker for his detailed financial review, I’d like to remind everyone that on Tuesday afternoon, March 28, at 4:30 in the afternoon, we will be hosting analysts and institutional investors at Lifetime’s New York City showroom, which is at 45 Madison Avenue. We want to give the financial community a good look at the many innovative products we’re introducing this year in all our divisions. And key members of our senior management team, including our division presidents will be available in the showroom in formal talks. It will be a very interesting afternoon, so I hope you can join us. If you haven’t already RSVPed, please call Harriet Fried at LHA, our Investor Relations firm, and that’s at (212) 838-3777 to get more details and to register. Larry?

Thanks, Jeff. As we reported this morning, net income for fourth quarter of 2016 was $14.7 million or $1 per diluted share as compared to $11 million or $0.77 per diluted share last year. Adjusted net income for the quarter was $15.2 million or $1.03 per diluted share as compared to $10.8 million or $0.75 per diluted share last year. The table, which reconciles this non-GAAP measure to reported results, was included in the release. Income from operations increased by $4.2 million to $21.8 million for the quarter. Consolidated EBITDA, a non-GAAP measure reconciled to our GAAP results in the release, increased $1.2 million to $25.1 million and $2.3 million to $47.2 million for the full year. For our U.S. Wholesale segment, net sales increased $9.5 million to $156.4 million, as growth from our tableware and home solutions business categories more than offset a small decline in kitchenware category. Tableware’s increase primarily came from flatware and storage and organization product sales and growth in the houseware club channel, while home solutions reported a very strong quarter from portable beverageware products. In the kitchenware division, strength from tools and gadgets approximately offset lower volume from the other kitchenware product lines. 2006 acquisitions contributed approximately $6.8 million to the segment sales volume in the current quarter. U.S. Wholesale segment gross margin was 38.7 in the 2016 quarter compared to 36.2 in 2015. The increase reflects a decrease in sales allowances, although it was approximately the same on a full year basis, and another contributing factor was the change in product mix. Gross margin increased by 30 basis points for the full year to 36%. U.S. Wholesale distribution expenses as a percentage of sales shipped from our warehouses was 7.9% in the 2016 quarter versus 7.7% last year. The increase is due in part to the transitional distribution service costs related to the Focus and Copco acquisitions. U.S. Wholesale SG&A expenses were $24.6 million compared to $21.5 million last year. This increase reflects short-term incentive compensation on the improved profit results and additional brand and customer marketing expense. These increases were partially offset by savings from headcount reductions and in other expense classifications. For our International segment, net sales in the 2016 quarter decreased to $29.1 million from $31.4 million in the quarter of last year. However, in constant currency, net sales increased by $3.1 million or 12%. The increase was due to an increase in both kitchenware and tableware sales to online retailers as well as export sales. International segment gross margin was 31.4% in 2016 quarter compared to 34.5% last year. Gross margin declined as products are sourced in U.S. dollars, which strengthened versus pound sterling. However, our foreign currency hedging contracts substantially offset the decline, which is reported in SG&A. International distribution expenses as a percentage of sales shipped from warehouses were approximately 12.2% in 2016 versus 11.6% in 2015. The increase was due to an increase in warehouse storage costs. The Company uses several facilities to distribute its products, which inefficiency is exacerbated when sales volumes peaks. We are well into the planning phase of establishing new facility requirements and a potential location to consolidate this function. International SG&A expenses were $4 million in 2016 versus $6.2 million last year. The decline reflects the effect of currency translation and gains on foreign currency hedging contracts. Our Retail Direct segment net sales increased $8.1 million in the 2016 quarter from $7.6 million last year on controlled discounting on the cost of products. This action as well as fewer no charge replacement from improved packaging helped lift gross margin to 67.4% from 66.1% last year. As a percentage of net sales, Retail Direct distribution expenses increased 10 basis points, 30.5% on freight rate increases. Retail Direct SG&A expense declined by $300,000 to $2.2 million, reflecting reduced headcount and lower paid search fees. Now with respect to non-segment items, unallocated corporate expenses decreased by $400,000 to $4.9 million in the 2016 period, reflecting the timing and segment allocation of certain expenses, partially offset by higher acquisition-related expenses. Interest expense decreased by $100,000 to $1.3 million in the 2016 period and lower average borrowing rates due to term loan repayments. The effective tax rate for the 2016 quarter was 33.2% compared to 36.7% last year. 2016 reflects the benefit of a lower UK tax rate on higher earnings and lower blended state rate on changes in allocation and enforcement factors. Equity and earnings was $1 million in 2016 quarter compared to $743,000 last year. Looking at our balance sheet and cash position. During 2016, our operating cash flow was $30 million versus $47 million last year. The $30 million approximates our average annual operating cash flow over last several years. The amounts generated in 2015 benefited from timing events related to customer collections and supplier payments. At December 31, 2016, the leverage ratio of our debt was 2.1 times, well below the maximum committed of 3.75 times and our liquidity was approximately $84 million. Looking at 2017. As noted in the release, we are currently forecasting low to mid-single-digit organic sales growth. During our next earnings call, we plan to provide more detailed projections on the full year. This concludes our prepared comments. Operator, please open the line for questions.

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

Good morning, guys, and congratulations on the quarter.

Thanks, Frank.

Thank you, Frank.

Hey. A lot of good things here, but I wanted to first focus on the organic growth. Given what’s going on at the retailers, Jeff, I know you commented on this. But, do you think -- and I know it’s kind of hard to parse it out totally. But, do you think it’s more that you gained in e-commerce or is this more a signal that maybe you’re gaining share at traditional retailers? That’s what I can’t get a sense of, like, I mean, it’s pretty good organic growth, given the categories that you’re in. So, just kind of wondering about that.

It’s a little of both. We made a very sizable investment several years ago in building a team to really drive our e-commerce business through both pure plays and through the brick-and-mortar retailers. It was costly, and it’s finally paying off and it’s paying off very rapidly in a very big way. So that is making up for some of the shortfall at the brick-and-mortar. But in brick-and-mortar, we do believe we are gaining market share.

Okay. And I assume like the competitive landscape there in the brick-and-mortar is -- I mean, it’s still pretty fragmented, right? I mean, there’s nobody too aggressively going after categories than the same players you’ve been dealing with, right? Just kind of update us on that.

That’s right. This is a very fragmented industry. We’re certainly one of the leaders in the categories we’re in; in most cases, we are the leader, and we know how to capitalize on that, and we know how to take advantage of where we are.

Okay. Your gross margin, I think it’s the highest gross margin I’ve seen, at least in the last five years. I could be wrong about that. I could only find one point where you’re in that 38% range before. Does this reflect sort of the input costs that you’ve garnered over the last couple of years; we’re finally seeing the flow through? And I was wondering if you could talk about how sticky that margin is going forward.

As we said earlier, in earlier calls, we expect to improve margins, and we have. Certainly, the business in the UK has helped do that. They have a terrific year, and they’re really working together. It’s a pleasure to see how that has come together as a business for us. And we’ve always focused on improving our margins throughout the Company, and we will continue to do that.

Okay. Yes, I’m just trying to get a feeling for like -- because since that’s near -- I think it’s near your peak margins even on the fourth quarter. Is that a correct statement, I mean, at least for the last five years or so?

It was high. Some of it is expectation early in the -- through the nine months we were substantially behind where we had been, probably 80 basis points. I mean, overall, for the year, I would hope, like 10 basis points. So, it’s timing. It’s not easy to gauge where your allowances will fall to customers and try and obviously an area of great estimate. So we had a fairly large swing quarter-over-quarter, which is good. It’s favorable, but it’s -- that’s why I commented on how it looks versus the full year.

Sure. Yes, I got that. Last question for me is just on distribution expenses. Given, Jeff, what you’re talking about the ability to kind of ship direct. Does that change the way we should look at that going forward? I mean, I know you’re trying to restructure things around your expenses and everything, but does it make it more expensive or has the investments you’re putting kind of made it manageable when you look at long-term, so your distribution expenses, if you ship more direct to the consumer through your online channel?

Yes. The goal is to become extremely efficient in doing that. And that’s a use of systems and automation, and we have invested heavily in that, in systems and automations. The retailers pay us back on shipping expenses…

Okay.

When we go direct-to-consumer. But you want to make sure that you have the lowest cost structure, so that you can do it in a way that doesn’t become a burden. And we’ve focused on that. And we’re in the process of consolidating the warehouses in the UK and it’s -- we will build into that that plants are doing direct shipping as we’re doing that and we’re also relocating one of our warehouses in California, our California warehouse and at the same time, going to make sure that the systems that are in place there will make us extremely efficient to ship direct-to-consumer out of that warehouse as well.

Thank you. [Operator Instructions] And I am showing no further questions at this time. I’d like to turn the call back to Mr. Siegel for closing remarks.

Okay. Thank you. Thanks for joining us today. And as you heard, we have a multitude of efforts underway to grow Lifetime’s assortment of brands and products while at the same time, increasing our efficiency and profitability. Our whole organization is committed to these initiatives, and we think they provide a great platform for 2017 and beyond. We’d like to show you our products in person, so I hope to see you at our showroom tour later this month. Thank you all.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.