Lifetime Brands, Inc. (LCUT) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lifetime Brands First Quarter 2017 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 like to introduce your host for today's conference, Harriet Fried of LHA. Please begin.

Good morning, everyone, and thank you for joining Lifetime Brands' first quarter 2017 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.

Thanks Harriet. Good morning everyone and thank you for joining us today. The first quarter of 2017 was another successful period for Lifetime Brands. In constant currency, which excludes the impact of foreign exchange fluctuations, our consolidated net sales rose 5.5% compared to last year's period. Our gross margin increased 220 basis points to 38.8%. Lifetime's strong first quarter results were in line with our expectations and reflect the ability of our portfolio of businesses to perform well in a rapidly evolving retail environment. The investments we made in the first-class ecommerce team and systems over the last several years has enabled us to deliver strong results even with the impact of lower store traffic and relatively soft consumer spending at traditional brick and mortar retailer. We are pleased that we made these investments early, as the cost of playing catch-up in the world of ecommerce is extremely high. We intend to continue to upgrade our I.T. and distribution systems to be able to capitalize on this continuing shift in consumer spending. I'm excited to say that we are beginning to see the strategic and financial benefits of a number of initiative designed to accelerate our growth and improve our profitability. Lifetime Next is an important strategic initiative designed to assure that every part of our U.S. business is aligned with our goals. Conceived in late 2015 and implemented beginning in mid-2016, when fully implemented later this year, this program is expected to result in higher gross margins, reduced SG&A expenses per dollar of sales and a more optimal level of working capital. We already have realigned a number of our divisions, reorganized our sales organization, reduced management layers, simplified processes and relocated several key product engineering positions from the United States to Asia. We are now in the process of implementing a project management system that enables category manger to drive strategic thinking, portfolio rationalization and clarify responsibilities including enabling the development of higher value SKUs and the elimination of low margin ones. We also are undertaking major improvements to our infrastructure, including plans now underway to relocate our West Coast distribution center to a new purpose-built leased facility that will be operational in early 2018 and to consolidate our European distribution from what is currently five locations to a new efficient single warehouse location that we expect to be completed in 2019. As we transition through these new distribution facilities, we are very mindful of the ongoing shift of business to ecommerce and each facility has been designed to be highly efficient in direct-to-consumer shipping. At year-end, we merged our U.K. businesses, Creative Tops and Kitchen Craft, to form Lifetime Brands Europe. We successfully integrated the management of these companies. Creative Tops is already running on SAP platform and we expect to have all of Lifetime Brands Europe on SAP by the end of the summer. While some of the benefits of these initiatives already are realized, others will be implemented over the next 18 to 24 months. When fully implemented, we expect an additional annual benefit to pre-tax income of $10 million to $13 million excluding the impact of additional revenue growth. Next on the five brands we acquired last year which grew up those sales and strong brands that complement our existing portfolio while adding only minimally through our SG&A. Wilton Armetale, Amco Houseworks, Chicago Metallic, Swing-A-Way and Copco have all been successful integrated and contributed nicely to both our first quarter sales and our gross margin. In the case of Chicago Metallic which greatly extended our bakeware offering, this great brand has also been opening new doors for lifetime as the retailers who have long carried became aware of and interested in our other housewares products. As a branded consumer products company, one of Lifetime's priorities has been to increase the percentage of sales from our company-owned and controlled brands. We have seen substantial growth in this are over the past several years with sales from owned and controlled brands rising from the 75% in 2016 as we have eliminated less significant licenses. The acquisition of the five brands I just mentioned will strengthen this trend even more going forward. Our shared service structure is helping us reduce waste and inefficiencies as well as enabling us to make acquisitions with minimal added SG&A as illustrated by the brands we acquired last year. With that high level background, I'll run through the high-lights of our first quarter by division and then mention some of the important product offerings we have on path for this year. Starting with the U.S. Wholesale segment, total sales were up 6.2% and within our different division we had many business and products that showed good strength and good growth both in sales and gross margin. Even though the timing of some programs has shifted to later in the year, so the full impact of those is not yet apparent. Our kitchenware business traditionally our largest and most profitable business got us to an especially strong start this year, particularly with the addition of the acquired brands I just mentioned. In tableware, sales increased slightly for the quarter, but real progress was made in gross margin which is up across the division. Our Wilton Armetale fine serveware and grillware made of unique aluminum based alloy that helps keeps foods hot food hot and cold food cold continues to be a great addition to our tableware products which a favorable margin. Importantly, our tableware division continues to do well with both pure-play online retailers and the online business done through our brick and mortar customers. As I have described in past calls, our ecommerce strategy has been an important initiative for us and results in our dedicated reach and the results of our dedicated ecommerce team's efforts have been especially effective in tableware. We also had strong results in our home solution division, continuing the outstanding growth in portable beverageware that we began generating amid 2016. Portable beverageware has been the single fastest growing components of the home solution division and to leverage current trends in this category, we expanded our rate with a considerable number of innovative new products under various brands. In a new initiative for Lifetime brands, we also placed a Valentine's Day home décor program at one of our customers this year and it performed very well for us. We expect to continue these seasonal promotions in the future. Turning now to our International segment. Sales were up slightly in local currency despite the challenging European economy and continued uncertainty about the Brexit referendum. We are seeing more activity among our major accounts and expect integration and restructuring FSB undertaken to have a positive impact as the year continues. Before turning the call over to Larry, I'd like to mention some of the important product offerings we have untapped this year, all of which involve technological introductions that levers Lifetime as we reposition in kitchenware. Firstly, patent pending EdgeKeeper technology which we launched in 2015 has been seeing continued success. Consumers frequently have two complaints when it comes to their cutlery that their knives don't stay sharp and they don't know how to sharpen them. With EdgeKeeper, we created a simple but effective system that automatically sharpens knives with each use. We have new EdgeKeeper products at retail now and expect the collection to be a key driver of our cutlery brands, especially as we continue to build on with additional products and innovations As we have shown in March, we introduced another breakthrough in cutlery technology, KNIFE ARMOR cutlery. Each blade is treated with our proprietary rust resistant coating which makes the cutlery dishwasher safe, thereby adding a new layer of convenience to washing cutlery. KNIFE ARMOR blades are also forged with high-carbon Japanese steel and a weighted imbalance optimal control. Our third introduction, which we demonstrated our show [ph] through New York City in March is West Blade. This is a patented new technology that revolutionizes grating by incorporated layers of reset blades that allow consumer to grate in both directions. These new culinary tools will help reduce time spent on food preparation. I'll now turn the call over to Larry Winoker for a detailed financial review. Larry?

Thanks Jeff. As we reported earlier this morning, net loss for first quarter 2017 was $1.3 million or $0.09 per diluted share as compared to $4.3 million or $0.31 per diluted share in the 2016 period. Adjusted net loss for the quarter was $1.5 million is $0.11 per share compared to $3.4 million or $0.24 per diluted share in 2016. Table which reconciles this non-GAAP measure for the reported results was included in this morning's release. Loss from operations was $1.9 million as compared to $5.2 million for the 2016 quarter. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release was $2.3 million for the quarter versus $300,000 for 2016 period and $49.2 million for the trailing 12 months ended March of 2017 versus $42.6 million for the 2016 period. For our U.S. Wholesale segment, net sales in 2017 quarter increased $5.1 million to $87.4 million. The increase reflects the contribution of the brand acquired during 2016. Organically, increases in the home solutions category, offset declines in kitchenware and tableware category due to the timing of planned customer programs. U.S. Wholesale segment gross margin was 38.4% in 2017 quarter compared to 35% last year. The increase reflects the timing of planned customer programs in lower ocean freight rates. This improvement is expected to lessen as we go to the year. The U.S. Wholesale distribution expense as a percentage of sales shipped from our U.S. warehouses was 11.2% in 2017 versus 11.3% last year. The improvement reflects the benefit of increase shipments partially offset by higher freight-out expense. U.S. Wholesale SG&A was $21.6 million or 24.7% of net sales in 2017 versus $20.9 million or 25.4% of net sales last year. The increase is attributable to marketing expenses, IT software to improve efficiencies and intangible amortization related to last year's acquisitions. For our International segment, net sales in the 2017 quarter, was $21.2 million, a decrease of $2.4 million. However, in constant currency net sales increased 3.4%. This increase in constant currency was due to an increase in tableware sales to U.K. national retailers and kitchenware export sales. The International segment gross margin was 34.2% in 2017 compared to 35.5% in 2016. The decrease in margins was due to a combination of customer mix, merchandise and support for a new retail program, the sell-off of a discontinued product line, and the impact of the weak British pound. International distribution expense was approximately 11.9% in 2017 versus 12.5% last year. Primary factor is a reduction in facility expense from sublease rental income. International SG&A was $6.2 million in 2017 and $5.3 million in the comparables 2016 quarter. The increase is primarily due to unrealized loss on foreign currency contracts, as the British pound strengthened against the dollar. The 2016 period is the comparable unrealized gain as the British pound weakened. For our Retail Direct segment for 2017 period, net sales were $4.7 million on gross margin of 66.7% versus 2016 net sales of $5 million on gross margin of 67.3%. Segments' income was unchanged at $100,000 in both periods, as savings from headcount reductions and lower selling expenses offset the lower gross margin dollars. With respect to non-segment items, unallocated corporate expenses decreased by 700,000 to $3.1 million in the 2017 period on lower professional fees and lower acquisition-related expenses. Interest expense was $900,000 in the quarter for 2017 versus $1.2 million in last year's quarter, which is attributable to lower average borrowing rate due to term loan payments. The effective tax rate for 2017 quarter was 33.5% compared to 35.4% last year. This lower effective rate reflects income derived from lower – income in lower rate foreign jurisdictions, as well as a reduction in the liability for an uncertain tax position. Equity in earnings of Grupo Vasconia, net of tax was $540,000 in the 2017 quarter compared to equity loss of $150,000 last year. The 2017 period reflects the deferred tax benefit of $200,000, while 2016 reflects the deferred tax expense of $200,000 due to tax adjustments related to foreign currency translations gains and losses. Grupo Vasconia's reported income from operations was $2.4 million in the 2017 quarter versus $900,000 last year. At March 31, 2017, the debt leverage ratio was 1.9 times and liquidity was approximately $60 million. During April, we repaid remaining balance of our term loan. Looking at the balance of 2017, we currently project full year sales excluding foreign currency impact, gross margin to improve approximately 50 basis points. And based upon expected sales volume, distribution in SG&A expenses as a percent of net sales should be in line with 2016. This concludes our prepared comments. Please open the line for questions.

Thank you, ladies and gentlemen. [Operator Instruction] Our first question is from the line of Frank Camma of Sidoti. Your line is now open.

Good morning, guys. Congratulations.

Thanks, Frank.

Good morning, Frank.

Larry, just a question on the guidance number you just gave. Real quickly, did you say about 3% top-line right, and was it 50% year-over-year gross margin improvement – 50 basis point, I am sorry?

Yeah, I said. Yes, 3% growth from sales ex-foreign currency and gross margin of approximately 50 basis points.

Higher, than the prior year?

That's 50, yeah, 50.

Okay. This will make sure. Okay, yeah. So, the reason, so you have the restructuring, well I guess let's break it down on to this, and the gross margin was – I think, I went back like 2012. I think this was the highest gross margin you've had in the first quarter, like it's at least for the last five years or so. So can we just stay on that for a second? And how much of that gross margin was benefited by the restructuring efforts today?

That's not significant factor at well.

So, there were some of the issues that you mentioned, I think Jeff had called out some product mix issues and stuff like that. Is this typically like your worst quarter for gross margin, Isn't that correct, I mean given lower sales line?

It can be. Our gross margin is a lot variable, so it's really because the first quarter tends to have a less favorable product mix than we have on later quarters.

Sure. Okay. So, did you mentioned the how much in the U.S. Wholesale was organic growth versus the acquisition driven over 6%?

Yes. In the U.S., organic was down about 1%. Overall, if you think about organic and taking out the foreign currency effect, it was about this – there was absolutely no change in the sale as well.

Okay. But just looking at U.S. Wholesale down 1%, correct?

Yes.

Okay. Alright. Since it's a pretty big number, I know you don't give detailed guidance. But the $10 million to $13 million, anywhere you can kind of give us like a cadence of that. I know you're pretty much spelled out over the next two years, so it's 2017, 2018. I mean is that more 2018? Maybe if you can give us a little more detail on that?

I mean, as you said, this initiative is a largely changing processes. So there is no big charge than a run rate, so a lot of it will be gradual. The one discrete item will be in early 2018 is when we move to the new West Coast facility. That will be discrete and we'll get the benefit of that run rate, little over $1.5 million a year, beginning in early 2018. The things that are a sort of like process-driven, late 2017 probably a substantial portion into 2018. I can't really calendarize quarter-by-quarter, if you didn't see this quarter, you won't see in next quarter somewhat likely that's a fourth quarter, you know we have [indiscernible] 2018, and then by early 2019 we should get the full run rate of the $10 million to $13 million.

Okay. Good. That's very helpful. On the warehouse issue alone, that will go flow strictly over assume through the distribution line, is that right? Like, we're going to model that?

I think that's right. Yes.

Just a couple more if I could. What are you seeing Jeff like on input cost now that you've kind of benefited from that over the last couple of years, but that's obviously now I think been flowing through your inventories has just now turned I guess. So, can you all just comment on what just general input cost there?

We are pretty stable right now. We are not seeing any major locations either negative or positive and you are right, we're now getting the benefit of the flow through, which there is quite a leg trying from when we were able to negotiate better prices until it comes through and there as we mentioned on prior calls, when we make acquisitions and the brands that we acquired last year, our first step is to lower input cost and benefit of that really you won't be seen for probably until the third quarter.

Okay. And sort of last question, just given what's going on, you called out – this has been for a while like a challenging retail environment. How do you feel about like the retailers inventory levels of sales, and I mean they've been kind of ratcheted down, so are they at good levels from your perspective?

In our first applications yes they are. They have ratcheted them down and certainly was somewhat of negative fact that last six months or so. But that stabilizes. It is stable now. The retail business is not horrible. You know it's called a slight funk if you want to put it that way. The only thing that makes us for it is of course the shift to online business.

Yeah.

But it's not a threefold or anything like that.

Right. It's just moving out.

Flat to down slightly in brick and mortar compensate before by the growth on the internet.

Great. Thanks guys.

Thank you. [Operator Instructions]. And we have another question from the line of Chris Lafayette of The Clark Estates. Your line is open.

Hi guys. Thanks for taking my call. Wondered if you could talk a little bit about your capital expenditure plans, are there cash cost that will be flowing through that line item in relation to the distribution build out in some of the IT investments that you mentioned?

Our replenishment CapEx is $4 million. We'll probably see for this year that number will probably be more like $8 million to $9 million which will cover the things you just mentioned, and then a little bit, it will be a little higher also in 2018, those will be some additional of that CapEx spending related to the warehouse in 2019, but in 2018, but I won't be – it will be somewhere between $4 million and the $8 million to $9 million.

Thank you. And as far as ecommerce, you mentioned how that's become a bigger piece of the business. Have you guys broken out how much of the business that is today?

We haven't yet. But I would tell you, it's in the order, our total ecommerce business including what's done – what we know is done through our retail partners. And not all of them are that forthcoming. But we believe it's hopefully somewhere around 14% right now and that's up dramatically over prior years.

Okay great. Thank you.

Thank you. And at this time I'm showing now further questions. I'd like to turn the call back over to Jeff Siegel for closing remarks.

Thank you. Thanks for joining us today. As you've heard we have a wide array of initiative underway to grow our assortment of brands and products, while simultaneously increasing our efficiency and profitability. We look forward to giving you and update in three months. Thank you all.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program you may now disconnect. Everybody have a great day.