Good day ladies and gentlemen, and welcome to the Q3 2017 Lifetime Brands' 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]. I would 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' third 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 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, and good morning everyone and thank you for joining us today for an overview of Lifetime's third quarter results. As all of you who have been watching the news and reading the quarterly announcements of other household products companies know, it has been a challenging time for brick and mortar retailers, which are trying to adapt to consumers' new buying habits by closing stores, reducing inventory levels, and adjusting to strategies. By contrast, pure play e-commerce retailers led by Amazon and those traditional retailers, with a robust online businesses, are doing well. The problem for wholesale suppliers like us, is that e-commerce sales, while growing rapidly, are not growing fast enough to offset declines in brick and mortar sales. We think that will change, but until it does, there will be pain and we will experience our share, as reflected in our third quarter results. Fortunately, several years ago, we committed to building a sophisticated e-commerce platform and our investments in infrastructure, systems and people are showing great results. In fact, we are well ahead of most wholesale suppliers, as evidenced by our growth in e-commerce sales, which was 59% during the quarter, and 51% for the nine months. And if we are able to sustain that rate of growth, and I believe we can, our sales for the pure play e-commerce retailers and the online sites of our traditional customers, will more than offset the rate of decline to traditional brick and mortar stores, beginning in 2018. As [indiscernible] I can tell you that our acquisition pipeline has never been greater, as many of the acquisition targets either don't know how or can't compete online or simply cannot afford to do so. As retailers adapt to consumers' change in buying habits, they have reduced the number…

Thanks Jeff. As we reported this morning, net income for the third quarter 2017 was $4.3 million or $0.29 per diluted share, as compared to net income of $6.5 million or $0.44 per diluted share in the 2016 period. Adjusted net income for the quarter was $5.5 million or $0.37 per diluted share as compared to adjusted net income of $7.5 million or $0.52 per diluted share in 2016. A table which reconciles this non-GAAP measure to reported results was included in this morning's release. Income from operations was $9.3 million for the 2017 quarter compared to $10.8 million for the 2016 quarter. Consolidated adjusted EBITDA, a non-GAAP measure, as reconciled to our GAAP results in the release, was $15.7 million in the current period and $16.7 million for the comparable period last year. Consolidated adjusted EBITDA was $45.8 million for the trailing 12 months ended September 2017, versus $45.6 million for the same period in 2016. For our U.S. wholesale segment, net sales in the 2017 quarter decreased $2.5 million or 1.8% to $137.1 million. The decrease reflects challenges at retail, including our delaying of shipment, and in some cases, holding shipments, due to concerns for certain customers' credit. U.S. wholesale segment gross margin was 34.2% in the 2017 quarter compared to 33.8% last year. The increase reflects better customer and product mix, partially offset by unfavorable fixed cost absorption, due to a decrease in inventory purchases. U.S. wholesale distribution expense, as a percentage of sales, shipped from our warehouses was 8.4% in the 2017 quarter versus 8% last year. The increase reflects higher freight add expense on higher sales to prepaid freight customers. U.S. wholesale SG&A expense was $22.2 million, which is 16.2% of net sales, and that's in this current quarter, versus $22 million or 15.8% of…

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

Hey, good morning guys.

Hey, good morning Frank.

Hey. I was wondering if you could quantify the impact of the -- I know they are small, but the acquisition, so we can [indiscernible] for the true organic versus non-organic results in the quarter?

Fitz and Floyd was very small, less than $2 million -- or about $2 million, and the others -- remember, when we make acquisitions, we sometimes use the brands. I can give you an example, with one of the acquisitions we made last year, we took the brand and put it on a product that was supposed to be on another brand, that we already owned. So it kind of mixed trend.

Yeah. We can count that. So did Fitz and Floyd add $2 million of revenue in the quarter? Is it --

About that, slightly accretive, but very little.

We only had that for one month. And part of that -- it would have been much greater for that month, and the purchase, we allowed the seller to take a significant sale that was supposed to be in August, that moved to September a bit.

Oh, I got it. Okay. I got it. Hey I mean, you clearly were all along in this thing about the last quarter, relaxing continued problems. In retail, it seems like the cadence may have caught you a little bit off guard, a little bit, considering the results. But you also made that interesting comment about the one largest customer with the weak sell on-hand, which clearly is going to sort of -- I assume, somewhat reverse itself in the fourth quarter. Is that a fair statement, that's how you get comfort with a flat result for the year on a revenue basis?

Yes. It's exactly what's happening. It's already happening. We were kind of surprised and I guess that all happened really in the month of September within the period. They decided to turn off the [indiscernible] and just wait. I guess maybe their overall store inventories were high, whatever it was, and so our weeks on hand, went down 22%, which is a dramatic difference. And they weren't the only one. We found that across several other retailers as well. But that situation seems to reverse itself. The weeks on hand, I can't give you a number right now, but the weeks on hand -- we turned very well with retail, our products turned well. So the weeks on hand are rather small, they are not big numbers. So when somebody reduces, it is significant.

It impacts it. Okay. So what gives you -- so I get the revenue, but as far as the margins, given what's going on. What gives you the confidence and even, like for full year increase of 25 basis points, where every month now, if I look back in my old model, will be kind of actually right, almost exactly flat when I adjust the numbers. So what would be that delta I guess, in the fourth quarter, that would give you, whether it's mix or -- it's obviously not pricing, but --

It's not pricing. It is something we are pretty -- we are pretty good on pricing. Commodities have gone up very slightly, and the commodities that we deal with. There was a period in the third quarter, where some of the factories that we deal with in China, were shut down temporarily, because of pollution. But they have all come back on, and so they have not -- [indiscernible] for several weeks, and that did slow us down a bit, on some inventory levels. But you know, it's customer mix more than anything else, and a focus on eliminating SKUs that are less profitable, which is -- you are going to hit us from all of next year. We are highly focused on really -- as part of the -- what the consultants did when they came in, they want us to focus on what high value SKUs and really eliminate a large number of less profitable SKUs, that really don't add up to anything in the long run for us. And that's what we are doing.

Frank, just as a reminder. 20 -- Through the nine months, were 80 basis points ahead of last year. So 25 says that the fourth quarter will not be as good as, launching in the next fourth quarter.

We will conserve it off the fourth quarter, because it's just -- it's a strange retail environment right now.

Right. I mean yeah, it still, I guess implies obviously, a decline in the gross margin in the fourth quarter. No, I totally get that. I mean, if you are only going 25 basis points, I guess I was just thinking about it from sort of the very current trend, versus the first two quarters. I get that. So I know it's a little hard to measure, given that your customers probably don't break it out this way, but what do you estimate the true percentage of revenue or ballpark is currently e-commerce versus traditional bricks and mortar, if there is a way to kind of --?

You are right. A lot of our customers don't break it out. Obviously, we do have the pure play, but we don't have the -- some of the retailers don't break it out for us. But we do talk to them about it all the time. So our belief is that it's in the mid-20s at this point, and what's really interesting to note, if you look at a country like the U.K., which has a much higher penetration of e-commerce sales versus brick and mortar sales in the United States, the numbers vary tremendously. We had our -- the Head of our U.K. operations was here this week, and he told us that John Lewis, which is the Macy's of the U.K., their online business, they announced is now 52% of their business, and quite profitable. So the dramatic shift that we are seeing is happening worldwide. It's already happening in the U.K., and we are taking advantage of it. E-commerce is our most -- it's our most important part of our business in the U.K., is the e-commerce. So it's something to really understand. And we are about to very aggressively grow e-commerce in Germany, and we are also looking at France now. So we are -- we have a lot to go, but there is no question that -- the growth is going to come in e-commerce. Though, brick and mortar is not going away, but I believe that e-commerce will certainly move to over 30% of our business and possibly even closer to 40% of our business over time.

That makes sense. And my last question and I will hop off. Previously, you had given sort of an estimated range, not really exact timing, on the impact of Lifetime Next, I think the savings pre-tax, was around $10 million to $13 million. How do you feel about that number now that, through time it has progressed?

Frankly, I would have liked to see it happen much faster, and it hasn't. One of the biggest components is rolling out of the system to handle lifecycle of a property. That took us much longer than we thought it would. We had to get buy-in by the divisions and the people, which was although difficult at first, because it’s a lot of work, and it's sort of holding back [ph], tying their wrists together versus allowing them to go [indiscernible] to develop products. We have gotten over that. We have made all the tweaks we had to make to the system to make it really work well and work fast. So we will get the results in 2018. How much of the results, I am not sure yet, but a good part of it will be in 2018.

But you think that number is sort of still a valid number, based on what you are seeing like ultimately, not really, from a timing standpoint?

Yes. Absolutely. And we have also found some other ways that we feel -- make some improvements other than what was originally planned, and we are working on those as well.

Okay. Thanks.

Thank you. [Operator Instructions]. And our next question comes from Andrew Walker from Rangeley Capital. Your line is open.

Hey guys. Thanks for taking the question. Just following up on the last question, Lifetime Next, it's just a little surprising to me how long it's taking. I think you guys have been mentioning SKU rationalizations, and since the 2015 earnings announcement. Like can you give me a little bit more on the timeline of when we are going to start seeing SG&A start coming down?

It's certainly frustrating to me though. To be very honest with you, when we brought in the outside consulting firm. They did put a ratable timeline on that. We felt in turn, that we could move faster than what they suggested, and it turns out their timeline was more accurate. So it's going to take time. We will get, as I said significant, benefits in 2018. We are working on it. We are doing a lot of things now. But the major part of this, the thing that gives us the most benefits, which is really SKU rationalization and developing systems to develop the right products versus just developing to many products, those only went into -- fully into play in the last 60 days. So it has taken much longer than I thought it would. I am not happy about that, but maybe we should have listened to them and not been so optimistic on our own.

And just to be clear, now a lot of that will come through cost of sales. The substantial increase you see in SG&A year-to-date, most of that, I mean a lot of are because of ups and downs; most of that relates to foreign currency, like almost $5 million and $3 million of it is mark-to-market. So that's not because of actual spending. We have got other things going on, we have added Fitz and Floyd, we have some bad debt and other related things, because of what's going around in retail. The implementation of that safety, some severance changes we are making. So some of that is non-recurring. But this isn't what we -- what you see in these numbers through nine months, it's not because of things like compensation going up and fast, it's probably flat, and not slightly down year-to-date. So this effects really distorts our expense profile.

Okay. And just quickly, speaking of the foreign currency. So I think this quarter is the first time you guys added back unrealized currency losses into your adjusted EBITDA, is that how you are going to be reporting going forward?

Yes.

In the past, it was -- certainly last year, it was immaterial. We never focused on it. And typically, these are hedges, plain, simple, pure [ph] hedges. But because of the type of contracts, where they are participating, it's very hard to get under accounting rules, hedge accounting. So we would otherwise and most -- probably most other companies report this in other comprehensive income. We don't qualify for it. And when we entered into these contracts, we weren't worried about it because, it was pre -- what it was, we entered into, was pre-Brexit, and the [indiscernible] of a relatively stable currency, it moved a little bit. And post Brexit it has been all over the place, and in fact -- the fact that at the end of September, when we did the mark-to-market calculation, the pound was -- the exchange rate was like 1.34 and forecast, bank forecast, [indiscernible] probably in the low 1.20s. So obviously a rollercoaster ride, not what we expected. But certainly, I think you understand the mark-to-market, which is go away and tie, because we don't sell these -- we are not going to sell the -- all the contracts, we are going to sell them in level course, because we actually hedge our -- in the U.K., they hedge our purchases of inventory in Asia, which is denominated in dollars.

That's fine. I was just comparing it to apples to apples. If these were entered pre-Brexit, I mean, that would make it seem like you are hedging inventory purchases, 18 to 24 months out for these, the resulting losses now? So I don't know --

The answer is no. What we did in the last 12 months -- I would say the point is that, well we couldn't get hedge accounting, we felt it was [ph], okay so what. The numbers which we called out, we still can't get hedge accounting, but now the number, because of the great volatility, the exchange rate really stands out in the reported earnings.

Okay. I don't want to belabor the point. And then, I mean, the last one you know -- I am sure, you guys are focused on running the business, but you know, as investors in the stock, you will hit the stock at like 2017 today. Obviously, there was an offer at 20 earlier this year, which I don't know, if it fully values the company or not, but I would just say, looking at the balance sheet, once you guys generate cash in Q4, you have a pretty nice balance sheet like -- is this some type of share repurchase program, with the focus on Lifetime Next cost cutting? I think that creates a lot of value. So I would love to hear your thoughts on that type of capital allocation?

We do have discussions on share repurchases with our board on a frequent basis. We haven't made any final decisions yet. It's something we have done in the past. I really don't want to comment on that now, until we do make a decision. But it's not something that we would ignore, and if the price of the stock warrants it, we will certainly consider.

Okay. I will just throw in one more thought, I mean, if you turn down an offer at 20, and you are reporting these results today, like I think repurchasing shares at these levels is in shareholders' best interest and helps justify turning down the offer at 20. But thanks for taking the call, and I will look forward to Q4 earnings.

Thank you.

Thank you.

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Jeff Siegel for any closing remarks.

Thanks again for joining us. We look forward to giving you an update next year on our fourth quarter performance, and the many actions we are taking to help Lifetime grow profitably in today's environment. 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.