Lifetime Brands, Inc. (LCUT) Q4 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Q4 2017 Lifetime Brands' Earnings Conference Call. [Operator Instructions] As a reminder, today's conference maybe recorded. I would now like to turn the call over to Ms. Jody Burfening. Ma'am, you may begin.

Thank you, Chelsea. Good morning, everyone, and thank you for joining Lifetime Brands' fourth quarter 2017 earnings conference call. With us today from management are Jeff Siegel, Executive Chairman; Rob Kay, 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 U.S. or foreign tax law and policy; changes in economic conditions; which could affect customer payment practices or consumer spending; the impact of changes in general economics on the company’s customers; expenses and other challenges relating to the integration of the Filament brands business and future acquisitions; changes in demand for the company's products; changes in the company’s management team; the significant influence in consent rights of the company's largest stockholder; fluctuations in foreign exchange rates; shortages of and price volatility for certain commodities; significant changes in the competitive environment and the effective competition on the company's markets including the company’s pricing policies; financing sources and appropriate level of debt and other risks detailed in Lifetime's filing 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 will now turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thank you, Jody. Good morning everyone, and thank you for joining us today. As you know just two weeks ago we announced the completion of our acquisition of Filament Brands, creating a premier housewares consumer goods company with more than $750 million in net sales of over 1,000 patents worldwide more than 20 leading brands and 27 categories. This is a transformational combination unlike any acquisition we have made before and we are incredibly excited about the opportunities it creates for both our shareholders and our customers. The acquisition integrates two of the most important companies in the housewares industry bringing together our highly complementary strengths and creates the most powerful platform in housewares across all channels including e-commerce. Filament is a leader of high-end design and innovation in the branded consumer product sector, whose products can be found all over the world. Filament's number one position in non-traditional high growth channels will help us to extend Lifetime's reach into important new segments. These include wine and bar, bath and kitchen measurement and commercial. The commercial segment has especially great potential since Lifetime has already developed a full line of knives, kitchen tools and gadgets, as well as dinnerware and flatware they use in commercial kitchens that can be distributed through Filament’s distributor network. In addition, we will leverage Lifetime’s international distribution capabilities to help Filament increase distribution outside of the U.S. As a result of the acquisition, Lifetime now has the scale, brands, capabilities and diversity to compete and win in today's dynamic global environment. Not only do we have an expanded presence in important markets around the world, we also have the infrastructure to create more cutting edge products for consumers and efficiently get them to consumers worldwide whether they want to shop in at brick-and-mortar retailer or online. We’ve also added three master brands from Filament Taylor, Chef'n and Rabbit with more brands products and stronger distribution of marketing platform, we have positioned to deepen our partnership with customers, expand our relevance with retailers and forge partnerships and promising new channels. In today's highly competitive retailing universe, there is no substitute for being the most relevant supplier. Approximately 80% of our sales will now come from owned or controlled rather than licensed brands. At the recently completed Home and Housewares Show, it was quite evident that the combination of Lifetime and Filament has created the preeminent housewares company in America. We had more significant meetings with senior management of key retailers than we have ever had, and it’s the Vice President of one of America's most successful retailers told us and I quote we have seen many mergers in housewares we were skeptical of how could the merger would be for us, but in this case we are extremely excited about the possibilities of what a combined Lifetime and Filament can bring you. Adding Filament’s marketing and consumer engagement capabilities for Lifetime's expertise in sales, e-commerce, sourcing and our IT infrastructure creates a very powerful platform. Equally important, the integration is being executed by two outstanding management teams with a track record of successful acquisitions and integrations. Over the past five years, we successfully integrated nine acquired brands into Lifetime's portfolio including most recently Fitz and Floyd which adds nicely to our tableware sales in the fourth quarter. Over the same period, Filament successfully folded four acquired brands into tailored products to create Filament brands. So, I’m tremendously excited and pleased to welcome Robert Kay formerly Chairman and CEO of Filament for Lifetime’s executive management team. Rob is now serving as our CEO overseeing day to day operations and activities, while I as Executive Chairman and focused on the successful execution of our company’s strategy. Both of us firmly believe that in this time of tremendous industry change, the company is well-positioned to deliver enhanced profitability, margins and cash flow. In the fourth quarter Lifetime's business was primarily impacted by sales declines at two key customers. One has been highly focused on reducing their weeks of inventory on hand and the other did not repeat two major promotions that were run in 2016. In the past we’ve got two periods of retailer inventory reductions and what ultimately happens is that the inventories bottom out after a few quarters, and the ordering cycle returns to normal. At the second customer, where the two promotions were not repeated, I'm pleased to say that for 2018 we've already secured the largest order in the history of Lifetime which will be shipped later this year. In addition, our new colleagues at Filament had confirmed significant new business for 2018 at the same customer. I'd like to point out some fourth quarter progress on initiatives. We have substantially completed our move into our new West Coast distribution facility. This built-to-suit facility with its state-of-the-art earthquake resistant construction allows for higher racking thereby reducing the facility’s overall footprint. The facility also has the capacity to handle Filament’s inventory requirements. We completed the consolidation of the Netherlands operation into the U.K. including its distribution facilities. We believe this and other significant changes we’re making through our U.K. operations to combine Kitchen Craft and Creative Tops will create efficiencies and leverage of each businesses customer bases thereby resulting in significantly improved results for 2018. We've reduced inventory by over 6% from yearend 2016 excluding the acquisition of Fitz and Floyd reflecting a successful companywide effort to eliminate the less productive SKUs as part of an on-going effort to improve our inventory turns. These initiatives are ongoing and are expected to provide substantial benefits this year and into the future. In addition, we expect to generate $8.1 million of annual savings from the Filament-related merger synergies. With that overview, Larry will come on now to provide more details on our recent financial results which will also impact that this quarter by the Tax and Job Cuts Act, after that Rob Kay will summarize our strategic priorities for 2018. Larry?

Thanks Jeff. As we reported this morning, the net income for the fourth quarter of 2017 was $1.3 million, or a $0.08 per diluted share as compared to $14.7 million or $1 per diluted share in the 2016 period. Adjusted net income for the quarter was $7.1 million or $0.47 per diluted share as compared to $14.9 million or $1.01 per share in 2016. The table which reconciles this non-GAAP measure to reported results was included in the release. Income from operations decreased to $10.9 million in the 2017 quarter versus $21.8 million last year. Consolidated EBITDA a non-GAAP measure reconciled to our GAAP results in the release was $19.2 million in the quarter and $24.7 million for the period in 2016. Consolidated EBITDA was $40.2 million for the full year of 2017 and $46.5 million for 2016. For our U.S. Wholesale segment net sales in the 2017 quarter decreased $30 million to $143.3 million. Kitchenware and home solutions declines were partially offset by an increase in tableware sales. The Kitchenware divisions decrease was primarily due to lower warehouse clubs sales, and a store wide inventory reduction at a key retail customer. Tableware’s increase primarily came from the luxury dinnerware sales to online retailers and the addition of its employees. The U.S. Wholesale segment gross margin was 38.9% in the 2017 quarter compared to 38.7% in 2016. The improvement reflects a change in product mix. For U.S. wholesale distribution, as a percentage of sales shipped from our warehouses was 8.4% in 2017 quarter, and this excludes approximately 650,000 of West Coast relocation cost, and that compares to 7.9% in the 2017 period. The increase is primarily due to lower volumes and inefficiencies associated with the move to our New West Coast facility. U.S. wholesale SG&A was $24.7 million compared to $24.6 million last year, an increase primarily attributable to the inclusion of its employee and customer credit risks were offset by a decrease in employee related expenses. For international segment net sales in the 2017 quarter increased to $31.8 million from $29.1 million in the fourth quarter of last year. In constant currency, net sales increased 2.4%. The increase came from kitchenware sales to Online Retailers, National Accounts and Export Sales and were partially offset by lower Tableware volume. The International segment gross margin was 33.2% in the current quarter compared to 31.4% in the 2016 quarter. Kitchenware maintained its gross margin from the prior year period while Tableware showed an improvement on reduced close out volume. Looking at international distribution expense as a percentage of sales shipped from warehouses, it was approximately 13.3% in the 2017 quarter and 12.2% in the 2016 period. The increase is due to higher temporary labor cost, in part from the initial SAP implementation and efficiencies. The International SG&A was $6.8 million in the fourth quarter versus $4 million last year. This increase primarily reflects foreign exchange transaction from operating activities and it change from the mark-to-market of foreign currency hedging contracts. Now looking at the Retail Direct segment, net sales were $7.6 million in 2017 and $8.1 million in the 2016 period. This decline reflects the continuing emphasis of sales from third party e-commerce retailers. Gross margin decreased to 63.9% from 67.4% last year. The decrease is due to clearance sales activities and a lower free shipping threshold requirement. As a percentage of net sales, Retail Direct distribution expense increased from 30.5% to 34.6% reflecting higher freight rates and lower revenue per carton shipped. Retail Direct SG&A expense was the same in both periods $2.2 million. Looking at non-segment unallocated corporate expense increased by $2.7 million to $7.6 million in the 2017 period. This primarily relates to the Filament-related transaction expenses. Interest expense decreased $100,000 to $1.2 million, reflecting lower average borrowings as we repay the term loan. The effective tax rate for the quarter was 84.3% compared to 33.2% last year. The 2017 rate reflects non-cash charge of $3 million for the remeasurement of the U.S. deferred taxes on reduction of U.S. corporate income tax rate under the new Tax Act. An estimate of $338,000 was recorded for the Act’s transition tax and unremitted foreign earnings. Due to complexities of implementing the act, the company has not completed its calculation of the transition tax. In addition, the effective tax rate increased as a tax benefit on foreign losses was lower than the U.S. federal statutory rate. Equity and earnings losses was a $265,000 loss in the 2017 quarter, compared to a $1 million of earnings last year. The 2017 period includes a deferred tax charge on the revaluation of fixed assets as compared to a tax benefit on revaluations last year. Looking at our balance sheet cash flow. For 2017, our operating cash flow was $17 million versus $29.7 million last year. This reflects a lower reported results from operations and normal timing factors for changes in working capital. At December 31, 2017, the leverage ratio was 2.4 times and our liquidity was approximately $66 million. In connection with the financing of the Filament acquisition, we entered into a $275 million senior secured loan maturing in 2025 and a new $150 million asset based revolving credit facility maturing in 2023, which replaces the existing revolving credit facility. At March 2, 2018, the closing date of the acquisition and the financing, total that was approximately $310 million and our liquidity was approximately a $110 million. Our pro forma leverage ratio on the closing date was 3.73 times that is based upon our reported 2017 EBITDA, Filament’s projected calendar year to 2017 EBITDA reported in the December proxy statement in the expected merger synergies, which aggregates to approximately $83 million. Now let’s turn the call over to Rob.

Thanks Larry. It's a pleasure speaking to all of you today as part of Lifetime Brands management team. As Jeff said we are intensely focused on accelerating the company's growth plans, capturing new opportunities from our position as a premier portion in the housewares industry and enhancing our cost management and operating discipline. Our focus over the week and a half since we have closed our transaction has been on the Chicago Housewares Show. This is the largest show of the year for us and we didn't want to impede the product and sales discussions. So we will be working to finalize our 2018 plans and strategic initiatives over the coming weeks and plan to give guidance on these topics in conjunction with our first quarter earnings report. As Jeff mentioned we are pleased with the activity at the Housewares Show that just wrapped up on Tuesday. We had significant and meaningful conversations both with senior management and our important customers, as well as, the ongoing product placement and merchandising discussions that are key to the show. Led by the full time effort of the newly created position of Chief Integration Officer we have many teams already working on the integration effort which focuses on one developing and implementing a seamless integration of the merger. Two ensuring that we fully identify and execute on the monetization of the over $8 million of hard hot dollar cost synergies that Lifetime had previously disclosed and three identify areas where we can re-engineer our company to achieve better execution, growth and efficiency. This effort is across every facet of our business. I’ll discuss this integration plan as part of the strategic communication that I previously referenced. As Jeff mentioned we are focused on the execution and achievement of existing initiatives that will greatly impact our financial results in 2018 and 2019. These include capturing the benefits and executing the integration and growth plan for our European operations, Lifetime Next initiative and the merger synergy initiative. As you might imagine, these initiatives are intertwined and we will be comprehensive in our execution strategy. Lastly, I would like to say how pleased I am with the resources and people that we have at Lifetime. Combining two great companies, we have a great organization that will and can achieve meaningful success and I am more confident today than before I had the advantage of being CEO of the combined company that we have a clear path to value creation and ultimately value realization for all of our stakeholders. This concludes our prepared remarks. Operator, please open the line for questions.

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

You gave the detail on the revenue shortfall here to sort of allow us modeling but I was wondering if you could help us with calling out how you benefitted, I’m just trying to get pure number here on organic of maybe if you could just tell us approximately how much revenue you booked from Fitz and Floyd in the quarter?

Well, Fitz and Floyd was approximately $5 million.

So, on the other, you called out the three issues that these basically destocking, I totally get the other issue on the comp that you are coming up against. Let's talk about that first. Was that all of Q4 issue meaning that special order you had gotten in 2016 or as I think I know what retail you're talking about, but was that a Q4 issue or was that also Q3 issue in 2016 of the prior year?

It’s a Q4 issue for the most part.

And so then going back to probably, I'm assuming you're stating these in the order of importance meaning that destocking was probably the biggest given the size of that customer than the others. But…

Frank it’s actually the opposite. The missing two promotions were bigger than the destocking.

I actually view that kind as a good thing, because I mean kind of missed the importance of that size, of that sell-in. So did you see on the destocking, I guess the question is, did you see that - could you had a little bit of that last quarter too. Did you see that accelerate through the quarter, can you talk about like what the cadence was or was it kind of consistent through the quarter because I've heard this issue with some of my other companies, but I think everybody's affected a little differently?

It was more in the fourth quarter than the third quarter, so we have within - at this point of time two quarters already. I would anticipate it’s probably coming to the - getting closer to the point where we bottomed out on that and we should start seeing normal order levels.

Yes, that was kind of I know and we expect - I think you’re not giving guidance or anything, but I guess to the extent that - and obviously Q1 is your seasonally slow quarter, but and it sounds like while you haven't seen it yet, that it's something you expect to moderate. I was just wonder, if you could talk about the rest of the business strictly the - like what you see - is there any way you could talk about Q1 so far even though it's a seasonally slow quarters anything we should note about that?

It's certainly nothing like Q4, which is a good thing for us, but you're right it's a very small quarter, and not very important in the overall scheme of things for Lifetime at this point, though going forward into the future, Filament has some businesses that are very important in the first quarter, but that’s the future and keep that in mind.

Right, you only have the one, less than one month of revenue.

That's right. So, that is for the future.

And the biggest month of the first quarter for Filament sales is January because there is some seasonality which was prior to the close of the transaction.

Okay.

February is the Chinese New Year in this year and - it’s always very slow and any of housewares businesses.

And so then moving on here a little bit, I was surprised - I was actually surprised at the strength of the both gross margin given and the level of sales, right, because you would have some hits in your fixed cost absorption. I think Larry called out the product mix. Is that really like what's driving that? Or is it part of that also getting rid of the productive SKUs? Or do they tie into one another?

No, it's the former, it's the mix.

Okay. So where are you at - in the cycle of on trimming down, did a good job of managing the inventory which kind of ties into that unproductive SKUs, but so where are you in the cycle of trimming back your SKUs to a point that you are happy with the assortment?

I think Frank you know we really did - the teams have been focused on particularly the last several months just the transaction and then of course people focus on the Housewares Show for you know a month or so before that. So a lot of the focus was shifted out as part of the integration and execution that I had mentioned in my remarks.

Then moving onto sort of basic questions about the legacy or the Lifetime business versus Filament, but can you just talk about what trends you've seen in commodity cost obviously like resin seem to be kind of stable, steel though can you kind of talk about those other input costs and what we should look out for?

You know there was a period about a month ago that some of the resins that we use were moving up. They've now reversed a bit. So they’re coming back down. We don't import any raw steel. So no - that's not going to affect this any way the tariffs will not affect us, but we have as you know, we’d expect over time the quantities do rise over time and we're very well-equipped to be able to handle that. We've gone through it many times but I don't expect this to be the year that we have any shocking increases that we have an issue with.

In last quarter, we talked a lot about e-commerce. You probably don’t have your hands around sort of the combined entities, but can you talk about just U.S. e-commerce and what trends you saw there in the fourth quarter percentage of the business, what kind of growth, et cetera?

It’s continuing to grow in a very dramatic rate both for - and it’s for also Lifetime and for Filament. So both companies have been focused on the e-commerce in addition to building a business in brick-and-mortar which is still the biggest part of the business for us. But e-commerce is still accelerating in the housewares world, the world that we're in and we are very well equipped to be a leader within our world as far as selling on online to e-commerce retailers. Both the e-commerce sites are about brick-and-mortar partners and to the pure play e-commerce sites.

Are there any categories that lend themselves better than others to e-commerce now like if you look at the combined company like gadgets versus tablewares versus - is there something we should look out for there as far as the categories themselves?

I mean the two things thing we look at on e-commerce both is size of the shipment. So if you're selling things that are in the neighborhood of $5 and under, then it's tough to do that but people combine but more importantly also in our business, we do have items that are very heavy. And then the freight cost comes into play and that's an impact on e-commerce. One area that is dramatically growing in terms of our focus on is Bridal Registry, where you look at - Jeff mentioned, the bridal products, it's very appropriate in terms of a gifting item but across our portfolio, there is a lot of opportunity and growth within Bridal Registry both in the omni-channel space, as well as the pure e-commerce space.

The last question is a question on the cash flow, it looked like to me that your cash flow from operations was negatively impacted by receivables collections. That’s only the thing that kind of stood out to me versus last year when you look at it kind of discreetly, is that just a timing issue or is that related to sort of the maybe the credit concerns at these couple of customers, can you talk a little bit about that at all?

So for the year receivables declined, it added to cash flow last year and actually took place a couple of years ago but it had to do with the timing and I think I've said it before, you know if you sell late in the fourth quarter and depending on the customer - for some customers have different terms, you could get - and you can do a lot of business even late November, if you get paid let's say in 50 days, it could really have really substantial impact over that year end quarter. So, you know I would say people look at it over on a three-year period and just soothe out.

But the credit concerns resulted not shipping certain accounts and therefore our inventories were higher because we held shipments particularly in one instance waiting for a bankruptcy to happen. So we could ship without credit concern post petition.

[Operator Instructions] Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Jeff Siegel for any closing remarks.

Thank you. As you heard this morning, our acquisition of Filament truly constitute an inflection point for Lifetime. All of us are proud to be part of an extraordinary team and look forward to capturing the benefits of our expanded platform together. We'll give you an update on our first quarter activities in May. Thanks for joining us today. 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.