Lifetime Brands, Inc. (LCUT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Lifetime Brands Earnings 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, today’s conference is being recorded. I would now like to turn the call over to Harriet Fried of LHA. You may begin.

Good morning, everyone, and thank you for joining Lifetime Brands first quarter 2018 conference call. With us today from management are Jeff Siegel, Executive Chairman; Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer. Before we begin, I’ll read the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The statements regarding the company and its consolidated subsidiaries 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 it’s 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; the possibility of impairments to the company’s goodwill; 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 economic conditions 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 or in the company’s management team; the significant influence of the company’s largest stockholder; fluctuations in foreign exchange rates; changes in U.S. trade policy or the trade policies of nations in which Lifetime and its suppliers do business; shortages of and price volatility for certain commodities; significant changes in the competitive environment and the effect of the competition on the company’s market, including pricing policies, financing sources and an appropriate level of debt; and other details – excuse me, and other risks detailed in Lifetime’s filings with the SEC. 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 thanks for joining us today. As you know, this is our first quarter of reporting as a combined company with the results of Lifetime and just one month of Filament included in the numbers we reported today. As noted in our press release, the merger of Filament into Lifetime was consummated on March 2, so the quarter includes Filament’s results for only 29 days. We expect the combination of our two companies to be transformational with progress beginning in the second-half of this year and accelerating in 2019. It is our expectation that this will enable us to realize substantial operational efficiencies, propel Lifetime into new growth categories and position us to develop new sales opportunities worldwide. Obviously, with the short time that’s elapsed since Lifetime and Filament’s merger, we are still at the beginning of this process. And inevitably, there is some integration expenses that must be incurred as we align our organizational structure, which you’ll see in our first quarter numbers. Still our team is very pleased with the rapid progress we’re making. Rob will outline the steps we’re taking to create a strong and unified company. After which, Larry will provide details on our first quarter financials. Before I turn the call over to them, I want to emphasize that comparings of results with prior year’s quarters can be misleading. Our business and financial results often vary significantly from period to period because of the timing of seasonal promotions and the impact of shipments for large retailers that don’t follow predictable cycles. These fluctuations are an inherent part of Lifetime’s business, which we have never managed on a quarter-over-quarter basis. In addition, the first quarter whether positive or negative is not representative of the way in which our full-year unfolds. In 2018, we’ll be rolling out most of our new programs and promotions in the second-half, including the largest single order Lifetime has ever received. We folded these prospects into our outlook for 2018, which we’ll also go with – go over with you today. Rob?

Thanks, Jeff. Again, it’s a pleasure speaking with you today as part of the Lifetime Brands management teams. Our whole team is currently prioritizing two things: first, combining the Lifetime and Filament organizations as rapidly and efficiently as possible; and second, capturing new opportunities created by our larger, more diversified business. In today’s call, I’d like to focus on the process of combining our organizations since there is already a lot of concrete progress to share with you. From the beginning, our stated goal has been to realize $8.1 million in annualized savings with the bulk of those being fully realized in 2019. We believe we are on track to exceed that goal once the integration has been completed. Additionally, we are working on optimizing our business structure and anticipate more opportunities to increase efficiency and reduce SG&A as a result. The hard dollar cost elimination savings that are related to the announced integration opportunity will come from three major areas and we have already taken actions in each of them to begin realizing the savings as quickly as possible. One of the largest buckets of savings we’ve identified is in sales and marketing, where we expect to realize a total of approximately $2.4 million annually. We enrolled a new integrated U.S. organization to our company at the end of April, consolidating our sales force and identifying the division’s leadership structure. We’re dramatically reducing the use of third-party sales representatives and the commission expense that used to come with those reps. Using Lifetime’s in-house sales force puts us in control of customer relationships, training and cost, in the process enhancing our profitability. It also positions us to build deeper relationships with key customers and build on each other’s businesses, opening new markets and sales opportunities, both in the U.S. and internationally and in the commercial and the consumer categories. Finally, our new U.S. organization has a single division that combines all our e-commerce and retail direct efforts. Additionally, we have created a new function called Lifetime Labs that will serve as the innovation center for the company and be accessible by all business units. The second large area of savings approximately $2.8 million annually, falls into the area of supply chain, where we’re consolidating warehouses and eliminating overlapping functions. We’re in the process of closing Filament’s third-party distribution center in Memphis, Tennessee and moving all warehouse activities to Lifetime’s new distribution center in Rialto, California. We’re also moving Filament’s direct-to-consumer warehouse fulfillment operation to existing Lifetime warehouses. And we’ve already rationalized our footprint and workforce in China. In late March, we consolidated our operations into a single group based in Shanghai. Going forward, we will manage supply chain, quality sourcing and project engineering for all of the company’s business units in the new consolidated footprint. The third bucket is overlapping G&A, which accounts for planned annual savings of approximately $3 million. In this area, we’ve combined finance and IT and are eliminating redundant back-office operations. We are starting to migrate our Filament business on to Lifetime’s SAP platform, which was designed to scale and rapidly integrate acquisitions. This migration is a gating item in realizing the savings I just outlined. We are focused on completing the integration by the end of 2018. That brings me to the financial guidance, which we issued this morning. We’ve built this forecast carefully after meeting with all of our key divisions, where we talked about their sales prospects, the resources they needed and the way we could all leverage the efforts being undertaken across the company. The forecast also takes in account a one-time cost of up to $3.2 million that we expect to incur to integrate our organizations and build a solid foundation for future success. The guidance considered – considers our continued growth of our e-commerce revenues with Amazon, now the second largest customer of our business. Combined with increased orders from our brick-and-mortar retail customers, we are providing guidance based on both organic growth, as well as top and bottom line synergies created by the combined Lifetime Brands. As provided in more detail on our press release, our outlook for 2018 is to achieve net sales of between $760 million to $772 million, EPS of $0.45 to $0.61 and pro forma adjusted EBITDA of $77 million to $81 million. With that overview, I’ll ask Larry to come on to give you an overview of our first quarter financial information. Larry?

Thanks, Rob. As we reported earlier this morning, the net loss for the first quarter of 2018 was $11.6 million, or $0.70 per diluted share, as compared to $1.3 million, or $0.09 per diluted share in the 2017 period. Adjusted net loss for the quarter was $8.3 million, or $0.50 per diluted share, as compared to the $1.3 million, or $0.09 per share in 2017. The table which reconciles this non-GAAP measure to our reported results was included in this morning’s release. Loss from operations was $13.3 million, as compared to a loss of $1.9 million from the 2017 quarter. Consolidated adjusted EBITDA, a non-GAAP measure that is reconciled in our GAAP results in the release was $71.9 million for the 12 months ended March 31, 2018. This includes permitted pro forma adjustments for Filament and projected synergies of $8.1 million. Consolidated net sales for the 2018 quarter increased $4.8 million to $118.2 million. The increase reflects the acquisition of Filament, which added $9.3 million and Fitz and Floyd, which added $3.2 million. For the U.S. Wholesale segment, organic sales declined $8.5 million. Of course, there were three categories, kitchenware, tableware and home solutions. The decline reflects the expected timing of planned customer programs and higher close-out product sales in the 2017 period. For the International segment, sales increased by $600,000 on a reported basis, but declined $2 million in constant currency. The decrease in constant currency reflects in part timing of e-commerce sales. Retail direct sales increased $200,000, excluding Filament. Consolidated gross margin was 38.2% in the 2018 quarter, compared to 38.8% in 2017. U.S. Wholesale segment gross margin was 37.3% in 2018 and 38.4% last year, reflecting a change in customer and product mix, in part due to the Fitz and Floyd addition. For the international segment, gross margin improved 70 basis points to 34.9%, largely due to the strength of GBP to U.S. dollars in the current period. Retail direct gross margin, excluding Filament, declined from 66.7% to 65.8%. Consolidated distribution expenses as a percentage of sales shipped from our warehouses, excluding $2.4 million of charges associated with the West Coast distribution center’s relocation and Filament’s expenses were 13.7% in the 2018 period versus 12.1% in 2017. For the U.S. segment, excluding the relocation and Filament, distribution expense rate increased, reflecting lower shipment volume and an increase in freight rates. The international expenses increased into higher labor and facility expense, as well as freight cost on shipments to Continental Europe. Our Retail Direct segment experienced an expense rate increase, reflecting higher peak volume and higher freight rates. Consolidated SG&A expenses were $40.2 million in the first quarter of 2018 versus $32.4 million in 2017. U.S. segment expenses increased by approximately $3.5 million from the acquisition of Filament and $700,000 from the acquisition of Fitz and Floyd. International SG&A expenses increased $1.9 million, primarily from the settlement of forward currency contracts and to a lesser extent from financial statement translation due to the strength of GBP to U.S. dollars. The currency contract settlement expense was partially offset by higher gross margin. Unallocated corporate expenses increased by $1.5 million from acquisition-related expenses and professional fees. Interest expense was $2.1 million in the 2018 quarter, as compared to $900,000 last year. The increase in interest expense is attributable to the financing obtained to acquire Filament. In April, we entered into a $125 million notional amount of 5-year amortizing interest rate swaps to fix a portion of our variable-rate debt. Under the swap contracts, we will pay a fixed rate of 2.6% and receive one month U.S. LIBOR. The effective tax rate for 2018 quarter was 24.6%, compared to 33.5% last year. The lower effective tax rate for this current period reflects reduced U.S. corporate statutory income tax rate, partially offset by nondeductible expenses. And equity and earnings of Grupo Vasconia, net of taxes was $77,000 in the current quarter, compared to $540,000 last year. Grupo Vasconia has reported income from operations was $1.1 million versus $2.4 million last year. At March 31, 2018, liquidity under the revolving credit agreement, including cash of $11.9 million was $91.4 million. This concludes our prepared comments. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of John Sullivan from Olstein Capital Management. Your line is now open.

Hi. Do you guys have an estimate of capital expenditures for the combined business? Because it seems to me, let’s say, looking at consensus numbers, which I know there’s not a ton of coverage, your adjusted earnings per share doesn’t add back any of the deal amortization, which seems to be relatively substantial. So I’m just trying to kind of gauge here what underlying cash flow should look like?

Well…

Larry?

Yes. Thanks, Rob. On the CapEx, our current forecast for the year is approximately $8 million for the combined businesses, normalized at about $6 million on a combined basis. But because of the move into this new facility, we mentioned in Rialto, California, it’s going to be a little bit higher. If I got your question right on the deal, all the amortization is added back in the – where we reconcile in the release the – how we achieve – how we get to the EBITDA guidance, there’s $24 million of D&A included there. And that includes all the – both the legacy Lifetime and the additional amortization related to the acquisition of Filament.

Gotcha. But we’re not looking here – some companies, where the deviation is so great here would report maybe a cash EPS on an adjusted basis. This is – the adjusted earnings don’t add any of that back. Just the – obviously, the adjusted EBITDA.

Yes. Well, if you take – if using the information we’ve provided, the – and excluding any working capital exchange, which we’re not giving guidance on, you will arrive at about operating cash flow of about between $40 million and $43 million. So if you subtract CapEx and yes, you can do your math, the – I can tell you that the weighted average shares outstanding should be about 19.8 million for the year, given the effects of the Filament transaction.

Got it. The same thing [Multiple Speakers]

Does that help?

Yes, that’s what I thought.

Okay.

Thank you. And our next question comes from the line of Frank Camma. Your line is now open.

Good morning, guys. Thanks for taking the call.

Sure, Frank.

Hi, Frank.

Hey, so your revenue guide is a little higher – or substantially higher than what I’ve had. Earnings were a little lower. The question is, Jeff, you had called out even though last call, this sizable order that you have. Is that a Q3 or a Q4 event?

It’s more in Q3.

Okay, good. So that [Multiple Speakers]

It will happen….

…for the holidays?

Yes.

Okay, great.

It will happen over more than one month, obviously, Frank.

Okay.

But the bulk, as Jeff said, will occur in Q3.

Okay, great. And can you talk about what you’re seeing on the commodity side as far as steel cost? I mean, steel is going up in China, how that’s going to maybe pressure margins longer-term? I know your turn is only about twice a year. So how should we think about that?

I mean, across the Board taken as a total, we are not seeing substantial pressure on the cost side.

Oh, good. Okay. And then on trucking, a lot of my companies are having issue with trucking. And you mentioned that – is that not as big an issue as I would have thought? I thought you would had a little more pressure there, given what’s going on just industry-wide?

I mean, freight costs have gone up. We have reflected that in our numbers in terms of the actual performance and we have reflected any impact in our guidance.

Okay. And last one for me, and then I’ll hop off, is just on e-commerce. You said Amazon is now number 2. Are you doing any sort of special promotions with them, such as Amazon Prime Day that you could talk about and/or any new products that we should be aware of that would – I mean, I know you have so many SKUs, but anything that would be worth mentioning?

We’re in daily dialogue with Amazon. We sell many different categories to them. So there is always things going on. In terms of your comment on Prime Day, it is a significant event that Amazon supports, that really is morphed into almost Prime Month. So we run programs throughout that month to take advantage, to position our ace. And so that we’re getting the appropriate rankings and to take advantage of the sales and margin opportunities. So we will run a substantial Prime Day program and had factored that into again, our guidance. We are speaking to them and based upon the size of Lifetime as a housewares vendor in the category and our relationship with them based upon the scale, one of the things we put together, we have launched an exclusive brand just for them. And there are a couple of other – there are three things that are currently underway, which would be exclusive at Amazon’s request something for them.

Great. I guess, last question, if I could. Of your categories that you’re in now that you’re crossing so many. What’s – where do you see from the consumer side being the most exciting or the highest growth category if you could rank it?

Look, our kitchen category in total is – where, obviously, something that is important to us. We’re a recognized leader from opening price point to the high-end. We are the innovation leader. And we haven’t had a problem with the category, and it’s providing a lot of growth and continues to do so. We don’t like to single out one category that we like more than the others. We – by strategic consideration, we’ve picked our categories. We will constantly reassess and prune the portfolio as needed. But we are enthusiastic about the prospects of where we’re playing.

The reason I asked the question is, I always see you guys as really good competitors in kitchen gadgets and such in sort of a good way to stay relevant with your retail partners. So that’s all I had. Thank you.

Thank you. [Operator Instructions] I’m showing no further questions at this time. I would now like to turn the call back over to Rob Kay for closing remarks.

Thanks, Mark. So everyone, thanks again for joining us today. As you’ve heard, we’re taking decisive steps to build a bigger, better Lifetime Brands. We’re committed as a team to deliver stronger growth and shareholder value. We look forward to giving you an update on our strategy and actions in our Q2 call in August. Also, we’ll be participating in the Stifel Cross Sector Insight Conference in Boston in June and look forward to seeing some of you there. 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.