Good day, ladies and gentlemen, and welcome to the Q3 2018 Lifetime Brands financial results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Harriet Fried of LHA. Ma’am, you may begin.

Good morning, everyone, and thank you for joining Lifetime Brands' Third Quarter 2018 Earnings Call. With us today from management are Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer. Before we begin the call, 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 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; the possibility of impairments to the company’s goodwill; changes in U.S. or foreign tax law and policy; changes in economic conditions that 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; changes in the company’s management team; the significant influence of the company’s largest stockholder; fluctuations in foreign exchange rate; changes in U.S. trade policy or the trade policies of nations in which Lifetime or its suppliers do business; shortages of and price volatility for certain commodities; significant changes in the competitive environment and the effect of competition on the company’s market, including its pricing policies, financing sources and an appropriate level of debt; 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. Kay. Please go ahead. Rob.

Thanks, Harriet. Good morning, everyone, and thank you for joining our call today. As you can see from the results we announced this morning, we are making meaningful strides in realizing the many benefits of the Lifetime-Filament merger. Notably, the quarter showed a 26% increase in net sales and a 10% increase in adjusted diluted EPS, evidence that Lifetime is starting to demonstrate higher earnings velocity accretive to the higher outstanding shares balance for the quarter. Before Larry goes over our financial results in detail with you, I’ll highlight the steps we’ve been taking to realize the financial benefits of the merger and to execute on our business plan and previously announced goals for 2018. I’d also like to bring you up to date on the new programs we’ve been rolling out in the second half of 2018 and go over the progress of several other important initiatives we have on tap for the coming month. As I mentioned during our quarter two call, our team’s focus for 2018 has been on three priorities: first, smoothly integrating Lifetime’s and Filament’s operations and realizing the identified cost savings and profitability improvement opportunities from the merger; second, laying the foundation for the repositioning of our product portfolio; and third, achieving a turnaround of our European operations. Our original target for annual cost savings that we’ve announced was $8 million, but I’m happy to report that we’re now on track to achieve an annualized level of over $11 million beginning in 2019, an increase of more than 1/3 from our original projection. Included in our 2018 results are $2.4 million in savings we will realize this year by reorganizing sales and marketing, streamlining our supply chain, consolidating our warehouses and eliminating overlapping G&A. All of these actions have been seamless to our customers.…

Thanks, Rob. As we reported this morning, net income in the third quarter of 2018 was $5.9 million or $0.29 per diluted share as compared to net income of $4.3 million or $0.29 in the 2017 period. Adjusted net income for the quarter was $8.2 million, which was $0.40 per diluted share of shares, compared to adjusted net income last year of $5.5 million or $0.37. A table which reconciles this non-GAAP measure to reported results was included in this morning’s release. Income from operations was $12.3 million for the 2018 quarter versus $9.3 million in 2017. Adjusted EBITDA non-GAAP measure, as reconciled to our GAAP results in the release, was $65.3 million – $64.8 million reflecting the credit agreement limitation for the 12 months ended September 2018. This includes permitted pro forma adjustments for Filament and projected unrealized synergies of $9.4 million. Net sales in the current quarter increased $43.5 million to $209.4 million. The increase reflects the acquisition of Filament, which added $38.6 million; and Fitz and Floyd, which added approximately $3 million. Organically, net sales increased $1.7 million, while the U.S. Wholesale organic sales increased $4.6 million. This reflects new tableware programs and an increase in Kitchenware products, partially offset by a decline in the home solutions category for international sales decreased by $2.9 million on a reported basis and declined $2.7 million in constant dollars. The decrease in constant dollars reflects the closing of the Netherlands operations in 2017 and the portfolio realignment for the tableware products line. Gross margin was 35.2% in the 2018 period versus – compared to 20 – excuse me, 34.5% in 2017. U.S. Wholesale gross margin was 34% in the quarter versus 34.2%, which reflects both a product and customer mix, partially offset by the addition of Filament products. For International,…

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

Good margining guys, thanks for taking my question. Let’s start with the top line because that’s where the major variance in my model was. You called out a number of things. But when I look at it on an apples-to-apples basis, stripping out the $38 6 million from Filament and the $3 million from Fitz and Floyd, it looks like the base business was up slightly, which is kind of what I was modeling. So it looks like the big part of the negative variance was really on Filament itself being less. So let’s start there. Was Filament under expectations for the quarter?

So you are correct that the base business grew at a pace of approximately a little over 4% on an organic basis. Filament is – second half of the year is on plan. You may have had some changes between – and if you look at versus prior year, some changes between third and fourth quarter.

So more like a seasonality issue is what you’re saying?

Yes, seasonality and mix. So your assessment is correct. The base business grew a little over 4%. And the Filament business year-over-year had declined, but that’s a mix between third and fourth quarter.

Okay. So there was a decline. And so that – you also called out – it sounds like you’re trimming some SKUs, right? So let’s talk about that. So given the – I mean, I understand the Filament issues are going to shift into fourth quarter, so that should give you some confidence on your Q4 number, right, because you’re benefiting from the pull forward, I guess, or shift in the fourth quarter. But what confidence do you now have on sort of achieving that number? Your Q4 number essentially implied, when you look at the new guidance, at least at the top line revenue, is really unchanged, right? Yet you’ve called some of the base. So how confident can you be in that given that?

Yes, we’re confident in what we’ve announced today. We’re sitting here. We know that October is a good month. So yes, we’re comfortable.

So what are the – are your retail partners saying? I mean, generally, the commentary has been positive relative to recent years. Are they reiterating that positive commentary to you, especially given past years' track record of inventory destocking? Can you give any commentary on that?

Yes. The end markets are healthy. If we look at our POS numbers to date and compare that to previous years, they’re strong for our products. In general, retailers have a good attitude in North America, which is the bulk of our business. So yes, all indications and what we’ve seen in terms of the POS are providing us with comfort.

Okay. So not to beat the dead horse, but, like the guidance midpoint-to-midpoint then, just focusing on sales for a second, has decreased by $34 million, with the vast majority of that being in 3Q. Part of it’s the shift for – and product mix for Filament. Part of it’s calling of the SKUs. Correct?

Yes. And as we look at that, and we’re looking to streamline our business to be more profitable, it doesn’t correspond, as you can see, with the change in the EBITDA, which is what we have solely in mind.

Right. Yes. No. That, yes, makes sense because the margins have actually improved technically speaking.

And will so. And this ultimately involves just some legacy business that we’ve looked at, that if we look at it on a fully burdened basis, so not just revenues and/or gross margins, which would be low, don’t add anything to the company either strategically and, obviously, not financially.

Okay. And then in the press release, you gave the full year net income in the range of $4 million to $7 million. Is that adjusted net income?

No.

That’s GAAP? Okay. So that’s the GAAP. Can you give it to us on the adjusted net income basis? Like apples-to-apples?

Not exactly, yes. But Frank, if you look at the bridge that’s in the release, there’s not a lot – there’s not a whole lot. There are some things that would happen, obviously, in the fourth quarter that would change that adjustment. But...

Okay. That’s what I was getting to. So we can just take the year-to-date and go through that? Okay. So that’s the GAAP number. And I guess, the last one for me, and then I’ll hop off. From my perspective, the one bright spot besides sort of the cost, and maybe that’s part of it, is just overall distribution expenses. Larry, you talked about this a little bit, but the distribution expense seem to be under control. Can you talk about any freight pressures you’ve been having? Some of the other companies have called that out. That doesn’t seem to be an issue here, so maybe you want to talk about that.

Here on the distribution, we just talked about freight out. And freight out is a really real small component of - there’s only certain customers where we pay the freight. So our; warehouse expense, it’s small. So even – obviously, if it goes up, it would hurt, but it’s such a small percentage of our total distribution expense.

And a lot of our goods are picked up directly in China. And there are goods that are picked up from our DCs that our customer paid freight. So as Larry pointed out, our cost is – it’s not meaningful. The only thing we’ve seen on a total freight basis is not on a P&L impact. But there is a shortage of containers in China, which slows things down a little bit.

Okay I got it.

Just to mention is that I made the comment, our freight costs are low. And it’s relative because there hasn’t been a shift in our sales to certain customers. So if our sales go down, we’ll grow in other customers where we don’t pay freight. Obviously, as a percentage, that’s going to go down.

Last one if I could. Fourth quarter is typically – given that’s your biggest quarter from a sales standpoint, typically your best gross margin, is that what we should – I mean, but at the same time, you have some tariff issues, given the staging. Should we still see improvement here sequentially for the fourth quarter?

It will be a little better. I mean, we did have a substantial business to – a direct business in the third quarter, and that’s a little low margin. So it could pick up a hair. But as Rob said, it’s really the expense control in those businesses that don’t add sale – that had, had sales, but don’t add a whole lot of operating margin. The benefit...

The direct piece that Larry mentioned is lower gross margin, but actually higher contribution margin.

Okay. Yes, okay. Yes, because I’m used to direct actually being sort of other way around. That’s interesting. Okay.

Direct to customers, so it’s not direct to consumer.

Not direct to consumer? Okay, okay. I got you. Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Justyn Putnam with Talanta. Your line is now open.

Rob and Larry, I have a couple of questions, if you don’t mind. First question is if I could get a little better understanding about the cross current between the tariffs and the currency. First of all, you pointed out a couple of times that the currency, strong dollar was a headwind in your European operations, which is understandable. But at the same time, the dollar has been strong for a lot of your – where your cost of goods is coming from like China. But in prior conference calls, I think you’ve spoken about that dynamic, but there being a delay in the benefit – like a six month delay in the benefit of currency changes in your cost of goods sold. Is that still the case? In other words, is the current strong dollar helping you from a cost of goods standpoint?

Yes. Justyn, so maybe there’s some completing of a couple of things. Roughly for translation, so the effect of when we did the budget we gave our guidance in the first quarter, the exchange rate, pound to the dollar, was about $1.40, okay? So that guidance was based on that. Now we’re down closer to around $1.30. So what we’re talking about is the translation of the – into U.S. dollars for the purposes of financial reporting. We weren’t talking about the effect of what our products will cost on a real currency transaction basis rather than a translation basis, which it hasn’t really been relative since we trade in dollars. The U.S. business really wasn’t that impactful.

The dollar versus the RMB exchange rate has been one of the things that we’ve used, and we talked about being proactive in reducing our cost of goods sold. So we went to our supply base, armed with that information, among other things, to get meaningful cost reductions. And this has been a driving factor for how we’ve mitigated the impact of the tariffs.

So let me ask it another way then. Aren’t most of your cost of goods contracts in China negotiated in dollars?

So yes, we purchase in dollars. And while we don’t – do not necessarily price lock, so to speak, it’s kind of a commitment in advance. But we went back this year and renegotiated with our supply base to get lower cost because of the RMB – using the RMB dollar exchange rate, which is part of the trade wars, right? So China, from the ways they’ve reacted is they devalued their currency. So we went back and said, "Hey, give us that money." And we’ve used that to mitigate the impact of the tariffs. And therefore, the amount that was left over, obviously, we passed on price increases, but we were able to pass on reasonable price increases to offset whatever we didn’t take in the cost of goods sold. So yes, we did order that benefit, and that has been what’s driving us so to mitigate the impact of the tariff.

Okay. So the next part of the question now is, is there not a little bit of element of a lag in that, though? In other words, we haven’t seen a benefit of those negotiations yet in the numbers, right? Because that’s fairly recent development.

Absolutely.

Okay. Okay. I’ll set that aside. The next question is, in the fourth quarter, obviously, that’s a big cash flow-generating quarter for you. And I think in conjunction with the acquisition last year, a big part of your plan was to start paying down debt. Can you give us any kind of sense about what a net debt figure would look like at year-end or your plans for debt paydown in 2018?

So our plans for paydown in 2018 as well as 2019 remain as previously disclosed. So yes, we will use generated cash flow to delever. In terms of any given period, we’re not looking out at that point. A matter of fact, while we generate a lot of revenues, there’s a always – we got to collect it. Collecting isn’t a problem, but there’s a lag impact here. So our cash generation in the first quarter is rather strong because of all we generate in the fourth quarter.

So just to clarify, so far this year, your debt paydown’s gone the other way. You’ve increased debt by $40 million or so, right?

Yes, it’s up, but you have to look at the working capital flows, right? That’s – and we generate cash through the end of the first quarter as our peak.

Correct. Yes, that was to be expected at this point of the year, but I just want to clarify that in the fourth quarter, you will be generating cash and that number will go down. I was trying to get a feel for how much that might be going down.

Yes. Directionally, that’s correct. I don’t have a target to share with you. But as Rob pointed out and the fourth quarter will be our strongest quarter. And to the extent that it’s more in the fourth quarter. The third quarter, as you can see from the numbers we reported today, it will be – the collection should be well into the first quarter of next year.

So the peak generation, cash generation period is more first quarter than fourth quarter because the peak revenues are in the fourth quarter.

Okay. But that’s a little bit of a change from historic – Lifetime historically.

No. Justyn, it actually varies from year-to-year. So if you did a – if you had a sale in early October, depending on the customers, you may be collecting in 28 – in the current year. If you have a sale in, let’s say, mid or early November, you may more likely will collect it in January or February. And it also depends on the customer. Not all customers have the same selling terms.

And if you look back at our cash flow annual, you’ll see it has varied. And additionally, the business is bigger this year. The Filament business generates more cash historically in the first quarter than the fourth quarter. It’s just a slight difference in seasonality.

Correct. Okay. Okay. So by the end of the first quarter next year, you’ll see a lot of the increase in debt that we’ve accumulated for this year kind of starting to reverse out. Is that directionally accurate?

Yes. That’s better. Correct.

Sorry. And then the last question I have, and just to clarify, you changed your guidance in revenues by, call it, $30 million. Just by order of magnitude, I think it is in three buckets. You had some SKU rationalization, some – this potential order that shifted into January. And then you had a currency impact, I guess, in European operations. But the largest of those three is the SKUs that you’ve called. Is that accurate?

Yes. The largest is the impact of, as you point out, the impact on revenues.

But the SKUs, the SKU rationalization...

So if you look at it, the sales – again, one way to look at it, as Frank asked and we were talking to him, is there’s a bigger impact on revenues than there is on EBITDA, right, which there isn’t.

Yes. No, I got that. Okay. I was just clarifying the order of magnitude in those factors. Okay. All right. That’s my questions.

Thanks.

This concludes today’s Q&A session. I would now like to turn the call back over to Rob Kay for closing remarks.

Thank you. So to everyone, thanks again for joining us today. With our expanded platform, combined capabilities and enhanced efficiency, we believe Lifetime can become a powerhouse in housewares across all channels. We’re looking forward to delivering a strong finish to 2018 and for the years ahead. Thanks for being with us today.

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