Good morning, ladies and gentlemen, and welcome to Lifetime Brands' Second Quarter 2019 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen-only model. After the speaker’s remarks there will be a question-and-answer period. [Operator Instructions] I would now like to introduce your host for today's conference, Andrew Squire. Mr. Squire you may begin.

Thank you. Good morning, everyone, and thank you for joining Lifetime Brands' Second Quarter 2019 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'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission. With that introduction, I'd like to turn the call over to Rob Kay. Please go ahead Rob.

Thanks Andrew. Good morning and thank you for joining us today to discuss Lifetime Brands' second quarter 2019 financial results. This quarter we continued to focus on long-term growth initiatives. And although our performance in Q2 fell short of expectations, I am pleased that the company remains on track to achieve its strategic priorities of repositioning our company for higher growth rates and increased returns. Looking at Q2 while we have successfully gained market share, in the majority of our business lines we have faced market and geopolitical factors that have had a negative impact on our results. Notwithstanding, these headwinds we successfully launched several initiatives in the second quarter and continue to benefit from the reorganization activities that we executed in 2018. The initiatives that we launched in the second quarter include the introduction of our cutlery and tabletop offering into the commercial food service sector, the launch of a comprehensive international sales effort and the launch of several new product lines across our bakeware, kitchen tools and home solution lines. While the international and food service initiatives are not expected to contribute meaningfully to 2019 results, the other initiatives will help provide positive momentum and results in the second half of this year. Further our U.K. business continues to show improved results as a result of our reorganization efforts over the past several quarters and we occupied our new single-location U.K. operation during the quarter, which will begin to contribute meaningfully to enhance margins and profits in the second half of 2019 and beyond. We also made significant progress on our portfolio realignment and SKU rationalization as we take a more strategic approach to products and categories going forward. As we discussed last quarter, the retail industry continues to face temporary down cycles, driven by structural changes in…

Thanks, Rob. As we reported this morning, the net loss for the first quarter of 2019 including the impact of the non-recurring non-cash charge of $8.5 million related to the SKU rationalization was a loss of $11.5 million, or $0.56 loss per share as compared to net loss of $6.1 million, or $0.30 loss per share in the second quarter of 2018. Adjusted net loss for the 2019 quarter was $4.5 million or $0.23 per share as compared to an adjusted net loss of $5.7 million, or $0.28 per diluted share in 2018. A table which reconciles this non-GAAP measure for quarter results is included in this morning's release. Loss from operations including the non-recurring non-cash charge was $8.5 million. With the SKU rationalization was $12.5 million for the 2019 quarter compared to a loss last year of $3.3 million. Adjusted EBITDA, a non-GAAP measure that is reconciled through our GAAP results in the release was $68.8 million for the trailing 12-month period ended June 30, 2019. After giving effects to certain adjustments and before limitations that as committed and defined in our debt agreement. This includes projected unrealized savings of $4.8 million. Of note the projected unrealized savings continue to decline as they continue to be realized and reflected in our actual operating results. Net sales for the 2019 quarter was $142.5 million versus $148.7 million last year. The U.S. sales segment decreased $5.9 million, or 4.6% to $123.1 million. The decrease was from certain low-margin tableware programs in 2018 not repeating in 2019 and to a lesser degree declines in Kitchenware. This decrease was partially offset by strong growth in hydration products. International segment sales were $19.4 million in 2019 versus $19.7 million last year on a reported basis. In constant U.S. dollars, which includes the impact of…

Thank you. [Operator Instructions] And your first question is from Frank Camma of Sidoti.

Good morning guys. Thanks for taking the questions.

Good morning Frank.

Good morning Frank.

The obvious question to me at least when I was first reading the release is on -- you obviously, did not meet your expectations, but your guidance at least on the sales side which I just want to stay focused on is actually going up. So can you talk about your confidence for the second half? How you achieve that especially in light of the fact that you're actually cutting SKUs? Can you just kind of bridge us to how you'd get there?

Yeah. On the SKU reduction rationalization it's not really having -- there is our non-productive assets and non-productive SKUs that we're eliminating. So there is really not having a big impact in terms of our overall revenues. And it's as I explained stranded assets and therefore, we're creating value by taking money that's just sitting there and converting that to cash. That will though...

Sorry. Just to stop you right there. So how do you -- assuming it's a product is it a product that you then divert through like a discount? Or how do you which channel do you get rid of that product that I guess?

So it's not going to happen in one week Frank. So it will happen over a 6 month to 9 month period. So it'd be done in orderly basis mostly through alternative channels.

Okay. That’s why I was getting that. Okay.

But while some of -- we won't anticipate recognizing margin for this and we're just converting it to cash. It will have some sales impact, which is why there was an uptick in the revenue guidance.

Okay, okay. I got that. All right. That makes sense now. So just staying on that for a second. Can you talk about the categories where -- I think you made a comment that you've gained some market share. So can you talk about the -- either the categories where you've pruned or the categories that you've taken market share?

So it's really less categories and product specific. So we've been gaining in barware, kitchenware, bakeware and some of the things that I mentioned, we've been gaining share. And a lot of that obviously shipped in the second half is the seasonality of our business as you're aware. So we've had big wins in those areas from a market share perspective and that's driving growth for us. And even this year in the first six months while the second quarter is always a low quarter for us, the first quarter was very strong and we've been gaining from the benefit of market share. A lot of that flows through in the second half of the year. The -- we -- it's not like we eliminated categories on the SKU rationalization. We eliminated products that weren't productive, but were in the products offering for some period of time -- in the company's offering for some period of time. So there was -- would have included for instance areas where we're growing like kitchenware, bakeware, sinkware, tabletop, barware. So across the company there was an opportunity to look at the portfolio from a strategic rather transactional portfolio and a return on assets basis to -- and that presented us with an opportunity to identify where we can monetize and create value off of our balance sheet by raising an additional $30 million plus.

Okay. And the $30 million does that also include, let me clearly -- like you said it includes this inventory that you've already marked down but does they also include sort of other assets like minority investments that you might hold?

So it does include other assets. Yes. It does include other assets.

Okay. All right. So -- and I think that's encouraging that sounds like you're going to use a lot of that to either invest into the company or reduce debt so just staying on capital allocation for a second. Do you think in light of what you're doing – obviously, you have a dividend it's not a very big dividend. But does it make sense to keep the dividend? Or does it make sense to perhaps use that money? It's not a lot of money, but to direct towards the reduction of debt or -- and/or even maybe the repurchasing shares at the current valuation? I wonder your thoughts about that.

So we have no intention to change the dividend.

Okay.

And the immediate use of this incremental capital raise will be to repay debt.

Debt. Okay. All right. And just the last one from me is, can you talk at all about, obviously not a big issue for you growing e-commerce platform, but can you talk at all about the inventory trends at your retail partners? Particularly some of them are still coming back right now actually the bricks-and-mortar, but some of them actually are not. So can you just talk about the general levels versus say a year ago?

I think we've seen an ongoing trend in this retail environment particularly with some of the larger players to shift some of the working capital burden to their supply base including us. We've seen a lot of that. We saw more of that in 2018. And if you look at particularly a lot of the large retailers in the tariff situation, they're doing a lot of direct import…

Right.

Private-label business. So if it's a 25% tariff or now maybe 10% on some other stuff they're paying all that themselves. And it's created additional pressures on the retailers which well not directly related to us they're looking everywhere including anything on the balance sheet. But nothing material for us in 2019.

Okay. That’s helpful. Thank you.

Thank you. Your next question is from Justyn Putnam of Talanta.

Hey Justyn.

Hey good morning. I just have a couple of questions. First question is, it looks like your guidance was lowered this quarter for the year, mainly due to geopolitical factors that occurred after the end of the quarter. Is that fair specifically the 10%? Yes.

Yes. No. That's fair.

All right. So follow-up on that is, I want just to hear your thoughts on the trail between the timing of trying to recapture, the margin from the tariffs versus maybe trying to capture market share. What is your own strategy on that?

It's complicated and it also depends upon levels. So, if you look at list 4, which is the recently announced 10%, it covers everything. So one of the kind of advantages for us of the putting list four for tariffs is basically everything sold in a retail environment is covered by the tariffs. So kind of creates a leveled playing field. And at 10% you can do things on a strategic basis such as you suggest. If those go to 25%, we're not going to neither is the market going to completely absorb a 25% tariff. Now you mitigate what you can, but you can't mitigate 25%. 10% is a lot different. And again it's a trade war. China is devaluing the RMB. That's low-hanging fruit in terms of cost of sales reductions of us. But little guys, if they try to absorb that will go out of business. Now, we wouldn't go out of the business but it's not - it’s a big dollar amount to try to absorb, so we wouldn't do that and we'd rather remain with the market neutral. Obviously react to market conditions. No one is doing that. What's going to happen is consumer prices will rise because the retailers will pass it through.

Okay. So understand it's complicated. But on average would you say that you are in a position to absorb maybe more than your competitors and potentially gain market share during this transition?

For the vast majority of our competitors that would be the case. And frankly, in food service in our -- which is a very large opportunity for us, the opportunities as a result of this and what it's impacted on some of the people selling comparable products has created a very favorable environment for us.

All right. Well, I was going to ask about that down the road, but since you mentioned it what is -- can you quantify the magnitude of the opportunity in that commercial line as you're…

So we're already a player in food service, Justin. On -- if you look at food service. There's two -- you can divide it into two big pieces which are separate. And one would be what's called front of the house and one's called back of the house. What's used in the kitchen, what's used in the front? So we've been a player for almost 20 years in back of the house. So, we understand the market. We've never been in the front of the house and we talked about this when we did the merger, the ability to do that because Lifetime has the products. Flatware, we're a global leader; dinnerware we're -- so the main products are still there. We make all that stuff. We're a global leader at any price point at any quality level. So it's a natural opportunity for us and we had now the expertise so we spent the first year, putting it all together and launched it in May of this year, launched a 1000 SKUs into front of the house. So it's a very good opportunity bowls, it’s a slow build for us. It's a good opportunity. And the products that we're selling in the front of the house in North America, in food service is a little over $1 billion market. So, we think we can get decent market share of that market.

What do you take decent market share?

You can guess. I mean, we haven't disclosed anything along that. But we're not talking of 1% or 2% here.

Okay. So my other question was the SKU rationalization initiative. I know you mentioned a little bit about that in the prior question. But this is on top of the cash flow that you're generating through the business this year at least based on your guidance as you've given. And looks like it's almost double your potential cash flow for the year. Is that accurate understanding of that opportunity with the SKU rationalization?

One piece is accurate and one piece isn't. This is completely incremental. That is accurate. We -- the realization of this cash flow will be both 2019 and 2020. So, we expect this to be a nine-month process to orderly go through the process and realize the numbers that we're stating.

Okay. Well the next two quarters are your big cash flow generating quarters anyway for the business. So, by spring of 2020 you expect to see significant decrease in net debt levels. Is that -- you be expecting over that SKU rationalization, right?

I mean basically correct with just a slight correction is we are in basically this quarter and next quarter peak seasonal cash need in terms of our working capital cycle and our seasonality of our business. And therefore the retail selling and the collection of what we ship is more fourth quarter and first quarter. We do have certain businesses in the combined business such as the Taylor line which is a very big first quarter business and other businesses that we have. So, it's couple of -- not as pure as you're saying and a little correction there, but directionally you're correct.

Okay. So, the other use you've decided for that free cash flow was investing in growth. Just kind of ballpark percentage how much of that cash flow is going to be used for investment growth versus -- just ballpark 25 or half of it or what?

So, I mean it gives us the opportunity to invest in growth. A lot of the initiatives that we've already talked about food service international we funded a lot of that. So this would be over and above opportunities that we've discussed to date. And it's more just looking at the appropriate return. At this point, the majority is being used -- will be used for deleveraging. And if there are -- as we originate additional closings to discuss to the shareholders and the public we will discuss that on a full disclosure basis. But at this point most of the cash will be used to delever.

Justyn let me just make just one clarification is that -- and we haven't said how much we're going to realize in terms of timing. But the term agreement -- term loan agreement has a what's called an excess -- I'm sure you're familiar with an excess cash flow sweep. So, it will be semi collected this year that is we reduce our working capital because we generate cash that will affect how much is available to reinvest versus how much we had to pay down debt. Just keep that in mind.

And we could always give you that. But -- so I mean we always have the option. But it is our intention as we generate and show there's opportunities which present appropriate return it -- we'll delever. But the point being is we've generated and created a significant amount of capital from stranded assets that give us tax flexibility to invest in growth with providing appropriate returns and until that time we'll just delever.

Okay. Well as shareholders I think that the opportunity you found stranded assets and the cash flows that you generate from that and the debt pay-down opportunity is pretty exciting. So appreciate that.

No. Thank you. We share your enthusiasm. We were very happy to identify this opportunity.

That's all my questions. thank you.

Your next question is from Patrick Barwin of Aegon.

Yes, thanks guys. Could you talk about the food service channel a bit more? Some, maybe not necessarily your competitors, but some other companies have talked about it being fairly pressured in terms of traffic declines and very aggressive pricing. Could you just talk about what you're seeing in the channel?

Yes. So the food service channel right which would be restaurant hotel catering and the like has for the past 10 years grown at a faster pace than our core consumer market. We know the channel well. And we know the price points in the channel and we know our cost structure and we have the products. So, the margin -- net margin in that business -- you have healthy gross margins there is big difference in gross and net. The margin is that we will be selling these products, which is known is well within our margin requirements. So not an issue for us. What you're seeing today globally and particularly in North America and particularly in the front of the house we're making a big initiative, is some disruption, because there are a lot of traditional players that are not providing a service level that you need to in food service, right? In food service, it's all -- from your distribution you need it, they want it, you need it tomorrow. So that is mission-critical. And there are certain players in that industry -- in that space today I should say that whether they're financially challenged or for whatever reasons -- other reasons I should say, we're aware of them obviously are not able to deliver. Fortunately for us that coincides with our tremendous investment in this space. So therefore, there is legitimate opportunities and we've gotten tremendous sales opportunities as a result of this. Obviously, we need to execute on that.

Okay. And then going back to the SKU rationalization and cash flow side of the labor. That's clearly the point of interest. You guys did about $20 million in free cash flow last year. So should we expect in the second half of this year? I mean, that should be double that number?

Yes. As we've said with Justyn Putnam's question is that it's going to be a nine-month period so some of the money that we're going to generate will be in 2019 and some will be in 2020. But this is all instrumental cash flow that the company will generate off its balance sheet.

Okay. And then the EBITDA guidance shifts a little bit with the language. So on an apples-to-apples basis, your EBITDA guidance is now $58 million to $60 million right, if we compare it to the first quarter?

So we went -- the guidance is $66 million to $70 million, which is from $71 million to $73 million. And last year, we did a little over $65 million. So that's where -- it's 4%. The midpoint of $66 million to $70 million or $68 million equates to 4% growth over prior year. And the range as I explained versus our guidance that was in place in the first quarter is down from the $71 million to $73 million level.

Okay. And then have you -- you have saw Amazon. There was an article out either this week or last week about Amazon going to vendors and saying it's reduced prices that they were selling anywhere else for cheaper. Have you guys had conversations with them on that? Or any view there?

Yes. I saw that article. Look Amazon does everything. Amazon changes every other week. Now that is not something -- you got -- it's a big effort which some particularly smaller companies have a harder time chewing in terms of maintaining MAP pricing on Amazon. They're very algorithmic-focused. So -- and their algorithms search around. And if there is -- what they do anyway if there is a lower price that they find online they immediately lower. And that causes disruption in the marketplace. So -- and we have a significant infrastructure in place to protect MAP pricing, because just to give you an example rabbit corkscrew we sell those in a significant amount of independent wine and liquor stores throughout the whole country. So if you have a guy and he's buying it, let's just say at wholesale and he's a little guy we'll just say in Long Island and he buys an extra 2,000 rabbit corkscrew marks it up $5 over wholesale, puts it on Amazon as a 3P reseller and totally disrupts the marketplace. So you need to believe that and basically go to that guy and say hey, you have two choices. Never sell like that again. Or sell like that we'll cut you off. And that's maintaining MAP pricing. It's just one example. So Amazon is very focused because of our size versus a lot of our competitors with Amazon. So there's an active dialogue on a million topics, but that has not been one of them.

Okay. Thanks guys.

Thank you. We have no further questions at this time. I will turn the floor back over to Rob Kay for any additional or closing remarks.

Thank you. Thank you again for joining us today. We remain focused on executing our strategic priorities to deliver sustainable growth in the second half of 2019. We appreciate your continued support of Lifetime Brands and look forward to discussing third quarter results on our next conference call. Have a good day.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day.