Lifetime Brands, Inc. (LCUT) Q4 2019 Earnings Report, Transcript and Summary

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

Thank you. Good morning and thank you for joining Lifetime Brands' fourth 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. Go ahead Rob.

Thank you. Good morning, everyone and thank you for joining us today to discuss Lifetime Brands' fourth quarter and full year 2019 financial results. We are pleased that we continue to deliver growth in a number of key segments and generate significant cash flow, greater than our expectations for the quarter and the full year 2019. However, despite those positive achievement, our performance this quarter fell short of expectation as a result of the impact in quarters three and four of the operational difficulties in our European business, which we discussed in our quarter three conference call. Importantly, our core US business outperformed in both the fourth quarter and for the full year driven by strong results in ecommerce combined with growth in market share and revenues in the brick and mortar channel as well as our expected realization of cost efficiencies for the plan which we previously detailed. As we generated cash flow this quarter, our net debt position is favorable to what we guided for the full year placing us ahead of expectations on our commitment to lower our leverage to guided targets. We achieved this cash flow performance notwithstanding operational challenges from our European operations, which resulted in the need to temporarily fund losses and invest in working capital during the third and fourth quarters. These positive results in the core US business were offset by financial losses resulting from operational challenges in our newly reorganized UK business which had an impact on shipments for that business -- for that business unit as well as higher operational cost, some penalties all resulted to these operational challenges. We've taken further steps to address these challenges and stabilize our international business and can report that as of January 2020 we have eliminated all backlog and restore the European operations to normal levels. Further, we remain on track to continue advancing our strategy and enhancing value for our shareholders created by the reorganization of our European operations in the second half of 2019. In 2019, we took deliberate and decisive actions to create shareholder value. We continue to broaden our market focus pursuing organic growth opportunities in adjacent categories, we renewed our emphasis on digital and ecommerce and are seeing our efforts in those categories come to fruition We remain focused on expanding initiatives in the commercial food service market and building a direct international sales capability and presence. As a result, I believe that today we are better positioned as a company to not only weather industry trends and cycles but to achieve meaningful organic growth. Turning to the results in our US business, as I mentioned we are pleased with the performance in our core US business which contributed to top and bottom-line growth for the quarter and full year. This progress is the result of effectively executing our strategy to increase our market share, drive product innovation and expand existing product lines. The fourth quarter was marked by continued enhancements and product development and in product optimization and we continued recognizing cost and supply chain efficiencies from our 2018 acquisition of filament. Importantly, the growth we achieved in 2019 was accomplished in an environment that it included a trade war with China resulting in Lifetime being responsible for over $21 million in tariff payments. Further expanding on ecommerce, ecommerce represented one of the most important growth areas this quarter and contributed to 17.3% of our total revenue for the fourth quarter, with pure-play e-commerce contributing 14.7% of total sales for the quarter. Please note that these numbers exclude a significant amount of e-commerce sales to omni-channel retailers where we cannot definitively track the percentage sold online. Additionally, as I mentioned last quarter, we've been gaining traction in the grocery channel, which represents a compelling value creation opportunity for Lifetime brands as we have not had a historically large presence in this sector. We continue to see strong performance in grocery this quarter with an increase of 9% for 2019 and we remain confident in the potential of both e-commerce and grocery. Turning to our ongoing efforts in food service, which we greatly expanded in 2019 through the launch of our front of the house initiative. We remain on track in our ramp-up of Mikasa Hospitality and are actively pursuing revenue opportunities in both US and Europe. We now fully stocked our warehouse with Mikasa Hospitality product and expect to begin shipments in 2020 based upon the sales efforts to date. We have been focused on increasing Mikasa Hospitality's brand awareness and equity and have been doing so participating in targeted tradeshows and exhibits as well as an increase investment in sales and marketing infrastructure. We strongly believe this is a meaningful channel for growth in our tabletop, serveware, cutlery, kitchen tools and smallware product categories and we are pleased with the conversations we have had out in the market. Based upon these conversation we are on track to meet shipment expectations during the year. While we ended the quarter on a strong note for our US core business we faced operational challenges in Europe as part of our ongoing reorganization of our UK operations, which negatively impacted shipping and revenue and contributed to our EBITDA mix. As a reminder in the third quarter 2019, we launched our consolidated UK operations from eight standalone warehouses and two separate business units into a single operation based in Birmingham, England. We experienced some operational issues in connection with [indiscernible] consolidation and restructuring and encountered challenges with personnel and process in the warehouse. This unfortunate carryover into the fourth quarter where we experienced significant customer shipment delays and order cancellation. As a result of missing and delayed shipments, we lost revenues, incurred fines and penalties, added temporary expense and needed to use additional cash to stabilize operations. This included hiring temporary workers and making management changes in order to ensure long-term productivity and effective leadership. As of January 2020, our UK operations are back up and running and we are shipping normally again. Not only have operations returned to normal activity, we have eliminated much of the temporary expense needed to stabilize the situation including meaningful reduction and temporary workforce headcount. We remain confident that despite these difficulties, we will see a significant improvement in profitability and cash flow for Lifetime Brands Europe going forward. Now let me talk briefly about what we are seeing and doing relative to Corona Virus. We believe we are working to mitigate the impact of Corona Virus and have taken proactive steps to minimize the effects of the virus on our business. Our primary concern is for the health and well-being of our employees and partners and those affected around the world. As soon as the Corona Virus became of public concern we restricted all travel to China, placed restrictions on other international travel, kept facilities closed beyond the Chinese New Year and set up for channels for employees to work remotely. We began responding to the situation before the end of the lunar new year holiday in china and took actions to prioritize shipments and ensure uninterrupted supply chain for open orders and near-term deliveries. As a result of the team's response to the situation we are currently operating with normal inventory and have only seen a modest decline in shipments from China to 90% levels in March. There remains daily challenges with ongoing precautions in place such as constraints in provincial travel which change of our China team's daily efforts. Importantly as a result of our timely response and ability to utilize our substantial infrastructure, we currently believe there should not be a noticeable impact from the Corona virus on our first quarter 2020 results. We are monitoring the situation closely and are fully engaged on a daily basis. We've built up sufficient inventory that we expect that would get us through any mild disruption. However if the situation significantly worsens we may see an impact on supply chain and shipping as we get further into 2020. That said, we have yet to see any material impact on our business and believe that our team's proper response to the situation will help mitigate any potential impact going forward. Looking ahead to 2020, we are excited about our potential to unlock value as we get our UK business back on track and continue to drive growth in our US business. As we continue advancing our strategy that we articulated on Investor Day during Q4 2019, we are confident that our more focused business model and strategic growth initiatives will enable us to generate significant cash flow, improve growth and profitability and create meaningful shareholder value in the coming years. With that, I'll now turn the call over to Larry.

Thanks Rob. Net loss for the fourth quarter of 2019 was $14.5 million or $0.70 per diluted share versus net income of $10 million or $0.49 per diluted share in the 2018 quarter. The 2019 quarter included a non-cash charge of $33.2 million related to the impairment of the US segment's goodwill. This charge resulted from among other factors, a sustained decline in the company's market capitalization observed in the fourth quarter of 2019. Adjusted net income was $20.4 million for 2019 quarter or $0.99 per diluted share as compared to adjusted net income of $11.2 million or $0.55 per diluted share in 2018. A table which reconciles the non-GAAP measure to reported results was included in the earnings release. Consolidated adjusted EBITDA non-GAAP measure that is reconciled through our GAAP results in the release was $64.1 million for the year ended December 31, 2019 as to giving effect to certain adjustments and before limitations as permitted and defined in our debt agreements. Excluding the impact of the non-cash goodwill impairment charge, income from operations was $17.7 million in the 2019 quarter versus $21.1 million last year, which excludes reversal of a contingent liability assumed in the Filament acquisition, a table which reconciles this non-GAAP measure to reported results was included in the earnings release. Now turning to business segment, income from operations from the US segment excluding the items I just noted was $29.1 million in the 2019 quarter versus $26 million the 2018 quarter. Loss from operations for the international segment was $6.2 million in 2019 quarter versus income of $600,000 last year. The US segment sales were $198.8 million up $700,000 from 2018. This increase came from kitchen tools and gadgets products and from the core products but they were partially offset by declines for the Lab 921 division although it was up for the full-year in dinnerware products. International segment sales was $28.1 million in the 2019 period versus $30.1 million in 2018 on a reported and constant US dollars basis. This decrease was driven by operational challenge in our European business as Rob commented on earlier. For the US segment, gross margin was 38.4% in 2019 versus the 37.4% in 2018. The increase reflects changes in product and customer mix and the benefit of a tariff exclusion refund for certain product classifications. For international, gross margin was $26.6 in the 2019 quarter compared to $35.4 in last year's quarter. The decrease is primarily due to sales of Clarence inventory and partly related to the consolidation of our UK distribution for multiple locations into one newly constructed facility and the operational challenges associated with the reorganization. For the US segment, distributions expense as a percentage of sales, shipments and warehouses excluding moving and relocation cost were 8.3% and 8.8% for the 2019 and 2018 quarters respectively. This benefit was attributable to the ongoing improvement programs, which resulted in the realization of labor efficiencies. For the international segment distribution expenses as a percentage of sales shipped from warehouses excluding moving costs to new distribution facility was 17.1% and 12.1% for the 2019 and 2018 quarters respectively. This increase was primarily driven by higher labor costs related to the operational challenges noted. US segment SG&A expenses were $31.4 million in the 2019 quarter as compared to $30.7 million in 2018 quarter excluding the reversal of the contingent liability noted. The 2019 period includes higher incentive compensation. SG&A for international was $6.7 million in 2019 quarter compared to $6.3 in the 2018 quarter primarily due to higher employee and IT expenses related to the reorganization. Unallocated corporate expenses were $5.1 million down from $5.4 million in the 2018 period. This decrease was mainly attributable to lower cash loyalties. Income tax expense for the full year 2019 reflects among other adjusting items the non-deductibility of goodwill impairment charges. Our normalized effective tax rate is expected to be approximately 30% going forward. During 2019, we generated positive cash flow which enabled us reduce our net debt by approximately $60 million, which includes completion of approximately 60% of our skew rationalization program. This is partially offset by negative cash flow from our European operations, a portion of the cash used for the European operations was planned to integrate and streamline it into a single cohesive business unit. At December 31, 2019 our net debt was $292 million and liquidity that is availability under our credit facility plus cash on hand was approximately $126 million. Later this month we expect to make an excess cash flow payment pursuant to the term loan agreement of $7.1 million. This concludes our prepared comments. Operator, please open the lines for questions.

And your first question is from Linda Bolton-Weiser of D.A. Davidson.

Can you talk about I mean am I missing something or are you guys -- are you not giving any guidance for 2020 or did I miss something in the press release or can you just comment on that?

No, you didn't Linda and as you will see and consistent with past practices on our year-end call we talked about the year end and in the next call is when we gave guidance.

Okay. Sorry about that and so I think that in investor's minds, that people have moved on from the China supply chain concerns and I think the investor is now more thinking about potential recession in the United States or globally in the coming year. Can you just comment on your business and how that would fair in a recession scenario and what product lines tend to stand up a little bit better versus others within your business and Mikasa Hospitality? How would that fair I would think that would be pretty cyclical, thanks.

Sure Linda, excellent question. It's something we're very focused on. We do believe that demand would be the impact of any on the Corona virus of which we have yet to see any terms of what we've been shipping so far this year, which remains ahead of expectations. If you look at our business lines and what we sell, recognizing that the average of what we sell isn’t very expense. People are buying a can opener, they tend to in recessions buy can opener rather than take a hammer out and try to open up the can. So a lot of our product lines are -- the majority of product lines actually fair pretty well and even if you look at 2008 the company rebounded really fast, faster than other industry segments of what we sell and within our industry as well. The one area that doesn’t do as well would be the dinnerware and particularly the consumer dinnerware market. In Mikasa Hospitality and our opportunity there we don't believe we were going to be significantly impacted because if there's an opportunity for us to take market share, and a matter of fact of recession would only help us because a lot of people that we were competing against in that area were already taking share for them in other areas and it hurts their ability to deliver timely as well as making necessary investments because they are not as big. In food service you need to have a 100% delivery it's not like you're bringing the stuff in from China and it's two months on the border, someone puts an order, they expect that order to be at your DC because you keep the investment in working capital not the food service operators and distributors. So that our stability and the message we're sending into the marketplace do that is helping us so far at least in the dialogue be more advance than we thought we would be. So we actually believe the recession would help our penetration and in the front of the house initiative we're starting from nothing so it's all incremental. So, we don't see any impact of anything positive.

Okay. Thanks, that's helpful and then can I just ask you I think your cash flow here was pretty strong. I think it exceeded our expectations in the quarter. Am I to understand that your initiatives to generate cash I think the target was for high cash flow through June or July of 2020. Are you still on target for that and therefore would we expect pretty strong cash performance in the first half, thanks.

Yeah we are, what we've seen also with the initiative on the skew rationalization side and also this is the same in our European operations where we did something similar as we consolidated into one warehouse is that the demand for the inventory that we were looking to liquidate was higher than our expectation and partly due to some of these external influences and people not being able to supply products. So, hey we have products, we're substituting it into these different channels and we're actually getting more margin than we thought in selling that and it's going better than expected. One piece, so yes, two things to talk about 2020 is we did have very positive as Larry mentioned cash flow performance for the year but we also for the year funded significantly ahead of more because we didn’t have the expectations because of the operational misses in the UK. That will reverse itself and help cash flow in 2020. So we are confident in what we've laid out for the 2020 notwithstanding the above expectation performance and cash flow for 2019.

Thanks and can I just ask one more on I think one of my other companies like I can't remember who, but they had mentioned that they felt that because of maybe less store traffic, because of Corona Virus in stores that actually they were seeing a big pickup in e-commerce and I know that a lot of people think Amazon is really going to benefit from this situation. Are you actually seeing that? I know you said your e-commerce was quite strong, it's gotten to be a big percentage, but can you say that you're seeing that phenomenon where it's actually shifting it more toward e-commerce?

Substantially so and what we're seeing because we got a lot of data particularly from pure play ecommerce is that our first quarter shipments are meaningfully up but we also get to see sell-through because you want to -- our certain people are loading up because of your supply chain but the sell-through has been substantially up. So I don’t know if people are as a result of Corona Virus one would expect people are buying online but definitely we are seeing robust shipments in the online environment.

Okay. And then just one more if I may and the gross margin I think that Larry said there was some kind of a tariff lead fund benefit. Can you just repeat was that for the year or the quarter and then will you see some of those benefits going forward in the future quarter, thanks.

Yes so that was in the quarter.

Yeah so we have some lifts particularly on lift two mainly that pertain to where we were paying tariffs on stuff as though you have lift two and while we have potentially we got no relief and then the government changes mind and excluded those items. So we were able to get a refund on that. It's a one-time event but what's not a one-time event is that now we're shipping in 2020 that product with no tariffs and therefore higher margin. So we're getting it in a different way but not the refund.

Let me clarify, yes it was in the quarter but it does relate to sales for that product classification or because we brought in that classification during 2019.

It too came out in the fourth quarter of 2018.

And you included that benefit in your results, you didn’t break it out as a specialized item correct?

Yes.

Okay. Thanks very much I really appreciate it.

Thank you, the next question is from Anthony Lebiedzinski of Sidoti & Co.

Yes. Good morning and thank you for taking the questions. So first as far as the I guess just to take you back on a tariff question, so as far as the Phase 1 China deal that was signed in late December, did that have any impact or will it have an impact on 2020?

It will in two ways. One is that the fact that big part of List four was not put in place, there was a substantial amount of incremental tax that were not placed on products that we sell and that's you know while we were always trying to mitigate it it's still positive and now as you saw in 2019 there is a J curve impact. We paid over $21 million or we were responsible for over $21 million of tariff payment in 2019. We didn’t get that all back. So that will have a positive impact. But we also, as part of that Phase 1 deal. There were some rollback and therefore we get the benefit of those rollbacks because the amount of tariffs in those particular items were cut in half roughly. So we will pick that up dollar-for-dollar going forward.

Got it. Okay. So that's good to hear and if we could just go back to the fourth quarter or so, is it possible for you to isolate the UK operational challenges in terms of the revenue impact that you think that might have had for the quarter as well as from an expense impact just the operational issues, do you have a sense of the magnitude of those?

The net impact bottom line was around $4 million and that's a combination of -- there were delayed shipments but there are also cancelled shipments that were fined in penalties, there was a substantial cost to try to get the warehouse operationally and we needed to throw a substantial amount of headcount in it. So expense our way up, as I mentioned we reduced 60 heads in January and February that were just thrown at the problem. So a mixture of a lot of different things plus the total impact of all that if you look at EBITDA perspective stuff $4 million.

Got it. Okay. Thank you for that and so I know you're not prepared yet to give precise guidance for 2020 but that being said, are there any high level thoughts that you could provide us as far as how we should think about broadly speaking sales I know you mentioned that coronavirus has not yet had an impact on demand, there is no impact on the supply chain but any high level thoughts that you can point to as to like when we think about updating our models going forward. Thank you.

Yeah, I understood Anthony. I mean look the world is going crazy and it's really hard to synthesize all the data and there is a lot of unknowns. We're taking a lot of precautions of -- precautionary actions. We shut our Seattle operations because all Seattle was shut that will not -- we have a big investment, we moved everything by fortunately 2019 including our major ERP system SAP but all the subsystem on to the cloud. So it allows us to access and be able to work remotely. So, we're not missing a beat even though we shut down the Seattle operation as an example, but there's a lot of moving parts. What we can report today is that look we're almost on to the first quarter, we have not seen an impact. We have the inventory demand was there and like I said had exceeded our expectations that were made pre coronavirus. There is still a lot of unknowns and we hope to analyze those sufficiently over the next couple of months.

And other than coronavirus any other like cost tailwinds or headwinds that we should think about anything. Obviously you won't have the operational issues to deal with in the UK anything else from an expense point of view that you can mention as far as 2020?

Yeah, we're doing -- we are on plan at a minimum in terms of our rollout of Mikasa Hospitality, we are adding to that, while we've always been a significant player in back of the house particularly smallwares we're expanding that offering, we added cutlery in '19 and we're doing it -- we didn't really decide to ramp that up recently. So there's a bigger opportunity there as well as in Europe which we didn’t really talk about in Investor Day. We haven’t talk about in the public, but as we're launching that we see an opportunity and are aggressively pursuing that. We have now implemented and started to roll out our international strategies. So we have country managers as opposed to going through distributors and agents in eight countries and growing and those would be the largest geographies that we play in. We go live this year with six of our brands on team out in China, which should be a huge opportunity. So there's a lot of things, I think it's more Anthony we're executing on the things we've talked about. The biggest sort of unknown variable that is since we talked has been coronavirus and we've given you an update on how we manage that today.

Thank you. Your next question is from Alan Weber of Robotti Advisors.

Just a follow-up on the previous question, in a lot of your I think you say the EBITDA was a $4 million impact. Is that just the fourth quarter or what was it for the year?

That was for the year. You have been substantially in the fourth quarter and a little bit of the third quarter.

And are you expecting that -- was the plan when you say stable, should that become a positive or are you just expecting kind of breakeven in 2020?

No, we're expecting a meaningful positive swing to the business. The operational issues have as of January been solved, so we've shipped, we're back up to normal deliveries. So no, there should be substantial profitability this year in that business.

But what kind of margin should that business normally have?

As Larry mentioned is mid-30s and because of our issues it's down to mid 20s.

Historically, it's been comparable the mix to our US business between kitchenware products and tableware. A little different but yes and for instance there's different types of channels there, club is not as big as it is here should the lower-margin business lot more independence whereas the US business is much more national on the presence and so forth off-price.

Okay and then I guess my other question was on the hospitality. What is the thought process in terms of the amount of investment that you think you're going to make and when, is it 2021 that you would expect that to start to show profitability?

Yeah, it's a great question Alan. So our investment is greater, it's seven figures and will start getting a return in 2020, but it's yes I mean 2021 where we'll see a return that beats the hell out of our cost to capital.

Okay great. That makes sense. All right well listen thanks a lot.

Thank you. There are no further questions at this time. I'll turn the call back over to Rob Kay for any additional or closing remarks.

Thank you, everyone for participating on today's call. As always we appreciate your continued support of Lifetime Brands and have a great day.

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