Good morning, ladies and gentlemen, and welcome to Lifetime Brands Second Quarter 2020 Earnings Conference Call. [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, and thank you for joining Lifetime Brands Second Quarter 2020 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. Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such 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 Rob Kay. Please go ahead, Rob.

Thank you. Thank you. Good morning, everyone, and thank you for joining us today to discuss Lifetime Brands Second Quarter 2020 Financial Results. We are pleased with our second quarter results, which have demonstrated the resilience of our business model in challenging economic conditions and the benefits from what we are creating through our Lifetime 2.0 strategic plan. Our strong results for the quarter were driven by end market demand in several categories including kitchen tools and gadgets, bakeware, barware and cutlery. This result was achieved through our ability to capture revenues by quickly shifting to meet strong demand in several channels including e-commerce, mass and grocery retailers. Overall, our company grew consolidated net sales by 5.3% over the second quarter of 2019, producing strong bottom line growth, including an increase in EBITDA of $8.1 million or 13%. As Larry will discuss, we also continue to generate significant cash flow and lower our net debt in the second quarter, and we were encouraged by the improved performance in our international business. I'll start with our core U.S. business. Building on a strong second half of 2019 and continued growth in the first quarter of 2020, we continued to see strong demand and shipment levels in our core U.S. business, with an increase in activity in our e-commerce, mass and grocery channels. Our kitchen, food prep, cutlery and bakeware products remained popular this quarter as families continue to increasingly cook meals at home. To that end, the strong demand led to numerous products that were difficult to keep in stock across the majority of our popular SKUs in these product categories. We worked hard to accelerate our supply chain to get these items back in stock, which we expect to happen during the current quarter. We continue to gain market share…

Thanks, Rob. As we reported this morning, the net loss for the second quarter of 2020 was $4 million or $0.19 per diluted share as compared to a net loss of $11.5 million or $0.56 per diluted share in the second quarter of 2019. Adjusted net loss was $3.1 million for the second quarter of 2020 or $0.15 per diluted share compared to adjusted net loss, excluding the impact of SKU rationalization of $4.5 million or $0.22 per diluted share in 2019. A table which reconciles this non-GAAP measure to reported results was included in this morning's release. Income from operations was $4.3 million for the second quarter of 2020 versus a loss of $12.5 million in the 2019 period. And excluding an $8.5 million nonrecurring noncash charge for the SKU rationalization initiative in 2019, loss from operations would have been $4 million. Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP release - results and release was $69.3 million for the trailing 12 months ended June 30, 2020. This represents an $8.1 million increase over the $61.2 million for the trailing 12 months ended March 31, 2020. Net sales for the second quarter were $150.1 million compared to $142.5 million in the 2019 quarter. The U.S. segment sales were up $9.5 million to $132.6 million. The increase was driven by significantly higher market demand for kitchenware products as consumers prepared more meals at home. This increase was partially offset by lower sales for product categories adversely impacted by COVID-19. International segment sales were up $4.9 million to $17.5 million on a reported basis, up $1.3 million in constant U.S. dollars. This segment has been adversely affected by COVID-19. As Rob noted, its distribution is heavily weighted toward independent retailers and national chain retailers, both of which were…

[Operator Instructions]. Your first question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

I guess I'd be curious to know, you had a program to reduce slow-moving and absolute inventory that I think was supposed to conclude right around the June quarter here. Is that program completed? And should we see a moderation in cash flow improvement going forward?

Thanks, Linda. I hope you're doing well. The program has been concluded. And we are doing a similar program in our European operations, which is why we took that $300,000 charge. That will result in enhanced cash flow benefit as we continue to execute that out of that operation. In terms of the impact on our cash generation over the last 6 months, we don't think it would be significant on a go-forward basis now that we're done with that. And included in our initial plan were some divesting of some assets, which because of the environment we put on hold. So that's something we'll likely relook at in the future.

Okay. And so how do you think about now that your leverage is down significantly, how do you think about use of cash kind of going forward? Is it still primarily a deleverage? Or are you looking at other potential uses of cash flow?

Yes. I mean so while we can buy back stock, it's not high our priority list. It's not something we're looking at. We're still looking to continue to deleverage. In the first 6 months of the year when COVID hit, as you know, we borrowed significantly on our line of credit. And just because we had so much cash, we repaid that all. And as we go forward, we will - if it's on a disciplined basis, so we will look at appropriate acquisition opportunities as long as they're accretive and providing the guidelines that we've set out. But at this point, we're still, as a prioritization, looking at debt reduction.

Okay. And then maybe you could comment, I guess, Libbey is kind of a housewares company that went through bankruptcy. Have you seen on the landscape kind of any other noteworthy bankruptcies? Or are you benefiting in any way from real small competitors that are having difficulty managing through the environment?

Yes. I mean, Libbey, we don't view as much of a comp. We really don't compete with them because they're a glass company. And they were having troubles from a cash flow perspective even before COVID hit because there's - if you look at - while they made money, their capital requirements were exceeding what they were generated on a cash flow basis. So there were issues beforehand. We have seen in this environment that we've been able to gain market share because we're better capitalized, our supply chain is intact, and we can invest in inventory to supply our customers. We've also, fortunately, invested a lot in pure-play e-commerce as well as our own site, and those things are paying off in this environment. So I think there's a lot of different things. The smaller guys that are less capitalized are losing share and becoming less of a factor than the larger players. So size definitely matters as the world is transforming. And it's benefiting our business model.

Okay. And then finally, have you sort of seen any difference in terms of retail takeaway in locations where COVID is reemerging, where it's spiking? Do you see kind of any change in what your retail POS looks like?

That's a great question. So we are seeing increased demand in channels that were dormant and with people as they're opening up stores. But it's too soon to parse through and see anything in terms of the POS data, which is it's too soon to go through that. Anecdotally, a lot of retailers, particularly off-price guys, are saying that store traffic is good. But the guys have remained open, the mass guys, the clubs, who are also grocers, their business has remained very strong, as has the POS. And they are seeing that continue.

[Operator Instructions]. Your next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

So first, I just wanted to see if you guys could comment on the monthly cadence of sales, what you saw April, May and June? And then do you have an estimated impact perhaps about the - from the store closings for the specialty guys, off-price department stores, what impact do you think that may have had on the quarter?

So in terms of cadence, when lockdown occurred at the end of March, there was - at the end of March, as we talked about in the first quarter, there was a significant drop-off as well as cancellation of orders as people close stores. In the U.S., e-commerce started picking up in the second half of April; e-commerce picked up on a much more lagged effect in Europe. And what we saw in the second quarter is that a certain channel that remains closed or partially closed, obviously, our demand was way down. We weren't shipping to those customers. And what we experienced was pure-play e-commerce omnichannel as well as people that were open, such as Walmart and Target, that sell groceries, or Costco, the brick-and-mortar guys that were open, and grocery as a whole channel more than picked up from that and the demand from our products, as I mentioned. Our challenge was, of course, remaining in stock, so it exceeded - greatly exceeded our expectations, even as we shifted extra inventory that we had from the shut channels into the channels that were robust. It's just the demand greatly exceeded. So it more than made up for it. As we go forward, we're seeing people, the biggest channel being the off-price open. We've been working with them. We're benefiting from, again, having the inventory and the ability to invest in it. We'll see as the world reopens, but we've seen demand, and we're starting to ship to those people as well as their stores have opened.

Okay. Great. And so the comment about July that you have seen, is that sort of consistent with June? Or has that accelerated?

No. We've had very strong demand. And July was a good month as well. Again, we need to - we've been out of stock on certain items. So we could have done better, but we sailed through a quality problem. And as we get back in stock, that will also help.

All right. And then - so as far as that in-stock or out-of-stock, actually, do you think it had a notable impact? I mean any way for you guys to quantify the out-of-stock situation?

Yes. I mean, sure, it had an impact. But again, it's a quality impact. Our sales were very strong. We shipped a lot. So if we had more inventory, right. We would have shipped more, but we greatly exceeded expectations. So again, quality problem, and it's just a matter of work in the supply chain to make sure we get back in stock. It doesn't damage us in the second - in the third and fourth quarter, of which we're confident it will not.

Got it. Okay. And then, yes, Larry, thanks for providing the gross margin breakdown between the domestic and international. So obviously, international was significantly down from last year. When we look at the back half of the year, is it - how should we think about the gross margin for the back half of the year? I know that $300,000 charge and some other things. But if you could just comment on the gross margin outlook, that would be great.

Yes. Anthony, it would tie into us sort of giving guidance. So I really don't want to comment on that right now.

We did mention, though, we're expecting the second half of the year sequentially versus prior year to be a noticeable improvement in our international business.

Okay. Got it. Okay. And then there was a large tax expense, actually, in the quarter. So the tax rate kind of has been bouncing around quite a bit. But how should we think of - just, I guess, first, what was the reason for the large tax expense for the quarter? And then secondly, how should we think about the tax rates for the balance of the year?

Yes. When you have a pretax amount, be it profit or loss, any permanent differences could really magnify it. So the rate doesn't become very, very meaningful. So it will be a function of what we earn, of course. And if we have obviously large profits, then those permanent items become a small percentage. If we don't earn a lot, they'll become big. So it's very difficult to pin down. I mean the reason we have an expense is because we have a taxable income in the U.S. that's greater than the book income because of the permanent differences. And in the first quarter, there was some benefit we probably might see. It had to do with carry back for the Cares Act. There's a rate differential having to do how many years we'll have to go back. We now don't foresee us having to carry back, which is a good thing. But on the other hand, it requires us to reverse that benefit. So I mean it's a lot of words. It's little confusing, but it's difficult to, as I said, when you have large permanent differences. And of course, I'm sorry, I mentioned the other piece, of course, was the big permanent difference was the goodwill impairment in Q1. By the way, it's hard to give you a - as I'd like to be able to give you an expected effective tax rate where you have these large adjustments relative to a - currently a small pretax loss.

Got it. Okay. All right. And then I guess, lastly, so one other line item on the income statement as far as equity and earnings. So that was a drag of about $848,000. I assume that's where your interest - equity interest in the Mexican company. How should we think about - I mean I assume they got hit harder by COVID? Is that why? And then anything to think about for the back half of the year for that line item?

Nothing in particular to think about, but yes, it's correct. That's related to our passive investment in the Mexican Grupo Vasconia.

[Operator Instructions]. There are no further questions at this time.

Okay. Well, thank you again for joining us today. We appreciate your continued support of Lifetime Brands. We hope everyone stays safe, and we look forward to discussing the third quarter results on our next conference call. Have a good day.