Lifetime Brands, Inc. (LCUT) Q2 2020 Earnings Report, Transcript and Summary

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 in grocery, where we historically have not had a large presence. We are excited about the opportunities ahead for sustained growth in this channel. We also saw our business mix change as many brick-and-mortar stores remained closed during the quarter. With more customers going online and to retailers with grocery operations to shop, we quickly shifted to meet this demand and capture these sales. Of note, our pure-play e-commerce sales for the quarter were 27%, which represents an increase from 16.2% in the first quarter and 13.6% for the fiscal year 2019. Please be reminded that this does not include our sales to omnichannel retailers as we don't track the shipments separately. However, our shipments to omnichannel retailers grew substantially in this period, which can be noted in our increase in drop shipments of 123% versus the first quarter. This, combined with our increased sales in the mass and grocery channels, more than offset the decrease in sales from retailers that had closed their brick-and-mortar locations due to COVID-19 mandates. As the U.S. economy reopens allowing brick-and-mortar retailers to open stores, we expect to see an increase in demand from these retailers, and have been starting to see such demand for the third and fourth quarters. Turning now to the international business. Even though our international business was down compared to prior year, driven by a drop in demand caused by the impacts of COVID-19, it achieved meaningful progress as it started showing growth by June as we began to see the benefits of our shift to a drop ship model and the beginning of a recovery in their end markets. As we have discussed in the past, our international business is more heavily weighted to independent retailers and national chain retailers, both of which were mostly closed during the second quarter. Starting in June, we saw an increase in demand as we were able to utilize our drop ship capability to capture a larger share of a rebounding e-commerce channel, which led to higher revenues and contribution margins. We have also started to see reopening and, therefore, demand from retailers across Europe. This should greatly improve the results for our European operations in the second half of 2020. As we move forward with transforming our international business, we are always looking for opportunities to improve efficiency and focus on our most productive assets. In line with this, we made the decision to eliminate certain products that do not provide adequate returns for the company and monetize this inventory more quickly. As a result, we are incurring a charge of $300,000 to write-down the value of these products and free up more cash. This charge impacts margins for the quarter, but monetizing these unproductive assets will allow us to free up stranded cash flow, become more efficient in our distribution center and reinvest in product categories that will drive growth. This initiative, combined with other cost and operational efficiencies being implemented, should allow LTB Europe to achieve positive contribution by the fourth quarter of this year and show meaningful year-over-year improvement in their results for the entire second half of the year. I'll briefly touch on the commercial food service business. Many restaurants, hotels and other foodservice operations remain closed or operated at limited capacity in the second quarter. And as a result, we saw reduced sales activity in our existing back-of-the-house business. We don't expect this to pick up in the rest of the year, but we remain confident that this channel will provide long-term growth and opportunity for Lifetime. Further, we continue to believe that hospitality is a meaningful channel for long-term growth, and we remain committed to our major growth initiative of Mikasa Hospitality for the front-of-the-house food service market. While our plans to grow Mikasa - the Mikasa Hospitality brand will likely be delayed, we remain enthusiastic about this category and are experiencing meaningful dialogue with customers about new business opportunities. Further, the disarray in the food service market caused by the COVID-19 pandemic is creating opportunities for Lifetime as we are noticeably better capitalized with a more established supply chain and distribution infrastructure than many existing participants that we would compete against. Turning to our efforts to reduce our debt. We are pleased with the progress we made on reducing our net debt to meet our guided targets. As we continue to generate significant cash this quarter, our net debt position improved, and our leverage ratio was approximately 3.3x as of June 30. As a reminder, we took a number of aggressive actions in the first and second quarter to address the impacts of COVID-19 on the business and increase our liquidity. Additionally, we maintained strict control of all operating expenses, resulting in a substantial year-over-year increase to the bottom line. This fueled an increase in EBITDA by $8.1 million to $69.3 million for the 12 months ended June 2020. These actions have enabled us to achieve strong results and positioned us to continue advancing our strategy, driving growth. While we are not providing annual guidance for 2020 due to the ongoing uncertainty caused by the pandemic, we believe we have demonstrated the ability to perform in this challenging economic environment. And through July, we have seen demand for our products remain strong. Additionally, given the company's recent performance and resilience amid the pandemic, on August 4, 2020, our Board of Directors has decided to resume a quarterly dividend of $0.0425 per share, payable on November 16, 2020, to shareholders of record on November 2, 2020. As we continue to navigate the COVID-19 environment, we are seeing the results from a resilient demand for our products, the investments from Lifetime 2.0 and the cost-containment strategies we have been executing. We remain confident in our ability in executing the Lifetime 2.0 strategic plan and continuing to deliver profitable growth. I'll now turn it over to Larry to go through our financial results.

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 mostly closed during the second quarter. Gross margin was 36.1% in the 2020 quarter versus 30.9% for the 2019 quarter on a reported basis and 36.8%, excluding the SKU rationalization charge. For the U.S. segment, gross margin increased to 37.6% in the 2020 quarter from 36.7%, excluding the SKU rationalization charge in the 2019 quarter. This increase primarily is due to favorable sales mix. For international, gross margin was 24.8% in 2020 quarter compared to 37.6% in 2019. The decrease was driven by inventory reserves as well as sales mix as most independent retailers and national chain retailers were closed due to COVID-19. Distribution expense for 2020 was 10.1% of net sales versus 10.9% in 2019. For the U.S. segment, distribution expenses as a percentage of sales shipped from its warehouses were 9% and 11.8% for the 2020 and 2019 quarters, respectively. The improvement reflects continued realization of variable labor management efficiencies and the benefit of absorbing fixed costs on higher sales volume. For the international segment, distribution expenses as a percentage of sales shipped from its warehouses, excluding moving costs to the new distribution facility, were up 15% and 14.5% for the 2020 and 2019 quarters, respectively. The increase was primarily attributable to higher labor costs associated with increased drop ship and e-commerce channel sales. Selling, general and administrative expenses were $34.4 million for the second quarter of 2020 versus $40.9 million in the 2019 period. U.S. segment expenses were $25 million in the 2020 quarter versus $28.9 million in 2019. As a percentage of net sales, SG&A expenses declined to 18.9% in 2020 quarter from 23.5% last year. The improvement was primarily attributable to lower expenses resulting from our cost reduction strategy. SG&A expenses for the international segment were $4.4 million in the 2020 quarter compared to $7 million for the 2019 period. The decrease primarily attributable to the realization of cost savings from the international reorganization as well as lower expenses from our cost reduction strategy. Unallocated corporate expenses were approximately $5 million in both periods. Our interest expense was $4.2 million for the 2020 quarter versus $5 million in 2019 due to lower debt balances and lower interest rates. Looking at taxes for the 2020 quarter, the company recorded an income tax provision of $3 million on a $100,000 reported pretax loss. This resulted primarily from the impact of permanent items, including the nondeductibility - the nondeductible portion of the goodwill impairment charge, the reversal of a rate benefit related to the Cares Act and a lower rate on the benefit for losses in foreign jurisdictions. And turning to liquidity. At June 30, 2020, our liquidity, which includes $63.5 million of cash plus availability under our credit facility, was $183.5 million. This is a significant increase from year-end 2019 as well as the amount at June 30, 2019. This was achieved through improved operating results, including our cost reduction strategy, lower inventory levels and the timing of liability payments. With regard to the timing of liability payments, we've temporarily revised payments to our vendors, including grant relief, deferred our May 2020 dividend payment and availed ourselves of certain tax payment deferrals as permitted by applicable governance. Note that we have not applied for nor received any government loans. While we intend to maintain our strong liquidity position, for commercial reasons, we will use some of our liquidity to reduce the outstanding balances for certain of the payment deferrals. And as previously disclosed, we will be paying the May 2020 dividend in December of this year. At June 30, 2020, our net debt was $226.5 million, and our net debt to adjusted EBITDA leverage ratio was 3.3x. This concludes our prepared comments. Operator, please open the line for questions.

[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.