Lifetime Brands, Inc. (LCUT) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Lifetime Brands Fourth Quarter and Full Year 2020 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 your 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 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 for 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. Good morning, everyone and thank you for joining us today to discuss Lifetime Brands' fourth quarter and full year 2020 financial results. We are very pleased with our performance in the fourth quarter, which marks another quarter driving significant value for our stakeholders. Our results this quarter reflect the continued strong demand for our products and our ability to outperform in the majority of our categories in both pure-play and omnichannel e-commerce combined with robust demand in many brick-and-mortar channels and market share gains in many of our categories. On a consolidated basis, we also delivered growth for the full year 2020 with a very strong fourth quarter capping strong revenue and earnings performance for the full year. This was achieved notwithstanding the negative contribution of our international business for the first three quarters of the year and the decline in our commercial foodservice business due to the impacts from the COVID pandemic. Despite the many external challenges we all faced, it was a truly transformative year for Lifetime Brands and I'm incredibly proud of the entire team's performance, whose execution on the opportunities and challenges we faced drove our strong performance. Throughout 2020, our core US business showed strength and in fact has now delivered its sixth consecutive quarter of year-over-year growth, achieving 10.7% growth in the fourth quarter. Similar to prior quarters in 2020, we experienced very strong demand in our kitchenware, cutlery and measurement products. The combination of market share gains and robust demand produced strong growth that in many cases exceeded the underlying growth in our markets. For example, at our largest customer, Walmart, we grew revenues year-over-year 34% in stores and 76% on walmart.com. Both levels which exceeded overall category growth in Walmart [ph]. Moreover, in the fourth quarter, we saw our ongoing strong performance across most of our channels, and we continue to capture revenue streams through participation across the spectrum of shopping channels available to the consumer. Thanks to the investments we've made as part of our Lifetime 2.0 strategy, we were able to further expand our e-commerce capabilities, enhancing our competitive advantage and capabilities to address increased demand and gain market share. Similarly, in 2020, we also saw meaningful growth with omnichannel retailers, thanks to our drop shipment capabilities, which gave us a competitive advantage and enabled us to meet increased demand and gain market share in that fast-growing channel as well. For the fourth quarter, our e-commerce revenues grew 41.6% and represented 23.4% of our total revenues. Turning to our international business. We achieved meaningful progress in the international business during the fourth quarter. While our international business faced many COVID-19-related challenges in the first half of 2020, our turnaround plan successfully stabilized the operational issues that we began facing in the third quarter of 2019. Driven by our newly launched business model and despite store closures throughout Europe towards the end of the year, our international business grew 3.3% in the fourth quarter marking its return to growth. Further, we are starting to see results from the strategy that we launched in 2020 of utilizing direct in-country managers and other strategic initiatives including in China where we launched four of our brands direct to consumer in the e-commerce channel. And as I mentioned on last quarter's call, we were also excited to launch a line of popular KitchenAid kitchen tools and bakeware internationally this year with a full product rollout in 2021. As per our foodservice initiative, we remain confident that this channel will provide long-term growth opportunities for Lifetime. As previously discussed, the result of COVID-19 regulations, which have impacted operations in restaurants, hotels and other foodservice businesses, has caused the delay in our ability to meaningfully penetrate this market. That said, our Mikasa hospitality business recognized some sales in 2020, particularly as we're getting picked up by foodservice distributors and this combined with meaningful interest in dialog for many industry participants is a good sign for the future prospects of the business. Even though the pandemic slowed our progress, we are optimistic in the power and the potential of Mikasa hospitality for the front-of-the-house foodservice market and remain confident that this initiative represents a growth opportunity of approximately $100 million or more over the next five years. As for headwinds in the fourth quarter, similar to the previous months, we continue to face some shipping challenges both related to inbound ocean freight and outbound domestic freight availability. These headwinds are shipping delays and cancellations, which slightly slowed our growth for the quarter. While we expect these challenges to remain for the first half of 2021, we believe we will remain capable of overcoming these obstacles and have taken steps to keep a strong fulfillment capability to meet equally strong demand. While 2020 challenged us all in many ways, the year provided a good opportunity to demonstrate the capabilities of Lifetime Brands and how our team is well equipped to quickly and efficiently pivot and responds to external events. It also provided an opportunity to showcase the capabilities we have built and the strategy we have implemented with our Lifetime 2.0 initiative. In the face of much global economic uncertainty, the Lifetime Brands' team diligently executed and delivered significant growth while making meaningful progress in our Lifetime 2.0 strategic plan, successfully accomplishing the priorities laid out when we launched our new strategy back in 2018. As a result, we generated $77.3 million in adjusted EBITDA in 2020, an increase of approximately 21% over 2019. And while we've delivered strong top-line growth, we've also remain focused on disciplined cost control, which has contributed to making our company a leaner organization. But now, the strategies which we have employed as part of Lifetime 2.0 has resulted in greater market share, a leaner more profitable organization and momentum that we have been demonstrating since the first half -- the last half of 2019. To that point, the pandemic has reinforced the importance of disciplined financial management. Throughout 2020, we managed to maintain adequate liquidity inventory levels and accelerated our supply chain, thanks in part to our flexible balance sheet. And the combination of generating cash flow from operations and a more disciplined approach to managing the balance sheet has created substantial cash flow that we have used to deleverage Lifetime to our target levels. All of these factors should lead to a strong first half of 2021 for Lifetime. We've started the year consistent with the second half of the successful 2020 and we expect this momentum to drive our performance as we continue to capitalize on the groundwork we have put in place. In line with our historical practice, we intend to resume guidance in the first quarter barring any unforeseen circumstances. Already in 2021, we have reinforced our consumer penetration strategy with the strategic acquisition of Year & Day, a development stage online table platform focused on millennials, which is an underrepresented age group in our current dinnerware offering. This acquisition is an example of our ability to incubate digitally native brands with significant growth potentials by leveraging our scale, infrastructure and global footprint. The brand's founder will be joining us, and then we'll operate under her leadership as a separate business unit within Lifetime. We expect the transaction to be accretive by 2022 and although not initially material to our business, we think it's a good example of how we can take advantage of our unique capabilities to support brands with significant potential for growth. Looking ahead, we continue to invest in brands and products that we believe will drive growth and profitability. I would like to emphasize the core to our 2021 strategy is investment in future growth initiatives. In addition to Year & Day, other investments for 2021 include the expansion of our KitchenAid line across multiple categories and into new international margins. We're excited about some new product launches in our profit of Rabbit line of bar and wine tools. And we will also be launching a new celebrity-backed lifestyle brand in partnership with Walmart, which is expected to be available in approximately 2,000 stores next year. As we invest in new product launches for the future, we are also investing in additional talent and people to be in a good position to capitalize on those opportunities. Given our success in achieving our Lifetime 2.0 objectives, we are moving forward with the next phase of our strategic plan, which will drive continued growth and profitability on top of the strong foundation that our team has built. We plan to do so by remaining focused on our core business and capitalizing on opportunities to expand into adjacent product categories that fit our core competencies and channel management, product design, and innovation. We also plan to leverage our strong financial foundation to maintain our prudent capital allocation strategy. With significant cash flow and a strong balance sheet, we are well-positioned to continue our dividend and pursue a disciplined M&A strategy that will drive incremental growth with a focus on growth, margin expansion, and strategic long-term value creation for Lifetime Brands. With that, I'll now turn the call over to Larry.

Thanks, Rob. As we reported this morning, the net income for the fourth quarter 2020 was $15.2 million or $0.70 per diluted share versus net loss of $14.5 million or $0.70 per diluted share in the 2019 quarter. 2019 quarter included a non-cash charge of $33.2 million related to the impairment of the US segment's goodwill. Adjusted net income was $15.2 million for the 2020 quarter or $0.70 per diluted share, compared to an adjusted net income of $11.3 million or $0.54 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 $24.4 million for the fourth quarter of 2020 as compared to a loss from operations of $15.5 million in the 2019 period. Excluding the non-cash charge for goodwill impairment in 2019, income from operations would have been approximately $17.8 million. Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $77.3 million for the year ended December 31, 2020. This represents a $4.6 million increase over $72.7 million for the trailing 12 months ended September 30, 2020, and an increase of $13.2 million or 21% over the year ended December 31, 2019. Net sales in the fourth quarter were $249.2 million compared to $226.9 million for the 2019 quarter. In the US, segment sales were up $21.4 million to $220.2 million. The increase came from category growth and increased market share in the kitchenware product category, led by tools and gadgets, cutlery, kitchen measurement, and barware products. Category growth reflects a continuation of consumers preparing more meals at home, in addition to market share gains. Market share gains reflect the appeal of our products and brands and our ability to keep retailers in stock. Tableware was mixed at some retailers, where we have a large presence in this category reopened slowly. In-home solutions, that scale has experienced significant growth, but it was offset by a decline for home decor, which [indiscernible] 2019 launch and for Lifestyle Products affected by the pandemic. Our development of a talented e-commerce team enabled us to address to accelerate opportunities in this channel as sales grew 41.6% in the quarter. International segment sales were up $900,000 to $29 million, on a reported basis $200,000 in constant US dollars. E-commerce sales grew significantly but was largely offset by lower sales to national and independent retailers as Europe continued its lockdowns due to the COVID-19 pandemic. Gross margin was 35.4% for the 2020 quarter versus 37% for 2019. For the US segment, gross margin was 36.2% in the 2020 quarter versus 38.5% in 2019. This was primarily due to channel shift and in 2019, we realized the benefit from a tariff refund. For the 2020 full-year, gross margin was up 20 basis points on a comparable basis, excluding the SKU rationalization charge recorded in the second quarter of 2019. For international, gross margin improved to 29.1% in the 2020 quarter from 26%, reflecting the benefit of the turnaround plan improvements, which included elimination of unprofitable SKUs, price adjustments for select offerings to increase margin, and the introduction of new products with higher margins. Distribution expense as a percent of sales shipped from warehouses those lowered by 60 basis points to 8.9% in 2020 quarter. For the US segment, distribution expenses as a percentage of sales shipped from warehouses was 8.4% and 8.3% for 2019 -- to [ph] 2020 and 2019 periods respectively. The benefit of higher sales volume on fixed cost and fewer prepaid freight orders was offset by an increase in hourly wage rates and higher pieces of expense from increased drop shipment volume. For the international segment, distribution expenses excluding the 2019 relocation expenses were 12.1% versus -- and 17.1% for the 2020 and 2019 periods respectively. This very large improvement was driven by the realization of the efficiencies of the new warehouse and the benefit of the turnaround plan. Selling, general and administrative expenses declined by $1.6 million to $41.6 million in 2020. US segment expenses declined by $1.5 million to $29.9 million in 2020. As a percentage of net sales, SG&A expenses declined to 13.6% from 15.8%. The improvement was primarily attributable to lower general and selling expenses resulting from our cost reduction actions. This is partially offset by higher employee incentive compensation earned. International segment expenses declined by $1.6 million to $5.1 million in 2020. The decline reflected the benefit of the turnaround plan and cost savings initiatives implemented as part of this plan and supplemented in response to the COVID-19 pandemic. Unallocated expenses increased $1.6 million to $6.7 million [ph] in 2020. This increase was mainly from higher incentive compensation earned. Interest expense declined to $4.2 million in 2020 from $5.3 million reflecting lower debt outstanding and lower interest rates. Effective tax rate for the 2020 period was 33.6%. The rate was higher than the statutory rate, primarily due to foreign taxes including a UK valuation allowance, state taxes and certain non-deductible expenses. The effective tax rate for 2019 was 27%, the rate was lower than the statutory rate, primarily due to state taxes and a decrease in non-deductible expenses offset by foreign taxes and R&D credits. Looking at liquidity, as of December 31, 2020, our liquidity was $156 million, which was comprised of $36 million of cash plus availability under our revolving credit facility. This was a $29.7 million increase from year-end 2019 achieved through improved operating results, including top-line growth and cost reduction actions taken by the company. And at December 31, 2020, our net debt was $253.9 million and the net debt to EBITDA ratio was 3.3 times. Our accounts receivable at year-end 2020 increased significantly over the comparable period in the prior year. This reflects higher sales volume in the 2020 quarter, particularly in November and December. As typical for us, cash flow was strong in the first quarter of the calendar year, which follows our peak selling period. As of February 28, 2021, our net debt was further reduced to $226.3 million, a decline of approximately $28 million from December 31. With a corresponding increase in liquidity, assuming our adjusted EBITDA was unchanged from full year 2020, the net debt to EBITDA leverage ratio at the end of February 2021 would have improved to 2.9 times. This concludes our prepared comments. Operator, please open the line for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Linda Bolton-Weiser from DA Davidson.

Hi. How are you?

Good. And yourself?

Good, good. So, you talked about the fact that your foodservice business was impacted by the pandemic in 2020. Is there any way to size that business for us? And I know that you are really just starting. But is there any way to give us some impression? Is it just really tiny revenue in 2020? Or is it 5% of revenue? Is there any way to size it for us?

So just to back up a second, we've been in the foodservice business in back of the house. So in the kitchen for 15 years plus. And that business is approximately a $20 million business for us, which -- it's all US-based and was meaningful down this year. Mikasa hospitality, which represents the big initiative, and I think is where most of your question is geared towards. We have de minimis sales of less than seven figures, but we are, as I mentioned, having meaningful progress and part of that's things we just shut down, right. So people weren't ordering new plates and dinnerware and the like and cutlery and so forth. That is starting to pick up and we are actually now in some major distributors were in their catalogs into two-step distribution process in foodservice. So as people reopen, we have share that will be utilized and results in revenues in 2020 and beyond, most in the second half and [indiscernible].

Thank you. That's helpful. And then I think that investors are looking at companies who were affected by the pandemic, either positively or negatively. And then looking at comparisons going forward for revenue growth, I guess one could argue that you've maybe been helped by the pandemic in some ways because you're selling kitchen goods and people are cooking more at home. Do you think there's been any unusual benefit that you've had that will be hard to lap those comparisons? Or are you changing your business enough so that you can still grow against growth when we get up against those comparisons?

Yes. That's basically everyone's question, right. We were a beneficiary of more people working from home and the demand for our products and home products. We also though as a result of what we've been doing and I think we accelerated that in the conditions of the pandemic to noticeably increased our market share. And if you look at NPD data, in many categories, we increased our market share. So that's a sustainable advantage and we think we can continue on that. And there were a lot of headwinds that we faced in 2020 that won't be there. And that's also why we've invested significantly in inventory and supply chain. And we -- realizing a lot of things going on in implementing our plan, we started investing heavily in 2020, but 2021 is going to be a significant investment year for us to grow for the future. So net, we believe we won't get lapped by some extraordinary tailwinds will give more guidance in the first quarter, but we think this is sustainable, and the first quarter, so far, is very strong to support that as well as our order book. So the market shares, new product introductions, other initiatives like Year & Day will just start really paying off in 2022. New products such as the Walmart, celebrity-backed brand that will announce -- will launch, we mentioned at the last call, will launch this year but will get the full benefit also next year. So, the second half of this year and next year. There is a lot of things going on which will give us ongoing financial momentum in 2021, but again, it will be an invest year so that we grow in 2022 and beyond. So we're not expecting to grow 21% in 2021 again.

Okay. And then your cash flow in 2020 benefited from working capital improvement. Is it fair to say the cash flow will be a little less robust in 2021?

We -- that's different [ph] that until we give our guidance in the first quarter.

We probably will have a little incremental -- not tremendously, but little incremental CapEx in 2021. We'll also have more cash flow at debt level right, there is some good gives and puts which Larry will elaborate on in our guidance [ph].

I will and I think we spoke about it, there were some deferrals we were able to take advantage of related to the pandemic, things like deferring some employer payroll taxes as well as in the UK, deferring payment of VAT tax, so -- and also, we negotiated some rents. So some of that -- a lot of that will begin to have to get paid in '21 is actually some into 2022.

Okay. Thank you very much.

You're welcome.

Thank you, Linda. I guess we'll see you tomorrow.

Yes.

Okay. Thank you. Your next question comes from Brian Nagel from Oppenheimer.

Hi, good morning. Thanks for taking my questions. So a couple here. First off, with regard, you called out your -- in your prepared comments just the shipping issues and we're hearing this from a lot of companies across the consumer landscape. So I guess the question I have is, till these sort of -- see naturally abate; are there leverage you can pull to help the company contend with them better or is it just a matter of basically accepting these disruptions in the nearer term?

Yes, it's a great question. I mean, we're doing everything we can, and I think an organization like us versus a lot of our competition, they can't do anything. So there's two shipping issues in terms of two general buckets. One is freight-in, getting things in from overseas -- really Asia, where there is an availability and price in terms of container costs [ph]. And the second is freight-out. So, -- but if you look at Walmart, Amazon, I mean, they've had major issues getting enough truckers to move things around and they have a little bit more weight than us. But we have been doing things to mitigate and also working with our customers as well as shippers on the freight-in side of things. We accelerate a lot of inventory into the fourth quarter and first quarter to meet what we saw very strong demands and that supersedes the availability of containers because we worked and we do have a tremendous weight with our third-party factories because we control a lot of those factories and therefore, we can get our goods meet quicker and then we ship for instance a lot pre-Chinese new year, Lunar New Year, which has just passed. And it's an investment in inventory. We have the balance sheet to do that and we've got things in faster. So there are things you can do, but a lot of it is beyond your control and we've been facing this for six months, it will continue. Fortunately, it's a quality problem that part of it is our demand is also very strong.

Got it. This was helpful. And then the second question I wanted to ask, it's somewhat of a follow-up to the prior question, but I agree with your comment. We were all looking at this to see how demands trend or what could or might shift is the COVID headwinds path. So, recognizing that it's extraordinarily fluid [ph] and I apologize for it's been a relatively near term question but you add some markets that started to open up more, certain parts of within the United States, are you seeing any early indications of demand trends for your products beginning to change?

No, except on the foodservice side where we're seeing demand increase. The -- in Europe, we are -- there is a tremendous lockdown starting in last December and that had a negative impact. The lockdown hasn't really been as extensive and we haven't seen that in United States. But we haven't seen that and there is -- it's not worth -- we're getting into a debate in terms of the sustainability of the move towards home cooking, which we believe in and there's been a lot of data, which you can view on your own, but if you look at a lot of categories, if you look at cookware for example, people -- it benefited tremendously, right. You go into many retailers and you couldn't find cookware on the shelves. But you're not going to buy another set [indiscernible] next year. Our goods are renewable and people use them and replace them. It's a different ticket item and so we think that sustainable. We're not relying on that as explained in Linda's question and there's a lot we're doing that is plus one for 2021 and beyond.

All right. I appreciate all the color. Thank you.

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

Good morning and thank you for taking the questions. So we're hearing from more companies about they're seeing inflation. Just wondering if you could comment on the -- are you seeing that and kind of what's your outlook for that as to how you think you'll manage that?

Inflation, did you say?

Yes.

We are definitely seeing a cost input inflation and we've been putting strategies to mitigate that, whether that be labor costs in our distributions, which has been up on average $2 for almost a year and a half already. Fortunately, where labor wage rate where if they go to $15 minimum wage, it doesn't impact us. That's the good news. But we've been experiencing -- But the cost inputs, whether it's materials, PP, polypropylene, sorry, which is a big input for us. If you look at, I mean, they're records highs. So a lot of the material cost, labor cost, a lot of the inputs, so there is cost inflation that we've been working for a while now and we will continue to do to mitigate that through various channels, but it is the reality.

Okay. So taking up testing or how exactly are you going to set some of these higher input costs – like, as -- labor costs as well?

Yes. On the labor cost, we've -- basically, we've been experiencing that for most of 2020. So we have mitigated that and you can see in terms of our -- if you look at the, I mentioned the distribution costs. And if you look at our distribution cost, it was down even in 2020 with significant labor cost increases. So we've had strategies to mitigate that, that have been highly effective and we'll continue to do so. The inputs, it's universal, right. This isn't a Lifetime-oriented [ph] thing, that everyone who is making anything similar to us, which will ultimately result in higher prices for the consumer overtime.

Got it, okay. Thanks for that. And Rob, you mentioned that -- so you have a strong outlook first half of the year. Is that both domestic and international? Or is it more skewed? Is it more domestic similar to the fourth quarter trends?

Yes. So just to clarify, we have not given any guidance and we will, with our first quarter call for our normal practice. I did say that, so far we've seen consistent with 2020, we've seen strong demand so far in the first quarter. In our core market, Europe was shut down and the combination of that and Brexit which frankly has been a complete disaster. We were well prepared, I think better than the average bear. But it's very difficult and they kind of hate each other over there. So that's had an impact on our business. So -- but demand still remains strong and we're off to a good start.

Got it. Okay, thanks for that. And then lastly as far as the tax rate is concerned, how should we think about that for '21?

It's in the past. I mean we should be in '21 plus the states; six, seven points 28 [ph] -- just know that the UK is planning to increase their rate legislations out there. So rate may be higher if that were to occur.

Got it. All right. Well, thanks and best of luck.

Thanks, Anthony.

[Operator Instructions] Okay. At this time, while we have no further questions, this concludes this morning's conference call.

Thank you again for joining us today. We appreciate your continued support of Lifetime Brands and we hope that you will tune in tomorrow to listen to our presentation at the D.A. Davidson Consumer Growth Conference. We look forward to discussing first quarter results for fiscal 2021 on our next conference call. Thank you, and have a good day.

This concludes today's session. You may now disconnect.