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Executives

Jeff Siegel - Chairman, President & CEO

Larry Winoker - SVP & CFO

Analysts

Alvin Concepcion - Citigroup

Peir Uslin - Jefferies & Company

Mike Ruggirello - Barrington Research

Gary Giblin with Quint Miller

Neil Goldman - Goldman Capital

Lifetime Brands, Inc. (LCUT) Q1 2010 Earnings Call May 6, 2010 11:00 AM ET

Operator

Welcome to the Lifetime Brands First Quarter 2010 Conference Call. At this time, all participants are in a listen only mode. (Operator Instructions) I would now like to turn the conference over to Ms. Harriet Fried, please go ahead ma'am

Harriet Fried

Good morning everyone and thank you for joining Lifetime Brands’ first quarter 2010 conference call. With us today from management are Jeff Siegel, Chairman, President and Chief Executive Officer and Larry Winoker, Senior Vice President and Chief Financial Officer.

Before we begin I’ll read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference that are not historical factors are forward-looking statements and involve risks and uncertainties including but the company's ability to comply with requirement of its credit agreement. The availability of funding under that credit agreement. The Company's ability to maintain adequate liquidity and financing sources and an appropriate level of debt. Changes in general economic conditions which could affect customer payment practices or consumer spending, changes in demand for company's product, shortages and price volatility for certain commodities, effective competition on the company's market and other risk details Lifetime Brands' filing with the SEC.

The Company undertakes no obligation to update these forward-looking statements. The company's earning release contained non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in this morning's release is reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP.

With that introduction, I would like to turn the call over to Mr. Siegel. Go ahead, please Jeff.

Jeffrey Siegel

Thank you, Harriet. Good morning and thank you for joining us, we’ll review our first quarter 2010 results. On today’s call, I’ll be joined by Laurence Winoker, our Chief Financial Officer. What a difference that you can make? As compared to 2009’s first quarter in which the company loss approximately $6 million, today, we report a net income of $729,000 equal to $0.06 per diluted share.

Gross margin increased sharply from last year and we continue to see leverage from reductions and distribution expense and in SG&A. Most important, we returned to growing our top line excluding $3.4 million of non-recurring net sales to one of our customers going out of business of sales. Also net revenue for the quarter were up by 2.4%. We also strengthened our balance sheet while further reducing inventory and (inaudible) asset. Lower inventories means that we will have few goods to close out and therefore margins like will be greater than the prior years. While the borrowings will result in volume interest expense.

We intend to maintain a prudent attitude towards inventory. We feel that there is quite a room for improvement in inventory terms though the reduction in inventory will not be as dramatic as it has been in the past year. Overall, our performance reflects improvements we’ve made to types of our business. In our wholesale business, our food product and Tabletop businesses (erupted) as compared to last year.

Our internal plan, which is updated monthly anticipates increases in these businesses every quarter this year with a most significant increases occurring in the third and fourth quarters. We attribute our improved performance to the results of our focus on innovation, brands and value. For many years Lifetime Brand has led the housewares industry in new product developments. In 2009, the year in which many companies cut product development budgets and reduced the staff across the board. We increased overall spending in this area. With almost 100 designers, engineers and audits in the US and Asia.

We have been introducing more new and innovative products annually than any company in our industry. In 2010, we expect to introduce over 5500 new redesigned items. Many of these were shown for the first item at the International Home and Housewares Show in March and at the Tabletop Show in April. These were two of the best shows I have ever attended and I have been attending trade shows for over 40 years. reflecting our goal of innovative solutions to improve everyday tests, new product introductions included enhanced designs and functionality water bottle and coffee mugs, multiple purposes peelers, slicers barbeque tools and accessories, fashion-forward cutting-edge cutlery, shearer and board designs, unique spice and storage solutions and a significant number of new patterns in dinnerware, flatware and glassware.

In addition to own full time enhanced designed steps, we (inaudible) have an open innovation network of thousands of investors and new products and entrepreneurs. In 2009, we screened more than 1000 inventions submitted by this group and some of our most successful new product introductions originated from this network. We expect this network to be very important source of innovative new products for many years to come. 18 months ago when we saw the weakening US economy with (inaudible) overall growth and the house ware sector. We began an intense focus on gaining market share. We hold a weekly meeting without key sales people and division helps focused only on market share gains and the top 25 retailers we do business with.

I can tell you that this intense focus has began to really pay off, I think you see what I mean when we report our sales in the next few quarters. Our performance also reflects the operational improvements we have made over the past two years. The disciplines we have developed now are our permanent part of our culture and should service well as business conditions improve. (Inaudible) and Lifetime Brands Canada also performed well in the quarter with each company recording strong local currency sales growth. On our last call, I told you that I did not expect our wholesale sales to grow more than 3 to 6% this year.

Based on indications that the US economy is recovering, I now expect that the number will be closer to 4 to 8% growth in 2008.

I would like now to turn the call over to Larry Winoker

Larry Winoker

Thanks Jeff. As we reported earlier this morning, net income for the current quarter was $729,000, $0.6 per share as compared to net loss of 6 million, $0.50 per share in 2009.

Income from operations was $2.5 million in 2010 compared to a loss excluding restructuring expenses of $2.5 million in the 2009 period. Adjusted EBITDA which is a non-GAAP measure and the fine narrow release was $37.2 million for the trailing 12 months period ended March 31, 2010 versus 12.7 million comparable period in 2009. For the 2010 quarter adjusted EBITDA was 5.7 million versus 600,000 through 2009. Looking at our wholesale segment net sales in the first quarter were 82.1 million, a decline of 1.5 million or 1.8%. As Jeff noted 2009 period included 3.4 million of sales in to the going-out-of-business sale of a customer that was liquidated. Excluding these sales wholesale volume increased by 2.4% over 2009. Wholesale segment gross margin increased 400 basis points in the first quarter to 37% due to favorable product mix the current period absence of a going-out-of-business sales where royalty expenses as we allowed certain and profitable licenses to expire and lower ocean freight cost.

Wholesale distribution expenses at the percentage of net sales was approximately the same at both periods at 10% and 10.1% respectively. Wholesale SG&A expenses in the first quarter was $17.1 million, a decrease of 7.1% from $18.4 million last year. As a percentage of net sales SG&A was 20.8% in 2010 versus 22% last year. This decrease is attributable to benefit of construction activities mainly a reduction in employee costs from management realignment, lower depreciation and amortization and lower occupancy expenses primarily from consolidated [sterling].

Now turning to our direct-to-consumer segment, net sales for the segment was $6.6 million for both periods. An increase in product revenue which includes our new lifetime sterling website is offset by lower shipping income reflecting free shipping promotions. Direct to consumer gross margins decreased to 66.6% from 67.4% in 2009 primarily due to these shipping promotional activities. Distribution and expenses for the segment were approximately 28.6% in the current quarter compared to 39.8% last year. This significant improvement is due to the efficiencies realized from our exiting the Yorke, Pennsylvania distribution center during July of last year. The segment SG&A in 2010 was 2.6 million compared to 2.5 last year. Which a (inaudible) non segment item, unallocated corporate expenses were 2.4 million compared to 2.7 million in 2009. In 2009 period, had high consulting expenses and severance cost. Interest expense declined to 2.4 million from 2.9 million. This decrease is due to lower average bank borrowing since 2007 which was partially offset by higher interest rates.

Our 30% owned in debt the, continues to deliver very positive results. Its strong operating performance and the effect of the strengthening that it can take so both added through our earnings increase. Turning to our financial position, our cash flow continues to be positive which enables us to further improve our balance sheet. During the quarter, we reduced bank borrowing by 4.5 million to 20.1 million at quarter end. This is achieved through operating cash flows, a planned further reduction in inventory within modest and appropriate level of capital expenditures of 600,000. We expect full year capital expenditures not to exceed $5 million. At quarter end, availability under the bank credit facility was $48.4 million which is net of $50 million of minimum required availability.

Given our continued operating improvement and stronger capital position, we believe we are well positioned to address our current securities. As you know during our last call, we are not giving guidance for the year, however, I do want to provide some information that maybe helpful for you for your analysis of 2010. First as you know our business in the first half of they year normally lower than second half, the (inaudible) wholesale sales volume during the first half of the year was more likely to produce fluctuations in our wholesale gross margin percentage due to product and customer mix.

Also note that on annual basis we expect a greater portion of our wholesale sales to be slow on a direct input basis. This means these product sales are shipped directly from overseas factories to (inaudible) and distribution facilities. This has a favorable effect on our distribution expense that result in a reduction in gross margin. Second, the benefit of our restructuring and consolidation actions on distribution and SG&A are now fully reflected in our Q1, 2010 results. We do not foresee any reasons why these benefits should not continue for the balance of the year. Lastly, as noted we have currently in discussion with vendors with respect to our 2011 debt maturities. If these discussion are successful it will be an impact on interest expense and related non cash items attributable to our existing debt. On an overall basis, we do not anticipate a material change in the interest expense solely as a result of any refinancing. Of course lower average volume in 2010 as compared to 2009 which significantly lower our interest expense for this year versus last year. I just want to make one correction to what I said. I expect that the wholesale of sales will increase 4% to 8% in 2010 not 2008. Now operator you could open up to questions. Thank you.

Question-and-Answer Session

Operator

(Operators Instructions). Our first question is from Greg Badishkanian with Citigroup. Please proceed with your question.

Alvin Concepcion - Citigroup

Hi, this is actually Alvin Concepcion in for Greg. I just wanted to get a sense, do you know what the POS at resale was in the quarter and also how trends have been in April?

Larry Winoker

I’m sorry but what I don’t understand what you said? It didn’t come in clearly. Can you repeat that?

Jeff Siegel

Yeah, it POS sales had been trending high, what, last year, we went through a period where we resale with the destocking. They’re no longer destocking. So they’re responding to automate towards sales trends and also anticipating a little further out as we can see by our work flow. But the POS sales seems to be rather strong.

Alvin Concepcion - Citigroup

Would you say it’s growing faster than the 2% at wholesale excluding that sales, there’s non-recurring sales from last year?

Jeff Siegel

Overall, yes. But the retails being very conservative. They’re maintaining low inventories. I talked to one retailer a few days ago that was very, very encouraged by POS sales, and they're one of our biggest customer. So I would say overall the answer is yes. POS sales are increasing.

Alvin Concepcion – Citigroup

Okay, great. And then you mentioned some market share gains. Are there any particular segments driving that?

Jeff Siegel

We don’t want to go into that but its pretty much across the board trust. We have gained market share, it’s been a truly intense focus of the company. It’s a two hour meeting every week. It really is something that’s paid off. And frankly, it took a lot longer to pay off than I thought it would, but its really starting to produce results for us, it’s the analyzing things that in ways we have never did before quite a focus for us.

Alvin Concepcion – Citigroup

Okay. And can you give an update on your view on commodities and also, based on that, do you feel your pricing and product mix will allow you to grow margins this year?

Jeff Siegel

Well, as far as commodity prices, they went up very quickly starting next year from mid last year. It has not had a major as you can see does not have major impact on our margins. We don’t expect it to. A large part of the products that we market are the more labor intensive than material intensive. So, raw materials do have some place in it, its not a very large place and we have also been using our design staff to redesign products that change materials and resource things when it was comfortable, the areas where we were very concerned with raw material prices, we firmed our prices very early and that enables the manufacturers and what’s the material suppliers provide the materials very early on.

Alvin Concepcion - Citigroup

Okay. And on that note, what are you seeing on the labor front?

Jeff Siegel

Labor has gone up in China but not so much that it will have a great impact on us. We are doing things to help factories do more coordination to compensate for some of the labor increases but as we anticipated the labor going up and we were right?

Alvin Concepcion - Citigroup

It's sort of trending in line with what you were expecting?

Jeff Siegel

Yes it is. It’s very much in line with what we expect and we also anticipated the considerable increase in ocean freight which is built into our prices in 2010.

Operator

Our next question is from Peir Uslin with Jefferies & Company

Peir Uslin - Jefferies & Company

A question on the interest expense really quickly, the number, by my math, if I adjust out the APB 14 interest expense, if I'm right about this, the interest expense in the quarter would've been closer to $1.7 million. I guess two parts, is that the right way to look at the math, and then, secondly, is that a reasonable run rate to kind of expect, given the sharp reduction in borrowings?

Larry Winoker

The 14.1 which is the debt discount that in any pre-amortization with respect to the bond, its about 800,000 so you are right on your calculation there. In terms of run rate, obviously the bond or fixed rate that doesn’t change during the year. The other part process I think and that’s certainly a function of what our borrowing will be, on average there were $22 million in this first quarter and some of it don’t change and you can do, make some assumptions as to our working capital needs in our model to say what I might be on a full year basis

Peir Uslin - Jefferies & Company

Shifting gears to the, you mentioned the increasing shift in the wholesale side to direct import. First of all, maybe what's behind that, and then, secondly, do you see that as kind of a little bit more of a permanent condition?

Jeff Siegel

This is not going to be a very dramatic shift. We are heading in this direction for sometime where it’s appropriate and we will continue to do so as we have great capabilities overseas and our people are able to handle shipping to customers. So we would rather do that whenever possible that is probably to our D.C.s and it also helps us to keep our course down and one time our intention is not to add any D.C. capacity in the US but as we grow to do more and more direct shipping to make sure that we make more money.

Peir Uslin - Jefferies & Company

The last question, I wanted to talk about the product innovation and the dynamics of having maybe the increased pipeline of ideas from the outside with the 1,000 inventions having come in because I think Proctor does something similar. I guess the inventors that you have in your network. I guess I'm just trying to figure how the relationship works. Are they more or less betrothed to you, or are they kind of shopping their ideas kind of to anybody that'll listen? Sort of just illuminate us on how the process works maybe a little bit.

Jeff Siegel

These are independent inventors. You could call them garage inventors in some cases but in some cases they are retired engineers and designers who just want to keep working and instead of working for one company they now just work from home and invent products. We’ve somewhat formalized this network. We have someone who works almost full time with us, going around the country meeting with these investors, meeting with groups, speaking he’s head of the Inventor Council but there is some National Group of Inventors he is the head of that group, he goes around speaking and represents us, exclusively represents us in the world that we’re in. so, though the investors are not exclusive to us, we have a much broader network than everyone that I know off and within our world.

Peir Uslin - Jefferies & Company

Great. One last one. On the, I know this will be in the queue but just preemptively, were the shares related to the convertibles? I assume that they would have been anti-deluded and so they’re not included is that correct?

Larry Winoker

That’s correct.

Peir Uslin - Jefferies & Company

Okay. Thank you. Congratulations.

Larry Winoker

Thanks

Operator

Our next question is from Derrick Lagao with Barringtom Research.

Mike Ruggirello - Barrington Research

Morning guys, this is actually Mike Ruggirello for Derrick

Jeff Siegel

Morning, how you doing?

Mike Ruggirello - Barrington Research

We were also excited about what we felt the house were shows here in Chicago like you guys were and that were specifically interested in hearing about the water bottle category?

Jeff Siegel

Okay. Its very rapidly growing with us. Percentage wise, it’s the fastest growing business that we have but it’s a small business. There’s going to be a large business this year. We won't give that number on it but we have terrific commitments from retailers for the flow on water bottle much more than we would have expected and some very, very unique products. its also, its not only water bottle its also what you call cocky months which are traveling mugs. Both are growing very rapidly for us. We have some very unique products. we were not in this business a couple of years ago, two years ago. We’re now considered a real player, we’re dealing with most of the majors. And so, a great growth business for us. We had a previous liability as you probably know. For us and its something that is very much on consumers' mind today because of the environment and the issues with plastic water bottle so it's something that is -- for us we anticipated the growth business for quite some time.

Mike Ruggirello - Barrington Research

So what's the growth opportunity that you guys are looking for there? I mean, it seems like it's a huge -- already a pretty huge market?

Jeff Siegel

It is huge market, we don't want to put a number on, we do have one internally but I can tell you it's -- for us its significant growth opportunity.

Mike Ruggirello - Barrington Research

I mean, I know it's a new category for you guys, but just in general how are the margins compared to your corporate margin, corporate average?

Jeff Siegel

They are excellent, that's because we have some very unique product that we are (inaudible) hands on.

Mike Ruggirello - Barrington Research

All right, perfect. Good quarter, guys

Jeff Siegel

Thank you.

Operator

Our next question come from Gary Giblin with Quint Miller

Gary Giblin with Quint Miller

Good morning, and great results for the quarter.

Jeff Siegel

Thanks Gary

Gary Giblin with Quint Miller

On the free shipping promotion, was there a promotionality increase beyond that or was that the extent of the increased promotionality of the direct DTC segment?

Jeff Siegel

No, let me answer that. In the world of internet marketing free shipping is becoming much more of standard that was before and in with our products since we of direct source able to cover it. So we are following the trend.

Gary Giblin with Quint Miller

Okay. So is there any other increased promotional activity beyond that or is that what --?

Jeff Siegel

No, there is no more promotional activity but nothing increased and the free shipping is becoming a big thing offered by many (inaudible)

Gary Giblin - Quint Miller

Yes, okay. And I mean, more broadly on DTC, are you satisfied with that year-over-year sales for the quarter, and is the segment where you expected it to be, excluding the (inaudible) order retail stores? But I mean, is your the current composition of your DTC, is that where you want it to be when you made some management changes and so forth, 12, 18 months ago?

Jeff Siegel

The idea of making management changes was to make that a profitable business which we expect it will be. In fact, our focus will continue to be primarily our wholesale business. The DTC business for us has other functions but not only in selling to consumers. And yeah, I’ll give you a few of them because they’re very important. One is, we found that we have Mikasa website and most consumers who go through the website use us to understand the patterns, see how to use them properly, how to set tables and they don’t want to buy the same Mikasa patterns from our customers from whether it would be Macy’s or any store like that, which is very important to us because it helps to drive sales.

In addition, the infrastructure that we have for our DTC business helps us to serve our retailers, we’re performing shipping through their consumers for their web business. So if a major retailer or subs some price to our consumer very often we actually do the shipping from our warehouse to the dialed product. And it’s a very important and very fast growing part of our business.

Gary Giblin - Quint Miller

Okay, thanks for that important explanation. And, just would you say destocking is completely over or just 80% over if you had…?

Jeff Siegel

As far as I am concerned it’s completely over. We don’t see it happen anywhere anymore. And not in any of the major customers we deal with.

Gary Giblin - Quint Miller

Okay. And then my final question is, in the previous conference call, you were kind enough to at least give a little enough color to say that you thought probably first quarter would be EPS-positive. So care to venture yes or no on EPS-positive for the second quarter?

Larry Winoker

We have (inaudible) last quarter because the timing we were too much into the quarter and that was only one month for the quarter. It certainly, the dramatic improvement you saw in this first quarter versus ’09 won’t happen in the second quarter. The second quarter last year was pretty good, we had good margins. So I think you will see something in second quarter of ’10 closer to what we saw in this quarter.

Operator

Our next question is from Neil Goldman with Goldman Capital.

Neil Goldman - Goldman Capital

First question, you had a great quarter of Vasconia, and one thing, you were off -- you had, like, $600,000, but your investment went up by 1.8. Did you explain that difference?

Larry Winoker

Its because of the peso strengthening.

Neil Goldman - Goldman Capital

Okay, which is probably now reversed. But that's just an item on the quarterly end? It doesn't affect earnings, right?

Larry Winoker

We go through (inaudible) comprehensive income. Then we go directly holders equity.

Neil Goldman - Goldman Capital

Number two, based on the history, you always started growing inventory entering the second quarter for the third quarter shipments, especially since we're importing. And this quarter it continued to shrink again. So A, what do you think is your low point of borrowing based on your new sales forecast for the year, and what would be your peak borrowings on your bank line right now?

Jeff Siegel

The low point is probably around now and what (inaudible) as of this week?

Larry Winoker

It’s below 20 million right now and that is the low point and the high point, we are focused on returns of that, I don’t expect it, it’s not going to have a dramatic increase. The inventory will certainly go up in the third quarter and not the second quarter we will probably hold inventory at very similar levels to this. We will go up slightly in the third quarter and as it goes up, we will have more borrowing but (inaudible) have a different number or what are you trying.

Jeff Siegel

Of course well to the borrowing because inventory to that factor but also courses the (inaudible) business that we have. Strong business we are going to more see (inaudible) going to have obviously more of borrowing under the facility. So you know it gets to what we think our results would be in Q3 and into Q4 than others have to say. I mean I seriously want to say it certainly could be substantially less than we had outstanding time and last year for the comparable period from ’09 but its not something I want to venture out because then it gets into where we think business level are going.

Neil Goldman - Goldman Capital

Your borrowing capability under this line is how much today?

Larry Winoker

Well its at 45 million.

Neil Goldman - Goldman Capital

Okay. So you have $120 million total availability between right now. And when you look out at refinancing the debt, are you looking for the same kind of capacity overall, forget the mix of long and short?

Larry Winoker

Yes we do need this thing kind of capacity. We expect to be cash positive so we certainly have no reason to increase it but you know of course the mix maybe different but it will be about the same

Neil Goldman - Goldman Capital

And based on your current talks with the lenders, if you're right now round numbers have 1.7 based on that question, quarterly which is 6.8 in interest, would it approximate that even though our current rates on the long term are very low?

Larry Winoker

I didn’t hear what words you just said.

Neil Goldman - Goldman Capital

Well my question would be, on a going-forward, once you refinance, given the current use of cash, would the total interest costs run around the same right now?

Larry Winoker

If I could tell you what’s the cost will be (inaudible) I could tell you that. We don’t think the rate will be materially different than where we are and the when the date’s of today. Until we are complete and successful with our refinancing I really can’t comment on that.

Neil Goldman - Goldman Capital

Also in the first quarter last year, did you include the sales of the Canadian business? It was direct?

Jeff Siegel

No.

Neil Goldman - Goldman Capital

It's the same this year and last year?

Larry Winoker

Its comparable, this year we are going to have a true comp.

Operator

(Operator Instructions) There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Jeff Siegel

Thanks again for joining us. We look forward to speaking to you again on our next call, thank you.

Operator

Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask you to please disconnect your line.

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