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Lifetime Brands Inc. (NASDAQ:LCUT)

Q4 2013 Earnings Conference Call

March 13, 2014 11:00 AM ET

Executives

Harriet Fried - LHA

Jeff Siegel - CEO

Larry Winoker - SVP, Finance and CFO

Analysts

Brian Freckmann - LS Capital

Laura Champine - Canaccord

Alexander Renker - Sidoti

Neal Goldman - Goldman Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Lifetime Brands' Fourth Quarter 2013 Earnings Call. My name is Joe and I'll be your operator for today. At this time all participants are in listen only mode. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And now I'd like to turn the call over to Harriet Fried of LHA. Go ahead please.

Harriet Fried

Good morning, everyone, and thank you for joining Lifetime Brands conference call. With us today from management are Jeff Siegel, Chairman 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 call that are not historical facts are forward-looking statements and involve risks and uncertainties, including the Company's ability to comply with the requirements of its credit agreement, the availability of funding under those credit agreements, 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 the Company's products, shortages of and price volatility for certain commodities, the effect of competition on the Company's market and other risks detailed in Lifetime's filing with the Securities and Exchange Commission.

The Company undertakes no obligation to update these forward-looking statements. The Company's earnings release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. Included in this morning's release is a 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. Please go ahead, Jeff.

Jeff Siegel

Thanks, Harriet. Good morning everyone, and thank you for joining us to discuss our fourth quarter results. By stripping out the accounting noise caused by the write-ups and write-downs in the value of our investment in Grupo Vasconia, we delivered another strong quarter with sales up 6.5% and gross margin increasing to 38.4%. I'll run through the highlights of the quarter quickly this morning focusing on our wholesale segment, since that represents the vast majority share of our sales and profits. After that I'll turn to the many exciting things we have underway for 2014, including the three acquisitions we've already announced this year.

In our third quarter call this November, I said that we expected kitchenware to fuel our growth in the fourth quarter and that was the case. The consistent growth in this category is due to innovation and newness, which no one does better than Lifetime. The talents of Lifetime's owned 120 plus designers, artists and engineers are supplemented by our open innovation network which enables independent inventors to submit ideas that Lifetime works with them to enhance and bring to market.

The new kitchenware programs we rolled out in early 2013 continue to do well and well into the fourth quarter and we also have been able to increase our penetration of the supermodel candle bringing kitchen tools and gadgets and programs with them to two major new customers. The Fred & Friends acquisition we made in mid-December 2012 again contributed nicely to our margins.

On the Tabletop side of our business, sales were up nicely in the quarter even though this category as a whole has been struggling at retail with less shelf space allocated by retailers. In both Tableware and Flatware we gained grounds in the more usual casual portion of the business, where the more formal portion of the business has been weak. We are committed to growing in the Tabletop category by emphasizing our strength in the casual segment.

Sales in our Home Solutions category were essentially flat, although we did make inroads with two major Pantryware programs. In November we began shipping Debbie Meyer brand storage products which are designed to extend the life all kinds of fresh produce, baked goods and snacks through a proprietary technology that absorbs ethylene gas. Sales got off to a great start and we expect a very strong performance from this licensing agreement in 2014.

Turning to the international side of our business, I'm pleased to report that Creative Tops had a good quarter. As we expected, the initial shock of anti-dumping import duty, which took effect in the fourth quarter of 2012 has been wearing off and sales with several major customers have regained their momentum. And as we anticipated, the business is bringing us new opportunities in Europe as well as the UK.

Lifetime Brands Canada also have turned into good performance and GS International, our Brazilian-based venture started supplying Walmart's Brazilian operations, which include more than 550 locations. As I mentioned earlier, our investment in Grupo Vasconia did create some accounting noise during the past year due to its acquisition of Almexa Aluminio and a movement in the share price. But we continue to have high expectations for the future of this business.

With that quick overview of last year's final quarter, I'll turn to the many things we have on tap for 2014. As those of you who follow our press releases know, we've already announced several important developments. In mid-January we acquired Kitchen Craft, a 165 year old business and one of the UK's leading suppliers of kitchenware products and accessories. In its fiscal 2013 Kitchen Craft had net revenues of approximately $70 million. Its kitchenware products are perfectly positioned to fill in the tableware and gift assortments marketed by Creative Tops and we expect our global presence, capabilities and scale to boost Kitchen Craft's growth both in sales and profitability. We also expect Kitchen Craft's gross profit and EBITDA margins to enhance Lifetime's future performance.

The Kitchen Craft acquisition was followed in quick succession by two smaller ones, Built New York and La-Cafetière. Built is a designer and distributor of highly colored uniquely patterned neo-premium products including lunch bags, coats, cases and baby products. Built's products and distinctive look bring a new dimension to our portfolio and its great customer base will enhance our distribution to find retailers worldwide.

And just this week, we acquired La-Cafetière which designs and distributes products for brewing and serving coffee and tea under the La-Cafetière and Wayne Wood brands. This latest addition for Lifetime's global platform further strengthens our presence in the UK and Continental Europe.

La-Cafetière has assembly and distribution facilities in the Netherlands that would be very useful to us as we expand our international business. In addition, we believe we can greatly expand the distribution of their products in North America. Acquisitions have always been a major part of Lifetime's growth strategy, but we have other meaningful growth initiatives in the works for 2014 too. As you recall last year, we received a trading license in China that enables us to directly supply Wal-Mart, China. Beginning in May we'll begin supplying Wal-Mart China's approximately 400 stores with kitchen tools and gadgets, cutlery, cutting boards, dinnerware, flatware, thermal mugs, water bottles and other items. In other words, a very expensive assortment.

I already mentioned that our Pantryware partnership with Debbie Meyer has had a strong start and in next week's international home and Houseware show in Chicago we'll launch our Mossy Oak branded, a collection of Beverageware, Food Prep, Tabletop, and Home Décor Products. Mossy Oak is one of the Country's most recognized camouflage brands and we've already seen an enthusiastic reception from retailers who have seen the line.

Another significant debut we're planning for the Houseware show is our new Brick Oven brand which will provide all the tools consumers need to recreate the gourmet pizza experience at home. We've seen a big increase in demand for specialty products and enable people to replicate professional food experience in their own kitchens. We believe pizza offers a great opportunity in retail and our Brick Oven brand is designed to fill the void in that market.

Finally, we continue to expand our international presence with the launch of Reo, a global collection of kitchenware products that provide simple and functional solutions for Food Prep. Reo reflects our strategy of developing new brands that Lifetime can control and use on a wide range of products all over the world. Reo features intuitive designs, trend bright colors and inviting forms to make cooking more enjoyable. The products will be available at retail beginning in December of 2014. If you are at the Home and Houseware show next week, please stop by at our booth and we'll give you a preview.

With that overview, I'll turn the call over to Larry to give you more details on our fourth quarter and full year financial results, as well as our guidance for 2014. Larry.

Larry Winoker

Thanks Jeff. As we reported earlier this morning, net income for the fourth quarter of 2013 was $9.4 million or $0.72 per diluted share, as compared to net income of $15.2 million or $1.19 per diluted share in 2012 period. Adjusted net income for the quarter was $10 million, $0.76 per diluted share as compared to adjusted net income of $8.7 million, $0.67 per diluted share in 2012. A table which reconciles this non-GAAP measure to reported results was included in this morning's release.

Income from operations was $16.6 million for the 2013 quarter, compared to $14.5 million in 2012. Consolidated EBITDA, a non-GAAP measure as reconciled to our GAAP results in the release was $21 million for the current quarter and $17.9 million for the period in 2012 and consolidated EBITDA was $43.5 million for the full year 2013, and $41.2 million for 2012.

Looking at our wholesale segment, net sales in the 2013 quarter increased by 7.9% to $158.2 million. The increase reflects an increase in kitchenware and tableware sales. Home solutions was essentially unchanged. Kitchenware's increase was $7.4 million, primarily due to the inclusion of the Fred & Friends business acquired in December of 2012. The tableware increase of $4.6 million was attributable to higher volume for dinnerware in the U.S. and UK, partially offset by lower flatware sales. Wholesale segment gross margin was 37.4% in the 2013 quarter, up from 34.4%in the 2012 quarter. The improvement reflects favorable product mix, including the expected improvement due to the inclusion of Fred & Friends.

Wholesale distribution expenses as a percentage of sales shipped from our U.S. warehouses was approximately 7.6% in both 2013 and 2012 quarters. For our UK operations, the expense ratio improved on higher volume and better labor management. Wholesale SG&A expenses were $25.9 million in the fourth quarter of 2013 versus $22.4 million in 2012. This increase was due to the inclusion of Fred & Friends and an increase in selling expenses and timing of certain other expenses.

For our Retail Direct segment, net sales was $7.7 million and gross margin was 66.8% in the 2013 quarter, versus net sales of $8.2 million and gross margin of 68.9% in the 2012 quarter. As a percentage of net sales, Retail Direct distribution expenses were approximately $29.3 million and $27.3 million in 2013 and '12 quarters respectively. The increase is due to lower sales volume and higher freight rates. Retail Direct SG&A expenses were $2.4 million in 2013 quarter and $2.5 million in the 2012 period.

Looking at non-segment items, unallocated corporate expenses increased by $900,000 to $5.5 million in 2013 period, which was primarily due to the acquisition fee and expenses. Interest expense was $1.3 million in both quarters. The effective income tax rate increased to 40.6% from 19.5% in the 2012 quarter. The low effective tax rate in 2012 quarter was due to a $2.3 million deferred tax liability reduction related to 2011. Excluding this reduction, the effective tax rate in the 2012 quarter would have been 36.7% and for the full year 37.5%. For the full year of 2013 the effective tax rate was 39.5%.

Equity and earnings was $300,000 in 2013 quarter as compared to $4.5 million in the 2012 quarter. Excluding certain unusual items related to Grupo Vasconia in the 2012 quarter, equity and earnings in the 2012 quarter would have been $600,000. These unusual items are reflected in the table that reconciles net income to adjusted net income.

Turning to our financial position, at December 31, 2013, the outstanding balance on our revolving credit facility was $49.2 million and senior term loan balance was $20.6 million as we prepay a portion of that loan in anticipation of our debt refinancing.

Our leverage ratio that is total indebtedness to trailing 12 months EBITDA was 1.6 times and availability under the revolving credit facility was $91.6 million. In January we refinanced our debt and used a significant portion of the credit facility availability to fund the acquisition of Kitchen Craft.

Looking at the full year of 2014, we currently project sales to increase by approximately 5% organically and approximately 50% from the recently announced acquisitions. Gross margin percentage and distribution expense percentage are expected to be in line with 2013.

For SG&A recent acquisition activities that will result in purchase accounting amortization and integration expenses, which have yet to be determined, make it difficult to forecast at this time. I'll provide more color on our next earnings call. Our income tax rate is expected to be 37% to 39%. Capital expenditures should be in the range of $4 million to $6 million, subject to acquisition related integration costs and for the full year of 2014, dilutive weighted average shares outstanding are projected at $40 million.

This concludes our prepared comments. Operator we're ready for questions.

Question-And-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Brian Freckmann of LS Capital. Go ahead please. Your line is now open.

Brian Freckmann - LS Capital

Just a quick question on that last comment about your guidance. You guys write in the press release roughly $100 million in net sales to increase. Your comments on the call were 5% organic, which I'm assuming is off a base of the $502 million you just reported. And then your comment about 50%, could you clarify that? I'm not sure what you're referring to?

Larry Winoker

May be I don't speak very clearly. I was saying 15, 1-5. So together it's 20%, which is approximately that $100 million.

Operator

Thank you for your question. Your next question comes from the line of Laura Champine of Canaccord. Go ahead please. Your line is now open.

Laura Champine - Canaccord

So my question is also on the guidance for growth through acquisitions. Is the, how much of -- what are the trailing revenues of the two smaller acquisitions that you've already done this year? And would you expect organic growth from those acquisitions, or is there some risk of sales decline in the transition?

Jeff Siegel

The two other acquisitions are relatively small and we do very definitely expect organic growth in both of them to be honest with you.

Larry Winoker

Also is that one of the reasons we didn't announce the price, it is relatively small and they are going through some changes that we're going to reflect. So, having their historical result is really not that relevant. It's what we are going to do with those two businesses going forward.

Jeff Siegel

We are going to change them dramatically and maybe hopefully improve them dramatically.

Larry Winoker

On the Kitchen Craft, the business would taking, we acquired with management in place will grow. These businesses are smaller and we're not taking a full management organization. Basically we're just going to run these businesses with our other businesses. So we're going to make substantial changes to them.

Laura Champine - Canaccord

And you mentioned that Fred & Friends was accretive to margins. Is there any meaningful impact to margins from these acquisitions that you've made from the Kitchen Craft acquisition?

Jeff Siegel

The only comment I make on, the other ones, the two small ones on the Kitchen Craft; now Kitchen Craft is a kitchenware business like our business and generally that business have has margins than some of our other businesses that we saw in the past like tabletop and home solutions. So, it will be, when you look at our wholesale business, the Kitchen Craft business should be little higher than the average for our wholesale business.

Operator

Thank you for your question. There are no further questions. (Operator Instructions). We have another question please from the line of Alexander Renker of Sidoti. Go ahead please. Your line is now open.

Alexander Renker - Sidoti

I was wondering if you could elaborate a little bit on how gross margin was able to kind of stay up and grow in fact, given that this was, by all accounts, a pretty promotional holiday season for retailers.

Jeff Siegel

Some of the quarter has to do with some mix and timing. For the year overall, our gross margins were up 90 basis points. Fred & Friends also have significantly higher margin that the rest of our business but I wouldn't take that the margin that we achieved increase in the fourth quarter is indicative of what's going to happen. I think you have to smooth it out and look at the full year, which is up only – was up nicely but it's up 90 basis points compared to a couple of hundred basis points for the quarter.

Alexander Renker - Sidoti

And then, how would I, I guess the two smaller acquisitions compared to the Fred & Friends acquisition, they look -- without having financial terms, obviously, they look comparable in the sense that these are niche brands that Lifetime might be able to help with distribution. Maybe if you could give us an idea of how these two small ones would relate to something like Fred & Friends?

Jeff Siegel

Yes, Built in particular is very similar and the distribution will overlap worldwide to some degree with Fred & Friends and hopefully we'll get that business up to the level of, current level of Built -- excuse me of Fred & Friends within a year. The La-Cafetière is a different business, which we are combining with our own coffee and tea products to make a much stronger statement. That's smaller but does having a big potential long term. As you know coffee especially is a very big thing and growing worldwide. So, we're very enthused with that and there will be a tremendous amount of synergies between all of the companies and the good thing about it is these acquisitions will not cannibalize any other business that we have.

Operator

Thank you for your question. Your next question comes from the line of Neal Goldman of Goldman Capital Management. Go ahead please.

Neal Goldman - Goldman Capital Management

Could you discuss Grupo Vasconia, true operationally this year versus last year was, what was your share?

Jeff Siegel

You are talking about let's say without the impact of some of the unusual items?

Neal Goldman - Goldman Capital Management

Right.

Jeff Siegel

This year there was a, I'm just looking at some notes I have. There was a small loss this year compared to a $2 million of profit in 2012.

Neal Goldman - Goldman Capital Management

Right. They were the ones who were primarily affected by these tariffs, correct?

Larry Winoker

No, no. They had two separate issues, one issue was, had to do with their difficulty in combining two businesses, the aluminum business and then they had few issues earlier in the year especially with their housewares business which seem to be improving, but they stumbled for the year, but we feel that they're going come back and do very decently in 2014.

Neal Goldman - Goldman Capital Management

Do you expect them to get back to the level of 2012 on your share?

Jeff Siegel

I don't think they'll get back in 2014 to '12. They feel they will but we don't believe that's going to happen. But I think there will be good improvement. And another year after that they get back '12.

Neal Goldman - Goldman Capital Management

That's a very significant swing on the bottom line, just from that interest alone. Okay.

Jeff Siegel

Say, it again, Neal?

Neal Goldman - Goldman Capital Management

I said that's a very significant swing on the bottom line just from the improvement in Vasconia.

Jeff Siegel

It should be. Yes, it was -- we obviously had a difficult year with them. It hurt our bottom line in 2013.

Operator

Thank you for your question. Your next question comes from the line of Alexander Renker from Sidoti. Go head please. Your line is now open.

Alexander Renker - Sidoti

Hello, guys. Sorry, one more. Do you have Creative Top's sales for 2013 versus 2012? Is that something you can share?

Jeff Siegel

Sure, their sales were up. They did about $42.5 million terms last year $39 – so about 42.5 million in '12 and about $39 million this past year. That's dollar terms.

Alexander Renker - Sidoti

Dollar terms. Okay. Fantastic.

Larry Winoker

Kitchen Craft. They had a weak first half due to the antidumping duties.

Alexander Renker - Sidoti

Right. I was just trying to estimate the impact there. Okay. Thank you.

Jeff Siegel

They did and it was in the comment that they were up in fourth quarter, which I've already mentioned, the comment about dinnerware being up in the UK.

Alexander Renker - Sidoti

Right. So you'd expect growth off that $39 million base for 2013?

Jeff Siegel

Yes. We expect growth in '14 as well.

Operator

Thank you for your questions. I would now like to turn the call over to Jeff Siegel, CEO, of Lifetime for closing remarks.

Jeff Siegel

Thank you. Thanks everyone for you time today. We are as a company laser focused in executing our strategic plan and have spent the last few years setting the platform to do so. As you can see we're continuing to leverage our brands with market leading product innovation and international expansion. We think it's a winning strategy for our Company and our shareholders.

In 2006, our business was almost 100% in two countries, the U.S. and Canada, and now just eight years later we'll be doing business in over 70 countries this year with a goal to increase that to 90 countries in the next 18 months. We have a good direction, we're very comfortable with way we're going and we hope to have a great year. Thank you.

Operator

Thank you for your participation today in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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