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Lifetime Brands, Inc. (NASDAQ:LCUT)

Q4 2007 Earnings Call

March 10, 2008 11:00 am ET

Executives

[John Halthorn]

Jeffrey Siegel – Chairman, President & CEO

Larry Winoker – Sr. Vice President & CFO

Chris Kasper – Sr. Vice President, Corporate Development

Analysts

Derek Leckow – Barrington Research

Bill Chappell – SunTrust Robinson Humphrey

Alvin Concepcion - Citigroup Global Markets

Gary Giblen - Goldsmith & Harris

[Adam Deland] – Moorehead Capital

Kathleen Reed - Stanford Group Co.

[John Cardy] – Principal Global Investors

Operator

Good morning ladies and gentlemen and welcome to Lifetime Brands fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to [John Halthorn], please go ahead sir.

[John Halthorn]

Thank you and good morning everyone and thank you for joining Lifetime Brands fourth quarter 2007 conference call. With us today from management are Jeffrey Siegel, Chairman, President and Chief Executive Officer, Larry Winoker, Senior Vice President and Chief Financial Officer and Chris Kasper, Senior Vice President Corporate Development.

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 call that are not historical facts are forward-looking statements and involve risks and uncertainties, including but not limited to product demand and market acceptance risks; the affects of economic conditions; the impact of competitive products and pricing; product developments; commercialization; technological difficulties; capacity constraints or difficulties; the results of financing efforts; the affects of the company’s accounting policies and other details contained in the filings with the Securities and Exchange Commission. The company undertakes no obligation to update these forward-looking statements. With that introduction I will turn the call over to Mr. Siegel. Please go ahead Jeff.

Jeffrey Siegel

Thanks John and good morning everyone. Let me start by saying that we were very disappointed by the company’s overall performance in 2007 and we’re highly focused on fixing what is wrong as well as continuing our focus on growing those parts of our business that are highly profitable.

That said, some of our businesses especially our Cutlery, Cutting Board, Kitchen Ware and Home Décor divisions in fact showed outstanding performance despite the difficult environment. We took decisive action to remedy those areas that did not meet our expectations. Moreover, the new product line initiatives that I’ll discuss in a moment have us extremely excited about our company’s prospects.

As detailed in this morning’s release, Lifetime’s sales for the fourth quarter and consequently for 2007 as a whole, were significantly impacted by the unfavorable retail environment. As I mentioned in our call in early November most retailers adopted a very cautious wait-and-see approach to building inventory for the holiday season. And once the season came consumers did pull back severely on their spending resulting in significant lower than expected sales for the quarter and in Lifetime’s case having a dampening affect on our entire year. Disappointing sales from our Direct to Consumer and our Dinnerware and Glassware businesses also contributed to the shortfall.

Our company has a high degree of operating leverage so the lower sales had an even larger impact on our bottom line. We’ve taken corrective action to remedy the DTC and Dinnerware issues and would like to take you through those actions before turning to our plans for achieving profitable growth in 2008.

I’ll start with the changes we have made in the DTC area. While our DTC management team did make progress in 2007 in revitalizing our retail stores, in December we determined that certain locations did not have the potential to show meaningful profits. In total we closed 30 stores, every one without a four-wall profit and made cuts in divisional overhead. We estimate these steps alone will eliminate approximately $2 million of DTC losses in 2008. We are continuing to look at all aspects of that business including addressing the inefficient warehouse we inherited as part of a [inaudible] acquisition. As we have said in the past we will exit the business if we don’t see a clear path to returning to an acceptable level of profitability in the near term.

Strategically we’re also continuing to shift the emphasis of the DTC division to the internet catalogue and internet catalogue end of the business and away from bricks and mortar retail. And to help us to continue to build strength in the internet and catalogue area we just recruited an individual with 25 years experience in the management and operation of successful direct response businesses. [Jeff Burman] who was most recently General Manager of JNR Music and Computer World, a major US consumer electronics, computer and music retailer that is highly focused on internet retailing started with us last week in the newly established position of President, Direct Retail.

Our dinnerware category also substantially underperformed in 2007 and we recently reenergized it with new management bringing in as President [Glen Simon] founder and former President of Sakura, a very successful dinnerware business that was eventually sold to [Oneida]. Under Glen’s direction we’ll be introducing approximately 100 new dinnerware patterns in 2008 that are both beautiful to look at and very well priced.

Turning to our plans for 2008 I want to begin by saying that even though retailers are extremely cautious they’re actively looking for answers that will boost business especially in the second half of the year. We are responding by employing Lifetime’s great strengths and designer innovation introducing a tremendous number of truly exciting new products that we anticipate will enable us to take market share and drive profitable growth despite a difficult retail economy.

In the first quarter of this year, we’re showing retailers approximately 2,500 new products all of which will be available for shipment this year. This more than doubles the largest number of new introductions we have ever had in any quarter. In 2008 as a whole, leveraging the strengths of our over 100-person staff of designers, artists and engineers, will introduce approximately 4,000 new and redesigned products. In addition to the new dinnerware products I have already mentioned, our most significant initiatives include and expanded Vasconia assortment that has been very well received by several key retailers. As you will recall Vasconia is one of Mexico’s best known brands and presents us with an outstanding platform for reaching US consumers of Latino heritage. We have been showing this line to retailers for several months and placements starts this June and running far ahead of our expectations. One of the things that is exciting about this line is that it does not in any way cannibalize any of our other retail placement.

Next is an amazing line of over 150 products under the EcoWorld brand that are made primarily from plant-based, earth friendly bio plastics. They look and function as well as products made of oil-based plastics and they offer the extra benefit of being biodegradable. Today both retailers and consumers are asking for products that are friendly to our planet and Lifetime is in the forefront of offering such products for the home. This like will be shown for the first time this Sunday in Chicago at the International Home and House Ware Show. We believe the introduction of this line has the potential to be an industry-changing event. Because we’re so sure of success and placement of the line, we’re working on a significant number of additional products under this umbrella brand. It is my expectation that EcoWorld will be the umbrella for over 500 SKUs by next year and the potential exists for several thousand more. Being able to be the first company in our industry to offer products such as this is a testament to our leadership in product development and particularly in material research.

Next are two great lines of trashcans under two of our best consumer brands. These are items that on average retail for well over $100. They are unique products with unique features and have been very well received by the few retailers who have seen them. This is a new category for Lifetime although it’s related to our current pantry ware business and there is great volume potential here. Interestingly with the introduction of these product lines our Kamenstein division is in a sense returning to its roots. In that it was Kamenstein that many decades ago was the first company in the world to market step-on trashcans.

There are also two additional and very unique lines of kitchen ware under our Hoffritz and Pedrini brands. These are unlike anything on the market today and will serve to emphasize our leadership in the category. We will also have a large number of new cutlery offerings at great price points under each of our major cutlery brands as well as a high end line of super quality [Damascus] steel cutlery that is approximately 70% less at retail then comparable products on the market.

In addition to these introductions the capitalize on the growing importance of so-called Black Friday promotions, we’ve developed a large number of items at super price points that we are about to show our retail partners. Retailers are asking for innovation to drive business year round and super based specials to drive extra business in the critical Thanksgiving to Christmas period. Lifetime will have both.

We believe these initiatives along with the many exciting new SKUs that we are introducing under our many established brands will help propel sales in our wholesale division enabling us to attain and organic growth rate of 6% to 10% even in this very weak retail environment. I’d also like to note that our Martha Stewart and Food Network branded lines both of which were launched late last year are doing very well.

In addition I want to give you a quick update on our inventory reduction initiative which is beginning to show the results we targeted. Year end acquisition adjusted inventory levels were down by $17 million, at 10% reduction from year end 2006. We believe there is additional room for lower inventory levels even though we expect sales to increase. We expect to reduce inventory dollars by year end 2008 by an additional $5 million to $10 million. We recognize that the economic climate in 2008 is likely to remain challenging. We think this environment will present us with a myriad of opportunities to take market share from smaller, less well capitalized competitors.

Before turning the call over to Larry, and then to Chris for more detail on our 2007 numbers and 2008 guidance, I’d also like to note we completed our acquisition of a 30% stake in Ekco SAB, Mexico’s largest house wares company in December and that the consolidation of our southern California distribution centers is coming on plan. Larry?

Larry Winoker

Thanks Jeff. The audit of our 2007 consolidated financial statements is not yet completed. Our auditors expect to complete it within the next few days. Therefore my remarks are subject to the completion of their review.

Net sales for the fourth quarter of 2007 were $155.1 million compared to $157.3 million in the 2006 period, a decrease of 1.4%. Net income was $5.4 million or $0.40 per diluted share for 2007 compared to net income of $9.5 million or $0.63 per diluted share in the 2006 period. For our wholesale segment net sales were $127.1 million for the fourth quarter of 2007 and $127.0 for the 2006 period. The Home Décor category improved due to new placement and programs with some major retailers. This increase was offset by lower volume in our other wholesale product categories largely due to the weak retail environment in the fourth quarter of 2007.

In the Direct to Consumer segment net sales were $28 million for the 2007 quarter compared to $30.3 million for 2006. This decrease was primarily due to the lower store traffic partially offset by higher volume in the stores that we are closing under the restructuring plan. Web and catalogue sales were lower versus the comparable quarter last year due to late summer/fall shipments in 2006 and the late holiday orders in 2007 that were shipped in January, 2008.

On a consolidated basis cost of sales for the fourth quarter of 2007 was $91.5 million or 59% of sales compared to $91.5 million or 58.1% of sales in the 2006 period. In the wholesale segment cost of sales was 62.7% of net sales in the 2007 quarterly period compared to 62.5% in the 2006 period. An improvement in cost of sales percentage due to increased emphasis on higher margin business in the Home Décor category was offset by unfavorable product mix in the Table Top category.

In the Direct to Consumer segment cost of sales was 42.1% of sales in the 2007 quarter compared to 39.6% in 2006. The increase as a percentage of sales primarily results from lower margins from the stores to be closed under the restructuring plan.

Distribution expenses were $15.4 million or 9.9% of net sales in the fourth quarter of 2007 compared to $14.8 million or 9.4% of net sales in 2006. In the wholesale segment distribution expenses as a percent of sales increased to 8.8% in 2007 versus 8.1% in 2006. The increased percentage results from lower volume and the start up of a new west coast distribution center beginning in December, 2007.

For the Direct to Consumer segment distribution expenses were 15.2% of sales for the fourth quarter of 2007 compared to 14.7% for 2006. Distribution expenses increased as a percentage of sales as a result of fixed warehouse costs including costs associated with the higher inventory levels during most of the 2007 period.

Total selling, general and administrative expenses for 2007 quarter were $37 million versus $33.8 million in 2006, an increase of 9.5%. Excluding unallocated corporate expenses, SG&A was $31.9 million in 2007 and $30.6 million in 2006. Increases attributable to our new headquarters and SAP enterprise system were partially offset by successful expense reduction efforts in the Direct to Consumer segment.

Unallocated corporate expenses for the 2007 and 2006 quarters were $5.1 million and $3.2 million respectively. This increase is primarily due to a one-time charge related to the termination of a license contract and higher professional expenses. During the fourth quarter of 2007 we recorded a charge of $1.9 million for asset impairment and restructuring charges related to the Direct to Consumer restructuring plan. These charges are primarily for the write off of fixtures in the stores to be closed.

Income from operations for the 2007 quarter was $9.3 million compare to $17.2 million in 2006. In our wholesale segment income from operations was $16.2 million in 2007 and $19.6 million in 2006. In the Direct to Consumer segment income from operations was $0.1 million or $100,000 in 2007 excluding the asset impairment and restructuring expenses versus $800,000 in 2006.

Other income in the 2007 period is primarily due to the gain recognized on the sale of our former headquarters building. Interest expense for the fourth quarter in 2007 was $2.7 million versus $1.9 million in 2006. The increase was attributable to higher bank borrowings outstanding during the current period. This is largely due to the acquisition of Pomerantz and Gorham, capital expenditures and our stock repurchase program partially offset by the proceeds on the sale of the building.

Our income tax rate was 45.5% for the full year 2007 and 49.2% for the fourth quarter compared to 38.5% for both periods in 2006. The increase is attributable principally to stock option expense that is not deductible for income tax purposes and to a lesser degree the affect of the Direct to Consumer segment losses in certain states where the company cannot recognize the tax benefit.

Turning to the balance sheet at year end 2007 availability under our bank credit facility was approximately $73.6 million and at the end of February, 2008 after giving affect to our fourth quarter results liquidity was approximately $50 million. During the fourth quarter the company generated substantial cash flow from operations which is attributable to normal seasonal activity as well as management’s effort to reduce inventory levels. During the current quarter we reduced inventory by $36 million. In addition we generated $8.8 million before income taxes from the sale of the building and used $23 million to acquire a 30% interest in Ekco SAB and $7.6 million to repurchase shares of our common stock. Capital expenditures were approximately $4 million during the fourth quarter of 2007. Now I’ll turn the call over to Chris.

Chris Kasper

I’ll expand on Jeff and Larry’s remarks by giving more detail on the number of Lifetime’s initiatives and their expected impact on our 2008 financials. Similar to my comments on our last earnings call, the focus remains on first, addressing underperforming businesses in particular our Direct to Consumer division. Second aggressively managing our working capital and capital expenditures to improve free cash flow and third maximizing the value of our acquisition.

But first let me review and comment on our 2008 sales and earnings guidance. We are currently projecting 2008 sales to be in the range of $510 million to $525 million. This guidance assumes the following. First our wholesale business representing 80% of our total sales is projected to increase between 6% and 10%. Second our bricks and mortar retail business on a comparable store basis is projected to increase between 2% and 4%. And third, our internet and catalogue business is projected to increase 6% to 10%.

As for EPS, our guidance is for $0.86 to $1.06 per share. But this included a $0.19 BTC restructuring expense. Our operating results are expected to be $1.05 to $1.25 per share. Based on a fully diluted share count of 14.6 million shares including the 2.7 million shares attributable to the 4 ¾ % convertible notes this equates to a full year net income of approximately $13 million to $16 million excluding restructuring expense.

In addition to the projected growth of the wholesale business the other big driver of increased profitability is the restructuring of our DTC division. As Jeff already mentioned we announced in December that we are closing 30 of our 78 factory stores for approximately 40% of our total retail doors. In doing this we are closing every store that was expected to have a negative four-wall contribution. Closing these stores will eliminate approximately $2 million of losses in the DTC division. Further we are taking a hard look at the divisional overhead and have recently announced staff reductions at the division’s York, Pennsylvania facility. Improvements in merchandising and operations should result in further improvement.

In addition opportunities for increased profitability will come in July, 2009 when the current lease for our York distribution center expires. This facility was acquired as part of the [inaudible] acquisition and its inefficient operation has been a drag on both the DTC business as well as the wholesale dinnerware business. Our distribution team is currently working on a plan as part of our company wide distribution strategy. To reiterate Jeff’s message, we expect substantial improvement in the operating results of the division in 2008 and are exploring every option to ensure the division does not continue to be a drag on our earnings in the future.

Let me shift gears and talk about the company’s focus on free cash flow. In 2006 the company had a free cash flow of negative $32 million while in 2007 that number was a positive $9 million. In 2008 we project free cash flow to be between $15 million and $20 million. This dramatic improvement is in large part a result of both a focus on improving our working capital efficiency and the end of a phase of significant infrastructure investment spending.

We are very pleased by the improvement we saw in working capital in 2007 and expect our continued emphasis to generate favorable results in 2008. 2006 changes in working capital and other operating assets and liabilities resulted in a use of $36 million in cash. In 2007 it was a source of $6 million in cash and in 2008 we project it to be a further source of approximately $5 million in cash. The driver of this is expected to be further reductions in inventory levels. In 2007 we ended the year with inventory levels at $144 million which is $12 million less than at year end 2006. Adjusted for acquisitions, inventories declined $17 million. These improvements were the result of three factors. First increased visibility of inventory levels and planning due to our new SAP system. Second having changed the incentive compensation of sales and division management to include inventory levels as a metric and third increased focus by senior management. We believe these initiatives which were implemented mid year last year should continue to generate results in 2008.

As we’ve noted in past conference calls our 2006 and 2007 capital expenditures were exceptionally high due to two large one-time infrastructure investments ; our new SAP system and our new Garden City Showroom, Design Center and Corporate Offices. Both of these investments provide a platform to support substantial growth in our business. 2006 capital expenditures totaled $21 million. In 2007 that number was $19 million and in 2008 we project it to be $7 million which is closer to our historical average. We expect CapEx in future years to be consistent with the 2008 forecast.

The $15 million to $20 million of cash generated by the business will be used first to pay our regular annual dividend of approximately $3 million and then the remainder will go to pay down debt under our revolving credit facility and due out of the company. Further uses may include opportunistic acquisitions, investments or partnerships but only those which we are convinced will yield a substantial return on our investment. To date we have utilized $22.7 million of our $40 million stock repurchase authorization. The company has not repurchased any shares since early December and any future share repurchases will be evaluated carefully. As for corporate development, Jeff already mentioned that we closed on our investment in Ekco last December. For a total purchase price of $23 million, we acquired 30% of the business. Jeff, Ron Shiftan and I were in Mexico City in January for our first Ekco Board Meeting and remained very impressed with the company and excited about its prospects. We continue to believe there is significant growth opportunity for Ekco as they go to market with Lifetime’s products and brands and work toward completing the integration of the [inaudible] acquisition they made in 2007.

Finally we are close to finalizing our conversations with Lifetime’s Canadian distributor about entering into an arrangement to grow the business in that market. We expect to make a formal announcement in the next few weeks.

We are now ready to take questions.

Question-and-Answer Session

Operator

Your first question comes from Derek Leckow - Barrington Research

Derek Leckow - Barrington Research

Just trying to calculate the EPS on an operating basis here and you’ve got a number of items obviously with the gain on the sale, and you’ve got the charge in here, you also mentioned something else on the SG&A line, could you remind me what that was and help me get to an operating EPS number?

Larry Winoker

The SG&A line are you referring to the unallocated corporate expenses?

Derek Leckow - Barrington Research

I think that’s what you mentioned. I think you said it during your prepared remarks, I’m not sure what that was.

Larry Winoker

Yes, I said that the unallocated corporate was up $1.9 million in part due to a one-time charge related to license termination. That was approximately about $1.5 million.

Derek Leckow - Barrington Research

Okay and so when you look at operating EPS what number, what do you guys come up with?

Larry Winoker

Well in our numbers we only remove the sale of the building as well as the restructuring of DTC and Chris the…?

Chris Kasper

$0.61, if you back out the sale of the building and the DTC restructuring you go from a $0.68 on a diluted per share basis to about $0.61.

Derek Leckow - Barrington Research

Okay thank you. And as it relates to the loss from DTC for the year, could you remind me what the net loss was for the full year and as well what it was in ’06?

Larry Winoker

Okay well what we report from segment, last year we reported $8 million we’ll report $8 million plus $2 million for the restructuring charges.

Derek Leckow - Barrington Research

So $10 million from that.

Larry Winoker

Yes.

Derek Leckow - Barrington Research

Okay and then looking at next year, you said you’re going to reduce that by $2 million is that right or did you have a larger improvement in mind for ’08 in your guidance?

Chris Kasper

We certainly had a larger improvement in mind. What we referred to on the call was that the $2 million reduction was a result of just closing the stores which we’ve already announced the closing for. It would be, the other initiatives that we discussed including addressing the distribution, supporting the Direct to Consumer business would all be additive to that $2 million improvement.

Derek Leckow - Barrington Research

So you’re still coming out a loss in your guidance for next year right?

Chris Kasper

That’s correct.

Derek Leckow - Barrington Research

Okay and then just if you can help out with the quarterly breakdown this year for earnings as far as I can tell it looks like you’re going to have a substantial increase in revenue I guess in the first couple of quarters based on some of these new products, but just maybe help me with the breakdown for the earnings progression throughout the year.

Jeffrey Siegel

Well first of all the new products that we’re introducing at the House Wares Show, some were introduced already in the first quarter, and some will be introduced at the House Wares Show next week, they’re not for shipment in the first quarter. Most of them are for shipment late second quarter, beginning third quarter. None of it will be in the first quarter.

Derek Leckow - Barrington Research

Okay so that comparison with the first quarter is probably going to be down then versus last year is that right?

Chris Kasper

Yes, I mean Derek, as you know business is very seasonal. Most of the improvements in the top line in the growth of the wholesale business that Jeff spoke to you earlier, we will be realizing in the third and fourth quarters of 2008. Further to that it’s probably worth noting that there are some additional expenses that we will be incurring in the first and second quarters of 2008 that will be a drag on results in those two quarters. First and foremost the fact that as a result of our restructuring of the distribution in southern California we’re affectively running duplicate distribution centers as we transition from the old DC to the new DC. We will be out of all the old leases before the end of the second quarter of 2008 but there will be a period where we will be running duplicate expenses there. And again, this is a business where Q1 and Q2 we have and expect to continue to lose money in the first and second quarter of the year.

Derek Leckow - Barrington Research

Okay that’s helpful and as far as the third quarter is concerned, that’s where we should see that improvement in the expenses related to the distribution center, is that right?

Chris Kasper

Not only will you see an improvement in expenses, but you will also see the impact of the sales for many of the new products that we have placed and just to reiterate, when we talk about the improvement in distribution expenses, the press release we issued in December of 2007 spoke to a pro forma improvement of approximately $1 million as a result of the realignment of our distribution in California.

Derek Leckow - Barrington Research

Okay thank you and then as far as the cash flow guidance that you gave, it sounds like most of it is coming from the reduction in working capital. It’s a pretty huge drop from 2007 to 2008, and then you said that that was going to be the average we should probably maintain going forward from that point, the $7 million?

Chris Kasper

Well the big improvements are the fact that capital expenditures are coming back to historical levels. And that’s really a very substantial change but also the continued benefit from our focus on working capital but really primarily inventory levels. Those two impacts themselves will have a very substantial impact on free cash flow in 2008. And those are things that we feel very comfortable taking to the bank right now.

Derek Leckow - Barrington Research

Okay, outside of any upside to your guidance that is, right?

Chris Kasper

Right.

Derek Leckow - Barrington Research

Okay thanks let me stop there, thanks a lot. Good luck

Operator

Your next question comes from Bill Chappell - SunTrust Robinson Humphrey

Bill Chappell – SunTrust Robinson Humphrey

I guess first question on the inventory side, help me understand how much of the inventory improvement or if any came from just the clearance sales from the retail or the DTC and then how much you would expect in the first quarter?

Larry Winoker

Let me just comment on the change for the year on inventory with respect to the DTC, it was basically flat. Most of the benefit we’ll get from the structuring going out of business has been seen during the first quarter of ’08. So the reduction came really from on the wholesale side of our business.

Chris Kasper

Bill if you remember, we really kicked off the going out of business and store closing sales sort of at the early part of December so they were just getting ramped up. We will see most of the inventory in those closed stores going out during the first quarter of 2008.

Bill Chappell – SunTrust Robinson Humphrey

Okay so I guess maybe looking at the other way is of your $5 to $10 million expected this year, how much would come from that and how much is just from operating improvements?

Chris Kasper

I would say $3 million to $4 million of inventory will be reduced as a result of the going out of business sales and I think its probably worth saying as well and I know Jeff would agree, that you know our internal targets are much more aggressive than this but we feel like these are good numbers for us to go out with, numbers that we feel confident we can hit. But clearly there’s greater opportunity for us to continue to bring down inventory levels while still growing the business.

Bill Chappell – SunTrust Robinson Humphrey

Okay and then on a tax rate, can you give us a little more clarification in the quarter and then what the expectations are for ’08?

Larry Winoker

Well the quarter is not really indicative of the rate, that was you know a change in an estimate so we took a significant higher rate in the fourth quarter. The 45½ % was had we known what we know now, we would say it was 45½%. With respect to going forward that’s something that we really need to evaluate but it will not, I don’t think it’s going to be 38½% which we had in the past.

Bill Chappell – SunTrust Robinson Humphrey

If I’m just, and bear with me, just kind of doing the bill from ’07 to ’08, say we have an operating net income of about $8 million going to about $13 to $16, $2 million is just for improvement on the DTC, so say $1.5 to $2 million is coming from the equity invested in Ekco and then probably maybe $0.50 million from improved tax rates so that gets me pretty close to what, $12 million right there. And I’m assuming just easier comparisons, operating efficiency gets me the rest of the way, is that the best way to look at it or are there any other big pieces that I’m missing?

Chris Kasper

Yes, I mean in a nutshell, the business when we look at 2008, the organic growth that we get in the business we get a tremendous amount of operating leverage out of. We have, as we’ve spoke to, made a number of investments and built up the SG&A in the company to support a large business platform. When we look to 2008 we don’t look to substantially grow SG&A. We believe with the infrastructure we have will support that higher top line and the elements that you spoke to plus the increase in organic growth gets you to that number.

Bill Chappell – SunTrust Robinson Humphrey

Okay great. And finally just on the new EcoWorld products is that something where you’ve already gotten some orders or this is going to be brand new at the House Wares Show next week and then what’s the target market. Is this like a whole foods type customer or is it a high end or would it even go to the mass?

Jeffrey Siegel

This is every end. All this is, is really a taking what we normally do, which is use oil-based plastics like polypropylene, polyethylene to make gadgets. With the material research that we’ve done, we found a material that we can mold very similarly to oil-based plastics with a slight change in equipment, slight change in molds, we’ve already done test molds. We’ve been working on this for a long time. We found we can produce the same exact quality product but made out of basically a bio fuel, not an oil-based fuel which has many, many advantages. Both environmental advantages, both ways, in producing the product as well as it being biodegradable at the end of the life of the product. We have not really shown it to anybody. It’s going to be shown for the first time on Sunday but we have had discussions with two retailers that are very different levels because we’re going to have several lines of this and they’re more than enthusiastic to say the least. This is going to cover every level. It’s not going to be one level.

Bill Chappell – SunTrust Robinson Humphrey

Got it, all right, thanks a lot.

Operator

Your next question comes from Alvin Concepcion - Citigroup Global Markets

Alvin Concepcion - Citigroup Global Markets

Would you be able to give us some color on what organic sales were in the quarter?

Larry Winoker

Well our wholesale sales were substantially unchanged quarter over quarter and so I would say it was relatively flat. We didn’t do any acquisitions.

Jeffrey Siegel

Organic was flat in the quarter, approximately flat in the quarter.

Alvin Concepcion - Citigroup Global Markets

Okay great and it sounds like you’re planning on accelerating organic sales growth in ’08, much of that will be driven by market share gains it sounds like, but is there an expectation that industry sales growth will also improve?

Jeffrey Siegel

I expect modest improvement in the industry sales. That house wares industry in general doesn’t suffer too much in a recession but right now we’re facing a consumer who on many levels is very stressed by the costs of living. So it’s hard to say, it really is hard to say.

Chris Kasper

Alvin I think the way I would characterize it is to say that given what we know about 2008 right now and kind of what the general tenure is of the market, that’s what we baked into our earnings guidance for the year. It doesn’t anticipate a dramatic depression but it also doesn’t factor into significant growth in the industry either. So I think it’s a conservative approach that takes into account the realities of what we see today.

Alvin Concepcion - Citigroup Global Markets

Okay and then if you have a comment on your inventory levels at retail, are you pretty comfortable with those levels?

Larry Winoker

At retail yes, retail inventory levels right now are on the low side.

Alvin Concepcion - Citigroup Global Markets

And then if you have any comments on pricing pressure in Asia and commodities?

Jeffrey Siegel

Yes, it’s been a constant pressure for the last year, I think we’ve done a great job. It’s taken a tremendous amount of effort and so it takes a lot of resources in order to redesign products and move things around and move factories and we’ve done a tremendous amount of that. We’ve moved thousands and thousands of products to lower cost facilities in order to counter act the increases in raw materials and the increases that are forced by social issues within the Orient. I think we’ve done a really good job overall. We don’t expect margins to deteriorate. But it’s been a tremendous amount of redesign effort and efforts in moving products to different factories. Changing materials where it’s appropriate. It’s been an all encompassing effort by many, many people within the company.

Alvin Concepcion - Citigroup Global Markets

Thank you.

Operator

Your next question comes from Gary Giblen - Goldsmith & Harris

Gary Giblen - Goldsmith & Harris

Just a follow-up on some of the questions on Ekco. Are you suggesting that the cost of goods is less because it’s not petroleum based?

Jeffrey Siegel

No but it won’t follow the ups and downs of the price of oil necessarily. The material is in some ways, on a per pound basis, the material is about the same price as oil-based plastics that it’s replacing. It’s a denser material therefore you can use a little bit less of it and you have to adjust some molds to give you, to end up with the same product. But there are some additional costs in producing it. The material is produced in the United States and we’re shipping it to China so the cost of shipping from the United States to China is very, very low because those containers go back empty. We expect that the products overall and we’ve told the retailers that we’ve talked to would be somewhere around 10% to 15% higher than comparable products that are made from oil-based plastics. There is no resistance to that.

Gary Giblen - Goldsmith & Harris

Okay so your cost of goods is about that much higher too?

Jeffrey Siegel

Yes it is. We’re certainly not going to make extra profit on it but we certainly aren’t going to work on a lower margin either.

Gary Giblen - Goldsmith & Harris

Okay and you think that the consumer even in a recessionary type environment won’t push back on it being more?

Jeffrey Siegel

No, because we’re mainly doing this in the kitchen ware business and we don’t find the resistance for that. If we move an item from $1.79 to $1.89 or from $2.49 to $2.69, it’s not an area that you get resistance in.

Gary Giblen - Goldsmith & Harris

Okay and then in terms of chain customer orders, have they stabilized and are you getting handful led orders or is it just less replenishment?

Jeffrey Siegel

No they’re somewhat stabilized. As we’ve said we expect our increases really to come towards the second half of the year, probably starting in the second quarter, but really the second half of the year we should really focus our business because that’s the way we look at it. It’s the size of the prize. If you make a lot of efforts in the first two quarters and get nothing for it, in the second half of the year you make the efforts you get a tremendous amount of return. And that’s our focus.

Gary Giblen - Goldsmith & Harris

Okay and I know that private label is not a, hasn’t been a factor competition much for you in the past, but is it increasing versus perhaps other players in the market. Is it becoming a viper gated market where you either have strong brand and design like yourself or more private label and then [inaudible]?

Jeffrey Siegel

There’s two parts to private label. The part that we really do well with is when a retailer wants to have a private label so they can stand out and not just has the lowest price in town. We’re great at that and they know we’re great at it and they come to us. That’s how we got the Kohl’s, the Food Network line, the Kohl’s and the Martha Stewart line at Macy’s. If a retailer wants a private label to have the opening price point low end line, we don’t do it. It’s not our strength. We don’t bring anything to the table for the retailer and we don’t want that business. We never did want it and that’ll continue. So when retailers want a private label that is not opening price point low end, they look to us in our fields and that’s what we do.

Gary Giblen - Goldsmith & Harris

Okay great and then finally, it looks like Macy’s as a whole is doing poorly, so does that translate at all to, I mean you said Martha Stewart is doing very well so.

Jeffrey Siegel

It’s doing well. The Martha Stewart line, I can’t speak for the whole line, you’d have to ask the people at Macy’s about the whole line, but the parts that we’re supplying which is mostly kitchen ware and same bake ware items are doing very well.

Gary Giblen - Goldsmith & Harris

Okay well do you have any programs like that proprietary brands that might be, might enter with other chains?

Jeffrey Siegel

We do, we’re working on things right now and we can’t disclose them but we are. There is one significant line that we will be doing this year in one part of our business but it’s not something that we can disclose.

Gary Giblen - Goldsmith & Harris

Understood, okay thanks, good luck in the current quarter.

Operator

Your next question comes from [Adam Deland] – Moorehead Capital

[Adam Deland] – Moorehead Capital

Just a couple of questions for you, I was wondering if you could tell me given the operating leverage in the business what the breakeven point is regarding sales.

Chris Kasper

For 2008?

[Adam Deland] – Moorehead Capital

Just generally, I mean you had a you said a 1.5% decline in sales and something like a 40% or 50% decline in net income, I was just wondering how far down does that go? At what point do you start losing money for the year on sales?

Chris Kasper

Yes, I don’t know that we give specific breakeven point I mean, the reality is when you look at all the moving pieces, that’s not something that I think we’ve given commentary on.

[Adam Deland] – Moorehead Capital

Okay and what kind of visibility do you think you have in sales and earnings for 2008 given that everybody was a little surprised in 2007 across the board but it seems to be a bigger surprise for you guys than a lot of people. Do you have a lot of confidence in your guidance for the year?

Jeffrey Siegel

We’re confident, we’ve gone over it many times. We’ve scrubbed the numbers many times and we’re very comfortable with what we’ve put out. We expect the environment to be a very, very difficult environment and that’s baked into our numbers.

[Adam Deland] – Moorehead Capital

Okay, and do you in those, do you see, how soon do you see the roll out of Eco products being sold in the US and Lifetime products being sold in Mexico?

Jeffrey Siegel

The Eco products we’re talking about is, there’s a similarity in the name but it’s not the same. This is not E-K-C-O. The EcoWorld that we’re talking about in the United States is E-C-O World. It has nothing to do with the Mexican brand.

[Adam Deland] – Moorehead Capital

Right, but I mean the Mexican brand of products specifically, are they already being sold?

Jeffrey Siegel

Yes, the Vasconia products we will begin shipping in the second quarter. Our major shipments are really the third and fourth quarter but we will begin shipping it in the second quarter, possibly the end of the first but most likely the second quarter and the Mexican company has already started aggressively purchasing lines direct through out facilities in the Orient.

[Adam Deland] – Moorehead Capital

Okay, excellent and that’s going well?

Jeffrey Siegel

That’s going very well.

Chris Kasper

But just to clarify Ekco SAB buying and selling product in Mexico does not directly flow through the sales and cost of sales line on our P&L; it only impacts our income statement through the equity method accounting. Okay so Ekco has been doing very well. They’ve been selling product at the end of last year and this year, from our brand and with products that we have licensed to them, but they buy and sell those products on their own P&L of which at the end of the year we’ll get our 30% corresponding to our equity ownership.

[Adam Deland] – Moorehead Capital

Okay, so the sales aren’t consolidated at all.

Chris Kasper

That’s correct.

[Adam Deland] – Moorehead Capital

Just the earnings at the end of the year?

Jeffrey Siegel

That’s correct.

[Adam Deland] – Moorehead Capital

Okay. When you, going forward you have the plan to acquire another 30% of the company at that point would they be consolidated?

Chris Kasper

Well the agreement that we entered into with Ekco does give Lifetime certain rights in regard to exercising a call option on the shares of the primary shareholders who own the vast majority of the company. We would, those rights begin in a time period starting two years from the signing of the agreement and at that point we will make a determination about whether we want to acquire the remainder of the business. If we did sell and took over 51% ownership then we would be consolidating their financials into ours. Until that time or until that event occurs we will just be accounting for the investment under the equity method.

[Adam Deland] – Moorehead Capital

Okay and then just one last quick question on capital structure, with the stock where it is do you think it might not make sense to suspend the dividend and just do further share repurchases?

Chris Kasper

I don’t think that’s something we anticipate at this point. The dividend being what it is about $3 million I think from what we’ve heard, that’s not something that would make sense for us to consider at this point.

[Adam Deland] – Moorehead Capital

Okay, that’s everything I’ve got, thank you so much.

Operator

Your next question comes from Kathleen Reed - Stanford Group Co.

Kathleen Reed - Stanford Group Co.

Can you talk a little bit about when you were talking about all of the improvements and changes you’ve made for your Direct to Consumer division, your stores, I think you did make a statement though that if this division doesn’t continue to improve how you think you will just close it down. Do you have a timeline that you can share for that or is it the whole year, half a year, just something else that you can, that you’ll judge it by.

Jeffrey Siegel

Because this is a division that we’ve had a problem with we watch it continually. It’s not something, we don’t have a specific point in time that we’re going to do an analysis right now. We are watching this on a continual basis. The emphasis is going to continue to shift towards the internet and catalogue part of the business. We believe that has tremendous potential and we will continue to shift in that direction. As you know, we’ve closed a substantial number of the stores and we will watch the rest of the stores. If the division does not perform it’s not going to be part of our future at least the brick and mortar part.

Kathleen Reed - Stanford Group Co.

Okay and then also just back to share repurchase it seems that other than reinvesting in your business and paying down debt, it was kind of a very and then it was even after acquisition, it was kind of a very distant number four. Can you talk a little bit about your thought process there, why again just with the depressed stock why it would kind of be a distant number four as opposed to maybe moving up higher than acquisition opportunities?

Chris Kasper

Well I think the way that we look at is there’s, first it’s paying down debt. Okay and that’s the no-brainer because we carry very little cash in the balance sheet and it reduces the, goes right to the reduction in the revolving credit facility. Second are the opportunistic aspects of the business in terms of acquisitions or partnerships or investments and the like. Those are really unplanned but come along and we look for those which can give us a substantial return. When it comes to repurchasing the stock, that’s something that we will continue to evaluate. As you know we have been under a black out period since early December under our trading rules. And we will emerge from that a few days from today and then we and the Board will make a determination as to what the most prudent course of action is in terms of repurchasing shares based on what the share price is, based on what our expectations are about the future, based on the timing of the free cash flow generation that we discussed earlier. All those factors go into the mix when we evaluate what’s the prudent thing to do with our shareholders’ capital.

Kathleen Reed - Stanford Group Co.

But you have a $40 million authorization and if I’m right you spent $22.7 million last year.

Chris Kasper

Correct.

Kathleen Reed - Stanford Group Co.

Okay and then just lastly, over kind of a bigger picture question, retailers like in January reported same stores sales I believe below expectations, some of the discounters did better in February, just and again this is a questions that’s already been asked but just given that in back part of your year we saw some earnings revisions to the downside, how confident or I guess how conservative are your numbers for the full year given that you don’t have a significant order backlog right now and we’re seeing mixed results in retail and more negative news in the press everyday.

Jeffrey Siegel

We agree that the news is certainly negative and we aren’t anticipating a strong spring but, and neither is anyone else in our industry but then we’re looking towards the fall. We look at the placement we have, some of our business as I said in the beginning of my prepared remarks, some of our businesses performed well last year and those businesses are continuing to perform well. You really have to break our business down into parts. They would have performed a lot better but the ones that did well, for instance the kitchen ware division, the cutlery division for last year, cutting boards, the home décor division, if the economy, they did well. If we were to measure them separate from the rest of our business taking everything [inaudible] they really did well. They would have done a lot better if the economy was better. Now we had two parts of our business that performed very poorly. They both lost a lot of money. One was DTC and the other was the dinner ware division. If those two businesses were just flat, we would have had an excellent year. We’re not in an industry that suffers that much as the economy turns down but there is a little bit of suffering and we’re anticipating that it will be a bad year. It’s baked into our numbers that it will be a bad year. We just look at the additional placement we have and the new offerings that we have that we know are well received. The ones that have been seen are well received already and the ones that we, like the EcoWorld which we’re 100% sure will be well received because of a few very short conversations that, I can talk about more at the next conference call, but I can’t talk about it now. So we put that altogether to come up with our estimates as well as getting things from sales. We’re comfortable with the numbers. We’re very comfortable. That’s all I can say.

Kathleen Reed - Stanford Group Co.

Okay, that’s very helpful thank you.

Operator

Your next question comes from [John Cardy] – Principal Global Investors

[John Cardy] – Principal Global Investors

I have three questions for you, first off how much of the Direct to Consumer business sales comes from the catalogue and the internet part of the business?

Larry Winoker

For a full year basis, about one-third comes from internet and catalogue.

[John Cardy] – Principal Global Investors

Okay second you mentioned that the stores that you closed lost I guess about $2 million, you’ve also done some overhead reductions I guess in the field et cetera, how much more in terms of cost reduction was that and how much more maybe yet to come so that is there more upside to reducing expenses by the $2 million that you’re talking about or the $2 million in losses?

Chris Kasper

There are a number of areas which we anticipate will improve the performance of that position. As you point out there are opportunities for cost reduction both within the divisional overhead and within the distribution center but there are also opportunities for us to improve the margin and top line in that business which can also have a very substantial impact on the profitability. The team that is in there now has been there for over a year and many of the changes which they implemented last year will be having a full year affect in 2008 and so we anticipate that would be an added benefit to the performance in that division in ’08.

[John Cardy] – Principal Global Investors

Did the stores that you are keeping open, the 46 stores, did most of those stores comp positively last year? I noticed that you were saying you’re looking for positive same store sales from the stores this year.

Larry Winoker

Yes, they were down about $1 million, flat to slightly down on comp stores for the full year.

[John Cardy] – Principal Global Investors

Okay and then my last question had to do with respect to the DC that I guess the lease runs out in July of next year in Pennsylvania for the DTC segment, would that involve consolidating those operations into an existing DC or would you have to go out and find yourself another one and if so would you be looking to acquire one that was smaller than the existing facility but more efficient?

Jeffrey Siegel

It’s much more complex than that. The DC we acquired is old fashioned and very, very high cost and it has severely impacted both the DTC divisions profitability and the dinner ware and glass ware divisions profitability. So we’re looking at two parts to improvement in those businesses. One part is just to improve the overall business and the second part is to improve the distribution for those businesses. The distribution for those businesses unfortunately won’t be substantially improved this year. There will be improvements this year and we’re getting the improvements by reducing the inventory levels to make the current warehouse more efficient which is very important to us. But the real improvement will come next year and it might be a new facility. We’re doing a very thorough analysis. It might be a consolidation into an existing facility. It might be an expansion of an existing facility. There’s many possibilities.

Chris Kasper

Just to build on Jeff’s comment, when we talk about inefficiencies, one thing to just put a little color on it, when we talk the York distribution center, its actually two separate buildings that are across the street from each other. So there is a structural inefficiency there. Our York distribution, distribution team has been working very hard on this and doing a good job but there are structural issues which we can address when the lease runs out. Then there are other operational issues that as Jeff mentioned we’re going to be able to deal with in this current year.

Jeffrey Siegel

We might remain in York with a new facility. We might find a way to improve one of the current facilities and make it very efficient. It has old fashioned systems in it. We need to improve the efficiency of the facility to get it down to the percentage expense that the rest of our distribution is for the rest of the company. That would have a dramatic improvement on both DTC and the dinner ware, glass ware divisions.

[John Cardy] – Principal Global Investors

But that would be in place by the time that the lease runs out next year?

Chris Kasper

Absolutely.

[John Cardy] – Principal Global Investors

Okay, thank you gentlemen.

Operator

There are no questions at this time. I would now like to turn it back over to management for closing remarks.

Jeffrey Siegel

Thanks again for joining us this morning. As I noted we are aggressively focusing on innovative and exciting products as a key driver of profitable growth. The evidence of our initiatives will be on display at the International House Wares Association Trade Show in Chicago starting this Sunday. If any of you are in Chicago on Sunday, Monday or Tuesday, please stop by and see us. Thank you.

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Source: Lifetime Brands Inc., Q4 2007 Earnings Call Transcript
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