Lifetime Brands, Inc. (LCUT) CEO Robert Kay on Q2 2018 Results - Earnings Call Transcript

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About: Lifetime Brands, Inc. (LCUT)
by: SA Transcripts

Lifetime Brands, Inc. (NASDAQ:LCUT) Q2 2018 Earnings Conference Call August 6, 2018 11:00 AM ET

Executives

Harriet Fried - SVP, Lippert/Heilshorn & Associates

Jeffrey Siegel - Executive Chairman

Robert Kay - Chief Executive Officer

Laurence Winoker - Senior Vice President Finance, Treasurer and Chief Financial Officer

Analysts

Frank Camma - Sidoti & Company

Operator

Good morning, everyone and thank you for joining Lifetime Brands Call. Currently at this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] Also, as a reminder, this conference call is being recorded.

I would now like to turn the call over to Harriet Fried of LHA. Please go ahead.

Harriet Fried

Good morning, everyone, and thank you for joining Lifetime Brands call. With us today from management are Jeff Siegel, Executive Chairman; Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer.

Before we begin, I'll read the Safe Harbor statements under the Private Securities Litigation Reform Act of 1995. The statements regarding the company and its consolidated subsidiaries 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 the Company's ability to comply with the requirements of its credit agreements; 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; the possibility of impairments to company’s goodwill, changes in U.S. or foreign tax law and policy; changes in economic conditions; which could affect customer payment practices or consumer spending; the impact of changes in general economic conditions on the company’s customers; expenses and other challenges relating to the integration of the Filament brands business and future acquisitions; changes in demand for the company's products or in the company’s management team; the significant influence of the company's largest stockholder; fluctuations in foreign exchange rates; changes in U.S. trade policy or trade policies of nations in which Lifetime or its suppliers do business, shortages of and price volatility for certain commodities; significant changes in the competitive environment and the effective competition on the company's markets including the company’s pricing policies; financing sources and an appropriate level of debt and other risks detailed in Lifetime's filings with the SEC.

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’d like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Jeffrey Siegel

Thank you Harriet. Good morning, everyone and thank you for joining the call today. As we noted in this morning’s press release, the integration of Filament Brands, which we acquired in March has been proceeding very smoothly. In fact, we are ahead of schedule in both our implementation timetable and the core savings we are realizing.

We continue to see the many value-creation opportunities we’ve previously described from combining Lifetime and Filament. Over time, these include gaining access to each other’s customers worldwide offering a broader product range, expanding our innovation capabilities, and realizing significant supply chain and distribution synergies.

We are excited about the path we’ve embarked on and what it will mean for our customers, shareholders and employees in the coming years.

As I said in the past, comparing results with prior quarters can be misleading as there is variability in mix and programs from year-to-year. In 2018, we will be rolling out most of our new programs and promotions in the second half which will have a positive impact on our third and fourth quarter performance.

The retail world is rapidly changing and we believe we are well positioned to thrive in this changing world. We have the best stable of consumer brands in the industry, which has enabled us to receive the largest single order in Lifetime’s 73 year history, which we will be shipping this fall. This order represents the customer’s first order of this kind for any Tabletop company.

I’ll now turn the call over to Rob to update you on our activities during the quarter and our financial outlook for 2018. Rob?

Robert Kay

Thanks, Jeff. As you can imagine, the last few months have been busy ones as we took steps to create a strong and unified company. Despite the challenging retail environment, they’ve also been productive ones. Our team has been focused on two priorities, operational integration and the identification and implementation of cost savings, which I will discuss in a moment.

We’ve been combining the Lifetime and Filament organizations as rapidly and efficiently as possible including reorganizing sales and marketing, streamlining our supply chains and eliminating overlapping G&A. This has been our number one priority as we are focused on a seamless integration with no disruption to our retail customers and consumers.

With only four months passed, since we closed on the transaction, that’s transformed Lifetime Brands, we are pleased to report that we are ahead of plan regarding both the amount of identified cost savings and the timing of the implementation of those savings. We are now on track to achieve $10 million annually with the full amount to be realized in 2019.

This represents an increase of 20%, as compared with our original targets that we disclosed upon consummation of the transaction. Of note, this year, in 2018, we expect to realize more than $2 million of these efficiencies.

As we shift from achieving our primary goals of integration and realization of cost savings, we are working towards a repositioning of our product portfolio to improve our profitability and laid the ground work for the many new opportunities that we believe are larger, more diversified business can take advantage of.

Additionally, we embarked on establishing the appropriate processes and business model to both fully take advantage of growth opportunities in our existing markets and pursue enhanced growth opportunities within our sector.

These efforts are focused on internal opportunities including further penetration of the commercial and international markets with a focus on improving the profitable growth opportunities that are within our existing channels and looking where we can expand our footprint to allow for enhanced margins and top-line growth.

Additionally, our team has begun work on optimizing the overall structure and performance of our existing business. This will yield incremental synergies above the $10 million that I just discussed. Further, while 2018 is and will continue to show a meaningful improvement in the profitability of our European operations, we are working on a plan to accelerate and improve the growth of this strategically valuable business unit, which will also become the hub of Lifetime Brands’ international operations.

An example of some of the already implemented changes in our European operations is the addition of two established branded lines to our product offerings, both of which are higher margin and growing. Together these two lines will add approximately $4 million of annual revenues and replace low margin offerings that we are eliminating.

That brings me to the second quarter performance and our outlook for the rest of the year. The second quarter remained challenging for our business and while our market shares have remained steady to slightly up, our shipments were soft.

Looking at our end-markets, we have experienced a mix bag. We continue to see growth in certain of our end-markets including strong growth in e-commerce and in some channels of brick and mortar retailers. At the same time, the trends in certain other channels of brick and mortar retailers have been mixed with some channels experiencing declines.

However, considering the seasonality in our business and the concurrent timing of the many programs and promotions we are launching in the second half of 2018, we are reaffirming the outlook for the full year that we provided in May.

That guidance was based on both organic growth and on top and bottom-line synergies created by the combined Lifetime Brands and we remain on track to achieve these results.

I’ll now turn the call over to Larry to provide more details on our second quarter financial results. Larry?

Laurence Winoker

Thanks, Rob. Net sales in the 2018 quarter increased $31.3 million to $148.7 million. The increase reflects primarily the acquisition of Filament which added $29.3 million. For U.S. wholesale, organic sales were about even with the 2017 quarter. This reflects a decline in Kitchenware sales reflecting our decision to not pursue low-margin business that was done in 2017 and the planned timing of Pantryware sales.

These declines were offset by the success of built product launches and houseware Tabletop sales. For international, sales decreased by $300,000 on a reported basis and $1.5 million in constant U.S. dollars. The decrease in constant currency reflects the closing of the Netherlands operations in 2017, which were at low margin and some weakness at brick and mortar retailers. This is partially offset by an increase for e-commerce sales.

Of note, while international sales declined the impact on its contribution margin was offset by higher gross margin percentage and the benefit of the consolidation of the Netherlands business into the UK. Gross margin was 35% in the 2018 quarter or 35.7% excluding the step-up of Filament’s inventory acquired in the acquisition. This compares to 36.5% in 2017.

U.S. wholesale gross margin was 34.2% in the 2018 period versus 36.5% last year reflecting strategic promotions and the sale of excess inventory in the tableware products category. For international, gross margin improved 220 basis points to 33.3% from favorable customer and product mix. Also in the prior year, there was a high level of inventory reserve established.

Distribution expenses as a percentage of sales shipped from our warehouses excluding a $200,000 charge associated with a West Coast distribution center relocation and Filament expenses were 12% in the 2018 period versus 11.8% in 2017.

For the U.S., excluding the relocation and Filament, distribution expense percent improved by 10 basis points to 10.7% reflecting fewer prepaid freight sales and improved labor efficiency, partially offset by lower shipments from company-managed warehouses. International expenses increased on higher labor and facility expense, as well as higher freight expense on increased sales from the UK into Continental Europe.

SG&A expenses were $40 million in the second quarter of 2018 versus $33.1 million in the 2017 period. U.S. wholesale expenses increased by $8.3 million from the inclusion of Filament including $2.6 million of purchase accounting amortization and $900,000 from the acquisition of Fitz and Floyd.

International SG&A expenses decreased by $3.4 million, of which approximately $3.6 million is a change in the mark-to-market valuation of foreign currency contracts. In constant dollars, SG&A declined $600,000 offset by strengthening pound sterling.

Unallocated corporate expenses increased by $2.3 million from Filament acquisition expenses and higher professional fees and insurance expense. Interest expense was $4.7 million in the 2018 quarter as compared to $1 million in 2017 reflecting the financing obtained to acquire Filament.

The effective tax rate for the 2018 quarter was 22.1%, compared to 39.9% last year. This lower effective tax rate reflects the reduced U.S. corporate statutory income tax rate, partially offset by non-deductible expenses. We continue to generate healthy cash flow.

Adjusted EBITDA was $69.2 million for the twelve months ended June 30, 2018 and as of quarter end, liquidity under the revolving credit agreement including cash at $6 million was approximately $90 million.

As you know, the U.S. government has imposed tariffs on a large range of products sourced from China. While a minority of our products are currently included, it is unknown exactly what will be implemented in the duration of such tariffs.

However, we are proactively taking steps to mitigate any financial impact such tariffs could have on our business. Since Lifetime is a largest customer for most of our suppliers, we believe that our vendor partners will work with us to attempt to minimize the effects of any increased tariffs.

In fact, we have already begun discussions to do so with many suppliers and we will be working with our retail customers to adjust pricing wherever necessary, as well as working towards getting our warehouses bonded in order to avoid paying any duty until we ship merchandize to our customers. We are closely monitoring the situation and we’ll take actions as necessary.

This concludes our prepared comments. Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Frank Camma of Sidoti. Your question please.

Frank Camma

Hey, good morning guys. Thanks for taking the call.

Laurence Winoker

Sure, good morning.

Frank Camma

I want to start on something that Larry said, just – so I don’t forget that – guess by that. What is bonded main in the sense of Chinese factories and how does that help on the tariffs side?

Laurence Winoker

So, if you look at, what’s called in a, free trade zone, when you bring goods in, you don’t have to pay the duty until you actually sell it to your retail customer. So, it’s really just – it’s cash flow. That’s when you – some companies do where they bring goods into, let’s say, the U.S. and then ship them out of the U.S., they avoid paying the duty altogether rather than paying it and try to obtain a refund.

Frank Camma

All right.

Robert Kay

So, Frank, we are just getting our warehouses certified correctly, so that we do not have to pay any tariffs until we actually ship them out of those warehouses to the customer.

Frank Camma

I got it. Okay, so you are preparing for it. The other question, just staying on the current financials, the gross margin decline was obviously a lot more than I was looking for, but then, there was the step-up you called out, Larry.

Laurence Winoker

Right.

Frank Camma

So, that would have been 35.7%, is that correct?

Laurence Winoker

Yes, consolidated, yes.

Frank Camma

Consolidated. So, how much more of that step-up – like how many more quarters will it take to burn that all?

Laurence Winoker

Yes, there is only – there is about $300,000 left and it should all be amortized in Q3, $1.5 million in total, we’ve burned off about $1.2 million.

Frank Camma

Okay, so that’s – so the bulk of it went through Q2, okay.

Laurence Winoker

Yes.

Frank Camma

Okay, all right. Now, I know, obviously your product mix changes quarter-to-quarter. Was there anything in Q2 though that would have weighed perhaps on the gross margin as far as product mix or channel-specific? Is there any color you can give us on that?

Laurence Winoker

Yes, I think, as you said, there is – it’s different parts of our business in terms of the mix in this quarter. We had more sales of our lower margin part of our tableware business, which impacted the overall mix in the particular quarter that wouldn’t hold for the whole year.

Frank Camma

Okay. Do you say the large order? Maybe I misunderstood this or misheard this, but the large order that’s coming in Q3 was, is that also in Tabletop like all else would?

Robert Kay

It’s a combination of dinnerware, of glassware and metals.

Frank Camma

So it’s like I hear…

Robert Kay

It’s tableware.

Frank Camma

It’s like a set that you are selling then obviously. So, does that mean that that will weigh on your gross margin in Q3?

Laurence Winoker

It will have an impact on our gross margin in Q3. The gross margin dollars will be varied.

Frank Camma

Half we’ll be getting, right, not necessarily the margin. But Q3 is sometime – I mean, and I guess it bounces around a lot season-to-season and you’ll get a benefit from – so if you look at it sequentially, you will get a benefit from – you’ll never longer have to step-up. I am just trying to figure out like, given that you are reaffirming guidance, you obviously, you think the second half of the year is not going to be – the gross margin is not going to be as bad as the reported Q2 number. That’s a fair statement, right?

Laurence Winoker

Yes, so, so, yes. We are – what we are expecting to occur is consistent with when we issued guidance. So the mix is consistent with when we issued guidance.

Frank Camma

Okay, okay. In the growth in Retail Direct, is that purely because of the Filament numbers flowing through the Retail Direct?

Laurence Winoker

Yes.

Frank Camma

Okay. And are there any new programs at either in Filament or legacy Lifetime that could get the Retail Direct numbers growing organically, like, I know that’s one thing that Filament work done in the past that you are going on, on those programs now?

Robert Kay

We are very actively working on that – the whole e-commerce area, so not just direct.

Frank Camma

Right.

Robert Kay

Through pure play players and through our omni-channel partners. So that’s a big growth area for us. Some of those are seeds and some of those will have more nearer term.

Frank Camma

Can you talk about the growth in e-commerce saw in the quarter? Sometimes you call that out. I don’t know, if you call that out this time.

Jeffrey Siegel

I don’t think we have.

Robert Kay

That Larry can look up.

Laurence Winoker

Yes, the one thing I’ll add to that, the growth in e-commerce is coming both from pure play and from the brick and mortar.

Frank Camma

Right.

Laurence Winoker

In fact, one of our key brands, we were told last week at one of our largest customers – a brick and mortar customer and one of our key brands, more than 50% of the sales is now online at that customer and that’s a brick and mortar customer.

Frank Camma

I believe, when I was in Bed Bath & Beyond trying to order one of your products and they directed me to the online system which was kind of interesting in the store and then shipped it to my house. So I assume that counts as an online order for them when they do that, so.

Jeffrey Siegel

It does.

Robert Kay

Absolutely and that’s rapidly growing as – if you look at – as Jeff has pointed out in the past of Urban Store at one point was 85% of our company and today it’s 5% of our company. But one major department store customer of ours is growing very nicely online in our business growing dramatically online. While I was, Frank in answering to your question, Larry did the quick math and looked it out, 18% for the quarter of – was e-commerce.

Jeffrey Siegel

Yes, and that’s apples-to-apples for the acquisition of Filament.

Frank Camma

Okay, that’s percentage of sales? Is that?

Robert Kay

Yes.

Frank Camma

Okay.

Robert Kay

That’s the e-commerce growth

Jeffrey Siegel

Yes.

Frank Camma

Oh, that’s the growth rate, growth rate. Okay, okay.

Robert Kay

No, no, that’s a percentage of sales.

Frank Camma

That is growth?

Jeffrey Siegel

Growth, yes, so, e-commerce grew by approximately 18% apples-to-apples, no organic.

Frank Camma

Yes, organic. Okay, all right. Good, good. Okay, and I guess the last question. You kind of touched on, but just sort of give us an update on given the tariffs, like what’s going on with underlying – it’s kind of a two-part question. First, the underlying input costs. So the steel cost, the resins, et cetera that go into these things and like what you are seeing there in China?

Robert Kay

The resins and metals are pretty much flat from the beginning of the year. They did go on for a while, but they came back down, so they are pretty much flat. And the U.S. dollar has gained strength against the RMB.

Frank Camma

All right. So that’s helping you on that supply cost, right? I mean, to some extent. Do you normally – you normally, some of these contracts of dollars, some are in RMB though, right or is it a mix?

Laurence Winoker

They are all dollars.

Jeffrey Siegel

They are in dollars, but, yes, yes.

Frank Camma

Like you can negotiate if it drops or how does that works?

Laurence Winoker

Yes. And with the dollar strengthening versus RMB, our cost of goods declines.

Frank Camma

Okay. Got it. I guess, the last question for me Bob, is, just the truck at – just a general trend in freight for my consumer product companies are pretty steep, everybody has kind of experienced that. I haven’t you heard you call out any like problems there. Can you talk about that a little bit?

Laurence Winoker

Ocean freight, you are talking about or is it just something?

Frank Camma

More trucking domestic, just getting the product or is it because you ship the direct to the warehouse of the Walmarts of the world is that why you don’t get that type of creep in your distribution?

Robert Kay

So, w have a fair amount of sales that we sell that is DI picked up in China.

Frank Camma

Yes, right.

Robert Kay

That has no impact on us and then, if you look at we ship out of our warehouses in the U.S., most of that is picked up at our warehouses by the customer. So FOB warehouse.

Frank Camma

Right.

Robert Kay

Therefore, it wouldn’t impact us as well. So it’s why aren’t talking about it as it doesn’t really have an impact on us.

Frank Camma

Doesn’t have an impact, okay. Great. Thanks guys.

Operator

Thank you. [Operator Instructions] I show no further questions in the queue. At this time, I’d like to turn the call over to CEO, Rob Kay for closing remarks. Please go ahead.

A - Robert Kay

Okay, thanks again for joining us today. As you’ve heard, we are taking many steps to build a bigger, better and more profitable Lifetime Brands. We are working well with the team and are committed to realizing synergies and delivering strong growth and shareholder value. We look forward to giving you an update on our progress in our Q3 call in November. Thanks and good bye.

Operator

Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.