Lifetime Brands, Inc.
Q2 2016 Earnings Call Transcript

Published: 9 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Lifetime Brands Q2 2016 Earnings Conference Call. 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] As a reminder today’s conference call is being recorded. I would now like to turn the conference over to Ms. Harriet Fried of LHA. Please go ahead.

[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 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, 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 markets, the impact of foreign exchange fluctuations 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:]

Thanks, Harriet. Good morning, everyone, and thank you for joining us today to discuss our second quarter 2016 results. Before I go into a detailed review of this quarter, I’d like to update you on the restructuring program we undertook with a major international consulting firm last year, to assess the opportunities to drive growth in our revenue, gross margin, operating profit and cash flow. We completed phase one earlier this year, among other things identified various opportunities for effectiveness and efficiency savings including organizational realignment, brand management, SKU management and indirect spend management. Based on those findings we realigned the U.S. Wholesale divisions in our organizational structure, reduced headcounts and incurred restructuring expenses. For this quarter, restructuring expenses amounted to $1.1 million following restructuring expenses of $640,000 for Q1. As you may recall, SG&A started to coming down this quarter and we were able to bring it down again in Q2 by implementing just a small portion of the study’s findings. We recently completed Phase 2 of the consulting project, which focuses on designing and executing solutions to increase efficiency on the front-end by, for example, reducing secondary SKUs, strengthening brand management and reducing complexity throughout the organization. The consultants have given us a clear roadmap and we have begun implementing the changes they’ve laid out. The entire process will take about 18 months and we believe the changes to our organization will contribute to growth in sales and even more so to profitability, especially as we enter 2017. I’ll also report on few other important trends in our business. First, we are seeing shifts in consumer spending that we expect to continue for the foreseeable future, and we are positioning ourselves to capitalize on those shifts. To that and the most notable are the shift to spending online versus the brick-and-mortar stores and the growing influence of millennial-consumers. Percentage of our products sold by both online sites of our traditional retailers, as well as sold at pure-play online retailers is growing at an extremely rapid rate, though this is mainly offsetting a reduction in business at traditional stores. We have been positioning Lifetime to capitalize on the shift by developing a first-class team that understands how to drive this business. The skill-set needed to do this is quite different than the skill-set needed to drive business through traditional retailers. This has been a major investment for Lifetime over the last several years and that investment is beginning to show important results, which will be evident both in the second-half of this year as well as in 2017. The second major shift is the growing importance of millennials. Brands that we have positioned specifically for millennials are among our fastest growing brands

[Laurence Winoker:]

Thanks, Jeff. As we reported this morning, the net loss for the second quarter 2016 was $1.2 million, $0.08 per diluted share, as compared to a net loss of $1.7 million or $0.12 per diluted share in 2015 period. Adjusted net income for the quarter was $90,000 or $0.01 per share as compared to an adjusted net loss of $600,000, $0.04 per diluted share in 2015. A table which reconciles non-GAAP measure to reported results was included in this morning’s release. Loss from operations was $300,000 for the 2016 quarter compared to a loss of a $1 million for the 2015 period. Consolidated EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $5.2 million for the current quarter and $4.4 million for the period in 2015. Consolidated EBITDA was $43.5 million for the 12 months ended June 30, 2016 and $44.3 million for the same period in 2015. For our U.S. wholesale segment, net sales in the 2016 quarter decreased $1.9 million or 2% to $92.7 million. The decrease reflects timelier program launches particularly for dinnerware and home décor. U.S. Wholesale segment gross margin was 35.6% in the 2016 quarter compared to 35.5% in the 2015 quarter. This increase reflects an improvement in product margin, partially offset by the impact of product mix. U.S. Wholesale distribution expense as a percentage of sales shipped from our U.S. warehouses were 10.3% in the 2016 quarter versus 10.2% in 2015. The increase reflects the effect of a decrease in sales shipped from warehouses, partially offset by a reduction in certain variable expenses. U.S. Wholesale SG&A expenses were $20 million in the 2016 quarter, a decline from $20.2 million in the prior year’s quarter. For our International segment, on reported basis net sales in the 2016 quarter were $21.6 million versus $22.5 million last year. In constant currency terms, net sales in the 2016 quarter increased by 1.2%. Growth from kitchenware, e-commerce and export sales more than offset a decline in tableware sales. International segment gross margin was $34.8 million in the 2016 quarter, compared to $32.3 million in the 2015 quarter. Gross margin increased as a result of reduction in promotional activities for the tableware business, which more than offset it sales decline and a favorable change in customer mix for kitchenware products. International distribution expense, as a percentage of sales shipped from warehouses, were approximately 13.4% in the 2016 quarter versus 13.8% last year. The improvement reflects an increase in sales shipped from our UK warehouses. I will continue. It’s just a fire drill, but I’ll continue anyway. International SG&A expenses were $5.3 million for the quarter of 2016 and $7.8 million in 2015. The 2015 period includes a charge of $1.5 million related to the change in fair value of contingent consideration attributable to the KitchenCraft acquisition. The decrease in expense was also due to foreign currency transaction gains resulting from hedging activity and foreign currency translation rate changes. For our Retail Direct segment, net sales were $3.8 million in the 2016 quarter versus $3.9 million in the 2015 quarter. Gross margin decreased 65.9% in 2016 from 68.4% last year, reflecting additional cost to reduce shipment breakage and higher royalty expense. As a percentage of net sales, Retail Direct distribution expenses were 28.9% versus 31.4% last year. The improvement reflects reduction in shipping expenses from fewer product breakage replacements. Retail Direct SG&A expenses were $1.3 million as compared to $1.8 million last year. The decrease in expense was due to a headcount reduction and also reduction in selling expenses. With respect to non-segment items, unallocated corporate expenses were $3.2 million in the 2016 period versus $2.2 million last year. The increase in 2016 was primarily due to acquisition related expenses, whereas the 2015 period included reimbursement of expenses for an acquisition not completed. Interest expense declined to $1.1 million in 2016 from $1.5 million last year, as average borrowings decreased and the average borrowing rate decreased due to term loan repayments. The effective tax rate for the quarter was 28.1% compared to 29.3% last year. The low effective tax rate benefit for 2016 was due to capitalized acquisition cost, partially offset by lower taxes outside the U.S. Equity in earnings was insignificant for the 2016 and 2015 quarters. The 2016 quarter, a $200,000 gain on the sale of the investment in GSI was offset by an equity loss of Grupo Vasconia. Grupo Vasconia reported income from operations of $2.1 million in the current quarter versus $3.9 million last year. The 2016 results primarily reflect the decline in the aluminum division’s result. At June 30, 2016 leverage ratio was 2.8 times and our liquidity was approximately $58 million. Looking at the balance of 2016, we currently project full-year sales to grow approximately 3%, excluding foreign currency impact. Based upon this expected sales volume, gross margin and distribution as a percentage of sales should be in line with 2015 with a modest improvement in the SG&A expenses. This concludes our prepared comments. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] And our first question comes from Frank Camma of Sidoti. Your line is now open.

[Frank Camma:]

Good morning, guys.

[Jeffrey Siegel:]

Good morning, Frank.

[Laurence Winoker:]

Hi, Frank.

[Frank Camma:]

Hey, what kind of feedback are you getting from the retailers? You said you’re expecting pretty healthy holiday season, so you must be obviously you’re going to get - sounds like you’re getting get orders there. And I was just wondering if you can comment on that.

[Jeffrey Siegel:]

Yes, it’s - no, it’s true. We have - looking at our order flow and looking at our projections, we are very confident on the second-half of the year, as I mentioned. In general, things are okay. The brick-and-mortar retailers are certainly having some of the tough time. It’s compensated for - by the shift that both they have and by the pure online retailers growing. And we’re gaining share on the online part of it. So we’re quite happy about that. But in general, I would say, retail is robust by any means. But we’re still expecting to have a good second-half, really good second-half.

[Frank Camma:]

Okay. And there - I mean, correct me, if I’m wrong, but their inventory levels are obviously pretty in check. I mean, you wouldn’t expect them to be heavy on any of these categories. So I would expect with over the last couple of years they have been pretty conservative with their levels, is that still true?

[Jeffrey Siegel:]

Yes, retailers are certainly conservative within inventory levels and that hasn’t changed. But they certainly expect suppliers like Lifetime to be able to ship basically next day. And we do. We’ve learnt how to do it the right way. We’ve done it without increasing our inventories of anything. We’ve been decreasing our inventories by better management. And frankly, the consulting firm that we’ve worked with has given us the tools and the ability to significantly reduce inventories and more going forward over the next couple of years, without affecting our business and we certainly could make use of those tools.

[Frank Camma:]

Okay. And just comment on the - because you mentioned the millennials obviously growing here as a portion, which is important. And housing numbers are, obviously, actually pretty good. So ultimately that’s got to help you as well, right, as housing formation, assuming rate stay low. That’s got to help housewares in general. Isn’t that inconsistent with what you’ve seen in the past?

[Jeffrey Siegel:]

Yes, historically as new household formations increase our business and interest of our industry increases as well. And as you also know, millennials up to now have not been moving out of their parents’ homes. So that’s been a negative over the last couple of years for us. But they will start breaking up, obviously, and we see it by the kind of products that have been bought now. They have been projected to be a big force as consumers over time. And I think we’re finally seeing that start, so I think we are kind of enthused, not only for this year, but really into 2017, 2018 there should be some significant increases in new household formations and that should certainly be beneficial.

[Frank Camma:]

Good. And my last question just on the - obviously, part of your plan, I actually don’t know that how big your plan is on SKU rationalization. But how much if you look at it, I’m just talking longer-term not in the near-term, but as you take out the SKUs, how much will that kind of negatively impact your ability for revenue growth, because obviously you’re going to be taking some out? I was just wondering if you can comment on that.

[Jeffrey Siegel:]

We don’t expect it to negatively impact growth at all. It’s largely just that having the right tools put in place to be able to not overlap with SKUs that are not necessary. I mean, you have to be - this whole thing obviously has to be very carefully and we recognize that and we will do it. But I’d say, as a very quick example, if we have a kitchen tool and gadget program at a retailer that’s only in the south, and we have a program of kitchen tools and gadgets at a retailer that’s only in the north, there is no reason why they can’t have the same program with maybe some slight tweaks; in the past, where that they have different programs. So we’re not doing that going forward. We’re being more insistent on one program. And so far, there has been no negative out there from the retailers on doing that. They recognize that it will be easier for us to maintain inventories properly for them. And also there’s cost savings involved, because if we buy one item in bigger quantity, it’s better for the manufacturer and we get a better cost. So we pass some of that on to the retailer. So it’s really all positive. We’re not looking to lock out [ph] part of our business or SKUs there, just because they’re a little bit unprofitable, because we’ve always believe in all of our SKUs being profitable. That’s not the case, it’s just swapping off the SKUs that we don’t need frankly.

[Frank Camma:]

Okay. Great, thanks guys.

[Jeffrey Siegel:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And I’m showing no further questions at this time, I would like to turn the conference back over to Mr. Siegel for closing remarks.

[Jeffrey Siegel:]

Thanks everyone for joining us today. And as you’ve heard, we have a lot of plans and product offerings underway to make the second-half of the year a really good one, as well as to position ourselves really well for 2017 and going forward. Enjoy the rest of the summer and we look forward to giving you an update in three months. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.