Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the lifetime brands third quarter 2019 earnings Conference call. At this time I would like to inform all participants that their lines wellbeing listen only mode.
So to speak Fisher marks there will be a question and answer period. If you would like to ask the question. During this time. It. Please press star one on your telephone keypad I would now like to introduce your host for today's conference Andrew Squier Mysteries choir, you may be gotten.
Thank you good morning, everyone in thank you for joining lifetime brands third quarter 2019 earnings call. This today from management or Rob K., Chief Executive Officer, and Larry When Noecker Chief Financial Officer.
For big in the call I'd like to remind you that are marks. This morning may contain forward looking statements that relate to the future performance of the company and these statements are intended to qualify for the safe Harbor liability established by the private Securities Litigation Reform Act.
Any such statements are not guarantee the future performance in factors that could influence. Our results are highlighted in today's press release and others are contained in our filings with the Securities Exchange Commission.
That introduction I like to turn the call over to Rob K. Please go ahead route.
Good morning.
Thank you for joining yesterday to discuss lifetime brands third quarter 2019 financial results.
We're pleased with our progress than results for the third quarter.
The transformation that we embarked on with the filament acquisition in delivering tangible results.
Evidence by the increase in sales and <unk> compared to the prior year quarter.
We remain on track to achieve our strategic priorities to reposition the company for higher growth and increased returns.
While we have made progress executing our strategy in a challenging retail and market.
We continue to face significant headwinds from the trade war with China, and the impacts brags yet.
Which has temporarily impacted gross margin and revenues.
As previously discussed lifetime has and continues to pursue a multifaceted strategy to mitigate the financial impacts created by the imposition of these towels.
We continue to improve profitability and increase investment in our brands and we have taken action this quarter to position us to capture these opportunities as we transition into the fourth quarter and fiscal 2020.
We're excited about our prospects and are confident that our strategy will deliver results drive improved performance and create meaningful value for our shareholders.
Par performance with a quarter show consolidated adjusted even talk wrote a $3 million.
As we started to see the early results of our product portfolio optimization and rationalization.
We continue to focus on our newly rolled out strategic product development and sales initiative.
And then locking the value of the cost efficiency campaign launched in connection with the filament acquisition.
Additionally, we remain committed to increasing the brand equity and trend and cried relevance of our best in class products and France.
And the third quarter, we achieve considerable market share games.
Corn U.S. markets.
Driven by a combination of new product introductions as well as extensions to some of our existing product lines.
Last quarter, we mentioned a number of product launches that would begin shipments in the third quarter, most notably in food preparation bar, where table top at home solutions.
Today I'm police report that during the past several months, we brought to market it new line of branded kitchen, where products.
Restart penetration in the grocery sector and partnered with the Scott Brothers of H.T.G.H.G.T.V. Fame.
Produce a proprietary brand products.
These new lines have immediately gained meaningful market share and.
And we are pleased with the positive reception and early adoption trend where seat.
We also expanded lifetimes legacy built breath through a new product introduction of insulated lunch bags and storage containers as well as a further penetration of the successful built bottle hydration line.
Not a macro level.
We are beginning to see the benefits from our strategic shift away from my focus on purist sales.
More strategic focus on product and category.
It's it's been a key performance driver that is enhanced our ability to sell in all channels.
As a result, we continue to gain momentum in the company's important retail segments and generate revenue growth.
You may recall that in connection with the film an acquisition last year.
Now, it's a number of administrative cost effectiveness initiatives.
That we would be implementing as part of lifetimes transformation.
These included reducing costs of goods.
Costs across the supply chain administrative costs and discretionary spending.
And pursuing product development initiatives to drive the sale of our products to our customers.
As Lowery report on in a couple of minutes.
Only have these initiatives meaningfully started to improve performance.
We've also seen the pro forma adjustments.
That we announced last year.
Translate into actual results that'd be add backs up and substituted with the results achieved by these actions.
As we know that didn't last quarter's call.
Due to the large magnitude.
Implemented and recently announced tariffs on China.
We do not anticipate fully implementing all this strategies discussed until the end of 2019.
However, we are pleased that we are already seeing the financial benefits of these initial efforts, which were contributing factor to our improved results in a third quarter.
Before turning throw more detail commentary of our segment results I want to briefly touch on some of the important growth areas that were most excited about it lifetime.
First we continue to see growth in E., Commerce, which was <unk> propelled by the restructuring of that organization announced in Q4 of last year.
Well E. commerce out a brief down try and do the timing of shipments we remain on track to see meaningful growth you're over here.
To that N. sharply E. commerce contributed slightly index of 12 access or 12 per cent of total sales for the quarter.
In addition, we are starting to gain traction in the grocery channel, which represents a compelling value creation opportunity given lifetime is not historically hottest significant presence in the sector.
As we work our way through the last quarter of the fiscal year and the I'm transition into fiscal 2020.
Remain competent and the potential about E. commerce, and grocery and we expect they will be strong performance.
As we discussed during the past headquarters the retail industry continues to face temporary down cycles, driven by structural changes in both brick and mortar any commerce retail.
In this environment, we are pleased out deliberate solid growth during the past border in a challenging retail and market.
We do know that we continue to see an impact from ongoing geopolitical <unk> conditions, including tower <unk> I'm sorry.
Lifetime actively monitors the changing tower environment and had strategies a plate intended to mitigate the impact of <unk>.
Oh, no although lifetime rabbits growing total.
<unk> negatively impacted revenue opportunities this quarter to lost business in certain channels.
We continue to expect to see some temporary negative impact on our margins until our mitigating actions are fully relax.
While we anticipate mitigating gross margins dollars.
We expect that attempts will continue to have a gross margin percentage impact.
That's why we will discuss in his remarks.
Position or Paris.
Excuse me yeah position of power. So it's been a meaningful survivor of higher inventory levels and a declining gross margin per se.
In the meantime, we're focused on maintaining a healthy level of gross margin dollar sales a key metric that will contribute to our ability to maintain and grow our bottom line.
Turning outdoor European operations, the restructuring of our U.K. operations also known as lifetime brands of Europe .
<unk> and we expect chancery recognize the benefits in 2020.
I was remind her in the third quarter, we launch or consolidated you <unk> you pay operation from eight Standalone warehouses in two separate business units into a single large operation based in Birmingham, England.
This will improve our efficiency reduce our costs <unk> infrastructure.
Create a meaningful competitive advantage.
Among other benefits this move or allows customers to order all products.
I'm, one business and receive one invoice from one ship point.
This restructuring also included a portfolio realignment as we shifted the product mix away from non productive low margin goods and tour to focus on France at offerings, where we can add value to the consumer and retailers.
Unfortunately in the third quarter, we experience some operational issues in connection with the launch of the consolidated U.K. business as we encountered challenges with personnel and process in the warehouse.
We have addressed those issues with a number of management and personnel changes.
As a result of these operation issues.
Our revenues declined in the quarter for the U.K. operation and they will continue to be an impact on revenues for that operation for the rest of 2000 in 19.
Additionally, we are facing some complications due to over inventory from these delayed shipment to customs.
To correct things off racial problems and personally mitigate the issues that arose we immediately sent an experienced team from the U.S. to temporarily oversee operations and provide leadership to stabilize the business.
In addition, where are the process of implementing them more permanent solution by hiring new personnel to manage ongoing operational tax tasks within the U.K. Division.
On a geopolitical fraud going forward, we expect to face continued headwinds in Europe , and particularly the U.K. as a result of the uncertainties surrounding <unk> and related F.X. challenges.
But overall, we are pleased with our turnaround efforts, we are confident that despite these difficulties, which we attribute to growing pains.
Given a significant <unk> initiative.
We will still see a dramatic improvement in profitability and cash flow for lifetime brands Europe , beginning in 2020 per our original plan, which we were outlining further detail out or investigate next week.
Moving to ecommerce.
We continue to see strong results and profitable growth in this channel with the Pureplay E. commerce revenues growing nearly four per cent year today compared to 2018.
As I mentioned earlier Pureplay E. commerce contributed slightly in excess of 12 per cent of total sales for the quarter, Although we experience a slight downticks related to the timing of certain shipments.
Despite this we remain on track for a meaningful grows year over year, E. commerce, including Amazon continues to be a significant revenue generator for our products, including kitchenware Bakeware and Farberware Caullery.
Were extremely proud of lifetimes, E. commerce team and operational processes.
You have been Reoriented, an optimized to expand our reach and it's increasingly critical channel.
Another key element of our strategies are reason expansion into the commercial food service industry. The launch of Macassa hospitality Standalone unit hundred a lifetime umbrella that covered yet aware flatware, drinkware and table Serbia accessories.
Continue to bring these products into our warehouses and expect to begin selling and the fourth quarter with shipments starting in fiscal 2020.
Well, we do not anticipate recognizing revenue from this business until 2020.
Expanded line is a logical and attractive growth opportunity in an industry I didn't product categories, where we are already a global leader.
To that and as we begin selling this full range of table talk product assortment.
We will continue to take steps to strengthen opposition et cetera standard for product and service excellent.
Exciting.
Before I turn the call over the Larry to provide more details or a third quarter results.
Update on our financial outlook for 2019.
We are revising financial outlet for 2019 true reflected noncash goodwill impairment charge of $9.7 million that we recognize in connection with our European restructuring initiative.
This is a one time accounting charge relating to our 2014 acquisition and has no impact on the benefits to be derived from the reorganization of our European operations, We expect will produce a meaningful improvement on profitability.
Importantly, we are <unk> reaffirming are full year 2019 guidance of 60 $670 million.
Well now tournament call over to Larry.
Thanks, Rob.
As we report this morning, the net loss for the third quarter of 2019 was 13.5 million 66 cents precluded sheriff's compared to net income a 5.9 million what 29 cents per dollar tree and a third quarter of 2080.
2019, then 2018 quarters include noncash charges 927 million in 2.2 million, respectively related to the pool right all of the international segments acquisition goodwill.
It's tough to net losses 2.7 million for the 2019 quarter 13 cents.
Share compared to adjust to net income of 8.5 million 41 cents per share in 2080, a table, which reconcile <unk> no sure reported results was included in this morning's beliefs.
<unk> cash good will come in charge is taken in 2019 18 periods income from operations was 16.6 million.
Versus 14.5 million <unk>.
Adjusted EBITDA Noncat measure that was reconcile 12 gap results and then release, but 69.6 million for the Trilling 12 months ended September .
30th 2090, F. to give me effect to certain adjustments and before limitations, that's permitted and define that agreement.
This includes projected unrealized synergies of 2.5 million.
Oh, no projected I'm really synergies continue to decline as these synergies become realize and reflected in you know what how cool operating themselves.
Consolidate net sales in the 2019 quarter was 250.5 million compared to 209.4 for the 2018 quarter for the U.S. segments.
Sales were up 9.1 million all categories increased led by new programs for homes solutions home decor products.
Kitchen, whereas rabbit products.
National second sales for 20.3 million in the 2019 period versus 23.4 million in 2018 on a reporter faces and it kind of some dollars U.S. dollars, which excludes the impact of foreign exchange fluctuations sales decreased 1.9 million or 8.6%.
<unk> decrease or treatment by operational issues in connection with the opening up a new distribution facility.
Birmingham, England.
Consolidate gross margin was 33.8% and the 2019 quarter compared to 35.2% last year for the U.S. segment gross margin was 34.3% in 2019 quarter versus 35.3 last year. The decline was primarily driven by product category.
<unk>.
Product category customer mix and the impact of terror from coast on certain goods scores from China.
However, as Rob noticed while the gross margin per cent decline, we were able to increase pro smoking dollars from 65.7 million 267 billion.
For International gross margin was 29.1% the 2019 quarter compared to 34.6% the 2080 quarter.
<unk> is primarily due to the higher proportion of sales to national counts as a new facility operational issues adversely affected the film at levels to certain other customer classifications as well as to sell off some clearance sounds good.
Consolidate distribution expense for the 2019 quarter.
18.5 million or 8.6% up net sales.
16.6 million 7.9 per cent of net sales for the corresponding period in 2018.
The U.S. segment distribution expense as a percent sales shipped from at the U.S. warehouses was 8.8% and 8.9% for the 2019 18 quarters, respectively. This improvement was primarily due to high you shouldn't and volume and real estate labor efficiencies, partially offset.
Oh, you afraid that expenses.
Well the international segment distribution expense as <unk> percentage of sales ship from L.U.K. warehouses, excluding moving costs are new distribution facility.
19.1% and 11.9 per cent.
In 2019 in 2080 quarters, respectively.
Increase also reflects the operational issues noted, including higher labor expense.
<unk> in general and administrative expenses with every 7.4 million 2019 in 42.1 million into 2018 period, you at segment expenses for 28.7.
In 2019 as compared to 31.4 in 2018.
Super send your trip net sales extra expenses for 14.7%.
Versus 16.9 per cent of 2018.
This improvement reflect realize synergy savings from the filament acquisition, which has not been fully implemented.
Bull run rate benefit will be realized what the ends up 2019.
A screen eight for international segment was 4.2 million in 2019 quarter compared to 5.5 in the 2018.
This improvement reflects as Rob discussed the benefit of improved efficiency of going from two separate business units.
<unk>.
Oh now located corporate were approximately an okay corporate expenses were approximately 4.5 million in the 2009 period versus 5.2 in 2018 curious to decrease was primarily attributable to lower professional fees.
Due to the decline the results of the European operations. Since this acquisition over five years ago exacerbated by the economic uncertainties <unk> negotiations. The company recorded Noncat structure of 9.7 million to write off the goodwill recorded the 2004 acquisition up at two K. based kitchen with it.
<unk>.
The third quarter of 2018 company grow up 2.2 million 2.2 million of goodwill related to the European people were business as results accompany yourself fully written off all goodwill associated with the European kitchen table, where businesses that required in 2014 2011, respectively.
Interest expense was 5.2 million and the 2019 quarter versus 5.6 in the comfortable quarter last year.
The 2019 period of reflects the benefit from Baltimore opt to walk it changes from interest rate swaps nah designated as expected pages for county purposes.
Income taxes for three months into September 30th 19 reflect taxes on U.S. earnings put a limited benefit on foreign losses limited benefit on farm losses due to the nondeductible 9.7 million goodwill and apparently trucks.
It was also affected by state and local taxes in certain onto comfortable U.S. expenses, excluding the amortization to be the goodwill impairment charge you affect the tax rate would've been 22.4% that's compared to a federal spectra tornado, 24% for the full year, we anticipate how effective tax provision rate.
The approximately 30%.
At September 30th 19 hour debt was 357.3 million no leverage ratio was 5.1 time leverage in three quarters normally the highest because assistance seasonality.
Leverage ratio was 5.4 times at September 30th Cup last year.
It's worthwhile to note that I would term loan debt, it's no negative natural maintenance competence and minimal required amortization.
Concludes that prepared comments operator, please go up in the line for questions.
As a reminder to ask a question you any depressed star one on your telephone call. Your question press the pound key.
The first question.
<unk>.
Hmm.
Good morning, guys How're you doing.
Okay, Frank Hey, I'm, Robyn Larry you you both quite a.
Bit of a description on the gross margin, but I.
I noticed in the press release, there's actual minuses decreases.
Due to changes in proposed product and customer Max.
You talked about the customer mix you know more I think the explanation was more.
And all counts, which I assume would mean that you know maybe you know those are lower margin, but can you talk about the product mix. The I was little surprise, there I thought you might.
That's it when I looked at this on.
Year over year basis, because because of the skew rationalization.
Yeah. So there are couple of your friend moving parts, Frank and you know a big impact on the margin per cent. As we also discussed we're the terrace, which have you know or while our mitigating actions that you see it in the numbers are focused on gross margin dollars. There's a reduction at cross margin per cent as a result right.
Of course marching dollars grew gross margin per cent went down.
The National account comment that allow already had talked about that you picked up a pawn deals with the discussion our European and particularly R.U.K. operations and as we are both talked about you know we experienced as we were going live with our single warehouse.
We have spare experience operational issues in that distribution center, and therefore shipping issues.
And as we were tree arching that situation, we were able to ship a lot greater percentage of that business to their larger what's it called national accounts to nationals as opposed to the independence, which is also a big market for them. There's a noticeable difference in March in between those two.
Segments. So the U.K. businesses off as a result of this but also their mix and therefore, they're margin was dramatically change that just a piece of our business.
In the U.S., the big driver and obviously the big a part of our business was tariffs from a margin per cent as we said that's why margin dollars group, but they're also was I just channel mix and you know there's different profit of a margin.
That we experience on different channels and there's just the mix was a little different.
On it.
And then.
Kind of staying a little bit on retired.
Actually quite a bit detailed.
Sounds like from my purse released from my model.
Away on the margins a little longer than I thought.
Irrespective of the margins, though are the call I mean can you talk about what if any impact or seeing on.
Product demand or customer I'm talking about end user consumer response.
Yeah. That's a great question you know so there's two pieces to that and as I referred to in my remarks.
While we have grown our business the tariff did slightly impact our growth rates because there is business that as a result of terrorist we lost.
Because the the of the price increases that were passed on and it. It we were not <unk> competitive and we just lost the space.
You know to date and it seems there's you know active movement on this topic I guess.
We speak.
To date, you know, we've been monitoring and haven't seen.
A consumer impact.
On on the industry, you know and that's you know general retail B.C., but you see but but yeah. We haven't seen anything specifically rated related to the end markets, maybe you could say.
We'll see what the future frames sure okay.
My last one is just.
You touched on that sort of the new products coming out in food service cause a pretty big positive over time and well you didn't say, it's gotta be anything material could you just talk about.
Long term is is that.
Do from.
Margin basis can you talk about that as.
Well, we'll actually go into Investor Day next week, which you'll be there, but the benefits of everyone. In the call will go into a lot more detail and we both of us that on our Investor Relations site for for every one on an F.D. basis see God, but the the margins in that business yeah, we've been in the business for a long.
Time, Yeah, we're launching what's called front of the house in this segment with all of our tabletop products. So we know the industry in general.
Your gross margins are higher than what we experience on the consumer side of the business.
But there's a lot of.
Complicated and multi step I won't go into the details today.
That's your day your net margins are similar on the high end, but similar but your gross margin on the gross margin it looks better okay.
Except look forward to next week. Thank you.
You're an x. question comes from.
<unk>.
Mm.
Hi, how are you.
Good and yourself.
Good so.
Hum initiative to sell through some of the slow moving it obsolete inventory to generate some cash.
Did you do much of that in the corridor and is it my understanding it would kind of help sales, but hurt gross margin as you do that process.
And if I if you did any of those sales in the quarter that would be helpful. Thanks.
Sherlund or just as a clarification you know we eliminated over 7000 skew. So we get a skew rationalization and eliminated you know across from 25% of our skew count and that's what sort of drove the charge, we talk and and the initiative that we announced last quarter.
You know specifically addressing your question, Yeah, we announced it last quarter, we really started you know.
Keeping those goods preliminarily in September you know show the impact on the third quarter was marginal.
I wish it more on the fourth quarter, but as we said the time is really going to be a nine month process for us to liquidate that inventory, but an answer. Your question. We did yeah. We just started we sold some but not much in the in per expectations in in September .
Right and so because this is kind of.
Do you think that.
Oh ramp up a fair amount in in the December quarter.
Do we think that the.
Sales of what we've identified in our skew rationalization low ramp up in the fourth quarter was that your question.
Well guess definitely more sales in the fourth quarter, because we'll be talking for three months versus one so they're definitely will be more in the fourth quarter about the bulk of it will be in 2020.
Okay, and then did you sorry, if I I didn't quite see all your statements.
The castle statement, if not can you give operating cash flow in the quarter or a year today.
Yeah sure it's well it wasn't released we just put out a.
Cash flow.
Okay.
Yeah, Okay. Yeah. It's in the you put up all the primary statements.
<unk>.
Okay, I can get that okay. The question.
You talked about in the U.K.
You know it sounds fairly disruptive when do you watch the timing of when you think that'll be resolved in back to normal in terms of operation.
Yeah. Unfortunately, you know.
Oh.
We remain and we're very coughing and in terms of results that our whole reorganization will produce and on and and a lot of.
You know in terms of consolidation and you know works all been done when we went like with the one solid one warehouse and when eight into one.
Without go into specifics there were opera honest unforeseen.
Operational issues it did impact us in this quarter it will impact us next quarter as we we are already improved and fixing the situation.
We're doing a though with a lot of help from the U.S. So we'll get it back to normal by Q. won in terms of where we want you know a normal shipment levels, but the other piece of that is you know we can't run it with U.S. leadership forever. When we're putting the write operation later, we had to replace our operations direct.
During the U.K., Unfortunately, and we need to replace that position and and that's underway.
Okay.
One last thing in terms of your commentary about losing.
Face or market.
Where you could do a pretty fine tune analysis of way to make the price increases because certain areas, where you're really strong American.
Been able to do it.
Just wondering what that across the board.
<unk>.
How are you going to kind of be able to correct back.
Yeah, It's a good question Linda so.
Yeah, So our price increases religion tariff were across the board and you know, where we lost share a not share but opportunities work in the off I Shan't also in most of what we felt his plan a grand and you get what we have to put in a uniform.
Price increase there are some opportunistic opportunities that you get it off price because as you know you things, it's not planning brand and they can sort of shift there shelf space around for different types of insurance could be any a good you know and they can replace apparel with I <unk> I mean, they could put wood.
<unk>.
And so we had some opportunistic opportunities that we sell in that channel that no longer made sense with the <unk>. So we didn't get those opportunistic opportunities, but we didn't lose share in our.
Court listings.
Okay. Thank you I'll see you next week great. Thanks, Linda.
Yeah. My next question names from John Sullivan.
I don't management.
Hey, guys I know you mention 30% is what you would think the tax rate would be for the year just trying to tease out maybe after the dust settles all the charges are done with maybe a more normalize rate would be.
Just you know looking at the quarter.
Just a number of negative 13 cents was clearly weighed down by the north of hundred per cent tax rate. So I'm just trying to.
See the operations, improving which is trying to get an idea is what's a good baseline for for the future.
Yeah I know, it's it's it's it's odd it's.
It's in frequent but it's not that unusual and it has to do with how we for county rules record the tax rate. So it's based on the angle ice rate, which is 30%.
And you need to look at the.
At the nine months and you can see the 30% rate.
We used the third quarters actually the back is to get the nine months to what it should be versus the six months here to date. This whole driven by this this <unk> goodwill, but so 30 per cent is what it is you to date in the in the release and that's based on <unk>.
They will be for the full year.
Gotcha, Okay, and secondly, just wondering on the free cash flow.
Whether or not you know usually get a nice fourth quarter reversal in working capital, whether that's still anticipated aspirin normal on whether we should see you know decent cash flow for the year, leading to some some debt pay down when.
I Wonder if that's still the case.
Yeah, Yeah, we I mean, we haven't <unk> I didn't find that yes that is typically peak generally in October 'cause of seasonality, depending on the timing of sales in a quarter in some cases classification different trade terms.
C benefit in more in December for she's January sometimes into February so, but that's that's kind of our you know.
Evan flow and we we should see significant pay down in this fourth quarter. The first quarter is historically in a seasonal seasonality basis, a big collection corridor.
Got it.
Okay. Thanks.
They are any further questions at this time.
Call back I pretty.
Mark.
Thank you.
Thank you everyone for participating on the call as always everything is available on our website and for those who will attend we look forward to seeing people next week.
Darn Best Your day Conference in New York City.
Thank you very much.
Increase today's conference call. Thank you for participating.