Q4 2019 Earnings Call
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Good morning, ladies and gentlemen, and welcome to lifetime Brands' fourth quarter and full year 2019 earnings conference call.
This time it what I can inform all participants to their lines will be in listen only mode.
After the speaker's remarks, there will be a question and answer period.
If you would like to ask a question. During this time. Please press star one on your telephone keypad.
I would now like to introduce your host for today's conference Andrew Squire. Mr Square you may begin.
Thank you.
Good morning, Thank you for joining lifetime Brands' fourth quarter 2019 earnings call well. This today for management or Rob <unk>, Chief Executive Officer, and Larry Winoker, Chief Financial Officer.
Before we begin the call I'd like to remind you that our remarks. 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.
By the private Securities Litigation Reform Act.
Any such statements are not guarantees of future performance and factors that could influence our results highlighted in today's press release and others are contained in our filings with the Securities Exchange Commission.
That introduction I'd like to turn the call over to Rob <unk> go ahead Rob.
Thank you.
Good morning, everyone and thank you for joining us today to discuss lifetime brands' fourth quarter and full year 2019 financial results.
We're pleased that we continue to deliver growth in a number of key segments and generates significant cash flow greater than than our expectations for the quarter and the full year 2019.
However, despite those positive achievements our performance this quarter fell short of expectations as a result at the impact in quarter, three and four of the operational difficulties in our European business, which we had discussed in our quarter three conference call.
Certainly our core U.S. business outperformed both fourth quarter on the for the full year.
Driven by strong results and E commerce combined with growth in market share in revenues in the brick and mortar channel.
Well as our expected realization of cost efficiencies for the plan, which we previously detailed.
As we generated cash flow this quarter or net debt position is favorable to what we guided for the full year, placing us ahead of expectations on our commitment to lower our leverage to guided targets.
We achieved this cash flow performance notwithstanding operational challenges from our European operations, which resulted in the need to temporarily fund losses and invest in working capital during the third and fourth quarters.
These positive results in the core U.S. business were offset by financial losses, resulting from operational challenges in our newly reorganize UK business, which had an impact on shipments for that business.
So that business unit as well as higher operational cost fines and penalties all related to these operational challenges.
We have taken further steps to address these challenges and stabilize our international business and can report that as of January 2020.
We have eliminated all backlog and restore the European operations at normal levels.
Further we remain on track to continue advancing our strategy and enhancing value for our shareholders created by the reorganization of our European operations in the second half of 2019.
In 2019, we took deliberate and decisive actions to create shareholder value.
We continue to broaden our market focus pursuing organic growth opportunities in adjacent categories.
We renewed our emphasis on digital and ecommerce.
And are seeing our efforts in those categories come to fruition.
We remain focused on expanding initiative in the commercial foodservice market and and building a direct international sales capability and presence.
As a result, I believe that today, we're better positioned as a company should not only whether industry trends and cycles.
What you achieved meaningful organic growth.
Turning to the results in our U.S. business.
As I mentioned, we're pleased with the performance in our core U.S. business, which contributed to top and bottom line growth.
For the quarter and full year.
This progress is the result of effectively executing our strategy to increase our market share.
Dry product innovation and expand existing product line.
The fourth quarter was marked by continued enhancements in product development and product optimization.
And we continued recognizing costs and supply chain efficiencies from our 2018 acquisition of filament.
Importantly, the growth we achieved in 2019 was accomplished in an environment that included a trade war with China, resulting in lifetime being responsible for over $21 million entirely payments.
Further expanding on E Commerce E. Commerce represented one of the most important growth areas this quarter and contributed to 17.3% of our total revenue for the fourth quarter with pure play E Commerce contributing 14.7% I'm told sales for the core.
Please note that these numbers exclude a significant amount of E commerce sales to omnichannel retailers, where we cannot definitively track the percentage it sold online.
Additionally, as I mentioned last quarter.
We have been gaining traction in the grocery channel, which represents a compelling value creation opting for lifetime brands as we have not had historically large presence in the sector.
We continue to see strong performance in grocery this quarter with an increase of 9% for 2019, and we remain confident in the potential about E commerce and grocery.
Turning to our ongoing efforts in foodservice, which we greatly expanded in 2019 through the launch of our front of the House initiative.
We remain on track and our ramp up copper hospitality.
And are actively pursuing revenue opportunities in both U.S. and Europe.
Now fully stock our warehouses with Macassa hospitality product unexpected began shipments in 2020.
Based upon the sales efforts to date.
We have been focused on increasing macassa hospitality brand awareness and equity.
I don't have been doing so participating in targeted trade shows initiative, it's as well as an increased investment in sales and marketing infrastructure.
We strongly believe this is a meaningful channel for growth in our table top serve where three kitchen tools and small whereas product categories and.
We're pleased with the conversations we've had out in the market.
Based upon these conversations we're on track to meet ship in expectations during the year.
Well, we ended the quarter on a strong note for our U.S. core business, we faced operational jobs in Europe as part of our ongoing reorganization of our UK operations, which negatively impacted shipping and revenue and contributed to our EBITDA on this.
As a reminder, in the third quarter 2019, we launched our consolidated UK operations from eight Standalone warehouses and two separate business units into a single operation base in Birmingham, England.
We experienced some operational issues in connection with skins called consolidation and restructuring.
And encounter challenges with personnel and process in the warehouses.
This unfortunate carried over into the fourth quarter, where we experienced significant customer shipment delays and order cancellations.
As result of missing on delayed shipments we lost revenue is incurred fines and penalties added temporary expense and then you needed to use additional cash to stabilize operation.
This included hiring temporary workers and making management changes in order to ensure long term productivity and effective leadership.
As of January 2020.
Our UK operations are back up and running and we are shipping normally again.
Not only of operations each weren't returned to normal activity.
We have eliminated much of much of the temporary expense needed to stabilize the situation, including meaningful reduction in temporary workforce headcount.
We remain confident that despite these difficulties, we will see a significant improvement in profitability and cash flow for lifetime brands Europe going forward.
Now let me talk briefly about what we are seeing and doing relative to Corona buyers.
We believe we're working to mitigate the impact of kroner buyers I've taken proactive steps to minimize the effect of the virus on our business.
Our primary concern is for the health and wellbeing of our employees and partners and that was affected around the world.
As soon as the kroner virus became a public concern.
The restricted all traveled to China.
These restrictions on other international travel.
Kept facilities close beyond the Chinese new year.
And set up for channels for employees to work remotely.
We began responding to the situation before the end of the lunar new year holiday in China and took actions to prioritize shipments and ensure uninterrupted supply chain for open orders a near term deliveries.
As result of the teams response to the situation. We are currently operating with normal inventory.
Always seem a modest decline in shipments I'm trying not to 90% fill levels in March.
The remains daily challenges with ongoing for cautious in place such as constraints in provincial travel, which into I try and his teams daily efforts.
Importantly, as a result of our time, we response and ability to utilize our substantial infrastructure.
We currently believe there should not be a noticeable impact from the kroner buyers on our first quarter 2020 results.
We're moderating monitoring the situation closely.
And our fully engaged on a daily basis.
We have built up sufficient inventory that we expect you would get that would get us through any miles assumptions.
However, if the situation significantly worsens, we may see an impact on supply chain and shipping as we get further into 2020.
That said, we have yet to see any material impact on our business.
Believed that our team prop response to the situation will help mitigate any potential impact going forward.
Looking ahead to 2020.
We are excited about or potential to unlock value as we get our UK business back on track and continue to grow dropped drive growth in our U.S. business.
As we continue advancing our strategy that we articulated on Investor day during Q4 2019.
We are confident that are more focused business model and strategic growth initiatives will enable us to generate significant cash well improve growth and profitability and create meaningful shareholder value in the coming years.
With that I'll now turn the call over July.
Thanks, Rob.
Net loss for the fourth quarter of 2090 was 14.5 million or 70 cents per diluted share versus net income of 10 million or 49 cents per diluted share. The 22 quarter. The 2019 quarter included non cash charge up 33.2 million related to the impairment of the U.S. segments goodwill distraught.
Resulted from among other factors and sustained decline in the company's mark to market capitalization observed in the fourth quarter of 2019.
Adjusted net income was 20.4 million for the 2019 quarter were 99 cents per diluted share as compared to adjusted net income of 11.2 million or 55 cents diluted share in 28 T. A table, which reconciles this non-GAAP measure.
Reported results was included in the earnings release consolidated adjusted EBITDA, a non-GAAP measure that is reconciled to GAAP results release was 64.1 million for the year ended December 31, 2019, after giving effect to certain adjustments and before limitations as permitted and define no debt agreements excuse.
In the impact of a noncash goodwill impairment charge income from operations was 70.7 million into 2019 quarter versus 21.1 million last year, which sucks, which excludes reversal of the contingent liability assumed in the film and acquisition.
Table, which reconciles this non-GAAP measure to reported results was included in the earnings release.
Now turning to business segments income from operations from the U.S. segment, excluding the items I. Just noted was 29.1 billion in the 2019 quarter versus 26 million mid 2018 quarter loss from operations for the International segment was 6.2 million in 2019 quarter first.
Income of 600000 last year.
The U.S. segment sales were 198.8 million 700000 from 2018.
Increase came from kitchen tools, and gadgets products and home the core products, but they will partially offset by declines for the lab 921 division, although it was up for the full year and dinnerware products.
International segment sales were 28.1 billion in the 20, Nike Korea versus 30.1 really 2080 on a reported and constant golf, let's dollar basis. This decrease was driven by operational challenge you know European business as Rob commented on earlier.
For the U.S. segment gross margin was 30.4% in 2019 versus the reception 0.4% in 2080.
Increase reflects changes in product and customer mix and the benefit of the tariff exclusion refund for certain product classifications.
For International gross margin was 26.6 in the 2019 quarter compared to 35.4 and last year score. The decrease is primarily due to sales of clearance inventory impart related to the consolidation of our UK distribution from multiple locations into one newly consumer.
<unk> facility and the operational challenges associated with the reorganization.
For the U.S. segment distribution expense as a percentage of sales ship from warehouses, excluding moving and relocation costs were 8.3% and 8.8% the 2019 and 22 quarters, respectively. This benefit was attributable to the ongoing improvement programs, which resulted in the real estate.
Function of labor efficiencies.
For the international segment distribution expenses as a percentage of sales ship from warehouses, excluding moving costs to the new distribution facility was 70.1% in 12.1% for the 2019 in 18 quarters respectively.
This increase was primarily driven by higher higher labor costs related to the operational challenges node.
You bet segment X gene a expenses with 31.4 million into 2019 quarters compared to 30.7 billion in 2018 quarter. Excluding the reversal of the contingent liability noted the 2019 period includes higher incentive compensation as street eight for international.
6.7 million in 19 quarter hits is 6.3 in the 22 quarter, primarily due to higher employee and I T expenses related to the reorganization.
No unallocated corporate expenses were 5.1 million down from 5.4 million into 2018 Korea.
This decrease was mainly attributable to lower professional fees.
Income tax expense for the full year 2096, among other adjusting items non deductible nondeductibility goodwill impairment charges, our normalized effective tax rate is expected to be approximately 30% going forward.
During 2019, we generated positive cash flow, which enabled us to reduce our net debt by approximately 60 million, which includes completion of approximately 60% of our SKU rationalization program.
This was partially offset by negative cash flow from our European operations.
Portion of the cash used for the European operations was planned integrate and Scream line it into a single cohesive business unit.
At December 31, 2019, our net debt was 292 million and liquidity that is availability under our credit facility plus cash on hand was approximately 126 million.
Later this month, we expect make an excess cash flow payment pursuant to the term loan agreements of $7.1 million.
This concludes our prepared comments operator, please open the lines for questions.
Certainly the floor is now open for questions. If you would like to ask a question press star one on your telephone keypad.
Your first question is from Linda Bolton Weiser of D.A. Davidson.
Hi, good morning.
Morning.
Can you talk about.
I mean, I am I missing something are you guys are you not giving any guidance for 2020 or did I Miss something in the press release or can you just comment on that now you Didnt Linda and you know I was you will see and consistent with past practices on our yearend call.
We talk about the yearend and in the next calls when we gave guidance.
Oh, Okay, sorry about that and so I think that in investors' minds that people have moved on from the China supply chain concerns and I think the investor is now more thinking about potential recession in the United States or globally in the coming year.
You just comment on your business and how that would fare in a recession scenario and what product lines tend to stand up a little bit better versus others within your business and how does macassa and because of hospitality how would that fair I would think that would be pretty cyclical. Thanks.
Sure Linda Yeah excellent question, it's something we're very focused on a we do believe that it's demand we I would be the impact if any on on the current about virus, which we have yet to see any in terms of what we've been shifting so far this year, which which remains ahead of expectations.
You know if you look at our business lines and what we sell recognizing that the average chicken of what we sell you know isn't very expensive young people are buying a can opener a they tend to a in recessions five can opener rather than you know take a hammer out and try to open up the can so.
A lot of our product lines are or the majority of our product lines actually fared pretty well and even if you look at 2008, you know the company rebounded really fast faster than a you know other Uh huh.
Industry segments of what we sell a and within our industry as well.
On the one area or that it doesn't do as well would be the dinnerware and particularly the consumer dinnerware a market in macassa hospitality and our opportunity. There a we don't believe we're gonna be significantly impacted because it there is an opportunity.
City for us to take market share and a matter of fact of recession would only help us because a lot of people Oh, we're competing against in that area. We're already taking share from them in in <unk> and other areas I mean, it hurts their ability to liver timely as well is making necessary investments because.
They're not as big in foodservice, you need to have 100% delivery, it's not like yeah, you're bringing the stuff in from China and you. It's too much on the water you know if someone puts an order they expect that order to be out of your D. C or because you you keep the investment in working capital not that foodservice operators and district.
Theaters, so that our stability and the message we're sending into the marketplace to do that is helping us so far at least in that dialogue or be more advanced than we thought we'd be so we actually believe of recession, but help our penetration and front of the house initiative.
Moving from nothing so it's all Incrementals. So we don't see any impact if anything a positive.
Okay. Thanks, that's helpful. And then can I just ask you I think your cash flow here was pretty strong I think it exceeded our expectations in the quarter I am I to understand that Youre you are initiative to generate cash.
I think the target was for high cash flow through June or July of 2020 are you still on target for for that and therefore would we expect pretty strong cash performance in the first first half. Thanks. Yeah. We are you know what we've seen also with the unit.
Yeah on the SKU rationalization side.
And also this.
The seem a in our European operations, where we did something semis, we consolidated into one warehouse is that the demand for the inventory that we were looking to liquidate was higher than our expectation partly due to some of these external influences.
And people not being able to sought supply product. So hey, we got we out product where substituting it you know into these different channels.
And we're actually getting more margin that we thought and selling that and it's going better than expected.
One piece, so yes, two things.
Talk about 2020 is we did have very positive as Larry mentioned cashflow forms for the year [laughter], but we also for the year funded significantly ahead of next that more we didnt have the expectations or because of the operations. This is in the UK that will reverse.
Itself and how cash flow in 2020. So we are confident in what we've laid out for 2020, notwithstanding the above expectation performance in cash flow for 2019.
Thanks, and can I just ask one more on.
I I think one of my other companies I can't.
Quite remember, who but they had mentioned that they felt that because of maybe less store traffic because of corona virus in stores that actually they were seeing a big pickup in E Commerce and I know that a lot of people think Amazon is really going to benefit from this situation are you actually seeing that I know you said your ecommerce was quite strong.
It's it's gotten to be a big percentage, but can you say that you're seeing that phenomenon, where it's it's actually shifting it more toward ecommerce.
Substantially so and what we're seeing because we've got a lot of data and protect you from pure play E. Commerce is that our first quarter shipments are meaningfully up but we also get to see sell through because you want to you know our certain people.
Well I loading up because if you're a supply chain, but the sell through has been substantially all so I don't know if people are as result of kroner virus. You. One would expect you know people are buying more in line, but definitely.
We are seeing a robot shipments.
On the in the online environment.
Okay, and then just one more if I may and the gross margin I think that Larry said, there was some kind of a tariff refund benefit can you just to repeat was that for the year or the quarter and then well you see some of those benefits going forward in the future quarters. Thank.
Yeah.
So that that was in the quarter.
Yes, So we had some list, particularly on lift to.
Mainly that pertain to where we were paying tariffs on stop it sounds like it's true and Ah while we petition we got no relief and then the government changes mine and excluded those items. So we were able to get a refund on on that its a onetime event.
You know, but whats not a onetime event is that now we're shipping in 2020 that product with no tower off and therefore higher margin see we're getting in a different way, but not the refund let me start but yes. It was received that obviously in the quarter put it does relate to sales.
With that product classification.
We'll go to put into that try to classification. During 2000 full 20, Nike catalyst to came out in the fourth quarter of 2018.
And then you included that benefit in your results you Didnt break it out as a special item correct.
I would just flows through okay.
Okay. Thanks, very much I really appreciate it.
Thank you.
Thank you. Your next question is from Anthony Lebiedzinski of Sidoti and company.
Yes, good morning, and thank you for taking the questions. So.
So as far as the I guess just to piggyback on the tariff question, so as far as a phase one China deal that was signed in.
Late December.
Did that have any impact.
We will have an impact on 2020.
It will in.
To ways.
One is that the Oh God no big part or lists for was not put in place. There was a substantial amount of incremental tariffs that were not placed on products that we sell.
And I I, that's you know.
While we would always try to mitigate the you know it's still a positive and now and as you saw in 2019, there's Jay Carvell impact, we paid over $21 million or were responsible for over $21 million tariff payments in 2019, we didn't get that all back right. So that's that that will have a positive impact.
But we also is part of that phase one deal there were some rollbacks.
And therefore, we get the benefit of how does roll backs because the amount of tariffs in.
Those particular items were taught in half roughly so a year, we will pick that up dollar for dollar going forward.
Got it okay.
All right. So that's good to hear and if we could just go back to the fourth quarter. So.
Is it possible for you to isolate the UK operational challenges in terms of the revenue impact that you think that might have had for the quarter as was from an expense impact. The just the operational issues do you have a sensors the magnitude of those.
Yeah, I mean, the net impact bottom line was around $4 million.
And that's a combination.
Yeah, there were delayed shipments, but they're also canceled shipments that were fines and penalties George the substantial cost to try to get the warehouse operationally and we needed to throw a substantial amount of head count in it so expense were way off as I mentioned, we've reduced.
Well, we do 60 heads in January and February that would just thrown out the problem. So just a mixture of a lot of different things parts of the total impact of all that was if you look at it even tougher than perspective.
About $4 million.
Okay. Thanks, Thank you for that and so I I know you're not prepared yet to give.
Precise guidance for 2020, but that being said <unk> are there any.
Hi level thoughts. So you can provide us as far as how we should think about broadly speaking a you know sales I know you mentioned that one the virus has not had to get an impact.
On the on demand the no impact on the supply chain, but sort of any are you sort of high level thoughts. So you can point to.
So when we think about updating our models going forward. Thank you yeah I understood. Anthony <unk>, you know I mean look the world's going crazy.
And it's really hard to synthesize all the data.
You know and there's there's a lot of unknowns I mean, we're taking a lot of precautions saw for you know a cautionary actions we've set our shut our Seattle operations. All GNC outlet shot you know that will not you know so we have a big investment we've moved everything the by Fortunately 2019, including our major ERP.
Some S.A.P., but all the sub systems onto the cloud. So it allows us to access you know ER and be able to work remotely. So we're not missing a beat even though we shut down the Seattle operation as an example, but there's a lot of moving parts <unk>. What we can report today is that you know look we're almost done with the first quarter, we have not seen an impact.
We had the inventory or you know demand was there a and like I said exceeded our expectations that were made pre corona virus.
You know, we're still there's still a lot of unknowns and we hope to you know.
Analyze those sufficiently no over the next.
Couple of months.
Okay all right.
And then.
Other than the [laughter] Corona virus or any other like is it cost tailwinds or headwinds that we should think about anything you can obviously you won't have the operational issues to deal with in the UK or anything else from a expense.
Point of view that you can mention as far as Twentytwenty.
Yeah.
Yeah, we still we're doing a we're on plan.
At a minimum in terms of our rollout of Macassa hospitality or we are adding to that while we've always been a significant player in back of the house, particularly small, whereas we are expanding that offering he added <unk> will be in 19, and we're doing or are we didnt really.
Decide to ramp that up a until more recently, so there's a bigger opportunity there as well as in Europe, which we didnt really talk about in Investor day, we haven't talked about the public but as you know weve launching a that we've seen an opportunity a and are aggressively pursuing that we have now.
Rented a you know and started to roll out or international strategy. So we have country managers as opposed to going through distributors and agents or in a eight countries and growing and those would be the largest geography is that we play and.
We go live this year, which six of our brands on.
A t. mainland, China, which you should be a huge opportunity. So there's a lot of things I think it's more Anthony we're executing on the things we talked about a you know the biggest sort of unknown variables that is since we talk has been Corona virus and then it would give you an update on how we manage that today.
Okay.
Well, thank you and best of luck.
Thank you.
Thank you. Your next question is from Alan Weber everybody advisors.
Oh good morning.
Yeah, Hi, just a follow up on the previous question in in all of you ever did you say.
The EBITDA was a 4 million dollar impact is that just the fourth quarter.
What was it for the year.
[noise], though that was for the year, yeah that was yeah, but it really happened substantially in the fourth quarter and a little bit of the third quarter.
And are you expecting that I mean was the plan.
When you say stable.
Okay.
Become a positive or you're just expecting kind of breakeven.
When you 20.
No, we're expecting a meaningful positive swing to the business.
The operational issues have as of January been solved. So you know we've we've ship you were backup to normal deliveries.
We so no there should be substantial.
Profitability this year in that business.
But what kind of margin should that business normally have.
No as Larry mentioned, you know it was mid Thirtys and here because of our issues was down to mid 20.
Gross profit and they should be comp ASU historically, its been comparable the mix to our U.S. business, you know between kitchenware products and tabler, Okay mix, a little different but yeah and they hadn't like for instance that there's different.
Types of channels. There club is not as big as it is here, which is lower margin business lot more independence or whereas the U.S. business is much more national.
Presence and mass and so forth.
Our price.
Okay, and then I guess my other question was announced accountability.
What is the thought process in terms of.
The amount of investment that you think you're going to make it when it 2021 that you would expect got to start to show.
Ability.
Yeah. It's a great question Alan So you know our investment or you know is greater is seven figures and we'll start getting a return in 2020, but it's yeah can be 2021, where we'll see you know a return that you know.
Yeah.
Beats, the elevate our cost of capital.
Okay, great Yeah that makes sense, all right well listen thanks, an awful lot.
Thank you.
Thank you there no further questions at this time I will turn the call back over to Rapkay for any additional or closing remarks.
Thank you everyone for participating participating on today's call.
As always we appreciate your continued support of lifetime brands and have a great day.
Thank you. This does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day.
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