Q1 2020 Earnings Call
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Good morning, ladies and gentlemen, and welcome to lifetime brands first quarter Twentytwenty earnings Conference call. At this time I would like to inform all parts of participants that their lines will be in listen only mode. After the speaker's remarks, there will be a question and answer period. If he would like to ask a question. During this time. These special one on your telephone keypad.
I would now like to introduce your host for today's conference Andrew Swire. Mr. Square you May begin your conference.
Thank you.
Good morning, and thank you for joining lifetime brands first quarter 2020 earnings call.
Well this today for management or Rob <unk>, Chief Executive Officer, Larry Winoker, Chief Financial Officer.
Before we begin the call we'd like to remind you get a box. This morning may contain forward looking statements that relate to the future performance of the company.
These statements are intended to qualify for the safe Harbor viability established by the private Securities Litigation Reform Act.
Such statements are not guarantees of future performance in sockets that could influence our results highlighted in today's press release and others are contained in our filings with securities which troops much.
Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of regulation G promulgated by the Securities Exchange Commission.
Included in subsequently there's a reconciliation of these non-GAAP financial measures for the comparable financial measures calculated in accordance with yet.
Got introduction I'd like to turn the call over to Rob.
We still had Rob.
Thank you.
Good morning, everyone and thank you for joining us today to discuss lifetime brands first quarter 2020 results.
I hope that you your family your friends and your colleagues are staying safe during these unprecedented times.
Before I begin I'd like to take this opportunity to recognize the exceptional efforts of our associates, including our operational teams, who have kept our facilities running safely and proto productively to ensure we can continue to deliver the products our customers know in line.
I would also like to thank our sales marketing and administrative teams who have been professional productive and highly effective as they work remotely.
At life time brands, we've been working diligently to deliver strong results, while ensuring the safety and well being of our employees.
Driven by the impact of our lifetime 2.01 issue there.
Combined with the actions we have taken since the onset of the covert 19 crisis. We're pleased that we delivered solid results in our core U.S. business.
These results were achieved with strong performance from several of our major customers and channels, including a significant increase in ecommerce sales.
Enabling us to generate significant cash flow and meaningfully lower our net debt in the first quarter.
This was slightly offset by the anticipated impact from the operational challenges in our European operation, which began in 2019.
And with solved by the end of January 2020. However, we also faced challenges in our international business, where there was a more significant impact from the cobot 19 crisis in the first quarter, where the border closures and retail store closures, resulting in shipping delays and lost revenues.
Let me start with our core U.S. business.
Ecommerce represented one of the most important growth areas this quarter contributing 16.7% of our total revenue for the first quarter.
Importantly.
That figure excludes a significant amount of additional ecommerce sales to omnichannel retailers, where we cannot easily tractor percentage sold online, but which were a key contributor to our success this quarter.
Further this figure was achieved notwithstanding our major E commerce customer shutting off all orders in mid March through the end of the quarter.
Of note this customer resumed resumed order activity in beginning of April.
Additionally, we saw strong performance in the grocery channel.
With the company is gaining market share and which we believe presents a compelling value creation opportunity for lifetime brands as we have not had a store historically large presence in this sector.
The growth in the first quarter was a combination of market share expansion and strong demand by the consumer for our products, particularly kitchenware, which experienced continued strong demand both before and after of the and after the impact of the cobot 19 pandemic became visible.
When many retailers it began to close brick and mortar stores in mid March we did experience to drop off in demand from these customers.
However, we were able to offset the same pack to enhance sales to the ecommerce channel.
Those brick and mortar customers that remained open as well as omnichannel retailers.
This resulted in our ability to grow revenues year over year in the U.S. led by our core kitchenware business.
Turning now to the international business as we have previously discussed the operational issues from 2019 extended into January 2020.
However, LTB Europe was also hit harder by the impacts of Kobin 19 in the first quarter with a much higher proportion of independent retailers, who were all shuttered and border closures, resulting in shipping delays and lost revenues.
With the operational issues now behind US we believe we are well positioned to capitalize on the reorganization of our European operations.
Our operational repositioning has enhanced our capabilities exemplified by our focus on using our improved infrastructure to offer drop ship to national retailers that has resulted in an increased from 1000 shipments per week.
To approximately 3000 shipments per day from our consolidated UK warehouse.
We are therefore confident that despite recent challenges.
We will see a significant improvement in profitability and cash flow for lifetime brand, you're going forward, particularly as cobot 19 recovery efforts continue.
Let me briefly touch on our commercial Foodservice initiative.
2020 was intended to be a ramp up here for our Macassa hospitality brand.
Significant sales activity to begin building market share in this new category, where we have significant opportunity for growth.
However, with the sharp declines in the hospitality industry.
Many restaurants hotels and other foodservice operations have closed and we expect a delay in when we'll start to see the benefits of the investments we've been making in this area.
Even so we were actively pursuing revenue opportunities in both the U.S. in UK and continue to strongly believe this a meaningful channel for long term growth in our tabletop serveware carpentry kitchen tools and small wears product categories.
I will now discuss the aggressive actions we've taken at lifetime to address the potential impact of the Covidien 19 pandemic on our business.
Across all our operations in the U.S. Asia and Europe, we have managed operating cost with meaningful reduction implemented in spend across most categories, including compensation other benefits trade shows and travel and commission structure.
We are further taken steps to increased liquidity by negotiation by negotiating rent abatement and deferrals.
And changes to payment terms for trade and administrative vendors.
Together these actions have and I believe we'll continue to enable lifetime to achieve solid results that give us confidence in our ability to navigate the current environment advance our strategy and drive growth.
As we generated cash this quarter, our net debt position is noticeably reduced and favorable year over year, placing us ahead of our expectations on our commitment to lower our debt levels to guided targets.
We dramatically lowered our net debt position and achieved this cash flow performance notwithstanding the cobot 19 situation and operational challenges from our European operations.
Additionally, in an effort to preserve our cash balance, which was $85.3 million as of March 31st.
The board of directors has determined to postpone the dividend on our common stock that was payable in May 2020 until December 2020.
Given the uncertainties about the future direction or economic impact of the ongoing cobot 19 pandemic. We believe this is the right decision as it offers enhanced liquidity to the company.
We will continue to evaluate the situation going forward and movie visit all cobot 19 related decisions in due course.
Due to the ongoing economic uncertainty caused by the pandemic.
We have decided not to provide an outlook for our full year full fiscal year 2020.
Nevertheless, thus far in Q2.
We continue to see fairly strong demand and shipping levels in our core U.S. business.
With the strong E commerce activity and demand from our largest customers.
Driven primarily by kitchen, food prep and food prep and cutlery products that have remain popular as more families are cooking at home.
Thanks to this underlying demand our U.S. business is trending flat year over year, and our UK business is showing sequential improvement.
Looking ahead to the rest of 2020.
We believe the actions we have taken will help to mitigate the continuing continuing impact of cobot 19.
And we will continue to take actions as needed to ensure the stability of the business.
We believe that the foundation, we have built over the past few years with the actions of lifetime 2.0.
Provides us the infrastructure flexibility and liquidity to weather this period of uncertainty.
As we continue advancing our strategy. We're confident that are more focused business model and strategic growth initiatives will enable us to generate significant cash flow improved growth and profitability and create meaningful shareholder value moving forward.
With that I'll now turn the call over the Larry.
Thanks, Rob.
As reported this morning, the net loss for the first quarter 2020 was 20.2 million.
All in 36 cents per share versus a net loss of four point ninemillion.
24 cents per share in the first quarter 2019.
Adjusted net loss was 5.7 million.
20, 2027 cents per share versus an adjusted net loss of $4 million or 19 cents for sure.
The table, which reconciles this non-GAAP measure to report results was included in this mornings release.
Loss from operations was 25.2 million 20, 22.3, 29 T. The loss from operations for the current period was 5.1 million, excluding the impact of a noncash charge for goodwill and intangible asset impairment related to the U.S. business segment.
The current period loss from operations includes a charge.
Bad debt reserve 2.8 million should provide for potential credit problems certain retail customers may have financial difficulties caused or increased by the cold in 19 pandemic.
Adjusted EBITDA, a non-GAAP measure those reconciled to GAAP results in the release was 61.2 million for the trailing 12 months ended March 31, 2020, after giving effect to certain adjustments and before limitations as permitted and defined in our credit agreements.
Adjusted EBITDA was calculated to include the tries to bad debt reserve of 2.8 million today just mentioned.
Net sales in that 2020 quarter, well 145.1 million compared to 149.9 billion for the 2019 quarter.
The U.S. segment sales were up 2.2 million to 129.2 million. The increase was primarily that wed like to truly has continued success or programs that commenced in the latter part of 2019 for several product lines as well as increased.
<unk> sales.
This increase was partially offset by decline for products, so predominantly to customers that will close to the endeavor.
Oh.
Second sales were down 7 million to 15.9 billion on reported basis in down 6.8 million in constant U.S. dollars as Rob noted. This decrease reflects the operational issues in late 2019 that extended into the early part of Twentytwenty and the impact of Cobot, 19, which had a more ever.
It's affected the quarter, therefore, our U.S. businesses.
Gross margin increased 30 basis points to 36.5% in the 2020 quarter.
The U.S. segment gross margin was 38.2% in 2020 versus 36.5% last year.
Improvement was primarily due to an increasing kitchenware and the overall in the overall product mix driven by the company's targeted efforts as part of lifetime to Plano initiative, which we have discussed in prior earnings calls as well as at our November 19.
Investor Day.
For the International segment gross margin was 22.9% in 2020 compared to 34.9% in 2019.
This decrease primarily reflects the impact of the operational issues noted that temporarily affected customer service levels.
Distribution expense, the 2020 was 11.4% of net sales versus 10.6% 29 team.
For the U.S. segment distribution expense as a percentage of sales shift from its warehouses, excluding moving and relocation costs.
Were incurred and 29 team.
Were 9.8% <unk>, 10.8% periods, respectively.
Improvement reflects the continued realization of labor management efficiency and the benefit of leverage of fixed costs on higher sales volume.
For the international segment distribution expenses as a percentage of sales shift from its warehouses, excluding moving costs.
For the new distribution facility were 15.9% and 11.6% in 2020 and 29 P. respectively.
This increase is primarily attributable to the operational difficulties and inefficiencies associated with consolidation into the new warehouse, most notably higher temporary labor.
Selling general and administrative expenses were 41.5 million in 2020 versus 40.1 million 2019.
The U.S. segment expenses was 30.4 million in 2020 as compared to 20.4 million 2019.
As noted in the earnings release, you charged a bad debt reserve was provided for potential credit problems certain retail customers, who had financial difficulties.
Cause or increase by the covert 90 pin debit.
2.8 million consolidated charge 1.9 billion related to the U.S. segment.
6 million 2019 on lower professional fees.
In the 2020 quarter. The company recorded a 20.1 billion million dollar noncash goodwill and intangible asset impairment charge related to the west business segment.
The impairment charge resulted from among other factors more conservative estimates of future cash flows.
Right of the uncertain market conditions are rising from the cobot 19 pandemic.
During the quarter, we recorded a non cash charge of 2.3 million for a mark to market loss on certain of our interest rate swaps. These swaps were invented into to lock in a fixed interest rate on our variable rate debt.
The loss was caused by the recent precipitous decline in interest rate.
Our intent is to hold these swap contracts until maturity.
Hence overtime this noncash loss will reverse.
For the 2020 quarter. The company recorded an income tax benefit of 3.7 million and effective rate up 11.6%. This varies from the federal statutory rate of 21% primarily due to the impact of non deductible expenses of which the most significant item was the goodwill.
Impairment charge.
And as of March 31, 2020, our liquidity, which includes 85 million of cash plus availability under our credit facilities was 137 million.
As Rob described earlier since late March we have performed significant work to address the cash flow impact of cobot 90, when much of the economy and in particular, the retail sector close down.
This work coupled with the strength of our core business has enabled us to protect our liquidity.
We believe that availability under our revolving credit facility and cash flow from operations will be sufficient to fund the company's operations for the next 12 months.
This concludes our prepared comments operator, please open the line for questions.
At this time I would like to remind everyone that if you would like to ask a question two questions. One on your telephone keypad now again nexstar one for any questions over the phone line, we'll pause for just a moment to compiled acuity roster.
And the first question will come from Linda Bolton Weiser with D.A. Davidson.
Hi, Hi, how are you look good I hope you doing well yes.
So your your.
Your operating cash flow is quite impressive in the quarter actually this is the second quarter in a row that you beat our estimate can you give us a sense for I seem to recall that your target for.
Improving cash flow would mostly through the June 2020 period. So are we to expect as big improvements in operating cash flow in the second and third quarter or will the improvement kind of taper off a little bit as we look to the next few quarters.
Okay.
Yeah sure Linda.
So just to clarify.
There were some initiative that we had announced in 2019, which would supplement.
Our operating cash flow and that was primarily the SKU rationalization and potentially yeah divestiture.
Mhm.
Small product line.
The whether we pursue the divesture is not there.
Huge but.
What is not in our cash flow, so obviously that would be supplemental to the future.
But we have pursued this Q rat and that has.
Supplemented our cash flow a little bit, but what's my the majority is driving it is just the performance of the core business and the cost that we've taken out of the business. So we're generating more cash on the bottom line.
Okay. So it sounds like we can expect to see continuing improvement.
At least some going forward is that kind of what you're saying.
Yeah, Linda so.
Yeah.
Historically, you know this others notice that we generate cash obviously, the latter part of the fourth quarter well into the into the first quarter, but generally that's when generally starts to let's say flatten out a lower because.
Yeah, we collect the most of the receivables that were generated during the holiday season, and now we generally again see generally because the world has changed generally now is when we start to build a working capital and we'll see a.
More borrowings again, it's hard to say now because of that some of the changes in business practices given the.
Pandemic and what happens with stores reopening, but but as said historically second quarter, we would not see we actually see a decline.
Okay.
And then <unk> when you reported in March I think it was around March 10th or 11th you had said that the issues in the UK aberrational issues were completely resolved as of January.
So I'm I'm, a little surprised that the gross margin in international was so impacted because the issue supposedly were overweight in January so could you talk about just why I mean did you continue to have some issues in February and March or can you explain that thing yeah I will definitely.
Sorry for the confusion yeah. So by the end of January and we had.
Celgar operational issues.
In the UK that has not changed.
The as.
Once we saw the operational issue then we needed to we had thrown sorry for not articulating well.
In advance of solving the operational since we started throwing a lot of cost to make sure. We can continue to shipping and minimize disruption a lot of that was temporary labor. So the labor inefficiencies in the warehouse or were quite strong.
Hi, and we basically eliminated those by the end of February. So we did have a hang over in terms of the operational cost would had an impact of margin in the first quarter, which we had anticipated. We may not have worked articulated that well, but the operational issues were sound continue to remain fine and matter of fact that I had mentioned in my remarks.
As a result, now with enhanced dropship capabilities and speed of doing that we've been able to benefit and capture a lot and as I mentioned, there's a 15 fold increase in what we're shipping on a drop ship basis from four to two now.
Okay and then.
And just see I think you said in your remarks that the U.S. cells in April.
We're kind of trending flattish you know April may flattish year over year.
So you know <unk> can you just confirmed that that's kind of what you said with international still down but improved sequentially is that kind of what you said.
The United We said, we as we kind of look out for now.
You know you can't tell in any given month, we've had a good start in Q2.
In the U.S. business and you know the mix is a lot different for instance, we had over 28% of our business in April that was E commerce.
So this for a lot is you know is shifting but the business performed fairly well year over year so far.
With may not Don in April the books.
Okay.
No I know that.
That Helen of Troy I had mentioned in their OXXO business that it's the business is actually benefiting from people staying at home you know buying kitchenware type stuff are you kind of thing that phenomenon in your business and that's why it's holding up.
Very much. So so you know we always joke about you know can openers, we can't keep them in stock and you know we've always talked about that was absolutely true you can't you can't buy am I you know we're trying to.
Accelerate as much as possible.
And the demand for all of our Kitchenware Kitchenaid Farberware, you know primarily has.
Greatly exceeded our expectations and both in E. Commerce, you know the omni channel guys that are you know working just our web sites, but the other major customers that are on a lot of our major customers are open and grocery so kitchenware cutlery.
And there's a bunch of categories that have remained stronger actually stronger than what we expected because the theres been a big increase in demand as people are doing more eating at home.
<unk>.
Great and then I'm can I just I'm asked one final one on.
I guess I guess, you drew down some on your revolver. So technically your total that including the revolver increased in the quarter right, but or do you intend to keep kind of cash on the balance sheet through the rest of the year or will we see the did the debt actually coming down for the year, including the revolver.
Yeah. That's a good question I mean, the truth is you know we pulled down on the revolver and we haven't needed it.
But in an abundance of caution because there's so much uncertainty created by cobot 19, the pandemic.
We have.
Greatly exceeded.
Our cash flow.
Flow since we did that.
But we still are prudently remaining not repaying that amount, yes, we have little negative carry as a result, and we'll continue to evaluate that right. We still are looking at things reopen you'll be looking theres a second wave. So we just think it's abundantly prudent to have that buffer if everything goes up and the.
World You know, we're sitting on $85 million a cash.
Okay. Thanks, so much and good luck with everything thank you Stacy.
The next question will come from Anthony Lebiedzinski with Sidoti and company. Please go ahead.
Hi, Good morning, gentlemen, I hope you are both doing well thanks for the up to take the to ask questions.
So I know you talked about E. Commerce is certainly seeing a nice increase in sales can you talk about the margin profile or whether it's a different the when you sell to Amazon or it's a way for us for the margin for the products versus the traditional brick and mortar retailers.
Were.
What we can say is that we are seeing and improving overall in our margin on a year over year basis. So we have as the shift has impacted we havent seen any deterioration in margin though.
Got it okay. Thanks for that so.
I know you talked about the supply chain disruptions in the UK impacting.
The results for the first quarter.
Sounds like everything has been resolved so.
Looking back. So so you you said the international segment gross margin was a 22.9 versus 34.9 a year ago.
Notes are correct so.
Is there any reason to think that the mechanical back to those margins from a year ago now that the.
Issues have been resolved or is there are some some or something else that could perhaps prevent you from achieving those margins that you had a year ago before the disruptions.
Yeah, Nancy's Larry no. There's there's no particular reason why that would be member we said that the.
This is similar to Cook a hangover from some of the operational issues the.
The customer service levels.
That being.
Deal to us.
Later this.
First quarter.
So there's nothing.
About the business that would cause it to.
We'll go back to southern causes it to continue as is.
Got it is waiting was the first quarter, so well pull the word it responds to say no it should be a nonrecurring.
Condition.
Okay, great. Thanks for that.
And I.
I know you guys I'm, not giving any formal sales or your EPS guidance, but I guess as far as it just just looking at the other line items as far as expenses I know you have done some expense reduction initiatives.
Can you perhaps quantify.
Those are the expense reductions as to how we should think about adult flow through the piano through the rest of the here.
Yeah. It's it's again, it's a flux target we have been very aggressive.
Looking at all categories of spend as I mentioned.
Yes, so you'd see a.
Positive variance.
Across all categories, but we're also monitoring the situation you know a for instance, yeah. We've been in a position that Weve furlough DNL 101 hundreds of people.
And but is not a you know we evaluate in terms of bringing people back.
We right sized you know in the UK.
In particular, when you know there wasn't buying we had to rightsize our operations.
You know as things normalize you know there will be increase spend so I you know we can't say that it's permanent situation is all influx, but we can say that you know we are reacting to protect.
The company's results as the situation evolves.
Got it right. Thank you and best of luck.
Thank you.
The next question will come from Justin Putnam Putnam with Talanta. Please go ahead.
Good morning.
Yes.
Yeah. So.
Obviously, all the turmoil in the back half for the first quarter and so far in the second quarter with.
Everything is going I want to pandemic it sounds like.
First half.
The second quarter.
Being flat in.
In the business sales.
Maybe a pretty marketable achievements so congratulations on that.
However, I guess, Rob I'd be.
Helpful. If you get a little bit more information about your.
Our thoughts and expectations for the.
No the back half of the year in particular because that is your.
Largest your questions largest profitability and largest ours revenues.
Would you consider the successful third and fourth quarter, if you maintain a similar pace similar flat pace.
In the back half of the year or.
How would you characterize that just trying to get a sense of.
Everything is playing out with the changes made with the company and what's going on and the.
And the wider world.
Yeah, there Justin I'm appreciate the question here I mean beyond what we've already given just yeah. We think it's prudent didnt similar to a lot of other companies that it's there's just so many moving parts that you know, we're not providing any detailed guidance.
Yeah, we can as we talked about say that when.
You know, we we reacted we think very quickly and very aggressively on all fronts.
In terms of how we manage the business with uncertainties and potentially economic crisis created by this pandemic.
And we did that globally and we looked at everything we do both how we do it the ability to continue to operate and and the like so Fortunately, we haven't had any shipping disruptions both from a supply chain perspective.
And we had stress tested it in a situation like this you wouldn't and I can say that we've been.
Pleased that what has happened senses.
Greatly.
Exceeded our expectations of what could have happened in an environment you know, but you know our products are in demand in recession.
As we've talked about you know what happened in 2008 and you're seeing it here you know so so you are there has been really good demand for a lot of or our product categories.
Yeah, but but there's a lot that we don't know I'm in which is why we're not giving specifics. You know is you know they're going to be a second wave what impact that will be we can say that the mix has changed a lot. Yeah. We're doing a lot more E commerce as I mentioned, you know 28% over.
<unk> percent of our shipments in April.
We're ecommerce and that's the big ecommerce guys, but it's also you know the <unk>, which included are in addition to that isn't we're doing a lot of omni channel now as I mentioned in the UK.
We went from 1000, a week to 3000, a day drop ship and that's omni channel.
And and that's not like Amazon for instance, a which is a big customer for there.
So you know we are benefiting from increased demand you know, it's been as I said exceeding our expectations.
Giving us so far good performance, but we don't known when you know we're not commenting on what the future will hold one other point is yeah lifetime had moved everything to the cloud are complete infrastructure. So we could do call center, we could do everything remotes, what's been seamless for us.
And while our salespeople on traveling you know they are actively involved in conversations on setting up plan O grams and working on.
Programs for the fall and holiday season, with our major accounts has not stopped.
Okay.
I appreciate that their commentary thank you.
At this time there no further questions I'd like to turn the conference back over to Rob K for any closing comments.
Great and thank you. Thank you everyone as always for joining our call listening and for your questions and asking us for clarifications, everyone stay safe and we appreciate your listening in on our call.
Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.
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Oh.
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