Q2 2020 Lifetime Brands Inc Earnings Call
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Ladies and gentlemen, this is the operators today's conference is scheduled to begin momentarily until then your lines will again be placed on musicals. Thank you for your patience.
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[noise] good morning, ladies and gentlemen, and welcome to lifetime Brands' second quarter 2020 earnings Conference call.
This time, all participants are any listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone.
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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' second quarter 2040 earnings call.
They from Michigan, or Bob Jones, Chief Executive Officer learned when they occur Chief Financial Officer.
Before we begin the call I'd like to remind you put on remarks. This morning de contain forward looking statements that relate to the future performance will be pumping.
These statements are intended to qualify for the safe Harbor liability established for the private Securities Litigation Reform.
Such statements are not guarantees would be superwoman doctors that could equal in close both highlighted today that's really.
I'll do it doesn't seem to though filings with securities It seems.
Our remarks this morning and in today's press release, often contain non-GAAP financial measures within the meaning of regulation G. Promulgated about security midstream missing included and that's really is reconciliation of these non-GAAP financial measures to comparable financial measures calculated in accordance with gap.
Got it because that's the I'd like to turn the call over to Rob.
Please go ahead Rob.
Thank you.
Thank you good morning, everyone and thank you for joining us today to discuss lifetime Brands' second quarter 2020 financial results.
We're pleased with our second quarter results, which have demonstrated the resilience of our business model and challenging economic conditions and the benefits from what we are creating through our lifetime to porno strategic plan.
Our strong results for the quarter were driven were driven by end market demand in several categories, including kitchen tools and gadgets bakeware Barware and car.
This result was achieved through our ability to capture revenues by quickly shifting to meet stronger man and sell channels, including ecommerce, Matt and grocery retailers over.
Overall, our company grew consolidated net sales by 5.3% over the second quarter of 2019.
Producing strong bottom line growth, including an increase in EBITDA from 8.1 million or 13%.
As Marty will discuss we also continued to generate significant cash flow and lower our net bad in the second quarter.
And we were encouraged by that improved performance in our international business.
I'll talk about for U.S. business.
Building on a strong second half of 2019.
Continued growth in the first quarter 2020, we continue to see strong demand and shipment levels in our core U.S. business.
We've been increasing activity in our ecommerce math and grocery channels.
Our kitchen food Prep Korean bakeware products remain popular this quarter as families continue to increasingly cooked meals at all.
That Ed the strong demand led to numerous products that were difficult to keep install across the majority of our popular skews and these product categories.
We worked hard to accelerate our supply chain to get these items back in stock, which we expect to happen during the current quarter.
We continue to gain market share and grocery where we historically have not had a large but.
We are excited about the opportunities ahead for sustained growth in this channel.
We also saw our business mix change as many brick and mortar stores remain close during the quarter.
With more customers going online and to retailers with grocery operations to shop.
We quickly shifted to meet this demand and capture these sales.
Of note our pure play E commerce sales for the quarter were 27%, which represents an increase from 16 20, 16.2% in the first quarter and 13.6% for the fiscal year 2019th.
Please be reminded that this does not include our sales to omnichannel retailers as we don't track the ship and separately.
However, our shipments omnichannel retailers grew substantially in this period, which can be noted in our increase in drop shipments of 123% versus the first quarter.
This combined with our increased sales in the math and grocery channels more than offset a decrease the sales from retailers that closed their brick and mortar locations due to co bid 19 mandates.
As the U.S. economy, reopens, allowing brick and mortar retailers to open stores, we expect to see an increase in demand from these retailers and have been starting to see such demand for the third and fourth quarters.
Turning now to the international business.
Even though our international business was down compared to prior year driven by a drop in demand caused by the impacts of cobot 19.
It achieved meaningful progress I, just started showing growth by June as we began to see the benefits of our shift to a drop ship model.
And the beginning of a recovery in their end markets.
As we've discussed in the past our international business is more heavily weighted to independent retailers a national chain retailers.
Both of which were mostly closed during the second quarter.
Starting in June we saw an increase in demand as we were able to utilize our dropship capability to cap for larger share a rebounding E Commerce channel, which led to higher revenues and contribution margin.
We've also started to see reopening and therefore demand from retailers across Europe.
This should greatly improved results for our European operations in the second half of 2020.
As we move forward with transforming our international business.
We're always looking for opportunities to improve efficiency.
And focus on our most productive assets.
In line with as we made the decision to eliminate certain products that do not provide adequate returns for the company and monetize this inventory more quickly.
As a result, we are incurring a charge of $300000 to write down the value of these products and free up more cash.
Discharge impacts margins for the quarter, but monetizing these unproductive assets will allow us to free up stranded cash flow.
Become more efficient in our distribution center and reinvest in product categories that will drive growth.
This initiative combined with other costs and operational efficiencies being implemented should allow LTV Europe to achieve positive contribution by the fourth quarter of this year.
And show meaningful year over year improvement in their results for the entire second half of year.
I'll briefly touch on the commercial foodservice.
Many restaurants hotels and other foodservice operations remain closed or offer that limited capacity in the second quarter and as a result, we saw a reduced sales activity are in our existing back of the house business.
We don't expect us to pick up in the rest of the year, but we remain confident that this channel will provide long term growth and opportunity for lifetime.
Further we continue to believe that hospitality is a meaningful channel for long term growth and we remain committed to our major growth initiative of akasa hospitality for the front of the house foodservice market.
While our plans to grow Macassa hospitality Macassa hospitality brand will likely be delayed we remain enthusiastic about this category and are experiencing meaningful dialogue with customers about new business opportunities.
Further the disarray in the foodservice market caused by the Cobot 19 pandemic is creating opportunities for lifetime as we are noticeably better capitalized with a more established supply chain and distribution infrastructure than many existing participants that we would compete against.
Turning to our efforts to reduce our debt.
We are pleased with the progress we made on reducing our net debt to meet our guided targets.
As we continue to generate significant cash this quarter, our net debt position improved and our leverage ratio was approximately 3.3 times as of June thirtyth.
As a reminder, we took a number of aggressive actions in the first and second quarter to address the impact appropriate 19 on the business and increase our liquidity.
Additionally, we maintain strict control of all operating expenses, resulting in a substantial year over year increase to the bottom line.
This field an increase in EBITDA by 8.1 million to 69.3 main for the 12 months ended June 2020.
These actions have enabled us to achieve strong results.
And positioned us to continue advancing our strategy driving growth.
While we're not providing annual guidance for 2020 due to the ongoing uncertainty caused by the pandemic.
We believe we have demonstrated the ability to perform in this challenging economic environment and through July we've seen demand for our products remained strong.
Additionally, given the company's regional performance and resilience mid dependent.
On August four 2020, our board of directors has decided to resume a quarterly dividend of 4.25 cents per share.
Well on November 16th 2020 to shareholders of record on November 2nd 2000 twin.
As we continue to navigate the cobot 19 environment.
We are seeing the results from a resilient demand for our products.
The investments for lifetime 2.0 on the cost contain contained strategies we've been executing.
We remain confident on ability in executing Lifepoint lifetime, 2.0, strategic plan and continuing to deliver profitable growth.
I'll now turn it over to Larry to go through our financial results.
Thanks, Rob.
As we reported this morning, the net loss for the second quarter of 2020 was $4 million or 19 cents per diluted share as compared to a net loss of 11.5 million or 56 cents per diluted sure.
Diluted share in the second quarter 2019.
Adjusted net loss was 3.1 million for the second quarter 2020, or 15 cents.
Per diluted share compared to adjusted net loss, excluding the impact of SKU rationalization.
Of 4.5 million the 22 cents per diluted share in 2019, a table, which reconciles this non-GAAP measure.
Reported results was included in this mornings release, you confirm operations was 4.3 million for the second quarter 2020 versus a loss of 12.5 million in the 2019 period and excluding an 8.5 million nonrecurring noncash charge would skew rationalization initiative in two.
2090 loss from operations would have been 4 million.
Adjusted EBITDA and non-GAAP measure those reconciled with GAAP release results and release.
69.3 million for the trailing 12 month ended June Thirtyth 2020. This represents an $8.1 million increase over the $61.2 million for the trailing 12 months ended March 31 2020.
Net sales for the second quarter were $150.1 billion compared to 142.5 in the 2019 quarter.
The second sales were up 9.5 million to 132.6 million. The increase was driven by significantly higher market demand for kitchenware products as consumers prepared meals at home.
This increase was partially offset by lower sales for product categories adversely impacted by coated 19.
International segment sales were off 1.9 million 70.5 million on reported basis.
Off 1.3 million in constant U.S. dollar.
Segment has been adversely affected by coated 90 as Robert noted its distribution is heavily weighted toward independent retailers and national chain retailers, both of which were mostly closed during the second quarter.
Gross margin was 36.1% the 2020 quarters versus 30.9 for the 2019 quarter on on a reported basis and 36.8, excluding the SKU rationalization charges.
You bet segment gross margin increased to 37.6% 20 to 20 quarter from 36.7%.
Excluding the SKU rationalization charges in 2019 quarter.
This increase primarily due to favorable sales mix.
For international gross margin was 24.8%.
20 quarter compared to 37.6 in 2019.
The decrease was driven by inventory reserves as well as sales mix as most independent retailers and national chain retailers will close to two focusing team.
Distribution expense of 2020 was 10.1% of net sales versus 10.9% in 2019 view of segment distribution expenses as a percentage of sales shift from its warehouses were 9% and 11.8% for the 2020 and 29 two quarters respectively.
The proven reflects continued realization of variable labor management efficiencies as benefit of absorbing fixed costs on higher sales volume.
For the international segment distribution expenses as a percentage of sales shift from his warehouses, excluding the cost through new distribution facility, where 50% and 14.5% to the 20 22019 quarters respectively.
The increase was primarily attributable to higher labor costs associated with increased drop ship and E Commerce channel sales.
Selling general and administrative expenses was 34.4 million for the second quarter of Twentytwenty versus $40.9 million into 2090 period.
Newest segment expenses were 25 million in 2020 quarter versus 28.9 million in 2018.
As a percentage of net sales EXINI expenses declined to 18.9%.
2020 quarter from 23.5% last year.
Improvement was primarily attributable to lower expenses, resulting from our cost reduction strategy.
SPD expenses for the International segment were 4.4 million is a 2020 quarter compared to $7 million.
For the 2019 period.
Decreased primarily attributable to the realization of cost savings from the internationally organization as well as lower expenses from our cost reduction strategy.
Unallocated corporate expenses were approximately $5 million in both periods.
Our venture that our interest expense was 4.2 million for the 2020 quarter versus 5 million in 2019, due to lower debt balances and lower interest rates.
Forward looking at taxes for the 2020 quarter. The company reported an income tax provision of 3 million on a $100000 reported pre tax loss. This resulted primarily from the impact of permanent items, including the nondeductibility. The non deductible portion of the goodwill impairment charge.
The reversal of a race spend has been.
Related to the cares Act.
Lower rate and the benefit for losses in foreign jurisdictions.
Turning to liquidity at June Thirtyth, 2020, I will liquidity, which includes 63.5 million of cash plus availability under our credit facility was $183.5 million.
This is a significant increase from year end 2090, as well as the amount at June Thirtyth 2019.
This was achieved through improved operating results, including our cost reduction strategy low inventory levels and the timing of liability payments with regards to the timing of liability payments, we temporarily revised payments to our vendors including.
Rent relief.
Further our may 2020 dividend payment and availed ourselves of certain tax payment deferrals as permitted by applicable governments note that we have not applied for you will see any government loans.
Why we intend to maintain our strong liquidity position for commercial reasons, we will use some of our liquidity to reduce the outstanding balances for certain of the payment deferrals and as previously.
Disclosed we will repay the may 2020 dividend in December of this year.
At June Thirtyth 40, 20, our net debt was 226.5 million and our net debt to adjusted EBITDA leverage ratio was 3.3 times.
This concludes our prepared comments operator, please open the lines for questions.
Ladies and gentlemen, as a reminder, if he would like to ask an audio question. Please press Star then the number one on your telephone keypad.
Again that is star one we'll pause for just a moment to compile acuity roster.
Your first question comes from the line as Linda Bolton Weiser with Davidson.
Hi, Thank you for taking my question.
I guess I'd be curious now.
You had a program to reduce well moving and obsolete inventory that I think was supposed to conclude right around the June quarter here in that program.
Needed and should we see a moderation in cash flow improvement going forward.
Thanks, and I hope you doing well.
The program has been concluded.
And we are getting a similar program in our European operations, which is why we talked at $300000 charge.
That will result in enhanced cash flow benefit as we continue to execute that out of that operation.
In terms of the impact on our cash generation over the last six months.
We don't think it would be significant on a go forward basis now that were done with that.
Included in our initial plan were some divesting of some assets, which because of the environment. We put on hold so that's something.
We'll likely we look at in the future.
Okay and.
So how do you think about now that your leverage is down.
Significantly.
How do you think about use of cash kind of going forward is that still primarily de leverage.
Or are you looking at other potential uses of cash flow.
Yes, I mean so.
While we can buy back stock, it's not not high on our priority list is not something we're looking at.
We're still looking to continue to de leverage.
In the first six months for the year when cobot head as you know we borrowed significantly on our line of credit and just because we had so much cash was repaid that all.
And.
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As we go forward, we will if it's on a disciplined basis. So we will look at appropriate acquisition opportunities.
As long as they're accretive and providing the guidelines that we set out.
But at this point.
We're still as a prioritization looking at debt reduction.
Okay and then.
Maybe you could comment I guess in Libya is kind of.
How some areas company that went through.
Bankruptcy.
We have seen on the horizon landscape kind of out any other noteworthy bankruptcies or are you benefiting in any way from real small competitors that are having difficulty managing through the environment.
Yes, I mean libbey, we don't views much of a comp we really don't competed with them because our glass company and they were having troubles from a cash flow perspective, even before cobot hit.
Because there's if you look at while they made money their capital requirements for.
Exceeding what they would generate on a cash flow basis. So there were issues before hand.
We have seen in this environment.
That we've been able to gain market share because were better capitalize our supply chains intact.
And we can invest in inventory to supply.
Our customers. We've also fortunately invested a lot in pure play ecommerce as well as our own set aside and those things are paying off in this environment.
So I think theres a lot of different things. The smaller guys that are less capitalized are losing share and becoming less of a factor than the larger players are side definitely matters as the world is transforming and it's benefiting our business model.
Okay.
And then finally.
Have you have you sort of seen any difference in terms of retail takeaway and locations, where coping and three emerging where biking. These see kind of any change in and what your retail Pos looks like.
Okay, Great question so.
We are seeing increased demand in channels that weren't dormant and with people as they are opening up stores.
But it's too soon.
Parse through and see anything.
In terms of the Pos data.
Which is it's too soon to go through that.
Anecdotally.
A lot of retailers, particularly our price guys is saying that store traffic is good.
But the guys have remained open you know the mass guys. You know that the crops, who are also grocers. Their business has remained very strong as has the pls.
And they're seeing that continue.
Okay. That's it for me, thank you very much and take care.
In Q2.
As a reminder deals like task and audio question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Anthony Lebiedzinski with Sidoti and company.
Hi, good morning, and thank you for taking my questions. So first just this morning.
Steve you guys to comment on the monthly cadence of sales.
April may and June.
And then.
You have an estimated impact perhaps about the.
So from the store closings for the specialty you guys off price Department stores.
Pat you figure that May have had on the quarter.
So in terms of a cadence when lockdown occurred at the end of the March there was an.
Amended margins, we talked about in the first quarter, there was a significant drop off as well as.
Cancellation of orders.
As you know people close stores.
In the Us E commerce start picking up.
In the second half April ecommerce picked up on a much more lag effect in Europe.
You know and what we saw in the second quarter.
Is that certainly channels that remain closed or partially closed.
Obviously aren't demand.
First way down we weren't shipping to those customers.
And.
What we experienced was pure play ecommerce omni channel as well as people that were open.
Such as Walmart and target you know that this whole groceries or cosco.
The brick and mortar guys that were open and grocery as a whole channel.
More than picked up for that and the demand from our products as I mentioned, our challenges were is remaining in stock. So it exceeded greatly exceeded our expectations, even as we shifted extra inventory that we had some the shot.
Channels into the channels that were robust it just the demand.
Greatly exceeded sort of more than made up for it as we go forward. We're seeing people you know the biggest channel being the off price open we've been working with them, we're benefiting from again, having the inventory and ability to invest in it.
We'll see out of the World, we opened but we've seen demand and we're starting to ship those those people as well as their stores open.
Okay great.
The comment about July that you have seen is that sort of consistent.
That accelerated.
No we've had very strong demand.
On July or is it was a good month as well.
Again, we need to we've been out of stock on certain items, yes are we could've done better.
We sold through quality problem.
As we get back in stock that will also help.
So as far as.
In stock or out of stock the actually.
Do you think ahead.
Notable impact I mean in any way for you guys to quantify.
The out of stock situation.
Yes, I mean share it had an impact but again as a quality impact you know our sales were very strong we shipped a law.
So should we had more inventory right. We would have shipped more but you know we greatly exceeded expectations.
So again quality problem and it's just a matter of work in the supply chain to make sure we get back and socket doesn't damages from the second the third and fourth quarter of which were confident it will not.
Got it Okay and then.
Yeah, Larry Thanks for providing the gross margin in the breakdown between the domestic.
Obviously.
Sure.
Significantly down from last year, when you look at the back half of the year.
No is it.
How should we think about the gross margin for the back half of the year on that.
No charge and some other things with it.
Just comment on the gross margin outlook.
Great.
Yeah.
Anthony.
Hi into sort of giving guidance so.
Really I want to comment on that right.
We did mention though we're expecting the second half a year sequentially versus prior year to be a noticeable improvement in our international business.
Okay.
Okay and then.
The large tax expense action border tax for the kind of.
Dancing around quite a bit.
Should we think this I guess first.
Yeah.
Large tax expense for the quarter and then secondly, how should you think about tax rates for the balance of the year.
Well you have a.
Pretax amount be as profitable lost any permanent differences to really magnify. It so who rates have become very very meaningful.
So.
It will be a function of won't be around of course, and b of a obviously what profit that those permanent items become a small percentage. If we don't are lighter becomes so it's very difficult to pin down the really ever we have an expensive because we have a taxable income in the us.
Thats greater than the book income because it a permanent differences in the first quarter. There was some benefit we thought we'd like to see has to do carry backs.
For the cares that does a rate differential having to do how many years with optical bat.
We have all foresee us having to carry back which is a good thing but on the other hand, it required us to reverse that benefit.
So we as little worse.
So confusing but its.
Well it is difficult to as I said when you have large permit differences and the other question. So I mentioned the other piece what was the big from a difference was this was the goodwill impairment in Q1, but really it's hard to give you a as I'd like to be able to give you an expected effective tax rate where you have.
These large adjustments relative to a.
Currently a small.
Pre tax loss.
Got it okay.
Just lastly.
One other line item on the.
Income statement.
Equity in earnings.
Yes.
Now.
I assume that's where you're.
Interest equity interest.
The company.
How should we think about I mean.
I assume they're going to hit harder by.
That's why then and you seem to think about.
Half of your for that line item.
Nothing in particular to think about a year, yes, that's correct thats related to our passive investment in the Mexican Grupo Vasconia.
Got it got it okay.
All right well, thank you and best of luck.
Thanks, David.
Again, ladies and gentlemen, if he would like to ask an audio question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time.
Okay, well. Thank you again for joining US today. We appreciate your continued support of lifetime brands, We hope everyone stay safe and we look forward to discussing the third quarter results on our next conference call.
Good day.
This does conclude today's conference call you may now disconnect your lines.