Q3 2020 Lifetime Brands Inc Earnings Call

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[music].

Good morning, ladies and gentlemen, and welcome to lifetime brands third quarter 2020 earnings Conference call. At this time I would like to inform all participants that their lines will be on a listen only mode.

After the speakers remarks, there will be a question and answer period. If you would like to ask a question. During this time. Please press Star then one on your telephone keypad I would now like to introduce your host for today's conference Andrew Wire. Mr. Squire you may begin.

Thank you.

Morning.

Oh, well do four to 20 point I mean, it's Paul.

Mr. Nathan benefiting a lot Okay, Chief Executive Officer, Larry went up to keep fighting for you.

Before we begin the call.

Good morning.

Morning, making FY <unk>.

But I believe the future performance of the company.

These statements are intended to qualify the arbor buys more to be done.

At least by the private securities.

The former.

Any such statements are not guarantees.

Doctors they could before the results are.

Highlighted in today's press release and others are contained in the filings Securities Exchange Commission.

Our remarks. This morning are in today, that's really I.

In today's press Weve also contain non-GAAP financial measures within the meaning of regulation G obligated, but where do you think.

Ladies and secondly, the reconciliation of these non-GAAP financial measures to comparable financial measures calculated in accordance with GAAP.

That introduction I'd like turn it over to Rob. Please go ahead Rob.

Thank you good morning, everyone and thank you for joining us today to discuss lifetime brands third quarter 2020 financial results.

We are pleased with our strong performance in the third quarter, which marks another quarter of sales and earnings growth as we continue to make progress executing on our lifetime to point out a strategic plan.

Our results this quarter reflect continued strong demand for our products in many of our product categories.

And our ability to efficiently execute our transformative initiative, which gives and which are giving us important competitive advantages, including increasing our dropship capabilities and building, our digital marketing and sales tools.

These initiatives combined with effectively managing our supply chain.

Positioned us well and allowed us to meet increased demand and gain market share.

I would like to take this opportunity to.

Emphasize the progress we've made in our U.S. business, which is the core of lifetimes operation.

You EPS. Good times continues to show strength and we are pleased to deliver our fifth consecutive quarter of year over year growth contributing to a 3.2 is increasing that Phil this.

This increase was driven by our household products led by our kitchenware products category, which continues to experience high consumer demand and gain market share across most of the channels that we sell into.

In addition sales and are you watch business also increased this quarter as brick and mortar stores continue to reopen across the country.

Strong consumer demand has been a key driver of our sales growth was point of sales growth for the third quarter that shows lifetime.

Westfield increase meaning.

According to the NPD group retail tracking service data kitchenware grew 59%.

Internal measurement was up 76% back.

Bath measurement up 34% and cutlery up 24% compared to the three month period a year ago.

Slightly offsetting this growth was good but a decline in our foodservice business, which experienced reduced demand due to the cold it impacts on that industry.

Further as I discussed below well lock, while our consumer demand has been strong we have had some delay in shipping retailers to replenish stocks during the third quarter.

And we will even shipments in the current core.

[noise] life turned out very balanced product portfolio.

And we have demonstrated that we can be flexible and allocate our resources to take advantage of market opportunities as they arrive.

This can be seen throughout 2020, as we have been successful reaching consumers through E commerce.

Any channel and brick and mortar retailers as they have resumed operations.

The investments, we have made and brand equity supply chain.

Distribution, particularly dropship capabilities and liquidity Pavel.

Have allowed us to capture demand and gain market share in a challenging economic environment.

Throughout the quarter, we saw solid performance across most channels.

That we in turn to optimize through a comprehensive channel management strategy.

This allowed us to better serve our customers and capture additional market share.

As concrete as consumers increasingly shop online we.

We continue to see an increase in pure play E Commerce sales, which represented 16.4% of the quarters net sales.

An increase of 59.2% compared to Q3 of fiscal year 2019.

While our absolute sales into this channel have grown.

Third quarter, 4% decline in pure play E commerce sales compared to the second quarter as our sale to other channels grew at a higher rate.

One area and meaningful growth. In addition to pure play E Commerce has been with Omnichannel retailers.

Our ability to provide drop shipments in that channel has been used to gain market share and capture the strong demand being experienced by these retailers.

Accordingly drop shipments increased.

Approximately a 115% compared to the comparable quarter last year and approximately 117% for the year to date period versus the prior year.

Factoring in our drop shipments total E commerce revenue for the quarter grew nearly 60% for the quarter and approximately 66% for the year to date period.

While the pandemic or had a negative impact in certain of our sales channels, such as department store and foodservice.

Our ability to capture revenues in our other channel has more than offset these impacts and allows us to continue to grow our core EPS basis.

But no we continue to invest and channels such as foodservice.

Which we believe will provide meaningful growth in the future.

Turning to our international business.

Consistent with expectations expectations, our operations in Europe has stabilized and further end markets have continued to recover as towards the open.

We have also capitalized on our warehouse investment, which has meaningfully increased our drop ship capability in Europe.

Importantly, during the quarter, we have begun to see the benefit of the improvements related to the operational issues in Europe, which we have now into that and the elimination of excess costs, which significantly improve the financial performance of the business.

The results of our actions are evident in the reduction of our distribution costs in our European operations from over 24% of net sales during the fourth quarter first quarter.

To approximately 15.5% by the end of the third quarter.

This number will continue to improve as we implement new processes and systems.

That are being used in our Europe in our us operations that will further create efficiency and operational cost savings in our UK operation.

In the third quarter, we delivered 14.3% revenue growth in our international business over the prior year.

And its turnaround plan, we have outlined remains on track.

That said, we are closely monitoring increasing government restrictions in Europe and potential fallout from Brexit.

Prepared to take action to mitigate these challenges should they arise.

Looking ahead, we will continue to invest in growth initiatives that we believe will benefit lifetime in the longer.

Specifically, we are focused on enhancing our digital and E commerce capabilities.

Building out our commercial foodservice business.

And expanding our international.

Despite the challenges created by the global pandemic.

We have continued to invest in and made progress on these important growth initiatives.

We recently launched for our brands through Alibaba T Mall.

Directly to the Chinese consumer.

And we have recently launched the popular kitchenaid brand internationally.

In addition, we continue to invest in our brands that resonate with the end consumer and have demonstrated the strong performance in the current environment.

Turning to our foodservice business.

As restaurants hotels and other foodservice operations remain closed for only partially open.

We continue to see reduced sale activity in our existing foodservice.

Regardless of the current environment, we remain committed to our hospitality business and we continue to believe it is a meaningful channel for long term growth.

Despite delayed growth caused by the ongoing impact of COVID-19, we.

We are confident in the potential macassa hospitality for the front of the house foodservice market.

In fact during the third quarter, we began to realize sales in the quarter hospitality and we expect the brand will continue to gain traction going forward.

I'll now turn to our balance sheet, which Larry will also touch on.

Given the increased demand in our product which exceeded expectations.

Our balance sheet flexibility allowed us to keep our supply chain and running in order to maintain adequate inventory levels.

As a result, we have increased investments in inventory.

The new to exist in the near term.

We have an active labour management programs, which allow us to mitigate labor cost increase.

Further while we experienced some shortage of trucking availability in the U.S.

Which has impacted impacted our ability to ship to certain customers.

This is only resulted in delayed shipments of orders.

This has not resulted in any orders being canceled and we do not anticipate any cancellations.

Trucking availability is an issue companies across all industries are currently facing.

And we are working with our customers and partners to improve the flow of deliveries.

For lifetime these challenges of slightly dampened and delayed revenues for the period, which I emphasize grew at a meaningful rate. Despite these headwinds.

While we have not provided annual guidance for 2020 due to the ongoing uncertainty caused by the pandemic.

Our strong results in the past several quarters showed the strength of our business and demonstrates our ability to successfully execute a lifetime 2.0 strategic plan.

With the confidence provided by our performance on November seven 2020, our board of directors determined to continue our quarterly dividends of 4.25 cents per share paid.

On February 12, 2021 to shareholders.

A record on January 29, 2021.

As we navigate the COVID-19 pandemic, including monitoring the recent uptick in cases globally and reintroduction of restrictions in certain countries.

We are pleased that demand for our products remain strong and our lifetime 2.0 strategy is continuing to gain momentum.

While COVID-19 has been a catalyst for increased consumer demand for our products.

We expect a new generation of home chest, we'll continue to have a positive effect on our revenues even when the pandemic is longer.

We are proud of our third quarter results and we remain confident in our ability to continue delivering 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 income for the third quarter Twentytwenty was $13.9 million was 65 cents per diluted share as compared to net loss of $13.5 million or 66 cents per diluted share in the third quarter of 2019.

Adjusted net income was 13.9 million for the 2020 quarter was 65 cents per diluted share as compared to adjusted net loss of $3 million or 15 cents per diluted share in 2019, a table, which reconciles. This non-GAAP measure to reported results was included in this morning's release.

Income from operations was $21.5 million for the third quarter of 2020 as compared to $6.9 million in.

In the 2019 period.

Excluding a non cash charge for goodwill impairment in 20 nineties income from operations would have been $16.7 million.

Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release was $72.7 million for the trailing 12 month period ended September Thirtyth 2000. This is a $3.4 million increase over the $69.3 million for the trailing 12 months ended June Thirtyth 2020.

Net sales in the 2020 quarter with $224.8 million compared to $215.5 million for the 2019 quarter view a segment sales were up 6.3 million to 201.5 million. The increase was driven by strong demand for future where food preparation products.

And flatware as consumers continue preparing and consuming more meals at home.

The increase in demand also reflected reopening of stores in the quarter and continued year over year growth in E commerce, including job drop shipments to Omnichannel retailers. This increase was partially offset by lower sales for tableware products as the third quarter of 2018 period at a large warehouse club program.

And the 2020 quarter experienced weakness in the Department store channel as Rob noted.

Sales in the warehouse Channel club channel were up on a year to date basis from 2020, but the current quarter's volume was off due to timing of various programs.

Sales into the foodservice channel back to school lunch box volume, we're also off as the pandemic impacted consumer activities.

International segment sales were up $2.9 million to $23.2 million on a reported basis for $2.1 million in constant US dollars. The segment's income came from growth in E Commerce and export volume. In addition, the UK brick and mortar business stabilize following store reopenings.

Gross margin for the 2020 quarter was $35.1 million versus 20, 33.8% to 35.1%.

As compared to 33.8% in the 2019 quarter.

For the US segment gross margin was 35.6% in the 2020 quarter versus 34.3% in 2019. The increase is due to changes in product and customer mix for international gross margin improved to 30.2% in 2020 quarter versus for.

29.1% in 2019.

The current quarter included a charge for slow moving inventory that had a 1.5 point negative impact on gross margin percentage.

The 2019 quarter was affected by the new distribution facilities operational issues and lower margin clearance sales.

Distribution expense for 2020 was 8.4% of net sales versus 8.6% in 2018.

For the US segment distribution expenses as a percentage of sales shift from its warehouses was 8.4% in 8.8% for the 2020 in 2019 quarters respectively.

This improvement reflects the continued realization of labor management efficiency and the leverage benefit of fixed costs on higher sales volume.

For international distribution expense as a percentage of sales shipped from its warehouses were 13.6% and 19.1% for the 2020 and 2019 quarters respectively.

The improvement was primarily attributed to the improved efficiency in order fulfillment.

Labor efficiencies and lower third party storage expenses.

Selling general and administrative expense expenses were $38.3 million for the third quarter of 2020 versus 37.4 million in 2019 period.

USA segment expenses.

For $27.3 million in the 2020 quarter versus 28.7 in 2019.

And as a percentage of net sales ex unit expenses declined to 13.5% in 2020 from 14.7% in 2019.

The improvement was primarily attributable to lower marketing and selling expenses, resulting from the cost reduction actions. We implemented this was partially offset by higher employee incentive compensation.

SGT expenses for the international segment were $4.8 million in 2020 quarter compared to $4.2 million in 2090.

As seen a reflects the higher sales commissions and leasehold amortization expense related to the new facility offset by lower expenses from cost reduction initiatives. In addition, certain expenses previously classified and distribution are now included in ESG DNA.

Unallocated corporate expenses were $6.3 million in the 2020 quarter versus $4.5 million in 2019.

Increase was primarily attributable to higher employee incentive compensation and legal expenses, partially offset by lower professional fees.

Interest expense was $4.1 million in the 2020 quarter versus 5.5 million 2019 due.

Due to lower debt outstanding as well as lower interest rates.

Looking at taxes for the 2020 quarter of the income tax rate was 21.2%. This reflects the federal statutory rate federal statutory tax rate with with state and local taxes offset by various other items that were immaterial.

Finally looking at liquidity.

As of September Thirtyth, Twentytwenty, our liquidity, which includes $42.7 million of cash plus availability under our credit facilities was $164.3 million. This is a significant increase from year end 2019, as well as from the comparable period.

September Thirtyth 2090 it.

It was achieved through improved operating results, including cost reduction actions and the timing of vendor payments with regard to the timing of vendor payments as noted last quarter, we temporarily revised terms with our vendors, including obtaining rent relief to further the may 2020 dividend payment to December.

And deferred certain tax payments as permitted by applicable governments.

Why we intend to maintain strong a strong liquidity position as Rob discussed for commercial reasons. During the fourth quarter. We may relax on payment terms and increased inventory levels to meet expected higher demand. If this were to occur our fourth quarter historical decline in net in net debt may not occur I answer.

The size that this would be a deliberate management decision for competitive reasons and would be a short term action.

Finally at September Thirtyth 2020, our net debt was $245.6 million in the debt to EBITDA leverage ratio was 3.4 times. This.

This concludes our prepared comments operator, please open the line for questions.

At this time I would like to remind everyone I'd like to ask a question Press Star then the number one on your telephone keypad again start being the number one.

Ask your question.

And our first question comes from the line of Linda Bolton Weiser now.

Hey, David.

Hi.

Congratulations on a good quarter.

Do you think you could clarify that sales staff that you mentioned from the third quarter to the fourth quarter.

Hi, Linda hope you're well.

Yeah.

So.

The.

Trucking.

Challenges in the U.S.

Resulted in some significant.

Sales orders that we couldn't fulfill in September and just rolled over into October because customer pickup. They just couldn't pick up these are large customers.

And couldn't pick up and there have been delays. It can you know still continues so things are kind of moving.

Yeah.

Hi.

Eight.

We left in September or nearly $20 million.

Okay, and you expect that that shipped in the fourth quarter essentially right.

Yes.

So without a doubt that $20 million chip hi, So there is no nothing in terms of lost business now we just.

And are.

We have a tremendous amount of inbound.

Interesting enough because of our investment in inventory and because of the peak demand in getting back in stock.

Where as of October path now.

Was a peak for the company historically of inbound.

Now.

Because we're having so much coming in and so much going out.

Quality problem I guess.

So we've been managing a highly effectively highly effectively.

This that we're getting the stuff out you know that rolled over from September we need to continuing to work situation to make sure things aren't going to rollover from.

December to January.

But where we.

We are extremely confident and we havent lost any business as a result of these trucking issues that exist in the United States just month to month spec.

Okay.

And.

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Congratulations on getting your leverage ratio down to this level, let's see I think you said it was 3.4 times can you talk about what your targeted leverage ratio is.

And what you expect to do with cash flow kind of going forward.

Yes, so we've always said that.

Our leverage ratios in the pie that we were targeting a three times leverage.

The inotera domain, something maintain something below that.

Yeah look we're generating a lot of cash we continue to generate a lot of cash. So we're just going to use that to pay.

Paydown debt you know we have no borrowings on our line have not for for a while now this year.

[music].

Yes, so we're kind of close to that we have been looking at.

M&A opportunities that we've been passing on to discipline, maintaining a high level of discipline.

That even though they would have an accretive they wouldn't offered us a growth opportunity that is something we potentially get rate in this environment, we're not looking to buy back stock, but we have that ability.

So at this point in time, you will just continue to pay down debt until there is a good return opportunity that comes available to us.

Okay.

And then.

You mentioned in a couple of points in your.

Introductory remarks that you're gaining market share.

Do you think you're gaining market share from is that some of the larger players or is it just really small players in the fragmented industries that you are in or what do you think you're gaining share from.

Yes, so I mean, we compete against a lot of people in our average competitors much smaller than us in markets that we can then.

So what we've seen is that we both believe that these kind of put lifetime shukarno together.

Hi matters and that critical mass is important, particularly in a consolidating industry and that really accelerated this year. So more on smaller folks, but there is a.

Kitchen tools area. There is a very large company replied that that we've been gaining meaningful market share from.

In mass and grocery.

And it's just that we have.

Bigger balance sheet.

And more meaningful brand we believe.

And if you look at online brands really Bethany.

So our brands that resonate resonated in our agents have been.

Skyrocketing to the top and and again, our challenge has been keeping in stock. So it's that combination and thats against all.

Okay. Thank you very much.

Oh by the way.

One thing I failed to mention I mentioned in my comments drop ship, but the bigger players have the capability to drop ship any investment.

A huge competitive advantage of our a lot of the other players in the industry and Thats helped us gain market share.

Sorry, operator.

And our next question comes from Anthony Revisiting scheme, which the Daddy.

Yes, good morning, and thank you for taking the questions here so.

So as I understand as far as the delay in shipments so that should spill over into Q4, but otherwise I mean it is.

Is it safe to say that you guys feel for you feel good about your prospects for for Q4, just stripping out as far as the visit these issues with the shipment delays.

Yes.

Okay.

And then as far as the gross margin so.

Nice improvement year over year, how should we think about your ability to continue to improve that.

Going forward.

That's a good question Anthony.

So there's a lot of things that are driving margin.

Yes, and let me.

And through that between our international business in the us business separately.

But you know as part of as we discussed in went a little bit more detail at our Investor day.

In November.

19.

That you know we've instituted a different way of running the business.

And you know, there's a different new product development focus and there were less sales oriented.

Sales are important.

But we are driving our product development looking at overall profitability and competitiveness and the like and knew we focused on margin improvement.

As a result of that.

We've had a little J curve impact.

No in the us on.

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This back in 2019, we paid $20 million and task.

Getting at in terms of the ability to recoup that sort of delays a little bit answered a little benefit of that but a lot of it is product mix.

On channel mix has something to do with that as well as a channel has changed a lot year over year to answer those.

I've been factors there in the UK, we transformed our business we've looked at a lot of things have gotten out of a tremendous amount of business that we sold that you know.

Questionable contribution margin level on gross margin.

So a year, we're adding we're selling more of our own branded products, which are higher margin.

We're emphasizing.

Different capabilities and products. So that has had an impact but again channel mix definitely has an impact.

Over there as well.

So those have been the driving factors.

Got it Okay and then.

Rob You also mentioned that you are looking to.

But in some of the processes that you have in place new asked him to be okay. Can you give us some more details and maybe some some examples of what you're looking to do there.

Yes, sure so in the nature of the business has changed a lot. So we're doing.

More shipments were drop shipments.

Walking path and.

No shipments are much more labor intensive.

So more costs and any you as much as they.

Bigger more developed infrastructure in terms of the warehouse, where we put in processes and proprietary software we developed something called perfect. Okay.

Which allows the system to do a lot of work in stages thing effectively tell is much more meaning less manual labor at time to time money.

And also efficiency in our warehouse operation. So we've been working on implementing that and our new Birmingham warehouse were working out the Kinks a radical lives are now provides in Q4.

And the or that will increase our efficiency, our throughput, but off the track on labor cost in the warehouse meaningfully.

And here again, if you look at the labor cost as a percentage of revenues in the UK.

In the first quarter, we were op Ed in our lab and 5% in our four plus percent and no doubt will still drive down and we're just getting those efficiencies and continuing to run them through so that improve a lot on a year over year basis.

Got it okay, all right Thats, all I had thanks and best of luck.

Thanks, so much.

Again, ladies and gentlemen, if youd like to ask a question Press Star then the number one on your telephone keypad we'll.

Pause for a moment to compile the Q1 day last year.

And there are no further questions at this time are there any closing remarks.

Thank you operator.

Thank you everyone for joining us today. We appreciate your time. We appreciate your continued support of lifetime brands and we look forward to speaking to everyone.

On our next conference call at the end of our fiscal year.

Have a great day.

And this does conclude today's conference call. Thanks for your participation you may now disconnect.

[noise] I did mention that technical incidental.

Huh.

Yes I was.