Q2 2022 Lifetime Brands Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to lifetime Brands' second quarter 2022 earnings Conference call.
At this time I would like to inform all participants that their lines will be in listen only mode.
After the speaker's remark 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. Squire you may begin.
Thank you good morning, and thanks for joining lifetime Brands' second quarter 2022 earnings call with US today from management are Rob Kay Chief Executive Officer, and Larry <unk>, 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 protection from liability established by the private Securities Litigation Reform Act any such statements are not guarantees of future performance and factors that could influence. Our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission such statements are based upon information.
<unk> to the company as of the date hereof and are subject to change for future developments, except as required by law. The company does not undertake any obligation to update such statements. 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 and Exchange Commission included.
And such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP.
That introduction I would like to turn the call over to Rob Kay. Please go ahead Rob.
Thank you.
Hello, everyone and thank you for joining us.
Our performance in the second quarter was strong compared to pre pandemic levels, but we continue to feel the impact of the macroeconomic challenges.
Companies across industries continue to face.
Inflation and supply chain disruptions disruption.
I've created inventory buildup at major retailers.
Combined with weaker end market demand across many channels.
These factors have created a slowdown in purchases from consumers as well as our retail customers this quarter.
Notably in off price retailers.
Despite this environment. We were pleased to record result that exceeded pre pandemic levels, which is a testament to the progress. The team has made executing on our strategic objectives objectives.
These results demonstrate that lifetime continues to effectively manage our business notwithstanding macroeconomic and other external impacts.
We delivered $151 $3 million in net sales.
And $7 million and adjusted EBITDA compared to $188 6 million in net sales of $18 2 million, an adjusted EBITDA for the 2021 period.
However, compared to the 2009 quarter, which is a relevant benchmark prior to the significant impact of COVID-19.
Our growth in net sales and adjusted EBITDA is six 2% and six 3% respectively.
We believe that we are positioned lifetime, well to navigate these headwinds and have taken a number of mitigating actions, including implementing pricing adjustments, where possible and reducing our SG&A over the course of 2022.
Our business model has proven resilient through all market cycles, and we are confident we are on the right path.
Starting with our core U S business.
Asia remains solid and we continue to consolidate the market share gains we have made over the last several years.
That said inflationary pressures have dampened the end market demand.
With many retailers pushing back their scheduled deliveries due to supply chain disruptions and over inventory positions that occurred as a result.
Because of the recent supply chain challenges.
Taylor's have received late shipments across many categories and have missed seasonal windows, resulting in a shift in focus to selling down inventory on hand.
<unk> is selling in with new product orders.
Ultimately, while some decrease in consumer demand related translation is likely to persist.
We expect orders from our retailers to return to more consistent levels in the latter half of the year.
Once they are able to sell down buildup of inventory.
We have already seen public comments from a number of major suggesting they expect a normal a more normalized second half of the year.
For the quarter and year to date periods, respectively.
E Commerce sales represented 18, 7% and 18, 9%.
This was an increase from prior year, which was 16, 1% for the second quarter and 18, 4% for the year to date period.
Strong performance on Amazon and growth in our burgeoning DTC channel.
<unk> to the increase.
Drop ship sales through Omnichannel retailers declined approximately 17% for the year to date period.
This channel.
Showed reduced demand driven by the inventory and related issues that I've already discussed.
We continue to gain traction on our various growth initiatives, including year on gay, which has now successfully relaunched and you're seeing every quarter.
Turning now to our international business.
While we continue to gain market share in Europe , our performance in our European European business was significantly impacted by several factors.
The ongoing uncertainty caused by the war on Ukraine. In addition to even more severe inflation and supply chain pressures than those we faced in the U S. <unk>.
Have dampened the end market demand across Europe .
Corresponding decline in shipments for our EU based operations across all channels.
We continue to see a long term opportunity to expand our business in the international markets and we will continue to pursue.
Our growth initiatives with this objective in mind.
Our new distribution center in the Netherlands is now fully operational and performing in line with our expectations.
We are already in discussions with several customers about expanding our business in Continental Europe later in 2022 and beyond as a result of this new capability.
In Asia, we have also seen a falloff in growth as a result of supply chain and inflationary challenges.
But our Asia business continues to be profitable and we continue to see a significant opportunity with consumers and Asian markets going forward.
It's worth noting.
That the challenges in our international business are no longer operational in nature as in the past prior to our reorganization of the business.
And are primarily a result of macroeconomic factors.
We continue to feel good about the progress we've made on our European and Asian expansion.
Further as a result of the successful execution of the international turnaround strategy.
We believe our full year 2020, Joe will continue to show incremental financial progress.
Notwithstanding the current economic environment.
In commercial foodservice Mcarthur Audi continues to gain traction.
We are confident with the new leadership that we added earlier this year we have.
Well positioned to pursue our strategic objectives in this important growth initiative.
While we have seen a rebound in the commercial foodservice sector. This year, we are cautious about the impact of recessionary environment would have on this industry.
Which could delay our progress in the short term, but may accelerate our long term penetration due to our strong financial penetration I position.
Compared with most of our competitors in this space.
While the demand environment remains somewhat challenged we're starting see an easing in the global supply chain and shipping disruptions of the past couple of years.
As I mentioned briefly earlier, we have already taken actions to mitigate the inflationary and supply chain into impacts we are experiencing.
With the shifting demand picture in the second quarter, we have adjusted our strategy and are now focused on reducing our inventory levels gradually over time, while still ensuring we are adequately stocked to be a reliable partner to our customers and maintain our strong relationships with retailers.
In addition, we have implemented plans to reduce our SG&A across the globe.
We believe the actions we have taken will enable us to maintain robust earnings in this challenging environment.
We will continue to be nimble and flexible in responding to the market as we navigate ongoing macro challenges.
In addition, considering lessons we have learned from the pandemic as well as macroeconomic and geopolitical factors. We have made a concerted effort to reduce our reliance on China based manufacturing and build alternative sourcing options into our global footprint.
This initiative is long term in nature, and we are actively working on opportunities in Mexico, Eastern Europe , and multiple Asian countries.
An important long term effort to reduce our risk and enhance our operational flexible.
Dress unexpected supply chain challenges in the future.
Turning now to our financial guidance.
In light of the current environment and our results in the second quarter, we are revising our outlook for the full year 2022.
While we had anticipated softening of demand and accelerated inflation inflationary cost pressures in the outlook. We issued in May we did not anticipate the abrupt short term change in order trends across most channels.
In the quarter due to the dynamics discussed earlier, which are delayed many shipments in the first half year.
While we continue to view these impacts are short term and expect a degree of normalization in the second half of the year.
We now expect our adjusted EBITDA to be in the range of 73 million to $79 million and our net sales to be in the range of $800 million to $850 million for the full year.
Looking ahead, we will continue to be proactive in managing through this environment and we are focused on maintaining a healthy balance sheet and strong cash flows to maximize our operating flexibility.
On last call, we spoke about our commitment to the goals, we announced in our five year plan.
While we believe that the goals of the plan can still be achieved due to the current economic and geopolitical.
Oh political conditions and potential impact on global growth.
We are not at this time, providing an update while near term visibility in our results.
Limit.
We remain committed to being transparent.
Term objectives and as more certainty emerges we look forward to sharing our strategic path forward as we have consistently shared with our stakeholders in the past.
Overall, our business model has proved resilient through all market cycles, and our strong balance sheet and cash generation remained significant competitive advantage for lifetime, despite fluctuations in consumer behavior.
We continue to execute well on all of our growth drivers and we believe that our leading brands strategic growth initiatives and financial flexibility will continue to drive significant long term shareholder value.
With that I'll now turn the call over to Larry.
Thanks Ross.
We reported this morning, the net loss for the second quarter of 2022 was $3 5 million 16 cents per diluted share versus net income of $5 $8 million or 26 cents per diluted share in the second quarter.
Adjusted loss was $2 9 million for the second quarter.
22 were <unk> 14 per diluted share compared to adjusted income of $6 1 million 28%.
Sure. It's 41 loss from operations was 500000 for the second quarter of 42 as compared to income from operations of $11 million.
'twenty one.
Adjusted EBITDA was $79 9 billion with trailing 12 months period ended June 32000.
Yes.
Adjusted net income adjusted income from operations.
EBITDA, a non-GAAP financial measures and a reconciles our GAAP financial measures in the earnings release.
Following comments for the second quarter of 2022 months.
Unless stated otherwise consol.
Consolidated sales declined 9% from 2021 drop.
The impact of very high inflation and unprecedented supply chain disruptions resulted in significant excess inventory levels at retail have adversely affected our business in the current quarter. These results with especially when we compare to a very strong 2021.
However, when compared to the less than that in the second quarter of 2019.
We're up six 2%.
International segment sales declined in the current quarter decreases for the reasons.
Following a very strong performance in 2021.
When compared to the last <unk> second quarter of 2019, the U S segment sales were up 11, 5%.
A portion of this increase came from higher selling prices and the acquisition.
Gross margin increased to 36, 5% from 35, 4%.
So the U S segment gross sales gross margin percentage rose to 37.1.
35% this was driven by product mix of tariff reductions on certain products and low container costs.
Absolutely has approved and we will have.
Non vessel operating carriers.
For International gross margin was 35% compared to 32, 3% last year.
The decrease.
Primarily reflects the impact of fixed overhead costs.
Lower sales volume.
Distribution expense as a percent of net sales increased to 11, 5% from 10, 1% for the U S segment distribution expenses as a percentage of goods shipped from its warehouses, excluding nonrecurring expenses of $11 three.
Increased to 11, 3% from nine 4%.
The increased rate is attributable to lower shipment volumes and higher labor rates, partially offset by lower warehouse equipment and supply expenses.
Actually the rate was adversely affected by higher inventory levels.
Labor efficiency.
International distribution expense as a percentage of goods shipped from its warehouses with 22, 1% and 22 versus 17, 5% last year.
This increase was primarily attributable to lower shipment volumes higher labor cost and increased business occupancy tax expense will be UK warehouses. This increase was partially offset by lower freight cost as we now ship goods distribution in Continental Europe .
Nevertheless.
Selling general and administrative expenses were $38 3 million with 22 versus $36 two in 2021.
The U S. These expenses with $29, one and 22 versus $26 for 2021.
The increase was predominantly due to the acquisition of swell.
<unk> integration expenses.
G&A.
<unk> International a $4 3 million from 22, and $4 2 million last year.
Aaron currency transaction losses were offset by lower intangible asset amortization.
Unallocated corporate expenses were $4 $9 million in 'twenty two versus five points.
2021, the decrease was driven by low incentive compensation expense, partially offset by an increase in professional fees.
Our tax rate for the quarter was two 5% the rate was lower than the statutory rate of 21% primarily due to foreign losses with no benefit.
Just reconcile that.
Such benefit is offset by evaluation allowance.
Comparatively to the 2021 quarter the income tax rate was 25.
Either the federal statutory rate.
Primarily due to state and local tax expense.
Foreign losses about benefit net of a benefit related to share based equity compensation.
And looking at our debt and liquidity at June 32022, net debt was $259 1 million.
Debt to EBITDA leverage ratio based on pro forma adjusted EBITDA was three one times and liquidity, which includes $7 2 million of cash plus availability under our credit facilities was 130.
$1 billion.
Companys balance sheet liquidity remained strong notwithstanding the funding the <unk> acquisition and higher inventory levels.
And regarding our asset based loan agreement, which expires in March of 2023.
Pleased to report that you see signed commitments from all lenders to extend the agreement to August 2027, and terms, we believe our competitive competitive for the financing market.
Youre welcome Chase will continue as the administrative agent.
The definitive agreement is subject to completion.
The definitive amendments subject to completion of the agreement documentation.
This concludes our prepared comments operator, please open the line for questions.
Ladies and gentlemen, if you would like to ask a question. Please press.
Star one on your telephone keypad at this time, please hold while we poll for questions.
Our first question.
Sure.
Our first question comes from Linda Bolton. Please state your question.
Yes, Hello, good morning, how are you doing.
Doing well yourself.
Good good so.
Lynn.
Linda.
Hi can you hear me.
Just got you back, but we last year.
Okay. Let me start again, so last quarter, Rob you had spoken about a few issues that dampen sales last quarter, but were expected to help sales. This quarter. One of them was the Amazon distribution Center log Jam Theres something like that was was key.
Corrected and also the plan O grams were shifted into this quarter did those things occur or were those not things that actually helps this corner.
So.
Taking those separately Amazon did.
Clear out some of the issues and that benefited our business.
So we saw a pickup in Amazon noticeably and that contributed to as I mentioned.
A meaningful growth.
E Commerce sales as a percentage of total sales.
In terms of in general with all retailers and this impacted planning resets, yes ads has gotten a lot of attention I'm sure you're aware is that the retail brick and mortar retailers as well as e-commerce retailers, we're tremendously over inventoried.
And therefore, there has been a delay in shipments in pushing back across pretty much all channels, including the major ones with the planet ground resets.
Anywhere from 90 to 120 days, so we did not see a pickup related to that they were really.
Even if it is not our goods.
Yeah.
The retailers as you know we're really focused on.
Selling out.
Over inventory positions and we're bringing in new goods.
So if you were to estimate.
It's hard to estimate, but how much like why do you think that your retail inventory is how much is it up year over year currently.
You're talking about the inventory of our goods in retailers.
Yes.
It differs.
Channel with a lot of the big guys have started.
Reducing that Troy levels, and Dave and you've heard the big public.
The Omnichannel mass guys have announced they are expecting.
Pickups in the second half of the year and we're actually seeing some of that.
More in.
August is we look at that order book stands at July .
So we are seeing that if you look at.
The off price segment, which has been a robust segment for us we do very well.
<unk>.
We basically ship them.
Yeah.
And they were just very over inventoried, particularly with apparel.
The delays in shipping issues resulted in a lot not just them.
Other retailers experienced those but yes.
And it's a good example in off price they had a lot of apparel, particularly winter apparel.
And the kind of missed the season right. So theres been a lot of <unk>.
Discounting that some.
Retailers as you may be aware I've even.
Started looking to sell inventory through liquidators, rather than just blowing out the amount to sales.
By retailer base.
So we are seeing no pick up of order flow we remain cautious.
And there is hard visibility to really see but there has been a decline at retail of inventory levels and again, what we don't know.
Is other people's inventory and one of the problems we face.
Is when they are over inventoried, even if it's not in our inventory there is no room to ordering goods.
We've seen a little bit of that and Amazon, we have out indexed or category by three fold over the last quarter.
So quite noticeably and we've seen a pickup in as they are replenishing, but not as much as the sell through and it's because it's still inventory level thats being worked through.
Okay, and we have started to look at the IRI data a little bit.
For the track channels Pos for the year.
Company, and even though it doesn't tell the full picture those numbers do look like they really slowed down to pretty big year over year declines in Pos. So you know that has to do with consumer behavior and bouncing and all that but what why do you think you are seeing in those trends.
And do you kind of see the trend kind of worsening here near term or are you seeing things maybe start to improve a little on the Pos front.
Yeah, so by the way I'm glad it.
For our dialogue IRI NPD merge because we subscribe to a lot of MPD data now they are the same right.
And to see what we see.
So that's nice.
So if you look at.
<unk>.
The sell through there has been a softening of demand the biggest impact of that has been more the inventory levels that people haven't been buying and not necessarily sell through so it has been softening. The question is.
If we go into recession will that will continue there is no question that inflation has impacted people buying but eggs or twice the price of gas is more expensive people are spending less discretionary we've seen that more in Europe , which we believe is already in a recession.
And there has been a bigger impact from consumer demand.
Amazon as I mentioned, we're doing quite well and Amazon in the states, but not in Europe .
Because it's the consumer demand is not there.
So.
Even without it.
Completely answering your question the visibility is poor I think it.
It will be over six months.
A function of the economy decline.
Which will have a dampening on consumer demand, but we've seen some dampening as I said the biggest impact on us in this quarter has been more.
Our supply chain.
Oh fundings with the retailers.
Okay, and then can you just say I didn't see did you say how much the swell acquisition contribute to revenue in the quarter yes.
Yes.
By the way, we factored all of what we think is going to happen in our guidance right.
Right.
So.
Ill defer to Larry.
We fully integrated swell now into our business as part of our build business unit.
We're very optimistic.
Is going to be a very good acquisition for us probably exceed what we've been talking about it but.
There's always here when you acquire things that we have to work through.
Major over inventory.
Situations in channels that were stopped.
Prior to our.
Acquisition of the business.
Yes sure so.
Second quarter is well ahead of that $3 5 million.
Revenue.
It's just under about $4 million to $5 million.
Okay.
Theres a lot, though that we didn't include in our estimates that we are now aware of including will be able to drive a lot at the cost side for goods.
And we've integrated and more effectively than we thought than what we thought we thought I should say, but what we planned and talked about.
Okay.
And then.
Finally, we've been hearing.
From one of my companies a cosmetic company that is out of China that maybe some tariffs will expire in September and if theyre not renew they will expire and you will get those benefits are you thinking that that could happen that you could get some tariff relief here in the foreseeable future.
Yes, we have gotten some this year.
We are.
Very closely following and involved with.
These are good just theres a lot of hundreds of categories that fall into that.
We're not counting on that though to provide a pickup for us on margin.
Sure.
Thank you.
Okay.
Operator are there other questions.
Yeah.
Okay.
Good answer.
Yeah.
Later.
Okay.
Okay.
Yeah.
Okay.
Yeah.
Andrea East along can you hear us.
Yes, I'm here.
There seems to be intact with difficult that we've lost.
I'm sorry, My line was muted. Our next question comes from Anthony <unk>. Thank you. Please state your question.
Okay.
Anthony Anthony are you there.
Alright. My line was muted can you hear me now.
Yes, Anthony Hi.
Okay, Yes, so good morning, and thank you for taking the question so.
So firstly I definitely appreciate the color on the geographic breakdown.
As far as just overall looking at the product categories.
As the.
Weakness that youre seeing is that kind of across the board or are there any particular product categories that stand out.
Pretty much across the board it would be biggest in our tools category only because that's our biggest category.
Right.
But again.
It is much more.
And then by people retailers not buying because they have too much inventory.
So that makes it fairly uniform.
Across all categories.
Gotcha and then.
Okay.
Just to follow up on Linda's question about the tariff relief. So you. So you said you've got some relief. This year is there any way you can quantify that so I'm just wondering.
As far as how meaningful that was.
Yes, Larry mentioned in his comments that there was some pickup it's not what's driving our numbers get some benefit.
Back to that sort of called it out but.
I don't know the specifics.
It's not driving the numbers.
Got it okay.
I was just wondering if that was anything meaningful to call out as far as.
The impact of that so.
Yeah.
Looking at.
Comments.
Rob as far as your SG&A reduction that you plan, how should we think about that.
As we look to update our models here for the back half of the year.
So Anthony.
<unk>.
Yes.
To manage actively our business.
So we took a look at the business with these changes we were signed in 2022.
<unk> already implemented globally.
Expense reductions.
Those will impact the second half of the year right. So we really implemented them.
Our what we would call a $6 six plant right, so six actual and forecast.
So that's why you really don't see any benefit in the first six months, but they have been implemented.
It is across the globe in general.
We took out 5% of our SG&A now bear in mind as you model.
We have grown tremendously right we've doubled the profitability of this business over the last three years.
Yes.
And we've been looking to make sure we were investing in.
In growth as opposed to that.
Just pocketing.
Everything that we've achieved right. So we've been vocal and we've been investing millions of dollars that we would be making that much more money over the last couple of years in new initiatives, such as hearing day Mcarthur hospitality.
New product Adjacencies.
Kind of like.
So.
If you look at the year over year that includes more investment right in our backyard.
But now that will be.
By 5% right, because we took our run rate and cut it by 5% run rate as for the first six months not ours.
For the year 2021 understaffed.
Right right.
Got it thanks for additional color.
So.
As you work to reduce inventories.
Should we expect any anything in terms of the discounting of that as we looked at.
Yes.
Inventory sold or that you think youll be able to sell it at close to.
At full price or close to full price.
Yes, it's a great question so.
As you know for the last couple of years, we've been conservatively investing in inventory and it's been a highly successful strategy.
Well it's.
It's not a highly successful strategy at this moment.
In the environment that we're facing right. So we want to monetize that and we can.
No we are not discounting.
It's all a inventory.
We can sell it.
And it's not like a company that we've got a really mantra that and get the cash at a discount.
Because we don't need to right, we got tremendous liquidity, we're very strong financially.
So we will we are not discounting we have not discounted now if you look at where your discount today youre doing the off price channel the off price channel debt.
It will pick up its starting to pick up into great channel for us and a great relationships, but we're.
We're not going to go in any channel, including that channel, which we had an opportunity to do.
In this quarter and discount deeply but we decided not to monetize into some sales lower margin and Thats why you see our margins have maintained very strong.
We do not intend to discount this such as the region quite a different situation right you see them discounting and their operating margins are going way down as <unk> guided people to that's because they've got the inventory they've got to dump it and the only way to do it.
This reduction right. So we don't need to hold onto the inventory.
Cognizant.
<unk>.
We have extra spend if were overflowing and inventories and we've got a higher external warehouses.
And with.
The quarter being soft we didn't really inventory because we werent purchasing anymore, but we had we werent really down too much but you will see progress.
That initiative in the second half of the year.
Got it okay. Thanks for that Rob and then.
You also mentioned in your prepared remarks with a new facility that should have been another lens.
Youll be able to expand more into continental Europe , I certainly recognize that.
They are tough.
Therefore.
Europe , but.
Just if you could just kind of expand on that as far as the potential opportunity.
Yes.
I would assume would be probably next year, but if you could just give us some more color that'd be great on that.
Yeah, we will pick up some this year, we are picking up Anthony.
Benefit of that facility as we can ship anywhere in the continent and in 24 hours 48 at worst case scenario right. So we have availability on the content and that is not disrupted.
So.
And we can do it on really weak.
Talk about it being cost neutral it could even be better than that.
So we are picking up distribution.
<unk>.
In conjunction with our direct selling strategy and its ability more of it will be forward looking but we just have a better value proposition to offer people cheaper faster.
Better.
So we picked up car for actually we picked up a lot of business is done how much is in the U K. So that's not.
Netherlands space, but we are expanding.
E Commerce.
Throughout the continent relative is because we could drop ship.
Well from this facility.
It's a good capability, we have picked up market share, but the business is down because the impacts are more than offset that.
The macro and got it all right.
Understood. Thank you very much and best of luck.
Thanks Anthony.
And that was our final question.
Great.
Thank you operator, and thank you everyone for joining us as always on this call.
Larry and I are available for anyone who wants to reach out for further discussions or questions and we look forward to speaking to everyone in our third quarter call in a few months. Thank you.
Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
[music].