Q3 2022 Lifetime Brands Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to lifetime Brands' third 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 Speakers' remarks, there will be a question and answer period.
He would like to ask a question. During this time. Please press Star then one on your telephone keypad I would now like to introduce you to your host for today's conference Andrew Squire. Thank you. Mr. Squire you may begin.
Thank you.
And thank you for joining lifetime brands third quarter 2022 earnings call with US today from management are Rob Kay Chief Executive Officer, and Larry Wouldnt Ochre, 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 can 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 available 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.
Convention included in such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP with that introduction I'd like to turn the call over to Rob Kay. Please go ahead Rob.
Thank you.
Good morning, everyone and thank you for joining us today.
Our core business continues to deliver solid performance through the nine months year to date.
We maintained or expanded our market positions. Despite macroeconomic challenges that companies across industries continued to face, which also impacted our product categories.
The inventory buildup at major retailers that we discussed last quarter continues to limit customer shipments across all channels and it remains a major factor impacting lifetimes chip.
Additionally, the spike in inflation and other economic factors have contributed to weaker end market demand, especially in our European and Asia Pacific markets.
Even in this difficult environment, we continue to produce results that exceed pre pandemic levels and we are proud of the team for the progress we are making executing on our strategic plan.
Equally important we maintain a very strong balance sheet, which Larry will discuss in his remarks.
In the third quarter, we delivered 180 $686 million and net sales.
$18 $8 million and adjusted EBITDA compared to $224 $8 million in net sales and $29 3 million and adjusted EBITDA for the 2021 theory.
These results reflect the challenges I just mentioned.
We are focused on taking mitigating actions, particularly in our European business, which I'll touch on in a minute.
Starting with our core U S business, we maintained our market share gains from the last several years.
While revenue was down we have not lost distribution in our core business and further our point of sale data is exceeding shipments.
The residual impact of supply chain disruptions related to the pandemic that we spoke about last quarter continues to persist.
Retailers across all channels continued to focus on right sizing their inventory levels, which have been built up during the pandemic.
And have a renewed focus on reducing stock levels in response to current economic pressures.
As a result, new customer shipments have lagged consumer purchases at retailers.
To dive a little deeper.
The supply chain disruptions, which began in 2021 created an oversupply with retailers in many categories, particularly in seasonal goods, such as apparel and electronics.
These supply chain challenges and an inflationary environment have created excess inventory issues.
That are not necessarily specific to lifetime's categories of goods.
But nevertheless, nevertheless, do affect lifetime sales as retailers focus on reducing overall inventory levels across our range of guidance.
Major retailers distribution centers continued to be overbuilt, which slowest buying across channels.
Further retailers are lowering shipments in country and curtailing safety stock to reduce working capital given the current economic environment.
As noticeable by looking at the results of major retailers, who have reported lower margins as they attempt to sell down current inventory at lower prices.
In short we are being impacted by the inventory situations within our customer base, even if the challenges are not specifically related to inventory of lifetime's product categories.
Inflationary pressures are likely to continue to impact consumer trends and consumer behavior in our core business.
We expect that orders from our retailers will return to more consistent levels once inventory levels normalize.
We've already seen some uptick in customer orders early in the fourth quarter. Although we continue to have limited near term visibility into our customers' activity.
Now turning to our international business.
We are seeing the sustained impact of the current economic environment on consumer demand in Europe , and Asia Pacific, which had been much more significantly impacted than the north American market.
Across Europe and in the U K in particular, we've seen a drop in market demand and a very challenged environment for our retailers related to inflation inflationary and recessionary impacts exacerbated by the war in Ukraine, and the impact of Brexit on the UK economy.
In response to these pressures and a significantly reduced demand overseas, which we expect to continue in the near term we.
We have implemented a restructuring of our European based international operations.
While macroeconomic factors continue to impact our international business.
These targeted efforts to rightsize operations and eliminate costs well positioned favorably compared to the current run rate.
With little visibility into the European economy. We believe these actions are the right steps and expect to see benefits of the cost restructuring in 2023.
With that said, we continue to gain market share in Europe , and now have distribution presence presence.
Three large mass market channel.
This model is proving successful and we believe the restructuring we're currently undertaking.
Table is to pick up where we left off with the remarkable progress we have made in building our European business from the ground up over the past several years.
In Asia Pacific.
Significant year over year drop relates to our business in Australia, and New Zealand as consistent with the broader international travel.
We are retooling our go to market strategy in those important markets to align with our direct go to market strategy.
But now with our international business outside of Europe remains profitable even in this economic environment.
Although we are navigating uncertain time.
We continue to make progress on our growth initiatives.
This quarter, we saw the cost of hospitality hospitality continue to ramp up in benefits on the rebound in the commercial foodservice sector.
We remain optimistic that our foodservice business is positioned to reach $30 million in revenue by the end of 2023.
Continue to see this as a $60 million business by 2026.
Consistent with our broader strategy, we continue to look at acquisition opportunities in our core and adjacent product categories.
We're seeing more attractive valuations in general.
Increased availability of direct to consumer and digitally native brands that can benefit from our incubation model at scale.
We have demonstrated the potential of this model with your own day, which we successfully relaunched and we are currently discussing strategic partnership to expand its product lines in existing and new channels.
We therefore see M&A as an opportunistic avenue for accretive growth in this environment, but as always we will continue to be disciplined with our use of capital in the marketplace.
While we continue to focus on gaining share and growing our top line.
We've responded to the current market challenges by taking steps to reduce SG&A.
Five $5 million across the business and 13, 1% decrease compared to the third quarter of 2021.
To that end, we've cut out discretionary spending.
Reduced headcount and shifted our priorities to manage the environment, we're in to maximize profitability.
We are also focused on maintaining high liquidity levels.
Keeping ahead of the curve with active balance sheet management.
Particularly capital expenditures and working capital.
Larry will go into more details on how we have successfully managed in these areas.
These initiatives will enable us to maximize profitability in the current environment.
Importantly, as we focus on streamlining the company, we are preserving critical infrastructure across our global footprint to ensure we are well positioned to rapidly scale up and drive growth when markets improve.
We are also seeing our supply chain costs come back down.
Particularly ocean freight costs, which are now approaching pre pandemic levels.
And much like our customers, we have taken steps to meaningfully reduce our inventory levels and get excess products off our balance sheet.
Yeah.
Turning now to our financial outlook.
With little visibility into actions, our customers may take that would materially impact our results and in light of continued macroeconomic volatility.
We have decided to withdraw to withdraw our guidance for the full year 2022.
In this environment, we are unable to get an accurate view from our customers of the near term order flow, which has fluctuated monthly.
Most noticeably the widening gap between the point of sale performance of our products and the lowest shipment levels.
To our customers across all channels.
While implying a need for a catch up of increased shipments has yet to materialize.
We expect our core business to continue to deliver solid results, while we do not see a near term rebound in revenues in Europe and Asia.
We will begin to see a noticeable improvement in our bottom line performance of our international business solely related to the restructuring we recently implemented.
Although we may not see the benefits from these actions until 2023.
However, with so many factors outside of our control, having a potentially significant impact on our results quarter to quarter.
And with the fourth quarter historically being the most important contributor to our earnings for the year.
Find it prudent to withdraw our guidance for the near term.
We will consider establishing new outlets.
As we enter 2023.
This decision in no way diminishes, our commitment to deliver improved financial performance and we remain focused and confident in our ability to achieve our longer term financial goals.
Despite the macro factors impacting our results we are not standing still and we are built to weather the storm.
As I have described we are implementing cost saving initiatives right sides of our business for reduced demand, while continuing to invest prudently for the long term.
Our cash flow generation provides us with ample liquidity and we have significant balance sheet flexibility with limited risk in our credit facility.
We will continue to be aggressive in managing cost and executing our strategy as we navigate through this environment and remain focused on maintaining our healthy balance sheet to maximize our operating flexibility.
Asian lifetime brands for the future.
We are proud that our business model continues to prove resilient through challenging macro economic conditions and despite consumer behavior shifting our results reflect the important initiatives underway.
We also expect that as shipments increased with a normalization of our markets. It will be a corresponding impact to bottom line growth.
With that I'll now turn the call over to that.
Thanks, Rob as we reported this morning, our net loss for the third quarter of 2022 was $6 $4 million or 30 cents per diluted share compared to net income of $12 6 million or 57 cents per diluted share in the third quarter of 2021.
However.
Excluding an estimated charge for the wallets facility remediation and a noncash impairment charge for our equity investment in Grupo <unk>. Adjusted net income was $3 $5 million for the 2022 third quarter 16 cents per diluted share versus adjusted net income of $13 four.
<unk> million or <unk> 61 per diluted share in 2021.
Income from operations was $7 6 million $13 1 million as adjusted for the third quarter 'twenty, two versus $21 7 million or $22 2 million as adjusted in the 2021 period.
Adjusted EBITDA for the trailing 12 months ended September 32022 was $69 4 million before a $1 4 million credit adjust credit agreement limitation add back.
Net income adjusted income from operations adjusted EBITDA.
Our non-GAAP financial measures and are reconciled to our GAAP financial measures in the earnings release.
The following comments up for the third quarter of 2022 versus 2021 unless stated otherwise.
Consolidated sales declined by 17% from 2021, as Rob discussed high retail inventory levels adversely affected our shipments in the current quarter and high inflation and other economic factors contributed to weaker end market demand, especially in Europe and Asia Pacific markets.
Second sales were off 13% to $172 8 million.
The decrease was mainly caused by retailers efforts to reduce their inventory levels as they pass for many of our products significantly exceeded our shipments. In addition demand has been adversely affected by inflation.
Sales declines, partially offset by the inclusion of swirl, which was acquired in March.
International segment sales were down 49% to $13 8 million.
Or 42% on a constant dollar basis.
The.
This was driven by the same factors as in the U S.
It was exacerbated by the economic impact of Brexit The war in Ukraine, and very high inflation in Europe , which has led to weak consumer sentiment and in turn lower end market demand.
Gross margin percentage increased to 36, 4% from.
37% last year.
So the U S segment gross margin percent was $36 six versus 37, 7% last year and for international gross margin was 32.6 purchased $31 seven last year.
These changes were driven by product and customer mix.
Looking at distribution expense for the U S. Those expenses as a percent of goods shipped from its warehouses increased to 10, 4% from eight 4% the.
The decreased rate was attributable to lower shipment volumes, resulting in lower fixed expense absorption.
Increased storage fees due to high inventory levels and higher labor expense due to wage increases and less efficient use of labor due to high inventory levels.
For international distribution expenses as a percent of goods shipped from its warehouses was 22, 9% in 'twenty, two and 14, 5% in 'twenty one.
Increase was also primarily attributable attributable to lower shipment volume, resulting in lower fixed expense absorption and an increase in the business optimism since the tax for the U K warehouse.
SG&A expenses declined to $36 5 million in 2022 from $42 million in 2021.
U S expenses were $28 3 million in the current period versus $29 3 million last year.
The extent the expense decrease came from lower <unk>.
Incentive compensation, but also include the benefit of administrative cost reductions the company began implementing in the current quarter.
SG&A expenses for international were $3 9 million in 'twenty, two versus $6 3 million last year the.
The decrease was mainly due to lower intangible amortization expense and lower foreign currency transaction losses.
Employee and discretionary spending also declined.
The restructuring plan, Rob discussed was implemented in the fourth quarter, we expect the benefit of the plan to achieve its full run rate in early 2023.
Unallocated corporate expenses were $4 3 million in 2022 down from $6 4 million in 2021. This decrease was due to lower incentive compensation and for taxes in the current quarter the rate was 56%.
The rate exceeded the federal statutory rate, reflecting foreign losses for which no benefit is recognized and its fully offset with the valuation allowance.
For the 2021 quarter the tax rate was 31, 1% the rate reflects state and local income tax expense and that's in 2022 foreign losses for which no tax benefit is recognized.
During the third quarter, we recorded two unusual charges what was an estimate of $5 1 million for the walls facility remediation.
Amounts does not consider the potential for insurance coverage, which the company is pursuing.
Charge relates to our Sterling silver manufacturing facility located in Puerto Rico, which we have operated since 2006.
The pre 2006, operator of the facility you solvents that contaminated soil.
A detailed description of this matter as described in the contingency footnote of our past 10, Ks and 10, Qs and as updated in our third quarter 10-Q, which will be filed later today.
The other charges, a nonrecurring noncash charge of $6 2 million to write down our equity investment in Cooper's Scania.
This chart was prompted by a decline in group of Scone is public trading price to below our carrying value.
At the current public traded price the value of the investment.
Approximately $14 million.
Now turning to our debt and liquidity and balance sheet.
Our balance sheet and liquidity remained very strong in August we amended our credit facility agreement and among other things increased the facility size by $50 million.
As of September 30th this year, our liquidity, which includes $5 9 million of cash plus availability under the credit facility was $170 6 million.
We are highly focused on reducing inventory and improving its terms earlier. This year. When we became aware of the excess inventory levels at retail we implemented a plan to orderly reduce our inventory.
We analyze each of our product lines with a focus on canceling and reducing factory orders, we didnt pursue selling on hand inventory liquidation prices.
The plant is currently ongoing and will be refined based upon changes in market conditions.
Currently our liquidity.
Is over $185 million, that's a $15 million improvement from just a.
September quarter end.
This is the highest in the company's history a position we have achieved notwithstanding the current economic environment.
We are also very highly focused on controlling expenses, especially for the international segment as weakness weakness Mitch trading markets may be persistent.
Structuring actions taken are expected to be quickly you're on track to realize over $2 million of annual savings.
As Rob discussed in specific terms, we continue a pace and executing our strategic plan.
During the year, we acquired swell for $80 million and was still able to reach a record level of liquidity, we believe that a little liquidity will enable us to continue on our plan and we will balance it with careful consideration of our operating performance and working capital debt service and other needs.
This concludes our prepared comments operator, please open the line for questions.
Thank you Sir we will now be conducting a question and answer period. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue you.
You May press star two if he would like to remove your question from the queue.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please when we pull for questions.
Our first question comes from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Yeah.
Yes, Hello, how are you.
Finding yourself.
Good good.
So can.
Can you give us a sense, Rob I know, it's hard to estimate estimate these things, but can you give us a sense as to how your inventory is at retail like is it up moderately or down modestly or flat and then how does that compare to the recent few quarters. So you.
Isn't that inventory was up a lot year over year at retail and now it's up modestly or is it actually down just give us some sense of where you think it is right now.
Sure.
So just to clarify you're asking inventory at retail as I in more detail Larry discuss inventory that we're holding we are reducing inventory at retail.
Big impact, which has been quite unusual that we've experienced and has widened. This year is that the Pos or the point of sale of our product.
Is.
Far outstrip the shipments that we are making into our customer base. So what this is resulting in a lowering inventory levels at retail.
So we're seeing me many major retailers, where our in stock levels are in the eighties.
Whereas normally those would be in the mid to high nineties.
Now retailers have reduced their carrying levels, but their target rates are nowhere near in the eighties, our target rates are in the sort of <unk>.
Lower to mid Ninety's. So there is discussion between us and our retailers are bulkier, just missing shipments and out of stock and we need to get the inventory levels back there isn't necessarily disagreement but it has not changed which is like month to month that we've seen.
Our expectations on orders being different than what's come through and that's that was the result of two our decision on guidance. So in a nutshell. The answer to your question is inventory at retail is up.
Hello levels.
Okay.
Thank you that's very helpful.
And then in terms of P O S trends.
We get some data, but not a lot. It it looks like I mean, you have issues because of people, having stocked up on kitchen Ware type things during the pandemic. So declines I guess it would be expected, but are you seeing that P. O essence is getting worse getting.
Better or kind of stable like just what's the sense of what which direction. The P. O S broth is going in.
Yeah. So again, let me address our core U S markets, where we do purchase and have access to a lot of data P. O S has been down.
But our shipments have been down noticeably higher.
Dan.
Yeah, which is goes to the first question of why inventory levels are lower at retail.
It differs category category by category.
But it's been kind of steady over the last quarter.
The Pos at a time.
Okay.
Yeah, Europe , obviously not the same.
POS continues to decline demand is low in Europe .
Yeah.
Okay, and you would say, it's even maybe getting worse in Europe would you say.
Yeah really demand fell off the charts in Q4 of last year and it has yet to pick up and.
And we don't and that's why we restructured that business, we rightsize. It so that our cost structure reflects a new level of demand for at least the near term.
Because we don't see it picking up in the near term.
Okay.
And then.
How is that how's your ecommerce.
I was in the corridor is similar decline or better or worse than your overall sales decline.
Yeah. It does.
We'd love to get a lot and analyze that because youre seeing.
Less of the inventory impact, even though a lot of the pure play guys their warehouses happened.
But we basically were flat on a percentage basis.
In E Commerce.
Which is consistent with the fact that in brick and mortar there's a gap between Pos and our shipments yeah. So you would expect to see that yeah. So it was down slightly but relative.
Yeah.
Okay.
And then.
Is there any way just for my modeling purposes, or any way you can tell me what the well sales our year to date for the whole year so far.
Yeah, Lindsay Larry for the quarter or 8 million yesterday seems about 18, I'm just flipping through a schedule, where we didn't get the whole team well I mean, since we acquired or something that's not yeah.
Yeah. So it was a full a quarter and its also has its $12 four.
Year to date that is since the acquisition I remember we bought it in the second quarter. So this is really the first full quarter and that's the eighth at Larry.
You bought it embarks correct, yes, yes, yes, okay. I guess, that's the end of the first quarter is that right yeah.
Yes.
And so Rob I know this is like a really tough time.
Well companies for durable goods companies, but is there any way to kind of mitigate the situation.
<unk> really leaning into innovation, even more such that you could have new products or categories or something that can actually give you more distribution or shelf space something that would mitigate it took the whole macro situation that's going on.
Yeah.
Yeah, that's a tough one really it's a qualitative answer but.
We've invested a lot we continue to lead with innovation and as you've seen we picked off a meaningful market share over the last several years.
We have lost.
Oh sure we gained a little you know obviously, it's little things here and there and in Europe , we're gaining share even though that market down.
The.
If we ramped up innovation its not like Youre going to see an immediate benefit that's really innovation is a forward looking investment. So we have I mean, you've seen you know we've invested we do continue to invest millions of dollars. It's all forward looking so we continue to use that to gain market share and actually more finance lease.
They've all larger companies.
Well that had been in a downturn because we talked about the inventory shift in and retailers relying on on vendors for inventory you need a balance sheet to do that and obviously you see by our balance sheet is very strong and we have the capability to do that innovation, though isn't going to have an immediate impact and something in the origin batch.
It's one of the reasons why we continue to gain market.
Okay, well, thanks, very much and good luck with everything.
Thank you Linda.
And our next question comes from the line of Anthony <unk> from Sidoti <unk> Co. Please proceed with your question.
Hi, good morning, and thank you for taking the questions. So.
So first as far as the inventory levels.
Being higher retailers.
Obviously, that's something you guys talked about on your last call in August .
Is this across the board I know in the second quarter call you highlighted the off price retailers as being particularly high.
Inventories so.
Just curious as to like.
As you know your customers.
Where are you seeing.
Yeah.
Biggest issues.
Yeah. So we are seeing a pick up in off price, which is really the first six months was kind of nonexistent. So we are seeing some normalization there.
In some large a retailer's these are persistent and that led us to you know our guidance because it doesn't necessarily make sense that inventory levels have gotten as low as they have which is why they should and they agree to pick up.
But the orders aren't coming through so every month and things like that.
Why not and they don't really have an answer although you know I'm sure they're watching their balance sheet.
Very closely.
Hum.
So that situation has exacerbated because the inventory at retail has gotten lower.
Which surprised us.
And again no one has an answer for that it's also what I've seen.
A little pick up.
In E Commerce as we were talking about before because it's more direct if you think about it in terms of the impact in replenishing on the Pls.
We have plenty of inventory as Larry mentioned, we are prudently, we could dramatically reduce our inventory levels quicker by lowering our margins you know and liquidating the inventory, but we do not need you.
We are very strong healthy company and why sell at a discount. So we're doing it on a measured basis and will continue to generate more excess liquidity through that avenue, but.
But we are seeing some pickup in order flow, but not to the level that would logically dictate based upon the inventory levels at retail.
Okay. So just to clarify then so as far as this pickup in order flow are you you mean sequentially from third quarter to the fourth quarter or are you on a year over year basis, just wanted to clarify that.
Two quick questions.
Okay. Okay got you that's what I thought okay, and then in terms of restructuring in Europe .
Will that be more of a SG&A benefit or cost of goods, which was the right way to think about that or distribution expenses.
Yeah, So it's more SG&A, but.
Basically last year, we have transformed the international business changed the strategy and by the third quarter has gotten it from losing money to at least breakeven.
And then everything dropped out it has not improved and we reached the conclusion, particularly in a more challenging economic environment right and you know the last several years, we were dramatically exceeding everyones expectations, including our own.
So we reached the conclusion that there is no visibility.
We don't expect.
Near term rebound and we weren't going to fund the losses. So we looked at how to rightsize versus a much reduced volume right size, our infrastructure and a lot of that is head count in and you know.
Uh huh.
Non distribution spend that's not valuable cause distribution you know, we're not going to we can't shut our warehouse down.
And we came up with a plan, which we executed in October .
To reduce cost to levels of current demand allows it picked up obviously will benefit at a much lower level. So we can cut a lot of cost out.
Okay and then.
Given that the decline in ocean freight costs.
Reasonable to expect a sequential uptick in your gross margins or you think that we'll have to wait until next year.
Yeah, it's not an immediate impact remember we've invested.
It was a very successful strategy to carry extra inventory helped us gain market share and we use that tremendously as a strategic advantage for a couple of years in this environment not a strategic advantage right. So we're turning that around but as we resolved we do have inventory levels all good and sell all of that will sell through so you won't see an immediate like impac.
To those reduced costs, you will see that in 2003.
Okay.
Got it okay.
That's all I had with banks and the best of luck going forward.
Thank you Andrew.
There are no further questions at this time I would now like to turn.
The floor back over to Rob Kay for closing comments.
Thank you John .
You everyone for spending the time to listen.
To our discussion here today, and we look forward to further dialogue.
In the future.
Have a good day.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Hum.
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Yeah.
Yeah.
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