Q4 2022 Lifetime Brands Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to lifetime brands fourth quarter and full year 2022 earnings conference call.
At this time I'd like to inform all participants that their lines will be in a listen only mode.
After the Speakers' remarks, there will be your question and answer period.
If you'd 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.
Morning, and thank you for joining lifetime brands fourth quarter 2022 earnings call with US today from management are Rob Kay Chief Executive Officer, and Mary <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 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.
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.
Alluded in such releases 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 Andrew.
Good morning, everyone and thank you for joining us today.
Our core business delivered solid performance in the fourth quarter, despite the macroeconomic and industry specific challenges that companies across our industry continued to face.
Our strong market share position and proactive cost management actions helped to offset weaker end market demand as well as the ongoing impact of reduced orders from our customers as retailers continue to focus on right sizing their inventory levels.
Our proactive efforts to reduce costs.
Restructure our European operations and identify efficiencies throughout the business drove improved gross margins and continued strong free cash flow generation and a dynamic operating environment with gross margins exceeding both analyst and our own internal assets.
In the fourth quarter, we delivered $207 million in net sales and $19 7 million in adjusted EBITDA compared to $255 9 million in net sales and $39 million in adjusted EBITDA for the 2021.
These results reflect the challenges that persisted throughout the quarter.
Important to keep in mind that while the overall U S market is down lifetime continues to perform well in comparison to the market and its industry peers.
For the full year, our strong execution in a challenging environment enabled us to generate adjusted EBITDA of $58 2 million compared with 95 1 million in 2021.
As we move into 2023.
We're seeing the inventory buildup at major retailers start to abate.
And signs of a turnaround in order flow with a more normalization expected in the second quarter of 2023.
Also while inflationary pressures and other macroeconomic factors, including the war in Ukraine.
Continue to significantly impact demand in Europe in the fourth quarter.
The restructuring of our international operations is now complete and we expect that this will drive improved profitability moving forward, which I'll speak more about later on.
In our core U S business. It is important to note that we maintained our market share gains from the last several years.
While our revenue was down we have not lost distribution in our core business.
During the holiday season, we saw a decline in discretionary spending from consumers, which resulted in a more disappointing holiday season at retail across lifetimes channels.
Especially at our largest customers.
This decline in consumer spending was felt across the industry as large retailers saw reduced end market demand as a result of inflation and other factors.
But the larger driver of revenue declines.
In the quarter continued to be reduced orders from retailers as our largest customers continue to rightsize their inventory.
As a result.
Point of sale data again exceeded shipments in the fourth quarter.
While we're encouraged by the signs of a turnaround in order flow, we began to see this quarter in customer orders.
Yet to see full normalization in order flow.
As shipments increase with a normalized market, we expect there'll be a corresponding impact to bottom line growth.
Now turning to our international business.
We gained market share in Europe throughout 2022.
And our international business outside of Europe remains profitable.
However, we also continue to see the sustained impact of the current economic environment on consumer demand in Europe and to a lesser extent Asia Pacific.
Exacerbated by the war in Ukraine, and the impact of Brexit on the UK economy, which resulted in another tough quarter for retailers and in turn for our European business.
As a reminder, our U K business represents over 75% of our international business.
As we discussed last quarter, we took an important step in response to these pressures by implementing a restructuring of our Europe based international operations.
We're pleased to report that this restructuring was fully implemented in the fourth quarter.
And we expect to see a meaningful increase in profitability in the international business in 2023 as a result.
We don't expect the market demand to increase a normalize in the near term, which is why the decision to restructure this business what's so important.
Over the past several years, we've rebuilt our European business from the ground up and this additional restructuring will allow us to fully realize the benefits in the coming years.
In Asia Pacific, We also implemented a change to our go to market strategy.
We have substantially eliminated all third party distribution agents and major geographies and replace them with lifetime country managers consistent with our direct selling strategy.
This is an important change and will ensure we're operating with the highest efficiency and profitability across the markets and stuff.
We continue to make progress on our other strategic growth initiatives.
Global ecommerce sales as a percentage of revenues improved to 19, 8% in the fourth quarter, although still lower on a dollar sales basis at our peak levels during the heart of the pandemic.
We remain focused on expanding our e-commerce business, which is an important growth driver for lifetime and.
And we continue to make great progress in both our core U S market as well as Internet.
During the fourth quarter Mcarthur hospitality continued to gain traction and we believe we are poised for meaningful growth in the division in 2023.
We continue to expect our foodservice business have Mcarthur hospitality, Ann Taylor, who reached $30 million in revenues by the end of 2023.
And continue to see this as a $60 million business by 2026.
Given our strong cash position.
M&A activity remains a potential avenue for accretive growth.
And we are focused on strategic opportunities in our core product areas for adjacent categories, where we have an opportunity to leverage our global scale and or tap into a new product category.
We have a robust pipeline of potential value enhancing opportunities in the market.
And we will continue to be opportunistic and extremely disciplined with our use of capital consistent with our balanced approach to capital allocation.
Turning now to our cost management efforts.
Overall operating expenses were favorable on a dollar basis in the quarter.
Although unfavorable on a percentage basis due to a decrease in rabbit.
Last quarter, Larry spoke about the high labor expenses, we were experiencing due to wage increases and less efficient use of labor.
We are focused on lowering these costs and this quarter, we successfully reduced distribution expenses by $4 $6 million.
Driven primarily by an ongoing labor efficiency program.
Excluding charges for bad debt expense and incur incremental costs related to swell.
We also saw reductions in SG&A this quarter due to the effective management of discretionary spending as well as an effort to reduce operating cost infrastructure.
Active balance sheet management remained a key focus for us this quarter.
By the end of 2022.
And rightsize, our own inventory levels, which aided our achievement of historically high levels of liquidity as of the end of 2022.
Larry will speak more about our balance sheet and liquidity as well.
We also expect a cost benefit from the retirement of Jeffrey Siegel.
Who has been serving as our executive chairman.
The executive Chairman role was created in conjunction with lifetimes of merger with filament brands in 2018.
Jeff will continue to serve in the role of non executive Chairman of our board of directors.
And we look forward to continuing to benefit from his guidance deep knowledge of the business and ongoing leadership of our board.
Looking ahead, we continue to have limited visibility into certain macroeconomic factors that will impact our business, but.
But we believe the company will outperform 2022 results in the year ahead.
We intend to provide full 2023 guidance as we normally do.
We report our fourth first quarter results.
But in the meantime, let me provide some color on what is driving our fundamentals in the business as it stands today.
Global supply chain, including Ocean freight costs are fully normalized since the pandemic.
And as I mentioned, we do expect normalization of customer ordering patterns and improved profitability from our restructured international business in 2023.
We have a strong balance sheet at a time of relative economic uncertainty.
And our business model continues to prove resilient.
I am confident we are well positioned to drive shareholder value and get back on track with our long term growth trajectory in 2023.
We are proud to have achieved another year of progress for lifetime.
And I'm grateful to our talented team for all their hard work during these challenging times.
With that I'll now turn the call over to Larry to discuss our financial results in more detail.
Thanks, Rob.
As we reported this morning net income for the fourth quarter of 2022 of $3 3 million or 15 cents per diluted share versus a loss of 600000 or three cents per diluted share in the fourth quarter of 'twenty one.
Adjusted net income was $4 7 million for the fourth quarter 'twenty to 'twenty two cents per diluted shares compared to $14 4 million or <unk> 65 per diluted share in 'twenty one.
From operations was $12 8 million in the fourth quarter of 'twenty, two as compared to $8 9 million in the 'twenty one period.
Adjusted net income from operations for the fourth quarter of 'twenty, two was $14 4 million compared to $24 5 million into 'twenty one period.
Adjusted EBITDA for the full year 2022 was $58 2 million before credit agreement limitations adjusted net income adjusted income from operations and adjusted EBITDA, Our non-GAAP measures.
That are reconciled to our GAAP financial measures in the earnings release.
Following comments up to the fourth quarter of 2022, and 2021 unless stated otherwise.
Net sales consolidated net sales declined by 19% 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 a weaker end market demand, especially in Europe , and Asia Pacific markets U S segment sales decreased by 60% to 193 million.
The decrease occurred in all distribution channels. This was attributable to lower replenishment orders as retailers continued to reduce our weeks of supply on hand and.
In addition, retail sales declined.
Really shifted their spending towards services from goods, including housewares.
Decline was partially offset by the inclusion of <unk>, which we acquired in March.
International segment sales were down 11 6 million.
$8 3 million in constant U S dollars to $14 1 million.
The decrease was due to similar factors as was experienced in the U S.
This this this was exacerbated by the impact of higher food and energy inflation in Europe , which experienced substantially with juice consumer discretionary spending. In addition, a decrease in Asia as we move away from a distributor agent model toward more direct selling one.
Gross margin increased to 35, 9% from 34, 4% last year.
The U S segment gross margin increased 35, 8% from $34 nine the improvement is due to lower inbound freight costs.
For international gross margin increased to 37.1 from 33%.
The improvement reflected an increase in selling prices.
Lower duties low duty on goods imported directly to the EU versus to the U K and ongoing benefit of distributing to U K CBT U EU customers from the Netherlands warehouse and some favorable customer mix.
And distribution U S segment distribution expense as a percent of goods shipped from its warehouses was nine 2% versus $8 two last year.
The increase was driven by lowest sales, resulting in under absorption of fixed expenses and higher storage costs due to higher inventory on hand.
This increase was partially upset by the benefit of higher revenue per carton reduce variable labor.
Our continuous labor efficiency efforts and lower general expenses.
In the international segment distribution expense as a percent of goods shipped from its warehouses was 19, 6% versus 23, 1% last year.
The improvement was due to lower outbound freight as goods foot EU customers are now shipped from the Netherlands.
Prior year included a warehouse occupancy tax adjustment.
Selling general and administrative expenses increased less than 1% in the 2022 quarter.
Segment expenses increased $3 7 million.
232 point $32 3 million, primarily due to an increase in sales support expense the inclusion to swell and like higher allowance for bad debt.
For international.
G&A expenses decreased by $1 5 million to $3 8 million of lower head count lower allowances for bad debt and an operating net foreign currency gain.
Enel unallocated corporate expenses decreased $1 9 billion to $4 3 million of lower incentive compensation.
In restructuring in the 2022 period, the company recorded $1 million for restructuring expenses related to the elimination of certain senior executive positions. We expect this action will result in annual savings of approximately $1 3 million.
Also in the period $400000 of restructuring expenses were recorded for severance associated with the reorganization of the international segment's workforce. The reorganization was result of the realignment of management and the operating structure of the European business in response to a change in market conditions.
The company expects annual savings of $2 3 million from this reorganization.
Interest expense increased by $1 2 million due to higher interest rates on our variable rate debt and the effective income tax rate for 2022 exceeded the statutory rate primarily due to foreign losses for which no benefit recognized.
Partially offset by R&D tax credit.
Related to our group of <unk>.
<unk> 24 per cent equity owned Betsy.
We recorded a loss of $2 1 billion in 2022 quarter versus earnings of 600000 in 2021.
<unk> results were negatively affected in this house with business Similarly to our U S and international segments.
In addition, it was also adversely affected by lower demand in its aluminum business, which was exacerbated by the extremely high cost of aluminum procured in early 2022 which resulted from the Russia, Ukraine Ukraine's War.
On a very positive note our liquidity continues to be very strong.
As of year end. It was at an all time high of approximately $200 million, which was comprised of $23 6 billion of cash plus availability under our credit facility.
And why our liquidity was enhanced by an increase in our credit facility commitment he cheapest level by actively managing even actively managing our inventory down by $48 million during the year and without reducing selling prices in this challenging business environment first.
Furthermore, $80 million of liquidity was used to purchase the swell business and approximately 6 million was used to repurchase our common stock.
At December 31, 22, our net debt was $232 7 million and a net debt to EBITDA leverage ratio was four times.
This concludes our prepared comments operator, please open the line for questions.
[noise]. Thank you.
And gentlemen at this time, we'll be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
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May press Star two if you would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Hello, Hi, how are you.
Well hopefully you are.
Don.
So it's good to hear the news about some light at the end of the tunnel in terms of the inventory reductions by the retailers. So I was wondering if you could being that you've got a couple of months in the first quarter under your belt is it fair to say that the sales decline that you'll have enough.
First quarter of 2023 might be a little less than what we saw as a decline in the fourth quarter is is that the way to think about it.
Well the quarter's not over but that is a good way of thinking.
Okay, and then I can.
Kind of thought you were hinting around that maybe sales could be up year over year in the second quarter of 2023 did I understand that correctly.
So in our core U S business right. We do believe there will be a continued normalization of inventory levels.
And we'll see more of a benefit from the second quarter onwards, then we would in the first quarter.
Okay.
Hum.
Just curious about.
You know your own inventory level, which you reduced it as you said quite a bit in 2022 are you feeling comfortable that that's an appropriate level now or do you think we'll see some further reduction in inventory as we go through 2023.
We do feel it's an appropriate level there will be.
Some additional reduction in 2012.
And in the core U S business and in Europe . The foodservice business will continue to grow inventory to support the growth in that business.
Okay.
And just since you mentioned the foodservice business. It sounds like that's really kind of ramping up quite nicely is that industry back to pre pandemic levels in terms of the opening of restaurants and whatnot or are we still at or is that industry still below the pre pandemic levels.
So the industry had a tremendous 2022.
There's a lot of so it's different so first of all there's more challenge.
Vendors in the industry financially sound.
Good opportunity for us and we're picking up shares are resolved because there are people who can't perform.
New openings are not quite as good but people had delayed purchases for many years.
And those there's pent up demand on the hotel side. There is a lot more opening than there have been in the past couple of years. So we're seeing a tremendous boost from that.
So of course, the restaurants and hotels.
Thanks.
Okay.
And then I was I was wondering also.
You had mentioned a while back some particular brand programs with Walmart I believe our new product lines can you just update us on how those initiatives are going in and is there anything kind of new plan for 2023.
Okay.
In Walmart the biggest new Grand offering was the beautiful with beauty.
Drew Barrymore plan.
And there's three pieces to that one is tools.
Second is cutlery and we already have had for a long time.
Very large the leading branded market placement at Walmart the farberware.
And both of those categories.
The tools.
Haven't been selling so great.
They've been kind of disappointing frankly.
The cutlery has been very good.
I'm very happy with that I just Walmart.
And the tabletop stop more dinnerware than anything else.
We will enter in 2023 in all likelihood we actually while we're very large tabletop.
Prior as you know don't sell anything.
Prior to this to Walmart so it's all incremental opportunity.
Yeah.
Yeah.
Okay.
And then finally I just had one question about your your ecommerce sales you mentioned that number pretty specifically I was just curious if.
All of Europe pretty much almost all of your ecommerce sales are through.
You know like Amazon and other type of retailers like that or do you have a certain percentage of your sales that are three your own websites like DTC sales.
Yeah. So the majority of those sales.
Both here and internationally or in Europe .
Our true pure play ecommerce Amazon being the the Guy in Asia Pacific Amazon isn't the major player. So for instance, in China Tmall would be our biggest outlet there.
But we have been growing and growing profitably our own branded transactional websites continue to grow again.
This year and our own website.
For the full year or approximately $30 million, a little south of $30 million growth year over year worsen and that would be the 2020 between them.
Yeah.
Okay, well, thank you very much I'll pass it on.
Okay.
As a reminder, its star one to ask a question. Our next question comes from the line of Anthony.
<unk> with Sidoti and company. Please proceed with your question.
Good morning, and thank you for taking the questions. So first stake.
Looking at the fourth quarter results. So just wanted to get a better perspective for demand for your different product categories, Kitchenware tableware and home solutions.
Just wondering if the demand was consistent or did you see any variations in your demand levels.
No and again the.
The biggest impact on us has been the.
Over inventory situation and so at wholesale.
And.
That affects everything so when there is an open to buy and are too much and it depends on a channel by channel how it works.
They're not buying anything or cutting back on anything and its across the board. It doesn't have to be there to over inventoried in your products.
That situation is impacting your products, even if it doesn't you aren't over into inventory at retail.
Okay Gotcha, Okay and then.
Just in terms of the commentary about the second quarter. So is that when you expect to the point of sale system point of sale data to match. The shipment data is that is that a fair way.
Yeah.
We do mention that you know we are.
Looking positively at 2023, but we do also mentioned that you know there's very poor visibility.
Hmm.
We also do you know, we're very close with our customer base in terms of the inventory situation and what's.
In their D CS or in their club or whatever it is gonna be so there's the need it but.
But we can't.
Definitively put a date on things at this point.
Understood Okay.
Then you know in terms of the European restructuring can you guys quantify how much you expect in savings from that initiative.
You're talking about in Europe , Yes, please yes.
Yeah, sorry, Yeah, we said it should be about $2 3 million.
100000 restructuring some of these savings will come from attrition and less.
Warehouse flavor.
So again, no big Bang for the book.
And then we have internationally and we have executed a completely so there's no additional work to be done on the infrastructure.
Okay and then.
So you repurchased about six 3 million shares of your stock what is your appetite.
Well just to clarify we bought back $6 $3 million of stock that's 613 million shares.
Yeah, Okay, I, just thought I know you've got that but just to clarify you are currently on hold and that program, we'll reassess at accident year. It goes off.
Okay got it all right well, thank you very much and best of luck.
Thank you Anthony.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Yeah.
Okay. Thank you everyone. We appreciate People's continued interest and support of lifetime brands.
We look forward to continue communication, we look forward to people joining us on our first quarter conference call coming up.
Uh huh.
Thank you have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
Disconnect your lines at this time and have a wonderful day.
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