Q3 2023 Lifetime Brands Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to lifetime Brands' third quarter 2023 earnings Conference call.
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 portion of the call.
I 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 T. J O'sullivan Mr. Sullivan you may begin.
Thank you.
Good morning, and thank you for joining lifetime brands third quarter 2023 earnings call.
With us today from management are Rob Kay Chief Executive Officer, and Larry went 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.
Factors that could influence our results.
Are highlighted in today's press release.
Other factors 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.
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 in the press release is a reconciliation of these non-GAAP financial measures with 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.
We are pleased to share that our results in the third quarter once again exceeded analysts' expectations with our performance driven by the continued rebound of our core U S business and supported by our ongoing focus on actions to drive growth and profitability in a dynamic.
Operating environment.
As the industry headwinds, we have been observing for the last several quarters begin to abate.
The actions, we have taken are positioning us to perform well in comparison to the market and our peers.
The results reported today are unchanged from preliminary estimated third quarter results, we announced a few weeks ago in connection with the launch of an amendment and extension of our existing term loan B facility.
Which we'll discuss in further detail shortly.
First I will walk through our results.
In the third quarter, we delivered $191 $7 million in net sales compared to $186 6 million in net sales in the same period last year.
In the 12 month period, ending September 30th 20, twenty-three, we generated adjusted EBITDA of $55 $5 million.
Our year to date performance reflects a stabilization in our end market demand.
And continued strong operational execution.
We've also maintained or grown our gross margin percent.
Driven by favorable product mix and improved supply chain availability and costs.
Entering the fourth quarter.
We expect to see relative stability in our core U S markets as.
As well as some stabilization in our international markets.
For the quarter, we delivered year over year growth in our core U S business.
Supported by the continued recovery of our domestic end markets.
In prior quarters, we have discussed the impact of ongoing global supply chain issues.
On retailer purchasing behavior with retailers or cross channels altering inventory and distribution strategies in response to significant oversupply.
We are now seeing sustained positive trends in shipment in ordering activity for the first time since 2021.
Giving us confidence that these issues have been resolved.
We hope to see a return to typical order flow levels as we move forward.
That said, while we are experiencing positive year over year comparable revenues in all our markets.
We remain defensive as we monitor continued macroeconomic factors such as inflation and recessionary pressures.
We also remain focused on driving gross margin improvement.
Which was supported in the quarter.
Combination of mix and positive macro factors.
Of note the ocean freight cost environment remains favorable to prior year, reducing our cost of goods sold.
Turning now to our international business.
We continue to execute our international growth strategy and are pleased with the initial traction we are gaining despite ongoing challenges in European end markets.
We are benefiting from the investments we have made in our infrastructure for this business.
Including our Netherlands facility, which is already allowing us to better compete.
And when on the continent.
We saw several key new business wins in the quarter.
<unk> two new large retailers in continental Europe.
In terms of cost structure, the restructuring of our European operations, we completed in the fourth quarter of 2022.
<unk> continues to positively impact our bottom line.
Strengthening our foundation as we drive forward towards our goal of improved profitability for the segment in 2024.
Outside of Europe. We are also encouraged by the progress we are seeing in Australia, and New Zealand following last quarter's implementation of a direct go to market strategy.
This change will translate to significant margin improvement.
In Southeast Asia, we are continuing to rollout our e-commerce driven strategy across channels, such as Tmall Alibaba and choppy.
And are seeing strong receptivity among consumers in these markets.
The continued rollout of our direct go to market strategy and major geographies.
Driven by our core brands, including Kitchenaid swell and Macarthur.
Is expected to provide top level top line growth beginning in 2024.
Of note.
Our market shares remained strong.
As we work to bolster this strong market share position.
We are pleased with the successes of several key growth initiatives in creating incremental plus one opportunities that support our top line.
Throughout 2023, we have made significant investments in infrastructure for our foodservice business, which.
Which continues to gain market share.
We are seeing these efforts begin to pay off and are confident that they will drive meaningful growth and profitability in 2024.
Separately last quarter, we mentioned that we signed a license for a line of Dolly Parton branded products across several categories.
We are already adding new products across many categories and have gained placement.
Therefore, we expect this line to begin adding incremental growth with shipments beginning in the second half of 2024.
In pure play E. Commerce, we saw a continued strengthening in the third quarter and we expect this momentum will continue into the fourth quarter.
Now to provide an update on the execution of our strategic sourcing efforts Victor to diversify our supply chain.
And reduce our exposure to China.
We are well on our way to meeting or exceeding the goal. We originally set six months ago, which was to reduce our products supply such that approximately 25% of our spend on goods is outside of China.
To that end the plastics manufacturing facility, we invested in Mexico is now operational and we continue to ramp up production with the expectation that we will reach full capacity by 2024.
Other initiatives.
Include expanded sourcing capabilities in various Asian geographies that we continue to expand as well as further identifying sourcing opportunities in Mexico.
Turning now to our business outlook.
While there is still on certainly uncertainty due to macroeconomic factors.
The positive trends that we have produced year to date.
Bind with our confidence in executing the fourth quarter.
<unk> provided us with a revised outlook on the full year 2023.
To reflect these tales wins and our positive performance, we are raising the low end of our full year 2023 guidance.
We now expect net sales in the range of $670 million to $690 million and adjusted EBITDA in the range of $52 million to $55 million.
We are pleased with the strength of our balance sheet and remain disciplined in our approach to cash management and deleveraging to ensure we maintained we maintained our strong financial position moving forward in line with our commitment.
Conservative balance sheet management excuse me in line with our commitment to conservative balance sheet management. This quarter, we launched an amendment and extension of our existing term loan B facility, which was due in March of 2025 through an extended maturity of August 2027.
Given the ongoing uncertainty in the macro environment. We believe it is prudent to take proactive steps like this to minimize our exposure to event risk over the next several years.
At this point, we have finalized the participation in the amended facility and expect to close this refinancing during the fourth quarter.
We will provide an update to the transaction once it is closed.
We continue to evaluate value enhancing opportunities, including M&A in line with our commitment to investing for growth.
While pressures on the cost and availability of capital in the current market have translated to increasingly attractive valuations.
We remain disciplined and will act only on those opportunities we believe best support our long term growth prospects.
Yes.
We believe that our anticipated amendment and extension of our term loan b.
It will serve to bolster our strong balance sheet.
We expect to continue to be prudent with our capital and be opportunistic with investment initiatives, where we see value enhancement.
We are pleased with the improving trends, we are seeing across the business.
On any of our operating environment as we enter the fourth quarter.
The significant transformation, we have completed over the last several years has positioned us for success, even in the face of macro headwinds and.
And we are confident we have the business model and strategy in place to continue accelerating our progress.
With that I'll now turn the call over to Larry.
Thanks, Rob.
As reported this morning net income for the third quarter of 2023 was $4 2 million or 20 cents per diluted share compared to a net loss of $6 4 million or 30 cents per diluted share in third quarter of 2022 doesn't come for the current and prior year quarters. Each include a noncash impairment charge.
The latest where investment equity investment in group benefits Tonia.
$300006 $2 million, respectively. Adjusted net income was $7 7 billion for the third quarter of 'twenty three.
36 cents per diluted share compared to $6 2 million or 29 cents.
We would share in 2022.
Income from operations was $13 6 million in the third quarter up 23, as compared to $7 6 million in the 2022 period.
Adjusted income from operations in the third quarter of 23 was $17 7 million compared to $16 8 million.
In 2022.
And adjusted EBITDA for the trailing 12 months ended September 30th forty-three was $55 5 million before.
The pro forma synergy adjustment adjusted net income adjusted income from operations and adjusted EBITDA, a non-GAAP financial measures, which are reconciled to our GAAP financial measures in the earnings release.
Following comments for the third quarter of 23, and 22 unless stated otherwise.
Consolidated sales increased by two 7% from 2022 U S segment sales increased by three 8% to $179 4 million.
<unk> discussed our core U S business continues to rebound and retail purchasing behavior continues to normalize this factor as well as a new warehouse program drove the current quarter increase with partial offset from lower sales for arbitration problems.
International segment sales were down 10, 9% to $12 3 million or down 16, 6% constant dollar basis. The decrease was driven by continuing weakness in end market demand and the timing of customer shipments and as expected.
Implementation of the new growth go to market strategy in Asia.
Gross margin percent increased from 237% from 36, 4% for.
But the U S segment gross margin increased to 37, 3% from 36, 6%. This improvement is due to favorable favorable product mix and lower inbound freight costs.
For international gross margin decreased 10 basis points to 32, 5%.
Unfavorable product mix, which was off which offset the benefit of lower inbound freight costs.
So the U S distribution expenses as a percent of goods shipped from its warehouses, excluding nonrecurring expenses were nine 1% and 10, 4% last year.
This decrease was driven by lower storage intelligence defense.
Direct labor productivity improvements offset higher wage rates.
For international distribution expense as a percent of goods shipped from its warehouses was 22, 4% versus 22, 9% last year the benefit of lower outbound freight rates was partially offset by the effect of lower shipments on warehouse operations.
Selling general and administrative expenses increased to $40 2 million and 23 versus $36 5 million.
U S segment expenses increased by $3 3 million to $31 6 million.
And as a percentage of net sales SG&A increased to 17, 6% from 16, 4%.
The increase was primarily attributable to the timing of incentive compensation accrual.
For international SG&A expenses decreased by 5% to $3 7 million from lower foreign currency exchange losses as a percentage of net sales international segment expenses increased to 31% from 28, 3% due to the effect of period expenses on lower sales volume.
Unallocated unallocated corporate expenses increased by 600000 to $4 9 million on the timing of incentive compensation accruals, partially offset by a decrease in salary costs due to the elimination of the executive chairman position.
Interest expense increased by 600000 due to higher interest rates on our variable rate debt, but partially offset by lower average borrowings.
For income taxes, the effective income tax rate.
30 was 36, 5% for the current quarter, which differs from the federal statutory income tax rate of 21%.
<unk> due to foreign operating losses for which no tax benefit.
Yeah.
Related to group of Estonia.
Second company for which we have a 24, 7% equity interest the <unk>.
We recorded a loss of 700000.
Three period versus a loss of $2 million last year.
<unk> has a recent history of operating losses, and recently announced it will not make its debt service payments. Furthermore, its quota stock price continues to decline quoting.
Accordingly, the company recorded an additional noncash impairment charge of 300000 to write down the investment to which created a $4 million.
Our balance sheet continues to be strong at September 30th our liquidity was approximately $198 8 million, which was comprised of availability under our credit facility and receivable purchase agreement and cash on hand net.
Net debt was $221 7 million approximately 11 billion lower than at the end of 2022 and the net debt to EBITDA leverage ratio was.
It was four one times.
As Rob commented we are very pleased to report that we have received the required commitments to amend and extend our term loan B agreement to August 2027.
Principal amount will be 150 billion priced at 96 away D and bears interest at Sofa, plus $5 50.
The definitive agreement will be filed after closing which is expected shortly.
On a pro forma basis as of September 30th after giving effect to the amendment liquidity would be approximately 100 important.
Yeah.
As discussed in the release, we have updated our financial guidance raising the low end of our full year 2023 guidance.
Guidance for 2023 is as follows net sales of $670 million to $690 million.
Adjusted income from operations of 43, 5% to $46 5 million adjusted net income of $11 one to.
$12 3 million and adjusted EBITDA of $52 million to $55 million.
This concludes our prepared comments prepared comments operator, please open the line for questions.
Thank you at this time, we'll be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is that the question queue.
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And our first question comes from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Yes, Hello, how are you.
Good and yourself.
Ed.
So.
Was curious about.
It's good to hear that you're ordering patterns are more normalized but that doesn't mean.
Match some of the.
Some of the information, we're seeing out there about weak consumer demand. So I'm wondering yes.
Your retailer your retail customers may change their behavior.
As they see here the weak consumer behavior, maybe continuing in terms of P. O S. Demand. So can you kind of square those two things in terms of the better ordering.
Versus what seems to be still a very weak environment.
Hum.
So addressing each one of those independently the order demand is really addressing the.
Environment that we saw for some time, where there was a mismatch between ultimate P. O S. A and order demand from retailers because there was tremendous over inventory in every channel and across every channel and you were pointing out that.
That environment has normalized.
So there is no overstock situation, which.
Which is creating mismatch because ultimate end market demand.
And and and the shipments to whether it's e-commerce brick and mortar omnichannel or whatever.
Relatedly, but separately the end market is still not robust.
You know, we're seeing pickups in certain channels like off price. If you look on a euro basis, you know that's been positive.
And and that's coming off of a low base last year, our lowered base rate, where there was very little open to buy in that channel created because they had too much inventory right. So.
Got that.
Put them in a position to buy much more to meet meet their demand because there wasn't that mismatch mismatch Pos so we are still seeing.
I am not a robust end market demand and the larger more sophisticated retailers have already taken action.
Earlier, this year to lower their safety stocks, and therefore lower shipments to Hum compensate for lower Pos that they were seeing.
Yeah for the holiday season, you know, there's no visibility right you know the consensus and what's your kind of believes right, which is N. P. D and I right now is that it'll be a decent holiday season, but probably more discounting in the curve the bell curve or be a little different.
Okay. Thank you.
And then so you've pointed toward really sound kind of optimistic that you'll have sales growth in 2024 do you see that.
A gradual improvement in growth as the year progresses I'm starting.
Well, we're in the first part of the year and then building up is that the way we should think about it for next year.
So we're not counting.
Said, another way the visibility or the end market is poor.
So maybe someone else can figure out where that's going we don't and I don't think the retailers know either so we're not in 2020 for anticipating much rebound if any in the end markets in the U S. In particular in the U S excuse me and international Mark.
It's.
Pretty convinced there will be no rebound in 2024, not until 2025, but we are doing things to gain market share.
The go to market strategy in Europe, we're picking up some significant retailers and obviously you know if that sell through that that's a big market share gains, which will help our are changing.
And how we're going to market in Australia, New Zealand, you know, which is a decent market for us actually it is will provide meaningful growth because we are selling a much broader retail base now at a.
Triple profit level of profitability.
More importantly in our core market.
If you look at Foodservice you were expecting just on what we built in and it's kind of an annuity as you start selling out a six fold increase in that but it's a slow base.
But in 2024.
More importantly, it gets us to profitability in that business segment are the Dolly Parton line is getting.
We've done a lot of work we do.
Developed a lot we have already landed placement, which we think will expand.
That'll start shipping your earliest second quarter. So yeah. It will build up for your point as a result of these things, but these are built in initiatives that we've been working on.
If the end market grows.
That will be above what our current expectations.
Okay, and then do you have any estimation as to how the refinancing would affect annual interest expense.
Yeah, the offsetting I'll, let Larry comment, but the offsetting factors are if you look at you know remember we bought back at a discount some of the term loan B about 50 million almost a fairly recently and we're also in conjunction with this repaying.
<unk> another almost 50 million so the outstanding of the term loan b as much declined but the interest rate is higher.
They brought that up.
Now he's calculated approximately two and a half million dollars, which is pretty close position, which is pretty close to what we see when we did that the auction.
Back in June so higher overall interest expense, but we've downsized the amount of the indebtedness on the term loan b. So there kind of a wash.
Okay. Thank you very much good luck with everything.
Thank you. Thank you.
Our next question comes from the line of Anthony.
<unk> with Sidoti <unk> Company. Please proceed with your question.
Yeah, Hi, good morning, and thank you for taking the questions and nice job certainly nice to see U S sales growth in the quarter here. So just curious what it is.
If we look at pricing versus unit volumes anything to call out there or.
Just curious if you have any thoughts.
On that.
Yeah look I mean, you know the inflationary environment has impacted right.
And helped you know from the sense of you're getting higher sales on a same volume basis.
But for us mix as more of an impact of that you know so like Barry mentioned, we had a big program in the third quarter in club right. So that you know help volume hurt mix hurt margin.
But for year to date and club we're down.
Which helps margin percent right, you know, but hurts volume.
Understood. Okay gotcha, okay. So.
If we were to use the midpoint of your updated twenty-three C O.
And so the implied guidance.
For the fourth quarter as you know revenue decline of 5% from last year or so is that really all international that's driving that down.
No actually Anthony its clubs. So we had a big program in the fourth quarter of last year, which we're not doing this year.
And that's really driving that.
Okay Gotcha got it Okay, and then I'm just curious as far as the international segment. So obviously you know sales were down here in the quarter as you explained.
No no strategically and kind of longer term, how do you think about the potential for the international segment this quarter.
Italy was not the first time that you had some challenges there. So how do you guys think about this you know it would be international segment longer term.
Yeah, that's a.
Very pertinent question, but it's been a drag on our earnings as we've grown tremendously over since we really took over the business.
And we've restructured we've put it in a position here than it is heavily dependent on the U K Brexit had a major impact on the war in Ukraine and many other factors.
So we've continued to restructure that ultimately we need to be comfortable so the the potentials there.
The growth is probably one of our greatest growth opportunities and we are gaining traction as I mentioned in some of the retail gains I mentioned, what we're doing in Australia, and New Zealand and in other places and we're winning on the continent. So we are gaining share in a very depressed market we need to be.
Very firmly comfortable in our path and obtaining long term profitability or we need to take other action.
Mhm, Okay understood. Okay, and then lastly, I you know.
Gross margin you know a nice improvement there.
I'm just curious as to whether we should expect additional improvements in gross margins here going forward.
Now I'll look we've.
<unk> improved our gross margin profile.
Meaningfully over the last few years.
<unk> sustainable.
But we don't see and it'll still bump because of channel mix more than anything else.
Over any given quarter, but we don't expect a continuing upward trend in gross margin.
Gotcha, Alright, well, that's all I had thank you very much and best of luck.
Thanks.
And our next question comes from the line of Brian.
MC Namara with Canaccord Genuity. Please proceed with your question.
Hey, Brian Good morning, guys.
I think a lot of my questions have already been answered, but Rob I think you've mentioned lack of visibility for the last couple of quarters now I'm. Just curious you know you've been in the business for a long time is this kind of unprecedented.
What typical data points Mileposts do you typically look at to kind of inform your view for market growth moving forward and why is this time different.
But it's just the general macro environment and Theres a lot of inputs and you know what's going to happen trade wars.
Will that accelerate which is something we've thought over the last couple of years.
You know for that matter you know, we can't predict the weather, but it's a very cold winter, that's going to particularly impact negatively Europe because of the tremendous impact of fuel costs.
Theres a variety of factors I think it's fairly unprecedented there are certain things that you know we've seen over the years. So you know when Linda asked the question in terms of.
Basically.
Reaction by the sophisticated retailers in terms of paring back inventory levels.
That's standard so Walmart target you know, they're very sophisticated their financial department are very sophisticated and very powerful within the organization. So we've seen it as a leading indicator of tough economic times.
Because before really you know it makes the press we see those guys real tighten up on safety stocks shipped a burden to us because they don't care, if we over inventory our warehouses right put us out of business.
Let us take the risk right, so but that shift started occurring in 2022.
And we saw a lot of that so some of these trends you know.
Our normal to us nor.
Normal over the long term right you know you know paring back on inventory in a recessionary times, it's not normal.
But the general market is just very choppy, there's really no visibility.
There is you know.
Firmness in terms of looking what channels are winning and alike.
But there's no firm data and we look at POS data historically, you know we get the best metric for US is order flow.
Right in order flow by channel and understanding why you know as I mentioned in the off price channel. There was no open to buy right. It's not plan O. Gram. So you need to open to buy they had no money to buy which is a frightening situation in 2022. It did rectify this year and frankly, we've got a nicely. It's been one of the things driving our growth at the moment.
Great and then Uh huh.
International I mean, you guys have done a ton of work their restructuring and everything but you know I think investors are looking for growth. There. So like I think your eight eight consecutive quarters of pretty hefty double digit declines and you mentioned you know new business wins in Q3, I'm just curious like what would what would growth have been without those new business wins and kind of what.
When can investors kind of expect a return to growth there.
So year over year the improvement in profitability is meaningful.
The wins that I'm talking about and the changes we've made in Australia, ASEAN all that have yet to flow through the income statement.
Got it.
And then I've gotten those lands, but we haven't started shipping.
Got it.
And then just I mean, I think we touch on 2024 before as you know Mike.
Myself and my peers consensus expects about 5% revenue growth or at least that's our current estimates why relative to the midpoint of your revised guidance is that aggressive.
We have not issued our guidance on 2020 for yet.
And at care to share any high level comments, we've gotten a lot from our other coverage companies basically the the senior has been kind of talking down 2024.
Yeah, we havent issued any guidance, Brian Brian as I mentioned before.
We're not expecting much end market growth in 'twenty four.
But we have a bunch of initiatives that we're working to finalize and you're seeing the impact, but that's we'll get growth from.
Alright sounds good guys best of luck.
Thanks Brent.
And we have reached the end of the question and answer session I'll now turn the call over to Rob Kay for closing remarks.
Thanks Molly.
Once again, thank you for your interest in lifetime brands. Thank you for listening our call and we look to be.
Updating people shortly.
Have a good day.
And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Uh huh.
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Yes.
That's right.
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Yeah.
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