LCUT - NASDAQ

Good morning, ladies and gentlemen, and welcome to Lifetime Brands' Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Harley King. Ms. King, you may begin.

Thank you. Good morning, and thank you for joining Lifetime Brands' second quarter 2023 earnings call. With us today from management are Rob Kay, Chief Executive Officer and Larry Winoker, 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 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. 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 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. I'm pleased to share that we delivered second quarter results that surpassed analyst estimates, a testament to the strong progress we are making to position the company for growth and improve profitability while we continue to navigate macroeconomic headwinds. As companies across our industry and the broader market feel the ongoing impacts of inflationary and recessionary pressures on demand, our prudent balance sheet management, disciplined approach to capital allocation and careful evaluation of investment opportunities have positioned Lifetime for growth as macroeconomic conditions improve. In the second quarter, we delivered $146.4 million in net sales compared to $151.3 million in net sales in the same period last year. In the 12-month period ending June 30, 2023, we generated adjusted EBITDA of $54.6 million. We're pleased that our strong market share position and focus on execution have allowed us to continue to perform well in comparison to the market and our peers. I'll start with our core U.S. business, which performed in line with our expectations for the quarter. The oversupply issues that retailers across categories based in 2022 continue to abate a key positive indicator that has begun to translate to upticks in shipment activity. While we expect consumer demand in this market to remain under pressure due to macroeconomic factors, we were encouraged to see continued pickup in order flow throughout the quarter and expect these positive trends in purchasing levels will continue as we move through the balance of the year. Additionally, our continued focus on profitability allowed us to deliver greater-than-expected gross margin improvement for the quarter. As wholesale unit price declines resulting from normalized supply chain costs are passed on to consumers, we expect to see positive impacts on point of sale. It's important to point out that our results reflect the impact of a large-scale distribution conversion at one of our largest customers, which resulted in decreased orders and in-stock levels. We expect this temporary disruption to be fully restored in the second half of the year. Now turning to our International business segment. As I've discussed before, we've already realized significant benefits from the restructuring of our Europe-based operations, and we continue to expect that these efforts will result in a substantial improvement in profitability. However, the ongoing recessionary environment in the United Kingdom, which accounts for over 3/4 of our international business continues to impact consumer demand. While we expect these macroeconomic factors to persist in the short term, we remain focused on solidifying our international positioning with the goal of delivering top line improvement in 2024. In Asia-Pacific, the seamless implementation of our go-to-market strategy in Australia and New

Thanks, Rob. As we reported this morning, our net loss for the second quarter of 2023 was $6.5 million or $0.31 per diluted share compared to a net loss of $3.5 million or $0.16 per diluted share in the second quarter of '22. The net loss for the current period includes a noncash impairment charge of $4.4 million related to our equity investment in Grupo Vasconia. Adjusted net loss was $300,000 for the second quarter of '23 or $0.02 per diluted share compared to an adjusted net loss of $200,000 or $0.01 per diluted share last year. Income from operations was $4.4 million in the second quarter of '23 as compared to a loss from operations of $500,000 in the 2022 period. Adjusted income from operations for the 2023 quarter was $8.4 million compared to $4.2 million in the 2022 period. And adjusted EBITDA for the trailing 12 months ended June 30, 2023, was $54.6 million before a pro forma synergy adjustment and credit agreement limitation. Adjusted net loss adjusted income from operations and adjusted EBITDA are non-GAAP financial measures, which are reconciled to our GAAP financial measures in the earnings release. Following comments are for the second quarter of '23 and '22, unless otherwise stated. Consolidated sales declined by 3.2% from 2022. The U.S. segment sales modestly decreased by 1.6% to $135 million. As Rob discussed, open supply issues that retailers across categories faced in 2022 has continued to abate. The decrease in the U.S. segment sales were driven by the factor and a warehouse club program not repeated. In addition, a large customer experience, a new system implementation disruption, which delayed orders, we expect orders to normalize as the system matter is resolved. The U.S. segment's decline was partially offset by strong sales for our Taylor branded measurement products. For international, sales were down 18.9% to $11.5 million or 18.8% on a constant U.S. dollar basis. The decrease was driven by slowing of replenishment orders in the U.K. due to weaker end market demand and a decrease in e-commerce sales. Adverse economic conditions, notably high inflation are challenging in Europe, especially in the U.K. Consolidated gross margins increased to 38.2% from 36.5% last year. For the U.S. segment, gross margins increased to 38.3% from 37.1%. The improvement is due to lower inbound freight costs and favorable product mix. For international, gross margins also increased to 37.7% from 30.5% last year. The improvement reflects lower product costs, including the benefit of currency hedges, lower inbound freight costs and product mix. The current year also reflects the benefit of lower duty costs on goods sold to EU customers now distributed from the Netherlands rather than the U.K. Distribution expense -- the U.S. distribution expense as a percent of goods shipped from warehouses, excluding nonrecurring expenses, were 9.7% versus 11.3% last year. This improvement was driven by direct labor productivity, lower storage costs and lower talent expenses. For international, distribution expenses as a percent of good shift from warehouses with 25.1% versus 22.1% last year. The increase was due to unfavorable overhead absorption on lower shipment volume. Selling, general and administrative expenses declined to $35.9 million in 2023 from $38.3 million last year. U.S. segment expenses decreased by $1.7 million to $27.4 million. As a percentage of net sales, expenses decreased to 20.3% from 21.2%. This decrease was primarily due to the integration costs related to S'well that were incurred last year. And for International, SG&A expenses decreased by $300,000 to $4 million, driven by lower employee expenses as a result of the restructuring actions taken in the fourth quarter of 2022. As a percentage of net sales, international segment expenses increased to 35.1% versus 30.5% due to the effect of non-variable costs on lower sales volume. Unallocated corporate expenses decreased by $400,000 to $4.5 million on lower compensation expense, including the elimination of the Executive Chairman role. The decrease was partially offset by an increase in professional fees. Interest expense increased by $1.8 million due to a higher SOFR rate on our variable rate debt, which was partially offset by lower average borrowings. The repurchase of a portion of our term loan had a small favorable impact on interest expense in the current quarter. On an annual basis, the savings will be favorable by approximately $2 million. Looking at income tax for the 2023 quarter, the tax provision significantly exceeded income before tax. This is driven by the operating loss in foreign jurisdictions for which we do not record a tax benefit. In addition, there were certain other expenses that are not deductible for tax purchases. Grupo Vasconia, a Mexican company, in which we have a 24.7% equity interest, for which we had 24.7% equity interest. We recorded a loss of $1.4 million in 2023 versus earnings of $300,000 in 2022. Vasconia has a recent history of operating losses and recently announced it will not make its debt service payments. Furthermore, its quoted stock price has declined by approximately 75% in the last year. Accordingly, the company reported a noncash impairment charge of $4.4 million to write its investment in Vasconia down to its creating value of $5.3 million. Turning to our balance sheet. In June, we repurchased $47.2 million in principal amount of our term loan at a 5% discount. Notwithstanding this use of cash, our balance sheet and liquidity position remained very strong. As of June 30, '23, our net debt was $208.8 million, approximately $24 million lower than at the end of 2022. We and liquidity was approximately $190.5 million, which is comprised of $15.1 million of cash plus availability under our credit facility and receivable purchase agreement. At June 30, the net debt-to-EBITDA ratio was 3.8x. As discussed in the release, we are reaffirming financial guidance for net sales, adjusted income from operations and adjusted EBITDA. We have issued revised guidance for net loss and adjusted net income to reflect the second quarter equity and loss and the noncash impairment charge on the investment in Vasconia and lower interest expense estimated due to the repurchase of the term loan net of taxes. Guidance for 2023 is as follows: Net sales of $660 million to $720 million; adjusted income from operations of $41.5 million to $46.5 million; adjusted net income of $11.6 million to $13.9 million and adjusted EBITDA of $50 million to $55 million. This concludes our prepared comments. Operator, please open the line for questions.

[Operator Instructions] Our first question is from Brian McNamara with Canaccord.

This is Madison Callinan. I'm on for Brain. First, your implied revenue guidance is still a pretty wide range, flying anywhere from 96% to 99%. What's driving that? And how should we think about sustaining [the Q3 and Q4's] revenue growth?

Yes, it was a little garbled, but I think I got it. And please re-ask if you will because we couldn't understand something. So in general, I think you've seen that across other public reported companies. There isn't very strong visibility. So we were pleased that we've outperformed. And frankly, unlike a lot of our peers, we're comfortable leaving guidance unchanged, but it is a wide range because of continued lack of visibility in the general company.

All right. Awesome. And then secondly, would you mind giving some clarity on what your brands are particularly growing right now or which are lagging behind anything like that?

I believe, yes, with brands are performing hard -- as a point of information, we've looked at the business by category, such as cutlery, kitchen tools, dinnerware, and we sell multiple brands to be able to capture pretty most, if not all, of the channel and the opportunities. For instance, Farberware, which is our biggest brand is in kitchen tools cutlery, many different categories. KitchenAid is another example. That being said, giving you some color, I mean, I had mentioned in Prime Day, just using that, and that's just one obviously piece. BUILT and S'well, which has actually been an area underperforming for us, did very well was up 125% year-over-year. Cutlery continues to remain strong. And from a brand perspective, Farberware is the biggest piece of it. We use Sabatier, their KitchenAid is a small piece. But the cutlery was up 76.6% in Prime Day. But in general, cutlery use is also growing on a year-over-year basis. The biggest up for us in terms of a brand was Taylor, which encompasses kitchen measurement, weather measurement and bath, which continues to perform very strong across all channels. We did mention that we had 2 impacts in the first 6 months of the year, which has negatively impacted our revenues to date and therefore translate into market share and position. One is that one of our largest customers just had a systems implementation issue and the distribution side. And then in-stock levels and orders went way down, that will normalize, but they sell a lot of Farberware, a lot of our brands, so that had some negative impact. And also in the club channel, there was just a business that didn't repeat for instance, Rabbit, which had a big presence in club. We didn't lose it to a competitor. So it's not like we lost market share. It's just the clubs will run something 1 year and just change, right? That's just the nature of the club business. So Rabbit share is down in all the other channels, so Rabbit and line accessories continue to do well.

Our next question is from Alan Weber with Robotti Advisors.

So two questions. One is, assuming you meet your guidance for the year, can you just talk about cash flow or free cash flow or working capital for the balance of the year?

Yes. I mean I'll make some comments to see if Larry wants to add to that. One, the world has been strange over the last few years. And for a company that historically, if you trend back over any 10-year period, seasonality on working capital is very consistent. There has been so much disruption over the last couple of years such that those trends on the normal seasonality had went away. This year, we've seen a return to normalization. So if you look back in terms of our normal working capital trends, we expect to experience that and have seen that so far this year. So that means the second half of the year, there's increased. We shipped more in the second half of the year than we did in the first half. We're shipping a lot in the second half of the year. We collect some of that in the first quarter, right? So that is a big collection period, right? Inventories grow now through third quarter as we start shipping that stuff. So those would be the major trends. Anything you want to add?

Yes. Well, as Rob said, the last few years have been kind of odd. If you looked at release the cash flow was much stronger this year than it was last year. And that was last year coming out of '21. We had purchased a lot of inventory. We're on up paying for it in '22, so we really got hurt. This year, we have brought down inventory considerably, and that's helped our cash flow. So this first half of the year is better than normal. But last year was, let's say, abominable. It's really atypical. But First quarter of the year is actually the strongest for us. Fourth quarter…

From a working capital.

Yes, sorry, from a working capital point of view. So let me finish. So on the inventory, we still have some more inventory cuts to me, but most of it is done. It's going to be a lot smaller going forward. So we're not going to see what we've achieved by any means in the first half of the year. And then what drives really cash flow in the second half of the year, really the late part of the fourth quarter are collection from customers. And it's very hard to predict for a couple of reasons. One is it depends on when you sell in the fourth quarter, whether you're collecting the fourth quarter or you collect in the first part of the following year. So obviously, for example, if you shipping in October, good change we collect it in the year, if you're shipping November, likely you're going to collect it in the following year. And the other fact depends on customer because not all customers have the same selling terms back getting to naming individual customers. So the actual the mix of sales on particular customers could drive collection. So we have a really good December, but it will affect January and vice versa. So I'd like to think that more is a continuous period of time when 12-month period of time. So I gave a lot of stuff. I haven't completely answered your question because it's really somewhat difficult to forecast.

It was just actually unrelated, but as you talk about how things have changed. Rob, can you talk about not asking for a 5-year projection. But can you talk about where you are today or where we are today versus when you had the 5-year target, I mean, obviously, things have changed. And how do you think about it longer term? I mean, are things -- is it just pushing out what you think those targets could have been have things really changed where some of the expectations in terms of margins, revenues are just not realistic. Can you just talk about that?

Yes, Alan. So we still stand behind our long-term projections, but not in the original time frame because of all of the macroeconomic impacts. But the drivers are still in place. We're still making progress in all those drivers. We've been set back in almost everything, but international is having an impact. And hopefully, the world will normalize from an economic perspective, and we're well-positioned. There's a lot of industry events in terms of people being hurt with higher interest rates and just general decline, we're well-capitalized. We never factored that into our consideration will that give us tailwinds ultimately, who knows. But I think bottom line is we believe that our long-term plan that we had released very achievable, but definitely delay.

Well, I mean, the delay part is not -- Okay. Fair enough.

There are no further questions at this time. I'd like to hand the floor back over to Rob Kay, CEO, for any closing comments.

As always, we appreciate and thank everyone for their interest in their supportive Lifetime Brands. As a point of information, Larry and I will be in Boston next week, speaking at a Canaccord Genuity Investor Conference, and we hope to see people there or at the minimum at our next call. Thanks again.