Lifetime Brands Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 5 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Lifetime Brands' 2nd Quarter 2023 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen only mode. After the speakers' remarks, there will be a question and answer portion of the call. I would now like to introduce your host for today's conference, Carly King. Ms.

Operator

King, you may begin.

Speaker 1

Thank you. Good morning, and thank you for joining Lifetime Brands' Q2 2023 earnings call. With us today from management are Rob Kaye, 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.

Speaker 1

That such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. That 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 comparable financial measures calculated in accordance with GAAP. With that introduction, I'd like to turn the call over to Rob Kaye.

Speaker 1

Please go ahead, Rob.

Operator

Thank you. Good morning, everyone, and thank you for joining us today. I'm pleased to share that we delivered 2nd quarter results that surpassed analyst estimates, a testament to the strong progress we are making to position the company for growth and improved 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 that capital allocation and careful evaluation of investment opportunities have positioned Lifetime for growth as macroeconomic conditions improve.

Operator

In the second quarter, we delivered $146,400,000 in net sales compared to $151,300,000 in net sales in the same period last year. In the 12 month period ending June 30, 2023, we generated adjusted EBITDA of $54,600,000 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.

Operator

The oversupply issues that retailers across categories based in 2022 continue to abate a key positive indicator that has begun to translate to upticks and 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.

Operator

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 fourth of our international business, continues to impact consumer demand.

Operator

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 Zealand has translated to significant margin improvement compared to last quarter. We are encouraged by this success and are now rolling out an e commerce driven strategy in our other Asia Pacific markets. We are already seeing increased orders at better margin levels as as a result of our expanded product offerings and believe these trends will continue throughout the second half of the year and into 2024. While challenges in the operating environment remain, we are encouraged by the growth we are seeing in several key areas of our business.

Operator

We continue to focus on innovating and introducing new products to bolster our market position. In cutlery, we introduced a new Farberware Forged Knife Set that helped Farberware regain the number one position in market share and earned the brand's 1st place in Costco USA. In Kitchenware, the introduction of Kamenstein ceramic and core products created a new revenue stream with this product line extension. While the introduction of Chicago Metallic Everyday Bakeware creates an avenue to pursue market share at value based price points. We recently signed a license for a line of Dolly Parton branded products across several categories.

Operator

This is a plus one opportunity to sell in existing channels with a strong new brand and also in new channels as it expands our reach to consumers in a channel that we currently do not participate in. Separately, our foodservice business continues to gain share with Macassa Hospitality becoming a recognized industry player. We are encouraged by the progress we are making. Consistent with the nature of this market, the new business wins we are achieving in 2023 should drive significant growth in 2024. Additionally, consistent with our strategy of entering adjacencies, we capitalize on our relationship with the retailer, Meyer, to take over their outdoor product category, which will be a springboard for Lifetime to enter this new adjacency.

Operator

This opportunistic expansion into a new category through a strong relationship will provide us with an opportunity to to expand distribution of this category in 2024. I'd also like to highlight our record breaking performance at this year's Amazon Prime Day, where we outperformed in almost every category compared to both historical performance and our peer set. We saw a 47.5% increase in revenue versus our prior year prime date performance. We have been working closely with Amazon to optimize our advertising spend and drive sales. We are optimistic that our demonstrated momentum will continue in this key channel through the balance of the year.

Operator

We continue to take active steps to reduce our exposure to the supply chain issues in China through strategic diversification efforts. Through a transitional supply agreement, we are working to ramp up production at the plastics manufacturing facility that we expect to acquire in Mexico later this year. The facility in Mexico represents a key opportunity to enhance sourcing from 3rd party factories in the region. Continuing on the strategic sourcing initiative. In the next 15 months, we expect to have resourced product supply so that approximately 25% of our sourced spend on goods will be outside of China.

Operator

I'd like to briefly touch on the impairment charge of $4,400,000 we recorded in the 2nd quarter, which Larry will discuss with you in additional detail. This noncash charge on our investment in Grupo Vasconia represents the write down to record the investment at its fair value. It is important to note that this does not negatively impact our cash flow and is consistent with our view that this stranded asset from an investment made in 2,007 is not strategic to our company. Primarily, as a result of this charge, we provided revised full year 2023 financial guidance metrics for net loss and diluted loss per common share. We reaffirmed our 2023 guidance for net sales, income from operation, adjusted income from operations and adjusted EBITDA.

Operator

Turning to our balance sheet. We have continued to strengthen our balance sheet through a combination of disciplined cash management and deleveraging. This approach has put us in an increasingly strong position to deploy our capital at the right time to create value for our shareholders. For example, this quarter, we prepaid nearly $50,000,000 on our term loan, which resulted in a gain of $2,400,000 before fees and expenses. Additionally, this will reduce annual interest expense by approximately $2,000,000 the game was recognized in the Q2 of 2023.

Operator

As we look ahead and as the economic environment improves, we will continue to be thoughtful and opportunistic in our capital allocation approach as we evaluate value enhancing opportunities to drive growth, including potential M and A. We are confident that we are taking the right steps to position our business for long term growth. We have a leading portfolio of widely recognized brands with multichannel growth opportunities, a strong innovation engine, a resilient and efficient business model and a healthy balance sheet to support our growth initiative. Our ability to outperform in the quarter despite the challenges facing our industry and the broader market, reflects the progress we have made in the last several years to strengthen our company's foundation and ability to achieve our long term goals. I am thankful for all of our team members, unrelenting focus on execution, and I'm excited about the opportunity we see ahead.

Operator

With that, I'll now turn the call over to Larry.

Speaker 2

Thanks, Rob. As we reported this morning, our net loss for the Q2 of 2023 was $6,500,000 or $0.31 per diluted share compared to a net loss of $3,500,000 or $0.16 to diluted share in the Q2 of 'twenty two. The net loss for the current period includes non cash impairment charge of $4,400,000 related to our of the investment in Grupo Vasconia. Adjusted net loss was $300,000 for the Q2 of $0.23 or $0.02 per diluted share compared to an adjusted net loss of $200,000 or 0 point 0 $1 per diluted share last year. Income from operations was $4,400,000 in the second quarter of 'twenty three as compared to a loss of operations of $500,000 in the 2022 period.

Speaker 2

Adjusted income from operations for the 2023 quarter was $8,400,000 compared to $4,200,000 in the 2022 period. And adjusted EBITDA for the trailing 12 months ended June 30, 2023 was $54,600,000 before a pro form a of synergy adjustment and credit agreement limitation. Adjusted net loss, adjusted income from operations and adjusted EBITDA on non GAAP financial measures, which are reconciled to our GAAP financial measures in the earnings release. Following comments are for the Q2 of 'twenty three and 'twenty two unless otherwise stated. That consolidated sales declined by 3.2% from 2022.

Speaker 2

The U. S. Segment sales modestly decreased by 1.6% to $135,000,000 As Rob discussed, both supply issues that retailers across categories face in 2022 have continued to abate. The decrease in the U. S.

Speaker 2

Segment sales were driven by the SACCA and a warehouse club program not repeated. In addition, a large customer experienced a new system implementation disruption, which delayed orders. We expect orders to normalize as the system matter is resolved. That the U. S.

Speaker 2

Segment's decline was partially offset by strong sales for our Taylor branded measurement products. For international, sales were down 18.9 percent to 11,500,000 on a constant U. S. Dollar basis. The decrease was driven by slowing of replenishment orders in the U.

Speaker 2

K. Due to weaker end market demand and a decrease in e Amyris 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.

Speaker 2

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.

Speaker 2

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 UK. 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.

Speaker 2

This improvement was driven by direct labor productivity, lower storage costs and lower pallet expenses. For international, distribution expenses as a percent of goods shipped from warehouses was 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 $35,900,000 in 2023 from $38,300,000 last year. U.

Speaker 2

S. Segment expenses decreased by $1,700,000 to $27,400,000 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 SWELL that were incurred last year. And for international, SG and A expenses decreased by $300,000 to $4,000,000 driven by lower employee expenses as a result of the restructuring actions taken in the Q4 of 2022. As a percentage of net sales, international segment expenses increased 35.1% versus 30.5% due to the effect of non variable costs on lower sales volume.

Speaker 2

That our allocated corporate expenses decreased by $400,000 to $4,500,000 on lower compensation expense, including the elimination of the Executive Chairman role, the decrease is partially offset by an increase in professional fees. Interest expense increased by $1,800,000 due to a higher SOFA rate on our variable rate debt, which partially 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 $2,000,000 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.

Speaker 2

In addition, there were certain other expenses that are not deductible for tax purposes. Groupe of Asconia, a Mexican company in which we have a 24.7 percent equity interest, for which we have 24.7 percent equity interest, recorded a loss of $1,400,000 in 2023 versus earnings of $300,000 in 2022. That Vetsconia has a recent history of operating losses and recently announced it will not make its debt service payments. That furthermore, its quoted stock price has declined by approximately 75% in the last year. Accordingly, the company recorded a non cash impairment charge of $4,400,000 to write its investment in Vasconia down to its trading value of 5 and discount.

Speaker 2

Notwithstanding this use of cash, our balance sheet and liquidity position remain very strong. As of June 30, 'twenty three, our net debt was $208,800,000 approximately $24,000,000 lower than at the end of 2022. And liquidity was approximately 190,500,000 which is comprised of $15,100,000 of cash plus availability under our credit facility and receivable purchase agreement. That 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.

Speaker 2

We have issued revised guidance for net loss and adjusted income net income to reflect the 2nd quarter equity and loss in the non cash 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 $660,000,000 to $720,000,000 adjusted income from operations of $41,500,000 to 46.15 adjusted net income of $11,600,000 to $13,900,000 and adjusted EBITDA of 50 to $55,000,000 This concludes our prepared comments. Operator, please open the line for questions.

Operator

To thank you. We will now be conducting a question and answer session. Confirmation thank you. Our first question is from Brian McNamara with Canaccord. Please proceed with your question.

Speaker 3

Hi. This is Madison Townen. I'm on for Brian. Thanks for taking our questions. First, your implied second half revenue guidance is still a pretty wide range, implying anywhere from negative 6% to positive 9%.

Speaker 3

What's driving And how should we think about sustaining the Q3 and Q4 revenue growth? Thanks.

Operator

Yes. It was a little garbled, but I think I got it. And please re ask if you missed because we couldn't understand something. So In general, I think you've seen that across other public reporting companies. There isn't very strong visibility.

Operator

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 conference.

Speaker 3

All right, awesome. And then just secondly, would you mind giving some clarity on which of your brands are particularly growing right now or which

Operator

I believe, yes, which brands are performing We 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, Farbawear, 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 had mentioned in Prime Day, just using that, and that's just one obviously piece. Built us well, which has actually been an area underperforming for us, did very well, was up 125% year over year.

Operator

That we continue to remain strong from a brand perspective. Farware is the biggest piece of it. We use Sabatier, there's KitchenAid a small piece, but the cut rate was up 76.6% in prime day, but in general, cut rate is also growing on a year over year basis. The biggest up for us in that we had two impacts in the 1st 6 months of the year, which has negatively impacted our revenues to date and or translate into market share and position. One is that one of our largest customers about a systems implementation issue in the distribution side and then in stock levels and orders went way down.

Operator

That will normalize, but they sell a lot of far outweigh a lot of our brands. So that had some negative impact. And also in the club channel, there was just business that didn't repeat. For instance, Rabbit, which had a big presence in club. We didn't lose it to a competitor.

Operator

So it's not like we lost market share. It's just the clubs will to run something 1 year and just change, right? That's just the nature of a club business. So rabbit share is down in all the other channels. So rabbit and line accessories continue to do well.

Speaker 1

Thank you.

Operator

Thank you. Our next question is from Alan Weber with Robotti Advisors. Please proceed with your question. Hey, Alan.

Speaker 4

Good morning. How are you?

Operator

I'm okay. How are you doing?

Speaker 4

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

Operator

Yes. I mean, I'll make some comments and see if Larry wants to add to that. Once 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 a normal seasonality had went away.

Operator

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 ship more in the second half of the year than we do in the first half. We're shipping a lot in the second half of the year.

Operator

We collect some of that in the first quarter, right? So that is a big collection period, Right. Inventories grow now through Q3 as we start shipping that stuff. So those will be the major trends. Anything you want to add?

Speaker 2

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 'twenty one. We had a lot of inventory, we're going to paying for 'twenty two, so we really got hurt.

Speaker 2

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. That the last year was, I should say, abominable. It's really atypical. But Q1 of the year is actually the strongest for us.

Operator

Q4 From a working capital.

Speaker 2

Yes, sorry, from a working capital point So let me finish. So on the inventory, we still have some more inventory cuts to make, but most of it is done. That we're going to see what we've achieved by any means in the first half of the year. And then on the What drives really cash flow in the second half of the year, really the late part of the Q4 are collection from customers. And It's very hard to predict for a couple of reasons.

Speaker 2

One is, it depends on when you sell in the Q4, whether you collect in the Q4 before you collect in the 1st part of the following year. So obviously, for example, if you're shipping in October, the that the potential collected in the year, if it's shipping November, likely 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 into naming individual customers. So the mix of sales to particular customers to try collection.

Speaker 2

So we have a really good December, but it will affect January and vice versa. So I like to think of it more as a continuous period of time or 12 month period of time. So, gave a lot of stuff. I haven't completely answered your question because it's really somewhat difficult to forecast.

Speaker 4

That was just actually unrelated, but as you talk about that things have changed. Bob, can you talk about not asking for a 5 year projection, but can you to talk about where you are today or where we are today versus when you had the 5 year targets. 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?

Speaker 4

Or have things really changed where some of the expectations in terms of margins, revenues are just not realistic. Can you just talk about that?

Operator

Yes, Alan. So we still stand behind our long term projections, but not in the original timeframe because of all of the macroeconomic impacts. But we 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.

Operator

That ultimately, 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, that we're well capitalized. We never factored that into our consideration. Will that give us tailwinds ultimately? Who knows?

Operator

But I think bottom line is, we believe that our long term plan that we had released is very achievable, but definitely delay.

Speaker 4

Right. Well, that's I mean, the delay part is not okay. Fair enough. Great. Thank you.

Operator

No problem. Thank you. 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 and their support of Lifetime Brands.

Operator

As a point of information, Larry and I will be in Boston next week speaking at a Canaccord Genuity at investor conference, and we hope to see people there or at the minimum at our next call. Thanks again.

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Earnings Conference Call
Lifetime Brands Q2 2023
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