Lifetime Brands, Inc Q1 FY2020 Earnings Call

Good morning, everyone, and thank you for joining Lifetime Brands' First Quarter 2020 Earnings Conference Call. Please note that all participant lines are in listen-only mode. Following the speaker's remarks, we will have a question-and-answer session. I am pleased to introduce your host for today's conference, Andrew Squire. Andrew, you may start the conference.

Thank you. Good morning and thank you for joining Lifetime Brands' first quarter 2020 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 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. 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 for 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 to discuss Lifetime Brands' first quarter 2020 results. I hope that you, your family, your friends, and your colleagues are staying safe during these unprecedented times. Before I begin, I would like to take this opportunity to recognize the exceptional efforts of our associates including our operational teams, who have kept our facilities running safely and productively to ensure we can continue to deliver the products our customers know and love. I would also like to thank our sales, marketing, and administrative teams, who have been professional, productive, and highly effective as they work remotely. At Lifetime Brands, we've been working diligently to deliver strong results, while ensuring the safety and wellbeing of our employees. Driven by the impact of our Lifetime 2.0 initiative, combined with the actions we have taken since the onset of the COVID-19 crisis, we are pleased that we delivered solid results in our core U.S. business. These results were achieved with strong performance from several of our major customers and channels, including a significant increase in e-commerce sales, enabling us to generate significant cash flow and meaningfully lower our net debt in the first quarter. This was slightly offset by the anticipated impact from the operational challenges in our European operation, which began in 2019 and was resolved by the end of January 2020. However, we also faced challenges in our international business where there was a more significant impact from the COVID-19 crisis in the first quarter, due to border closures and retail store closures, resulting in shipping delays and lost revenues. Let me start with our core U.S. business. E-commerce represented one of the most important growth areas this quarter, contributing 16.7% of our total revenue for the first quarter. Importantly, that figure excludes a significant amount of additional e-commerce sales to omni-channel retailers where we cannot easily track the percentage sold online, but which were a key contributor to our success this quarter. Further, this figure was achieved notwithstanding our major e-commerce customer shutting off all orders in mid-March through the end of the quarter. Of note, this customer resumed order activity at the beginning of April. Additionally, we saw strong performance in the grocery channel with the company gaining market share and which we believe presents a compelling value creation opportunity for Lifetime Brands, as we have not had a historically large presence in this sector. The growth in the first quarter was a combination of market share expansion and strong demand from consumers for our products, particularly kitchenware, which experienced continued strong demand both before and after the impact of the COVID-19 pandemic became visible. When many retailers began to close brick-and-mortar stores in mid-March, we did experience a drop-off in demand from these customers. However, we were able to offset this impact by enhancing sales to the e-commerce channel, and those brick-and-mortar customers that remained open as well as omni-channel retailers. This resulted in our ability to grow revenues year-over-year in the U.S. led by our core kitchenware business. Turning to the international business, as we have previously discussed, the operational issues from 2019 extended into January 2020. However, LTB Europe was also hit harder by the impacts of COVID-19 in the first quarter, with a much higher proportion of independent retailers who were all shuttered and border closures, resulting in shipping delays and lost revenue. With the operational issues now behind us, we believe we are well-positioned to capitalize on the reorganization of our European operations. Our operational repositioning has enhanced our capabilities exemplified by our focus on using our improved infrastructure to offer drop-ship to national retailers that have resulted in an increase from 1,000 shipments per week to approximately 3,000 shipments per day from our consolidated UK warehouse. We are therefore confident that despite recent challenges, we will see a significant improvement in profitability and cash flow for Lifetime Brands going forward, particularly as COVID-19 recovery efforts continue. Let me briefly touch on our commercial food service initiative. 2020 was intended to be a ramp-up year for our Mikasa Hospitality brand, with significant sales activity to begin building market share in this new category where we have significant opportunity for growth. However, with the sharp declines in the hospitality industry, many restaurants, hotels, and other food service operations have closed, and we expect a delay in when we will start to see the benefits of the investments we've been making in this area. Even so, we're actively pursuing revenue opportunities in both the U.S. and UK and continue to strongly believe this is a meaningful channel for long-term growth in our tabletop, serveware, cutlery, kitchen tools, and small wares product categories. I will now discuss the aggressive actions we have taken at Lifetime to address the potential impact of the COVID-19 pandemic on our business. Across all our operations in the U.S., Asia, and Europe, we have managed operating costs with meaningful reductions implemented in spend across most categories including compensation, other benefits, tradeshows, travel, and commission structure. We have further taken steps to increase liquidity by negotiating rent abatement and deferrals and changing the payment terms for trade and administrative vendors. Together, these actions have and I believe will continue to enable Lifetime to achieve solid results that give us confidence in our ability to navigate the current environment, advance our strategy, and drive growth. As we generated cash this quarter, our net debt position is noticeably reduced and favorable year-over-year placing us ahead of our expectations on our commitment to lower our debt levels to guided targets. We dramatically lowered our net debt position and achieved this cash flow performance, notwithstanding the COVID-19 situation and operational challenges from our European operations. Additionally, in an effort to preserve our cash balance, which was $85.3 million as of March 31, the Board of Directors has determined to postpone the dividend on our common stock that was payable in May 2020 until December 2020. Given the uncertainties about the future direction or economic impact of the ongoing COVID-19 pandemic, we believe this is the right decision as it offers enhanced liquidity to the Company. We will continue to evaluate the situation going forward and revisit all COVID-19 related decisions in due course. Due to the ongoing economic uncertainty caused by the pandemic, we have decided not to provide an outlook for our full year for fiscal year 2020. Nevertheless, thus far in Q2, we continue to see fairly strong demand and shipping levels in our core U.S. business. With strong e-commerce activity and demand from our largest customers, driven primarily by kitchen, food prep, and cutlery products that have remained popular as more families are cooking at home. Thanks to this underlying demand, our U.S. business is trending flat year-over-year and our UK business is showing sequential improvements. Looking ahead to the rest of 2020, we believe the actions we have taken will help to mitigate the continuing impact of COVID-19, and we will continue to take actions as needed to ensure the stability of the business. We believe that the foundation we have built over the past few years with the actions of Lifetime 2.0 provides us the infrastructure, flexibility, and liquidity to weather this period of uncertainty. As we continue advancing our strategy, we are confident that our more focused business model and strategic growth initiatives will enable us to generate significant cash flow, improve growth and profitability, and create meaningful shareholder value moving forward. With that, I'll now turn the call over to Larry.

Thanks, Rob. As we reported this morning, the net loss for the first quarter of 2020 was $28.2 million or $1.36 per share versus a net loss of $4.9 million or $0.24 per share in the first quarter of 2019. Adjusted net loss was $5.7 million for 2020 or $0.27 per share versus an adjusted net loss of $4 million or $0.19 per share in 2019. A table which reconciles this non-GAAP measure to report results was included in this morning's release. Loss from operations was $25.2 million in 2020 and $2.3 million for 2019. The loss from operations for the current period was $5.1 million, excluding the impact of a non-cash charge for goodwill and intangible asset impairment related to the U.S. business segment. The charge included a bad debt reserve of $2.8 million to provide for potential credit problems of certain retail customers who may have financial difficulties caused or increased by the COVID-19 pandemic. Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release, was $61.2 million for the trailing 12-months ended March 31, 2020 after giving effect to certain adjustments and before limitations as permitted and defined in our credit agreements. Adjusted EBITDA was calculated to include the charge to bad debt reserve of $2.8 million that I just mentioned. Net sales in the 2020 quarter were $145.1 million compared to $149.9 million for the 2019 quarter. The U.S. segment sales were up $2.2 million to $129.2 million. The increase was primarily led by kitchenware's continued success of programs that commenced in the latter part of 2019 for several product lines, as well as an increase in e-commerce sales. This increase is partially offset by a decline for products sold predominantly to customers that were closed due to the pandemic. International segment sales were down $7 million to $15.9 million on a reported basis and down $6.8 million in constant U.S. dollars. As Rob noted, this decrease reflects the operational issues in late 2019 that extended into the early part of 2020 and the impact of COVID-19, which had a more adverse effect in the quarter than for our U.S. businesses. Gross margin increased 30 basis points to 36.5% in the 2020 quarter, but U.S. segment gross margin was 38.2% in 2020 versus 36.5% last year. The improvement was primarily due to an increase in kitchenware and the overall product mix driven by the Company's targeted efforts as part of the Lifetime 2.0 initiative, which we have discussed in prior earnings calls as well as at our November 19th Investor Day. For the International segment, gross margin was 22.9% in 2020, compared to 34.9% in 2019. This decrease primarily reflects the impact of the operational issues noted that temporarily affected customer service levels. Distribution expense for 2020 was 11.4% of net sales versus 10.6% in 2019. For the U.S. segment, distribution expense as a percentage of sales shipped from its warehouses, excluding moving and relocation costs that were incurred in 2019, was 9.8% and 10.8% for the periods respectively. The improvement reflects the continued realization of labor management efficiency and the benefit of leveraging fixed costs on higher sales volume. For the international segment, distribution expenses as a percentage of sales shipped from its warehouses, excluding moving costs with a new distribution facility, were 15.9% and 11.6% in 2020 and 2019 respectively. This increase is primarily attributable to the operational difficulties and inefficiencies associated with consolidation into the new warehouse, most notably higher temporary labor. Selling, general, and administrative expenses were $41.5 million in 2020 versus $40.1 million in 2019. The U.S. segment expenses were $30.4 million in 2020, as compared to $28.4 million in 2019. As noted in the earnings release, a charge to bad debt reserve was provided for potential credit problems with certain retail customers, who have financial difficulties that were caused or increased by the COVID-19 pandemic. Of the $2.8 million consolidated charge, $1.9 million related to the U.S. segment. SG&A expenses for the international segment were $6.5 million in 2020 compared to $6.1 million in 2019. The increase was primarily attributable to the charge to bad debt reserve, which was partially offset by lower employee and selling expenses. Unallocated corporate expenses declined to $4.6 million from $5.6 million in 2019 on lower professional fees. In the 2020 quarter, the Company recorded a $20.1 million non-cash, goodwill and intangible asset impairment charge related to the U.S. business segment. The impairment charge resulted from, among other factors, more conservative estimates of future cash flows in light of the uncertain market conditions arising from the COVID-19 pandemic. During the quarter, we recorded a non-cash charge of $2.3 million for a mark-to-market loss uncertain of our interest rate swaps. These swaps were entered into to lock in a fixed interest rate on our variable rate debt. The loss was caused by the recent precipitous decline in interest rates. Our intent is to hold the swap contracts until maturity; hence, over time, this non-cash loss will reverse. For the 2020 quarter, the Company recorded an income tax benefit of $3.7 million and an effective rate of 11.6%. This varies from the federal statutory rate of 21%, primarily due to the impact of non-deductible expenses, of which the most significant item was a goodwill impairment charge. As of March 31, 2020, our liquidity, which includes $85 million of cash plus availability under our credit facilities, was $137 million. As Rob described earlier, since late March, we have performed significant work to address the cash flow impact of COVID-19 when much of the economy and in particular, the retail sector shut down. This work coupled with the strength of our core business has enabled us to protect our liquidity. We believe that availability under our revolving credit facilities and cash flow from operations will be sufficient to fund the Company's operations for the next 12 months. This concludes our prepared comments. Operator, please open the lines for questions.

The first question will come from Linda Bolton-Weiser with D.A. Davidson.

Your operating cash flow was quite impressive in the quarter. This is the second consecutive quarter that you have exceeded our estimates. Can you provide some insight on whether we should expect significant improvements in operating cash flow in the second and third quarters? Or will the improvement start to slow down as we look ahead to the coming quarters?

Yes, absolutely, Linda. To clarify, we announced some initiatives in 2019 aimed at enhancing our operating cash flow. These initiatives primarily involved SKU rationalization and the potential divestiture of smaller product lines. While pursuing the divestiture is not a major focus, it does not currently impact our cash flow. Therefore, it would serve as an enhancement for the future. We've actively worked on SKU rationalization, which has contributed slightly to our cash flow improvement. However, the primary driver remains the strong performance of our core business and the cost reductions we've implemented, allowing us to generate more cash for the bottom line.

Okay. So, it sounds like we can expect to see continuing improvements at least some going forward. Is that kind of what you're saying?

Yes, Linda. It's Larry here. Historically, we generate cash in the latter part of the fourth quarter and into the first quarter. Typically, that’s when it starts to flatten out a bit because we’ve collected most of the receivables from the holiday season. Now, we usually begin to build working capital, leading to more borrowings. However, it’s difficult to predict this time due to changes in business practices following the pandemic and the reopening of stores. Historically, in the second quarter, we would actually see a decline.

Okay. And then when you reported in March, I think it was around March 10th or 11th. You had said that the issues in the UK, operational issues were completely resolved as of January. So, I'm a little surprised that the gross margin in international was so impacted because the issues supposedly were over with in January. So, could you talk about just, why? I mean, did you continue to have some issues in February and March? Or can you explain that better?

Yes, I apologize for any confusion. By the end of January, we had resolved our operational issues in the UK, and that hasn't changed. Once we fixed those issues, we had to incur additional costs to ensure we could maintain shipping and minimize disruptions, much of which involved temporary labor. The inefficiencies in the warehouse were significant, but we eliminated those by the end of February. We did experience lingering operational costs, which affected our margin in the first quarter, and we anticipated that, though we may not have communicated it clearly. The operational issues were resolved and have remained stable. In fact, I pointed out that due to improved drop-ship capabilities and speed, we've significantly increased our drop-ship shipping volume by fifteen times from the fourth quarter to now.

Okay, and then, I think you said in your remarks that the U.S. sales in April were kind of trending flattish, April and May flattish year-over-year. So, can you just confirm that? Is international still down but improved sequentially, is that kind of what you said?

As we said, we kind of look out for now, you can't tell in any given market we've had a good start in Q2 in the U.S. business, and the mix is a lot different. For instance, we had over 28% of our business in April that was e-commerce, so just a lot is shifting. But the business performed fairly well year-over-year so far, which may not dawn in April in the books.

Okay, I know that Helen of Troy had mentioned in their OXO business that the business is actually benefiting from people staying at home, buying kitchenware type stuff. Are you kind of seeing that phenomenon in your business and that's why it's holding up?

Very much so. So, we always joke about can openers. We can't keep them in stock, and we've always joked about that. Well, it's absolutely true. You can't buy them, right? We're trying to accelerate as much as possible, and the demand for all of our kitchenware, KitchenAid, Farberware primarily has greatly exceeded expectations, both in e-commerce, and the omni-channel, and just our websites. But the other major customers, a lot of our major customers are open in grocery. So kitchenware, cutlery, there are a bunch of categories that have remained actually stronger than what we expected because there's been a big increase in demand as people are doing more cooking at home.

Great. And then, can I just ask one final one? I guess you drew down some on your revolver, so technically your total debt including the revolver increased in the quarter, right? But do you intend to keep cash on the balance sheet through the rest of the year? Or will we see the debt actually coming down for the year including the revolver?

Yes, that's a good question. I mean, the truth is, we pulled down on the revolver, and we haven't needed it, but in an abundance of caution because there's so much uncertainty created by COVID-19 the pandemic. We have greatly exceeded our cash flow since we did that. But we still are appropriately remaining, not re-paying that amount. We have a little negative carry as a result, and we'll continue to evaluate that, right? We still are looking as things reopened, we are looking at, there's a second wave. So, we just think it's abundantly prudent to have that buffer if everything blows up in the world. We're sitting on $85 million of cash.

The next question will come from Anthony Lebiedzinski with Sidoti & Co. Please go ahead.

Hey, good morning gentlemen. Hope you're both doing well. Thanks for the opportunity to ask questions. So, I know you talked about e-commerce sort of seeing a nice increase in sales. Can you talk about the margin profile whether it's any different when you sell to Amazon or to Wayfair, as far as the margin for the products versus the traditional brick-and-mortar retailers?

We are observing an overall improvement in our margin compared to last year. Despite the changes we've experienced, we have not seen any decline in our margin.

Got it, okay. Thanks for that. So, I know you've talked about the supply chain disruptions in the UK impacting the results for the first quarter. It sounds like everything has been resolved. So, looking back, you said the international segment gross margin was 22.9% versus 34.9% a year ago. My notes are correct. So, is there any reason to think that we can't go back to those margins from a year ago now that the issues have been resolved? Or is there something else that could perhaps prevent you from achieving those margins that you had a year ago before the disruptions?

Yes. This is Larry. There isn't a specific reason for that situation. Keep in mind that it stems from some operational challenges we experienced. The customer service levels became apparent to us later in the first quarter, so there is nothing about the business that will lead to a continuation of those conditions. If you look back, there’s no reason for it to remain as it was in the first quarter. So, let's call it a response to indicate that it should be a non-recurring situation.

Got it.

The situation in the first quarter should not persist, as it should be considered a non-recurring condition.

Okay, great. Thanks for that. And I know you guys are not giving any formal sales or EPS guidance, but I guess as far as looking at the other line items, as far as expenses, I know you have done some expense reduction initiatives. Can you perhaps quantify those expense reductions as to how we should think about how those flow through the P&L through the rest of the year?

It’s a changing target. We have been proactive in assessing all areas of expenditure, which has led to positive variances across the board. However, we are keeping a close eye on the situation. For example, we have had to furlough hundreds of employees and are considering when to bring them back. We specifically adjusted our workforce in the UK when there was a lack of volume. As conditions stabilize, we anticipate an increase in spending. We cannot guarantee that the current situation is permanent; everything is in flux, but we are taking measures to safeguard the Company’s performance as circumstances change.

The next question will come from Justyn Putnam with Talanta. Please go ahead.

Considering the challenges faced during the latter half of the first quarter and the current second quarter due to the pandemic, achieving flat business sales in the first half of the second quarter might actually be quite an achievement, so well done on that. However, Rob, it would be beneficial if you could provide more details about your sales and projections for the latter half of the year, especially since that period typically sees your highest profitability and revenues. Would you consider the third and fourth quarters successful if you maintain this flat pace in the second half of the year? How would you describe that situation? I’m just trying to understand how everything is progressing with the changes in the Company and the broader context.

Yes, Justyn, thank you for your question. Beyond what we've already shared, we believe it's wise, like many other companies, not to provide detailed guidance due to the numerous uncertainties at play. As we mentioned earlier, we've responded quickly and proactively to manage our business amid the uncertainties and potential economic crisis caused by the pandemic. This approach has been global, with a thorough assessment of our operations. Fortunately, we've experienced no shipping disruptions from a supply chain perspective. We've stress-tested for scenarios like this and are pleased that the outcomes have far exceeded our initial expectations given the environment. Our products tend to be in demand during recessions, as evidenced in 2008, and we're seeing similar trends now with strong demand across various product categories. However, there are many unknowns, which is why we're refraining from being specific about future expectations. For instance, we can't predict if there will be a second wave of impact. We've observed significant shifts in our sales mix, with e-commerce representing over 28% of our shipments in April, alongside a robust omni-channel approach. In the UK, for example, we've ramped up our drop-ship volume from 1,000 per week to 3,000 per day, showcasing our omni-channel capabilities. Overall, we’re experiencing increased demand, which has exceeded our expectations so far, but we remain cautious about future developments. Another point to note is that Lifetime has transitioned everything to the cloud, allowing us to operate our call centers and other functions remotely without interruption. While our sales team isn't traveling, they are actively engaged in discussions about planograms and planning for the fall and holiday season with our major accounts, and this work continues.

At this time, there are no further questions. I'd like to turn the conference back over to Rob Kay for any closing comments.

Great, and thank you. Thank you everyone as always for joining our call, listening and for your questions, and asking us for clarifications. Everyone stay safe and we appreciate your listening in on our call.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.