Good morning, everyone, and welcome to Lifetime Brands' Third Quarter 2023 Earnings Conference Call. I would now like to introduce your host for today's conference, T.J. O'Sullivan. Mr. O'Sullivan, please proceed.

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 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 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 30, 2023, 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 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 impacts of ongoing global supply chain issues on retailer purchasing behavior, with retailers across channels altering inventory and distribution strategies in response to significant oversupply. We are now seeing sustained positive trends in shipment and 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 by a combination of mix and positive macro factors. Of note, the ocean freight cost environment remains favorable to the 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 win on the continent. We saw several key new business wins in the quarter, including 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 continues to positively impact our bottom line, strengthening our foundation as we drive forward towards our goal of improved profitability for this 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 roll out our e-commerce-driven strategy across channels such as Tmall, Alibaba, and Shopee, and are seeing strong lease activity among consumers in these markets. The continued rollout of our direct go-to-market strategy in major geographies, driven by our core brands, including KitchenAid, S'well, and Mikasa, is expected to provide top-line growth beginning in 2024. Of note, our market shares remain strong. And as we work to bolster the strong market share position, we are pleased with the successes of several key growth initiatives in creating incremental opportunities that support our top line. Throughout 2023, we have made significant investments in infrastructure for our foodservice business, 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 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 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 product 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 uncertainty due to macroeconomic factors, the positive trends that we have produced year-to-date, combined with our confidence in executing the fourth quarter, have provided us with a revised outlook on the full year 2023. To reflect these tailwinds 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 maintain our strong financial position moving forward, 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 has 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. We believe that our anticipated amendment and extension of our Term Loan B 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 and in 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 we are confident we have the business model and strategy in place to continue accelerating our progress.

Thanks, Rob. As reported this morning, net income for the third quarter of 2023 was $4.2 million or $0.20 per diluted share compared to a net loss of $6.4 million or $0.30 per diluted share in the third quarter of 2022. Net income for the current and prior year quarters each include a noncash impairment charge related to our equity investment in Grupo Vasconia of $300,000 and $6.2 million, respectively. Adjusted net income was $7.7 million for the third quarter of '23 or $0.36 per diluted share compared to $6.2 million or $0.29 per diluted share in 2022. Income from operations was $13.6 million in the third quarter of '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 30, '23 was $55.5 million before a pro forma synergy adjustment. Adjusted net income, adjusted income from operations, and adjusted EBITDA are non-GAAP financial measures, which are reconciled to our GAAP financial measures in the earnings release. The following comments are for the third quarter of '23 and '22, unless stated otherwise. Consolidated sales increased by 2.7% from 2022. U.S. segment sales increased by 3.8% to $179.4 million. As Rob discussed, our core U.S. business continues to rebound, and retailer purchasing behavior continues to normalize. This factor, as well as a new warehouse program, drove the current quarter increase, with a partial offset from lower sales for hydration products. International segment sales were down 10.9% to $12.3 million or down 16.6% on a constant U.S. dollar basis. The decrease is driven by continuing weakness in end market demand, the timing of customer shipments, and as expected, implementation of the new go-to-market strategy in Asia. Gross margin percent increased from to 37% from 36.4%. For the U.S. segment, gross margin increased to 37.3% from 36.6%. This improvement is due to favorable product mix and lower inbound freight costs. For international, gross margin decreased 10 basis points to 32.5% from unfavorable product mix, which offset the benefit of lower inbound freight costs. For the U.S., distribution expenses as a percentage of goods shipped from its warehouses, excluding nonrecurring expenses, were 9.1% and 10.4% last year. This decrease was driven by lower storage and talent expense. 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 the lower shipments on warehouse operations. Selling, general and administrative expenses increased to $40.2 million in '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 accruals. For international, SG&A expense decreased by 5% to $3.7 million from lower foreign currency exchange losses. As a percentage of net sales, International segment expenses increased to 30.1% from 28.3% due to the effect of period expenses on lower sales volume. Unallocated corporate expenses increased by $600,000 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. Our interest expense increased by $600,000 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 was 36.5% for the current quarter, which differs from the federal statutory income tax rate of 21%, primarily due to foreign operating losses for which no tax benefit is recognized. Related to Grupo Vasconia, a Mexican company for which we have a 24.7% equity interest, the company recorded a loss of $700,000 in the '23 period versus a loss of $2 million last year. Vasconia has a recent history of operating losses and recently announced it will not make its debt service payments. Furthermore, its quoted stock price continues to decline. Accordingly, the company recorded an additional noncash impairment charge of $300,000 to write down the investment to its trading value of $4 million. And our balance sheet continues to be strong. At September 30, 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 debt was $221.7 million, approximately $11 million lower than at the end of 2022. And the net debt-to-EBITDA leverage ratio was 4.0x. 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. The principal amount will be $150 million priced at 96 OID and bears interest at SOPA plus 550. The definitive agreement will be filed after closing, which is expected shortly. On a pro forma basis, as of September 30, after giving effect to the amendment, liquidity would be approximately $140 million. 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 million to $46.5 million, adjusted net income of $11.1 million to $12.3 million, and adjusted EBITDA of $52 million to $55 million. This concludes our prepared comments. Operator, please open the line for questions.

And our first question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

Yes. Hello. How are you?

Good. And yourself?

I was curious about your ordering patterns being more normalized, but that seems to conflict with some information regarding weak consumer demand. I'm wondering if your retail customers might change their behavior given the ongoing weak consumer behavior in terms of point-of-sale demand. Can you help clarify the relationship between the improved ordering and the persistently weak environment?

Addressing each point individually, the order demand is influenced by the previous situation where there was a mismatch between actual point of sale and retailer order demand due to significant overinventory across all channels. We are noting that this situation has normalized, eliminating the overstock issue that caused a mismatch between end market demand and shipments across e-commerce, brick-and-mortar, and other channels. However, the end market remains weak overall, although there are some improvements in specific channels like off-price, which have shown positive growth on a year-over-year basis, starting from a low point last year due to excess inventory. This has allowed them to purchase more to satisfy demand without the previous mismatch with point of sale data. Overall, we are not observing strong end market demand, and larger, more sophisticated retailers have already acted earlier this year to reduce their safety stocks and subsequently lower shipments in response to declining point of sale activity. Regarding the holiday season, there is uncertainty. The consensus from available data suggests it will be a decent holiday season, but with the likelihood of increased discounting and a shift in the typical sales curve.

Okay. You seem quite optimistic about achieving sales growth in 2024. Do you anticipate that this growth will be gradual throughout the year, starting off lower in the first half and building up as the year progresses?

We are not expecting a significant rebound in the end markets for 2024, particularly in the U.S. and internationally, we believe there will be no recovery until 2025. However, we are actively taking steps to gain market share, particularly in Europe where we are securing important retailers. If our products sell well, it could lead to substantial market share gains. We are also rethinking our marketing approach in Australia and New Zealand, which is an important market for us, and this should drive meaningful growth as we now serve a wider retail base at higher profitability levels. In the food service sector, we anticipate a sixfold increase in our low base business, which will help us reach profitability in this segment by 2024. We have made significant progress with our Dolly Parton line and secured placements that we expect to grow, with shipments beginning in the second quarter. These initiatives have been in development for some time and if the overall market improves, it could exceed our current expectations.

Okay. And then do you have any estimation as to how the refinancing would affect annual interest expense?

The offsetting factors include that we recently bought back about $50 million of the Term Loan B at a discount. Additionally, we are repaying nearly another $50 million, which has significantly reduced the outstanding balance of the Term Loan B, although the interest rate is higher.

Yes. As Rob mentioned, the amount we've calculated is approximately $2.5 million, which is quite similar to what we saved during the auction back in June.

So, the overall interest expense is higher, but we downsized the amount of indebtedness on the Term Loan B, so they kind of offset each other.

Okay. Thank you very much. Good luck with everything.

And our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

Nice job. Certainly, it's nice to see U.S. sales growth in the quarter here. So just curious, as we look at pricing versus unit volumes, anything to call out there? Or just curious if you have any thoughts on that?

Yes, the inflationary environment has had an impact. We've seen higher sales on a same volume basis, but the mix affects us more significantly. As Larry mentioned, we had a major program in the third quarter related to club, which boosted volume but negatively affected margins. However, year-to-date, we are down in club, which supports margin percentage but reduces volume.

Understood. Okay. Got you. Okay. And then if we were to use the midpoint of your updated '23 sales guidance. So the implied guidance of the fourth quarter is revenue decline of 5% from last year. So is that really all international that is driving that down?

No. Actually, Anthony, it's club. 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. Got you. Got it. Okay. And then just curious as far as the International segment. So obviously, sales were down here in the quarter, as you explained. Strategically and kind of longer term, how do you think about the potential for the International segment? I mean this quarter, admittedly, it was not the first time that you had some challenges there. So how do you guys think about this on the International segment longer term?

That's a very pertinent question. Look, it's been a drag on our earnings as we've grown tremendously since we really took over the business. And we've restructured it. We put it in a position that is heavily dependent on the U.K., Brexit had a major impact along with the war on Ukraine and many other factors. So we've continued to restructure that. Ultimately, we need to be comfortable. So the potential is there. The growth is probably one of our greatest growth opportunities, and we are gaining traction. I mentioned some of the retail gains. I mentioned what we're doing in Australia and New Zealand and 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 actions.

Okay. Understood. Okay. And then lastly, gross margin, nice improvement there. Just curious as to whether we should expect additional improvements in gross margins here going forward?

No. We've made significant improvements to our gross margin over the past few years. We feel confident in its sustainability, but we don't anticipate a consistent upward trend in gross margin percentage due to differences in channel mix or other factors from quarter to quarter.

And our next question comes from the line of Brian McNamara with Canaccord Genuity.

I think a lot of my questions have already been answered. But Rob, I think you've mentioned a lack of visibility for the last couple of quarters. Now I'm just curious, you've been in the business a long time. Is this kind of unprecedented? Like what typical data points, mileposts do you typically look out to kind of inform your view for market growth moving forward? And why is this time different?

The current macro environment presents a lot of uncertainties, including the possibility of escalating trade wars, which we've been dealing with for a couple of years. Weather patterns also play a role; for example, a particularly cold winter could negatively affect Europe due to high fuel costs. There are many factors to consider, and the situation is quite unique. We've noticed certain trends over time. When it comes to responding to economic pressures, sophisticated retailers, like Walmart and Target, typically reduce their inventory levels, and this is a standard practice. These companies have strong financial departments that tend to tighten safety stocks in anticipation of tough times before the media reports on economic shifts. This behavior started in 2022, with many retailers shifting risks to suppliers by reducing their stock. While some trends are normal, reducing inventory during a recession isn't usual. The overall market remains volatile, with limited visibility, although we can identify which channels are performing well. Despite the lack of concrete data, historically, we've relied on order flow by channel as a key indicator. For instance, in the off-price sector, there was a lack of available budget for purchasing, which was alarming in 2022. Fortunately, this situation has improved this year, contributing positively to our growth.

Great. Regarding international, there's been a lot of effort put into restructuring, but investors are seeking growth in this area. You've experienced eight consecutive quarters of significant double-digit declines, though you mentioned acquiring new business in the third quarter. I’m interested to know what the growth would have looked like without those new business wins and when investors might anticipate a return to growth in this segment.

Yes. So year-over-year, the improvement in profitability is meaningful. The wins that I'm talking about and the changes we made in Australia and New Zealand and all that have yet to flow through the income statement. We've gotten those wins, but we haven't started shipping.

Got it. I think we discussed 2024 earlier, and my colleagues and I expect around 5% revenue growth, which aligns with the current estimates relative to the midpoint of your revised guidance. Is that too optimistic?

We have not issued our guidance on 2024 yet.

And care to share any high-level comments? We've gotten a lot from our other coverage companies. Basically, the theme has been kind of talking down 2024.

Yes. We haven't issued any guidance, Brian. Look, as I mentioned before, we're not expecting much end market growth in '24. But we have a bunch of initiatives that we're working to finalize and see the impact, but that's where we'll get growth from.

All right. Sounds good, guys. Best of luck.

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, Shamal. Once again, thank you for your interest in Lifetime Brands. Thank you for listening to our call, and we look to be updating people shortly. Have a good day.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.