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spk03: Good morning, ladies and gentlemen, and welcome to the Lifetime Brands fourth quarter and full year 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 speaker's remarks, there will be a question and answer portion of the call. If you would like to ask a question during this time, please press star 1 on your telephone keypad. I would now like to introduce your host for today's conference, TJ O'Sullivan. Mr. O'Sullivan, you may begin.
spk02: Thank you. Good morning and thank you for joining Lifetime Brands' fourth quarter and full year 2023 earnings call. With us today for management are Rob Kay, Chief Executive Officer, and Larry Winokur, 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 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.
spk00: Thank you, TJ. Good morning, everyone, and thank you for joining us today. We had a strong fourth quarter delivering results that helped us to meet or exceed net sales income from operation, and adjusted EBITDA targets from the revised full-year guidance metrics we provided last quarter, as well as analyst estimates. We are pleased with the strong net sales growth we are driving across categories, especially in our e-commerce channel, which continues to gain share. Uncoupled with our continued focus on driving efficiencies across the business, This outperformance translated to meaningful operating income growth that we expect will continue in 2024. To start, I'd like to walk you through our fourth quarter and full year results at a high level. In the fourth quarter, we delivered $203.1 million in net sales and $21.5 million in adjusted EBITDA, compared to $207 million in net sales and $19.7 million in adjusted EBITDA in the prior year period. For the full year, we generated $57.3 million in adjusted EBITDA, compared to $58.2 million in 2022, coming in ahead of our internal estimates, thanks to diligent expense management and a focus on incremental revenue opportunities throughout the year. Of note, our performance was notwithstanding $3.6 million of one-time charges in 2023. We have been encouraged by the improving supply chain environment in recent quarters and experienced no disruptions in the fourth quarter. Though we are monitoring potential issues stemming from ongoing geopolitical challenges in the Red Sea, which have had some initial impact on ocean freight's costs and shipping times. Further, with another quarter of normalized shipment and ordering activities now behind us, we believe that the oversupply issues our retailers experience coming out of the pandemic have dissipated. Turning now to our international business. Throughout 2023, we remain diligent in the execution of our international turnaround strategy, and we are pleased with the meaningful progress we have made, including market share gains in these end markets. In Australia and New Zealand, the direct go-to-market strategy we implemented earlier this year is translating to increased listings with additional accounts, products, and brand listings. Additionally, we continue to drive incremental revenue opportunities as we roll out new product lines into our international markets, driven by our highly successful KitchenAid offering. As a result of these factors, in the fourth quarter, we saw the first turnaround in year-over-year international revenues since 2021. As part of our international turnaround plan, we took a non-cash inventory write-off in the fourth quarter, which impacted our bottom line performance. But we expect that the aforementioned initiatives will have a meaningful impact on our international channel's bottom line in 2024. In our food service business, we remain on track to achieve significant growth in 2024 as MACASA hospitality continues to gain traction and capitalize on the market positioning achieved in 2023. While this business is still in its early stages, we are confident that Lifetime is now recognized as an important participant in the food service industry and will continue to expand its product placement across North America. We maintain our long-term view that we can grow our total food service business to $60 million in revenues by 2026. Refining and building out our e-commerce strategy remains a key strategic priority for Lifetime. This quarter, e-commerce net sales exceeded 23% of our total net sales for the quarter, contributing meaningfully to our overall outperformance. This represents an increase of nearly 3.5% from the comparable quarter a year ago when our e-commerce net sales were slightly below 20%. We are continuing to hone our online strategy to ensure we are best positioned to capitalize on the significant opportunities we see in the channel. We maintain a strong focus on new product development and channel expansion to bolster our market position. Looking ahead, we are excited about our robust new product pipeline, many of which are incremental revenue opportunities. Production of our previously announced Dolly Parton branded products is well underway, with shipments on track to begin in April and the majority of products slated for the second half of the year. This launch is across four different product categories, all in the dollar channel. which is a new channel for lifetime. We are also reinvigorating our robust pipeline of Swell products with new items being launched in the first quarter of 2024. These will initially be available online on Swell.com as well as across e-commerce channels. In line with our commitment to reduce our exposure to supply chain issues in China, we continue to ramp up production capacity in our Mexico facility. With the facility now operational and on track to reach full capacity in 2024, and combined with other sourcing initiatives, we are well on our way to meeting our previously stated target of approximately 25% of our spend on goods being outside of China by the end of the year. Active balance sheet management remains a priority for us, and we are pleased with our financial position as we enter 2024. Our disciplined cash management throughout 2023 led to a noticeable improvement in working capital year over year in both our U.S. and international businesses, which Larry will discuss in further detail shortly. We remain prudent in our approach to capital allocation and are open-minded to value-enhancing M&A opportunities that align with our strategic priorities. We will continue to evaluate opportunities as they arise, especially in the current market, which favors strategic buyers. In summary, we are pleased with the strong momentum across our business as we close out 2023. The significant work we have done over the past several years to transform and reposition our business is paying off and we are entering 2024 as a more focused, agile company. Looking ahead, we are excited by the meaningful work already underway across our organization to continue innovating new products, expanding into new channels, and growing market share. generating significant value for our shareholders. With that, I'll now turn the call over to Larry.
spk05: Thanks, Rob. As we reported this morning, net income for the fourth quarter of 2023 was $2.7 million or 13 cents for diluted share versus $3.3 million or 15 cents for diluted share in the fourth quarter of 2022. Adjusted net income was $6.3 million for the fourth quarter of 2023 or $0.29 for diluted share as compared to $7.5 million or $0.35 for diluted share in 2022. Income from operations was $15.7 million for the fourth quarter of 2023 as compared to $12.8 million in the 2022 period. Adjusted income from operations for the fourth quarter of 2023 was $19.4 million compared to $18.2 million in the 2022 period. And adjusted EBITDA for the full year 2023 was $57.3 million. Adjusted net income, adjusted income from operations, and adjusted EBITDA are non-GAAP measures, which are reconciled to our GAAP financial measures in the earnings release. The following comments are for the fourth quarter of 2023 and 2022, unless stated otherwise. Consolidated sales declined by 1.9%. U.S. segment sales decreased by 4% to $185.2 million. The decrease occurred in the tableware and home solutions categories. Tableware was lower as most of its warehouse programs shipped during the first nine months of the year, and home solutions decline was due to lower hydration products in the corporate sales channel. The decrease was partially offset by strong sales in the kitchenware category. International segment sales increased by $3.8 million, or $2.9 million in constant U.S. dollars, to $17.9 million. As Rob discussed, in the fourth quarter, international had its first upturn in sales since the fourth quarter of 2021. The increase was attributable to higher e-commerce sales and market share gains from the launch of the go-to-market strategy and an increase in Asia sales, too. Gross margin increased to 36.4 percent from 34.9 percent. U.S. segment gross margin increased to 37.2 percent from 35.8 percent. The improvement is due to lower inbound freight rates and favorable product mix. For international, gross margin decreased to 27.2 from 37.1 percent, most notably from reserves to certain slow-moving inventory. U.S. segment distribution expenses as a percent of goods shipped from its warehouses, excluding warehouse redesign expenses, were 8.7% versus 9.2%. The improvement was attributable to the significant reduction in inventory, which eliminated the need for outside storage and improved operating efficiency. In addition, better safety experience lowered insurance costs, and abating inflation reduced some other expenses, such as for pallets. These inductions more than offset the cost of higher labor rates. International segment distribution expense of goods shipped from its warehouses were 19.1% versus 19.6%. The improvement was due to lower outbound freight rates and more shipments from the Netherlands warehouse. Selling general and administrative expenses decreased by 4.1% to $38.7 million. U.S. segment expenses decreased by $3.2 million to $29.1 million. And as a percentage of net sales, expenses decreased to 15.7 percent from 16.7 percent. The decrease was attributable to lower allowances for bad debt and a decrease in acquisition-related contingent consideration. International SG&A expenses increased by $700,000 to $4.5 million. As a percentage of net sales, expenses decreased to 25% from 26.7% due to the effect of period expenses on higher sales volume. Unallocated corporate expenses increased by $0.8 million to $5.1 million. The prior year reflected an expense reduction for performance stock awards not expected to be earned. Interest expense, excluding a mark-to-mark adjustment for swaps, increased by 0.5 million due to higher interest rates on our variable rate debt, substantially offset by lower average borrowings. The loss on extinguishment of debt was for the write-off of unamortized term loan fees due to the loan amendment. For income taxes in both Q4 23 and 22, the rate exceeded the statutory rate primarily due to state and local tax expense, non-deductible expenses, and foreign losses for which no benefit is reported. And related to our 24.7 percent equity interest in Grupo Basconia, we recorded our proportional share of its losses. Grupo Basconia is a passive investment for us. Finally, turning to our balance sheet, in November, we amended and extended our term loan. We now have no debt maturities until August 2027. In connection with the term loan amend and extend, we repaid $48.7 million of principal, and as a reminder, in June of 23, we repaid $47.2 million of principal, too. Notwithstanding this $97 million reduction in permanent debt, our balance sheet continues to be very strong with $134 million of liquidity. Liquidity includes cash plus availability under our credit facility and receivable purchase agreement. Our adjusted EBITDA to net debt ratio as of year end was 3.4 times, a considerable improvement from 4.0 times at year end 2022. This concludes our prepared comments. Operator, please open the line for questions.
spk03: Thank you. And ladies and gentlemen, at this time, we'll open up for a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star 1. We'll pause for a moment while we poll for questions. And our first question comes from Anthony Libidzinski with Sedodian Company. Please state your question.
spk04: Good morning, and thank you for taking the questions. Good morning. So first, just a quick follow-up in terms of the fourth quarter sales. So I know on your last conference call in November, you guys talked about a timing shift for shipments to a certain large warehouse club customer. So was the U.S. segment sales, was that the primary reason why U.S. segment sales were down from a year ago? Was it because of this timing shift or was there anything else that happened there?
spk00: Yeah, so the fourth quarter came in above our revised guidance, right? If you look at it on a year-over-year basis, there was a club program which didn't repeat, and that's driving year-over-year performance. The outperformance versus our revised upward guidance that we issued last quarter was not related to the club channel.
spk04: Okay. Got you. Thanks for that clarification, Rob. And then just to follow up in regards to the overall e-commerce strategy. So you mentioned that it was 23% of your sales in the fourth quarter. Do you have that number for the full year? And then as you look forward, I mean, do you guys have a goal in mind in terms of how high you want to get this to and just wondering about the margin profile for that channel versus others?
spk00: Yeah, Anthony, let me start and then Larry will give you the particulars. By the way, 23.2%, I believe, of quarter. So we do not have a target number in mind. Our sales philosophy is to sell wherever the consumer is and to maximize those opportunities. So we did reorient in terms of how we spend in our approach, which is why we've been successful across all channels growing and growing our share in each channel. So we tweaked that a little bit about six to eight months ago, and it's paying off nicely for us in gaining market share. So we're trying to maximize the pie in every channel for us, but there's no specific target, and part of that is based upon the overall market and, again, where the consumer is spending. right? So if the consumer spends 50% of their dollars in the e-commerce channel, we want to be at least 50%, right? So that'll drive it more than what we're experiencing now, which isn't being driven by a shift in the quarter or the last six months, really, towards e-commerce in the total market. It's more just lifetime's approach to that channel, which has been giving us enhanced success. Larry, you want to give a full number for the full year?
spk05: Yes. So for the full year, e-commerce sales increased. 2022 was 18.7% of sales, and 2023 full year was 19.3%.
spk04: Gotcha. Yes. Thanks for that. Okay. Perfect. So as far as the margin profile for sales, e-commerce versus others, is that comparable?
spk00: Yes, sorry, I forgot to answer that. Yes. Yeah, again, it is comparable, but there are different channels which have different dynamics. As we've talked about, the club channel, which is a very healthy and good channel for us, does usually run at a lower gross margin. It does have working capital benefits, but again, it's all priced accordingly. But in general, yes. The answer to your question is yes.
spk04: Got you. Okay. So I know you're not yet providing guidance. I know typically you do that in May. But as far as just if you could, I'm wondering if you guys could provide some additional color. So as you have your conversations with your top customers, what are you hearing from them in regards to overall demand as far as retail traffic or online traffic? What can you share with us as we try to recalibrate our models here after the results?
spk00: So the market seems to be stable. And retailers are definitely more comfortable. There's less discounting than you see when they're having trouble so that there isn't discounting that we're seeing in the market. There is healthy dialogue. The industry's big show happens next week. We'll know more after that. But we are comfortable with the conversations we're having. We don't see there being a downward discussion.
spk04: Gotcha. Okay. And then last question before I turn to others. So you did a nice job with improving your cash flows. You know, it looks like, you know, healthy inventory levels as well. As we look forward, do you think you can further reduce inventories? I know there are some quarterly variations, obviously, but I mean, You know, as far as just when you look at managing inventories, do you think there's some further improvements you could make or you think this is kind of like the bulk of that has already been realized?
spk00: Anthony, again, just backing up a second. Lifetime's financial profile is a very strong free cash flow. So we generate very good free cash flow and we have a very strong balance sheet. You know, in a lot of the macro-driven challenges over the last couple of years, including trade issues, ocean freight issues, availability, and, you know, COVID-related, we made a decision, as we were very public about, to invest heavy in inventory, and we used that to help gain market share, which we've retained. and by investing in more higher inventory levels. In 2022-23, when the market wasn't as robust, we, in an orderly basis, because as we said, this is always good inventory, we reduced those inventory levels. And again, we point out that our margin maintained or grew, so it wasn't like we were dumping the inventory and it wasn't excess. It was just, you know, an investment. And we monetized that. That helped us, you know, as Larry mentioned, it helped us be in a position to repay almost $100 million of term loan in 2023. You know, so just, you know, in general, it's very strong. Do we have an ability to further reduce inventory levels from where they are today? We do in our international markets. more so in the U.S., with the one caveat that the trade, the retailers in general, have relied more, which has been beneficial to us, but it relied more on vendors for replenishment inventory and less in their own distribution centers because they're smart and they can push that down to strong people like us. In very robust economic times, that shifts where they want quicker turns into their stores. We're not in that environment now, in a high-growth environment, so that always helps us in terms of inventory turns because it's not in our GCs, it's in theirs. But the big numbers we've taken off of our balance sheet in the U.S., there is still room internationally.
spk04: Understood. Well, thank you very much for all that color, and best of luck going forward.
spk00: Thanks, Anthony.
spk03: Thank you. Just a reminder to the audience, to ask a question, press star 1. To remove yourself from the question queue, press star 2. Our next question comes from Brian McNamara with Canaccord Genuity. Please state your question.
spk01: Hey, good morning. Thanks for taking the question guys. So Rob in November, you mentioned that you did not expect much of a rebound in the US and markets in either Q4 or 2024 as visibility remained pretty poor. I'm curious if that view has changed at all relative to four months ago.
spk00: Tough to answer that Brian. Yeah, a little bit. I mean, first starting with Q4, We exceeded, right, we had revised our guidance upwards, and we, you know, exceeded everyone's expectations, including our own. So, the market performed stronger than what we expected, positive, but, you know, in terms of our expectations, and we were fairly on top of our business, it did better than we expected, and that's good, obviously. We're still getting the data points. We are, particularly this year, as we launch a whole new channel and a new line, there's a big market share pickup. So that's not end market delivering results. We'll get results from that by all newness incremental. There is a little better clarity, but I think that we're still in a market where there is still unknowns in terms of general economy, less so in North America than internationally, but there is an absolute clarity of what we'd see in normal conditions.
spk01: That's helpful. It's nice to hear the new product launches for Swell and Q1. I guess I'm curious your views on the hydration segment overall given the recent Stanley craze and how you intend to position the brand in the market with competitive intensity ramping here.
spk00: Yes, Stanley has been a phenomenon and has gained tremendously. The whole category has grown driven primarily by Stanley and one other participant who's done particularly well, particularly at Walmart. They've been driving that category. It's still a very good category. You know, Swell is a phenomenal brand. It needed additional investment from when we bought it, and we have done that. And while it's really a phenomenal brand with great equity, from a product development perspective, you know, we inherited a zero pipeline, and we just needed to reinvigorate that. And we have, and actually you can see just by going on Swell.com or, you know, one of the e-commerce channels, pure play guys you'll start to see our products so but you know Stanley everyone including us has entrance into these you know keep you very hydrated with really big bottles right which is what Stanley is and look they've done a phenomenal job so we are increasing our advertising because you know Stanley as a good example has done a tremendous job at social media We need to get the story out as a great brand. We need to reemphasize the story that already people know, particularly with Swell, but also Built. Built is a major participation in hydration. So we're spending more to reinforce our brand equity. We've reinvigorated both at Built and Swell product development. You'll see, go online, you will already see, and you will continue to see that come to market, which we are very enthusiastic about.
spk01: Great. That's helpful. I know you're not providing, obviously, fiscal guidance until May, but is it reasonable to expect top-line growth this year?
spk00: Yeah. I mean, wait until May, but, you know, one thing just mathematically to look at is, you know, we are doing a major launch into a channel. The Dollar General has 20,000 stores, right? they'll have 23,000 very shortly. We're going to be in every one of those. So, you know, that's going to have an impact. You know, part of that won't be until 25, but a decent amount will be in 24.
spk01: Okay. The stock's done quite well since your Q3 earnings. I'm curious what should get investors excited for 2024 and moving forward, and then I'm done. Thanks. I appreciate you taking all the questions.
spk00: No problem. So as you know, Brian, and other people, management and our key shareholders that are on the board own a lot of this company. And we're very committed with our own money in terms of stake in the company. And we're very pleased with the run-up of the stock this year. we still think it's tremendously undervalued in just the math, and everyone can vote with their own dollars. So we are pleased. We think there's just where we are today, you know, and particularly, you know, relatively so. There's undervalue if you look at the cash flow that we generate, you know, in just the math. But, you know, we've been – Turning around our international business has got huge potential. There's huge opportunity there. We're starting to see some traction. Macasa Hospitality, as we grew the business when we relaunched the business, change management in 2018, we put something together. We streamlined the operation, but we also launched our food service initiative in Macasa Hospitality, and that takes time. You know, COVID delayed that. But as we've talked about, gained real traction in 2023. We'll see real results in 2024 and beyond in particular. That business is really an annuity business. You know, once you're spec'd on, you're selling that same product for years. So that'll ramp up. And that's something that we have talked about being excited about. We see that now. and remain very, very excited. You know, there's been some bumps. We haven't lost any market share, but there's been some bumps in 2022 after COVID. You know, the company is very streamlined, and as we continue to grow, a lot of that falls disproportionately, which is a positive to the bottom line. Very excited about that. You know, we talked, we don't overemphasize in terms of the M&A opportunities, but strategics have an advantage for the first time in 20 years, and I've taught, you know, dozens of companies. So, you know, we're cautiously optimistic that will translate in opportunities for us. Frankly, if we wanted to be much more aggressive, we'd be buying a lot more businesses today, but we would maintain a, you know, very strict financial discipline and But we think there's opportunities and hopefully we'll be able to transact. It takes two and we're not going to sacrifice our discipline to do that. So there's many different levers that excite us and hopefully excites the public in terms of the ability to continue to create value, let alone just from a cash flow generation we continue to create equity value with the cash flow that we generate, even if we did not grow. And of course, all these levers, we think there's ample opportunity for nice growth above market.
spk01: Thank you.
spk00: Thank you.
spk03: I think there are no further questions at this time. I'll hand the floor back to management for closing remarks.
spk00: Thank you, Operator. Thank you everyone for attending our call. We look forward to issuing our full year guidance as is our custom with our next call. Larry and I remain open for anyone who has questions or comments or want to discuss any aspect with us in the interim. Thank you very much and have a great day.
spk03: This concludes today's call. All parties may disconnect. Have a good day.
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