Lifetime Brands, Inc.

Good morning, ladies and gentlemen, and welcome to the Lifetime Brands fourth quarter 2021 earnings conference call. At this time, I would like to inform all participants that their lines will be in listen-only mode. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star, then one on your telephone keypad. I would now like to introduce your host for today's conference, Andrew Squire. And Mr. Squire, you may begin.

Thank you. Good morning, and thank you for joining Lifetime Brands' fourth quarter 2021 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 others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the day hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update such statements. Our remarks this morning and in today's press release also contain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included in such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. With that introduction, I'd like to turn the call over to Rob Kay. Please go ahead, Rob.

Thank you. Good morning, everyone, and thank you for joining us today to discuss Lifetime Brand's fourth quarter and full year 2021 financial results. We are pleased with our strong performance in the fourth quarter, which marks another period of significant growth and capped a record year for lifetime in 2021, as we continue to drive significant value for our stakeholders. While inflationary and supply chain challenges continue to impact our industry and many others, our team effectively managed costs and continued our actions to not only mitigate these challenges, but deliver substantial growth in spite of them. Our strong execution in the face of this challenging macroeconomic environment enabled us to generate adjusted EBITDA of $95.1 million, or a 23% increase over 2020, which exceeded the high end of our guidance for 2021. We delivered a strong gross margin dollar increase of 29.3 million, or 10.7%, as we managed cost pressures in the business, focused on growing market share, and implemented price increases to offset increased supply chain, freight, and other inflationary cost pressures. While supply chain disruptions did have an impact on revenues in the fourth quarter, We still outperformed on revenues compared to 2020, and our full year results in both revenues and EBITDA achieved record levels, thanks to continued growth and market share gains across product categories in the US and increased operating cash flow in our international business. While we estimate that supply chain disruptions had a negative impact on fourth quarter revenue of approximately $20 million, revenues and EBITDA still increased meaningfully for the year. Of note, while some of these delays resulted in canceled orders, the majority of these missed shipments are expected to ship throughout 2022. Starting with our core business in the U.S., we continue to see very strong end market demand across the majority of our product categories. Similar to prior quarters, our largest category, tools and gadgets, performed well, further contributing to our overall gross margin growth. We saw strong performance in our rapid accessory line, driven by robust demand across various channels, including club, mass, and e-commerce. And our plant box and tailor lines delivered record results in 2021, driven by strong consumer demand for these products. Further, we continued to gain traction with our beautiful brands at Walmart and see meaningful opportunities to expand that product line into new categories over the next few years. Brick and mortar stores in the US continued their strong rebound in the fourth quarter, even with the surge of the Omicron variant at the very end of the year. This drove growth for the company as we were able to sustain the market share gains that we achieved in 2020. In e-commerce, we greatly improved our margins and continued to see strong growth in this channel on a dollar sales basis, with e-commerce sales reaching $43.4 million in the fourth quarter and $136.5 million for the full year. The full year e-commerce sales as a percentage of revenue were down slightly to 17.7% compared to peak pandemic levels of 18.9% a year ago. This is consistent with the greater industry trend as brick and mortar channels gained back share at the expense of e-commerce throughout 2021. Continuing to expand our e-commerce business remains an important growth driver for Lifetime, and we continue to make great progress in both our core US market as well as internationally. Turning now to our international business. Our international business continues to benefit from the transformation that we fully implemented in 2020. And while we saw meaningful growth in the first three quarters of 2021, the fourth quarter saw a decline related to pressures from Brexit and end market disruption due to the adverse impact of Omicron variant throughout Europe. The international business achieved strong growth in the first fourth quarter and full year 2021 in gross margin percentage. This is directly attributable to our implementation of our transformation strategy. We continue to expand our Asia Pacific presence with growth of 47.5% for the full year achieving full year positive contribution margin in 2021. This result was achieved through meaningful growth in Australia and New Zealand and the continued ramp up of our e-commerce business in China, building on our successful launch in Tmall. We are leveraging the lessons learned from the Tmall launch as we transition even more categories and brands to the Tmall platform. We achieved these results in our international business despite seeing a more significant impact related to the Omnicom surge in Europe than in the US, with more widespread store closures, particularly in the UK and continental Europe. These COVID-related challenges, as well as the Brexit pressures I mentioned earlier, impacted our ability to ship goods from our UK warehouse to the continent in a timely manner. Going forward, these types of challenges will be significantly offset by the addition of our new warehouse in the Netherlands, which we expect to be up and running by the end of March 2022. The Netherlands warehouse will continue to drive our overall cost basis down and enable us to ensure we consistently meet the service level expectations we set for ourselves with the ability to ship across Europe within 24 to 48 hours. Combined with the new country managers we have installed in key geographies across Europe, we expect to continue to drive meaningful growth in our international business in 2022 and beyond. We also continue to make exciting progress on our other strategic growth initiatives, starting with Mikasa Hospitality. As I discussed last quarter, we invested in top talent in this area and staffed our hospitality business with world-class professionals. As a result, the commercial food service business is ramping up well, and we have begun to win very significant national accounts like Chili's and Hilton Hotels. La Casa Hospitality began generating revenue in 2021, and with the recent win, and a rebound in the hospitality market underway, remains on track to reach profitability in the second half of 2022. As we have said previously, we see this business as a huge growth opportunity for Lifetime. We expect to reach $10 million in revenue over the coming year and continue to see this as a $60 million business by 2026. We had a number of exciting product launches in 2021, including the successful launch of our KitchenAid cutlery line, and we expect to see the full benefits of this line in 2022. We also successfully relaunched our year-and-date business and website in 2021, which we continue to expect to be accretive by 2022. Finally, RightTime has continued its expansion into adjacent categories, including outdoor, pet, and storage and organization. While we are still in the early stages of establishing these categories, the early results are very promising. We have a lot of great products in development and expect more meaningful revenue contributions beginning in 2022. Additionally, as you may have seen last week, we announced our exciting acquisition of Swell Bottle. for creating the first reusable hydration fashion accessory, as well as a perfect fit for our growing and successful hydration and storage categories, and its well-established e-commerce presence will expand our direct consumer offering. Further, its significant corporate partnership business will open up a new and attractive channel for lifetime with meaningful opportunities for a number of our brands in our existing portfolio. We expect Swell to be fully integrated into our operations in the second quarter of 2022, at which point we believe it will contribute approximately $4.5 million of incremental EBITDA on an annualized basis. In addition to our strategic growth drivers, we continue to focus on operational excellence. Over the past year, we accomplished our goal of transitioning all our direct-to-consumer websites to Shopify, This shift provides a uniform back end for our direct-to-consumer business and creates significant operational efficiencies across the business. Before I conclude, I want to take a moment to touch on the ongoing macroeconomic headwinds that are still being felt across industries. While we continue to take action to effectively mitigate supply chain and inflationary pressures, we are not immune to disruptions and we are feeling the impact of increased labor, shipping, and material costs, as well as the availability of adequate shipping containers, vessels, and trucks. Our mitigation efforts remain focused on driving down operating costs, increasing prices, and investing in inventory levels to maximize the availability of our products, which leverages our scale and our market share competitive advantages. On the labor side, we have restructured our distribution center operations to add another shift and transition our model from largely temp labor to more permanent positions in order to retain talent and keep our operations fully staffed. As you can see from our results, these actions continue to be successful, and we have been able to effectively manage through the macro headwinds and the multiple obstacles these have created. We expect these pressures to persist in 2022, and we currently expect to see normalization of supply chain costs in 2023. We remain confident in our ability to continue to deliver very strong results in the current environment, and we believe that our growth initiatives will continue to drive significant long-term value. In closing, our record performance in 2022 mark another year of incredible progress for Lifetime Brands. We are well positioned as we move into 2022. Again and again, we have shown a proven ability to manage through a variety of business cycles and we are executing on or ahead of plan on every single one of our growth drivers. We look forward to continuing to advance our strategy and create value for our shareholders. With that, I'll now turn the call over to Larry.

Thanks, Rob. As we reported this morning, the net loss for the fourth quarter of 2021 was $600,000, or $0.03 per diluted share, versus net income of $15.2 million, or $0.70 per diluted share in the fourth quarter of 2020. The 2021 quarter included a non-cash charge of $14.8 million related to the impairment of definite life, intangible assets in the international segment. These assets were initially recorded when we acquired Kitchen Craft in 2014. Adjusted net income, which excludes the non-cash charge, was $14.4 million for the fourth quarter of 2021, or $0.65 per diluted share, as compared to $15.2 million, or $0.70 per diluted share, in 2020. A table which reconciles its non-GAAP measure to report results was included in this morning's release. Income from operations was 8.9 million for the current quarter as compared to 24.4 million in the 2020 period. And excluding the impact of the impairment charge, adjusted net income, adjusted income from operations was 23.7 million for the 2021 period. Adjusted EBITDA non-GAAP measure as reconciled to our GAAP results in the release was 95.1 million for the year ended December 31, 2021. This represents an increase of 17.8 million, or 23% over 2020. Net sales in the 2021 quarter grew 2.7% to 255.9 million, and for the full year, net sales grew 12.2% compared to prior year. The U.S. segment sales were up 9.9 million to 230.1 million. This increase is mainly driven by increase in the kitchenware products category led by pantryware and in the tableware category from warehouse programs and e-commerce sales for dinnerware. International segment sales are down 3.3 million to 25.7. On a reported basis, $4 million in constant U.S. dollars. As Rob discussed, this is caused by Brexit disruptions which impacted our ability to timely ship goods from our UK warehouse to continental Europe and the adverse impact of the Omicron variant in Europe. As Rob also commented, the Brexit disruption will be alleviated beginning later this month as we will service continental Europe from a third-party logistics facility located in the Netherlands. Gross margin was 34.4% for the 2021 quarter versus 35.4% For the U.S. segment, the gross margin was 34.9% in the current quarter versus 36.2% last year. This was primarily caused by higher inbound freight costs and product mix, partially offset by higher selling prices. For international, gross margin was 30.3% in the 2021 quarter compared to 29.1% in the comparable period last year. The improvement reflects favorable customer mix for both the US and Asia export business and selling price increases. This is partially offset by higher inbound freight expense and duty charges for shipments to Europe. The latter will be alleviated by distributing from the Netherlands facility. Distribution expense as a percent of sales shipped from warehouses increased by 30 basis points to 9.2% in the 2021 quarter. For the US segment, The expense as a percentage of sales shipped from warehouses was 8.2% and 8.4% for 21 and 20 quarters, respectively. The improvement was a result of leveraged benefit of fixed costs on higher sales volume and the success of our continuous improvement programs, particularly in labor management. The latter largely offset higher hourly labor rate increases. For international distribution, Expense excluding relocation expenses in 2021 were 23.1% and 12.1% for the 21 and 20 quarters respectively. The increase was driven by a current period charge related to a revised real estate tax for the UK warehouse and higher freight out expense for shipments to continental Europe. Excluding this real estate tax division, distribution expense was 16.5%. Freight expense will decline when we begin distributing from the Netherlands. Selling, general, and administrative expenses declined by $1.5 million to $40.1 million for the quarter. US segment expenses declined by $1.2 million to $28.6 in the 21 quarter, primarily due to lower incentive compensation. As a percentage of net sales, SG&A declined to 12.4% from 13.6%, reflecting the leveraged benefit of fixed costs on higher sales volume. International segment SG&A increased nominally to $5.2 million. Higher foreign currency exchange losses and high employee expenses were offset by lower amortization expense. And unallocated corporate expense decreased by $500,000 to $6.2 million in the current quarter. The decrease was from low incentive compensation offset by higher professional fees. Interest expense declined to $3.9 from $4.2 million last year due to less debt outstanding. Our tax expense for the quarter reflects a loss in the UK, including the intangible impairment charge for which no tax benefit was recognized. And looking at a balance sheet, our balance sheet and liquidity continue to be strong. At December 31, net debt was $224.1 million, a decline of approximately $30 million from last year end. This was achieved despite a strategic increased investment in inventory to help mitigate supply chain risk. At year end, the net debt leverage ratio was 2.4 times, and liquidity, which is comprised of cash Plus, availability under the credit facility was approximately $174 million. This concludes our prepared comments. Operator, please open the line for questions.

Thank you. And at this time, we will be conducting 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 your line is in the question queue. You may press star two 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. One moment please while we poll for questions. Our first question comes from the line of Linda Bolton-Weiser with DA Davidson. Please proceed with your question.

Hi. So I was curious, usually you issue guidance for the next coming fiscal year, and I was curious why you are choosing not to do so at this time.

So Linda, consistent actually, just to correct your understanding, we always issue guidance in May, so we haven't changed our practice at all.

okay I'm sorry I that's right I forgot about that so so you plan so you plan to issue it that's at the time that the first quarters reported correct that's consistent with what we've always done okay great and with regard to the 20 million of orders that were shifted I mean you're pretty much almost done or partly done with the first quarter I mean what portion of that 20 million is is going to come in the first quarter, and then is there some sort of shifting of first quarter sales into the second quarter, if you know what I'm asking?

Yes. So there's several buckets. So they're a little bit greater than the 20, and some orders did cancel. There was a big Thanksgiving program we did, and that didn't make it. Some of it did. So we got some cancellation. The majority of it, though, moved over. Of those shipments that were missed, some of them, because there was some seasonality, they'll result in sales as late as the fourth quarter or shipments as late as the fourth quarter because of the nature of those products. So they wouldn't, on a normalized basis, and I'll get to your question in a second, have shifted in the first quarter anyway because of the delay. They either were going to make it or they have to wait until the third quarter, the fourth quarter, and the first quarter. We have not yet caught up in the first quarter because it's still basically a two-month delay to get into port, a month delay to get out. So there has not been alleviation, and there is a corresponding, From January, for instance, you know, things rolled into January and then sure shift, and then some January stuff rolled into February. So we have not caught up as of yet.

Okay. So, I mean, maybe you could just give a little more detail because, I mean, all companies are facing these issues, but sometimes it's different situations. I mean, is it – getting finished goods from Asia to the U.S. and Europe for distribution, or is it bottlenecks like imports where it's just the distribution that's delayed? Where are the biggest bottlenecks for you that are holding you up?

I think the bottlenecks exist everywhere. It's getting out of China and Asia, India, wherever we're shipping from. Although that's alleviated somewhat as of late, but it's getting container ships out. Then to our destination ports, the average wait on the West Coast to get into port is two months to less. These boats are sitting out waiting for a berth to be able to unload. There's a tremendous delay. just getting your products to our markets, the biggest ones being Europe and North America. Then there's delays getting out of port, so the ports are having problems with that. There are trucking delays, very noticeable in Europe, but also here. So it's not one which is also why we don't think that this situation alleviates very quickly unless there's a big depression or something, which we know. hopefully not, because there's so many aspects that need to be fixed in the chain. So it's not one thing, but what gets most press and people talk about is ocean freight and ocean timing, that it does have a very big impact. Hope that helps.

Yes, okay, thank you. Your inventory now, I mean, it's kind of crept up. And, again, a lot of companies are keeping more inventory, so you're not unusual. But, I mean, your level of inventory exceeds your annual sales now. So it is kind of a big lump there. Has the percentage that's in transit gone up a lot? Can you give us some sense of that aspect of inventory?

Yeah. I mean, first of all, answering your question directly, yes. Because of the situation I described and goods taking much longer to get from its source of production to actually a distribution center, whether that's being ours or if it's direct import, a customer, that created a slowdown in terms of a much higher inventory just by its very nature. Secondly is for some time, as you're aware, we've strategically decided to use our very strong financial position and balance sheet to just invest in a lot more inventory. It's proven successful in terms of gaining and maintaining market share, and then you see it in the results here. So even with delays, we're still growing very nicely. But we are carrying higher inventory levels, and we plan to keep higher inventory levels until there's some normalization in the world, and we think that's no earlier than 2023. Additionally, as you point out, is the fact of the supply chain is just taking much longer to get goods. We actually are the owner of those goods, even direct import in many cases, where the way it works, even though they're going directly to the customer, we're not getting paid right away. So this is having an impact in our receivables and our

Okay. I mean, do you think inventory is, like, going to creep up a little in the next year, or is there another big step up that you have to take in inventory level kind of in the next year?

So all other things remain the same. So on a constant-state basis, right, obviously we doubled revenues. You'd see a big increase in inventory. Not that we're guiding here, and we're not saying we're going to double our business in one year. No, we don't expect a big increase. We've made the investment. We started making the investment quite some time ago, in the interest of even carrying a tremendous amount of extra inventory, which we, again, have been helping us produce our results. We do believe that since this situation has lasted for some time. We continue to refine what we're doing so there's an opportunity to actually lower our inventories a bit this year.

Okay. And then in terms of the new distribution center in the Netherlands, what role then does that leave for the UK facility? Is that just fulfilling now the UK? And is there a chance that there'll be now excess capacity in the UK location? And kind of like explain kind of what's going on there.

So just as a point of information, the UK facility, when we set that up, is a bonded facility. So you're not paying duties, right? So when you're actually getting something in the EU through the UK, it is officially coming from China. It's like it never existed in the UK from a tariff perspective. However, in practice, it turned out that post-Brexit, they were just delaying anything coming out of the UK. It wasn't a tariff issue. We just couldn't get our goods. We went from service levels of 48 hours to on the goods side, four weeks and up to eight weeks to ship. It obviously hurt our business noticeably. Rotterdam facility, as we ramp it up, will be getting goods almost wholly from source of origin, so they won't be routed through the UK. That would just result in slower times, higher inventory levels system-wide, and higher costs. It'll be direct in terms of we'll manage it through there. As a result, yes, because we're having more total capacity in the system, less going through the UK, it will free up capacity in the UK and present an opportunity for us there. We weren't at full capacity there before, just as an FYR. This is giving us more capacity, excess capacity.

Okay. And then just switching a little bit to the new acquisition, the Swell acquisition. So if you said it added $4.5 million of EBITDA on an annualized basis, so in 2022 it will add 10 months roughly of that. A portion of that will be in for 2022. Am I understanding that correctly? Yes.

I think roughly eight months, but besides that, I think you are understanding correctly. Seasonality aside... So I think it would be about eight months after the transition period, if I'm understanding my math right.

Okay. And annual revenue is... Roughly, I'm guessing $30, $35 million, something like that. The high end. Oh, okay.

But pretty much, you're right on. It's just, yeah.

Okay. And the seasonality of that business? Is there something unusual in the seasonality?

I mean, look, it's predominantly hydration. There's definitely seasonality in hydration, as you're aware. At one point, going back to the UK warehouse, even though we're creating excess capacity, we will be at a lower cost footprint system-wide once we're live.

Okay. You mean with the Netherlands combined with the UK, the whole thing is going to be lower cost?

Correct.

Okay. And that's supposed to be up and running kind of like at the end of March, you said?

Any day.

Okay. Sounds good. Okay, I'll pass it on to the next person. Thank you so much.

Thank you, Linda.

And our next question comes from the line of Anthony Libosinski with Sidoti & Company. Please proceed with your question.

Good morning, and thank you for taking the question. So actually, just to follow up on the previous question that Linda asked us, as far as the The lower cost that you are talking about as far as movement from the UK to the Netherlands, how should we think about the magnitude of those cost savings? If you could give us an approximate idea, that would be very helpful.

We're putting that warehouse in place because once we're live, we'll be able to ship anywhere in the continent in 24 to 48 hours. So it's a huge... revenue opportunity for us. That's really what's driving that decision. The math is we'll actually be in a lower cost footprint combined, but it's not significant. The big impact from the middle end is going to be revenues and not costs.

Okay, got it. Yeah, thanks for clarifying that. Definitely appreciate it. So as far as price increases, can you quantify what the impact was from higher prices in your fourth quarter and as far as plans for further price increases this year?

Yeah, I'll take that. Yeah, the price increases are not the easiest to calculate, in part because we change our products so frequently. So you can only look at those that are comparable. Our estimate for the fourth quarter, bear in mind a lot of this is being phased in, is like maybe 5%, 3% on an annualized basis. And as it's being phased in, Our sales obviously were affected by the approximate supply chain issues of about $20 million, so you have to factor that in as well. That would have had an impact on that percentage.

In terms of further price increases, Anthony, the world went from crazy to crazier, so we've got to constantly monitor it. We put in several price increases. We do it by market. In 2021, we were very clear that we were only looking for what was required and we'd come back. We've already come back for additional price increases in 2022 and that may continue as the world and markets shift in one way or another.

Okay, yeah, thanks for that, Collar. So I know you're not providing guidance, obviously, yet for this year. You did mention earlier, Rob, in your prepared remarks that you're well positioned for 2022. You know, that being said, just looking at, you know, How you guys did it in 2021, you had a huge first half as far as, you know, first quarter, you had a 35% sales increase and 24% in the second quarter and modest in the back half of the year. So could we see kind of, you know, tail of two halves this year just in reverse order? You know, just directionally, if you guys could comment on what you think What's reasonable to expect for this year?

Yeah, that's a good question, Anthony. I mean, look, backing up two years, we had a record year in 2020, right? And then we crushed it in 2021, right? And, you know, frankly, beat our expectations as well. Good stuff. Yeah, so we said in 2020, well, look, we can't keep on growing 20-plus percent a year, but we kept it up. We can't keep on going 20% a year, all those things remaining the same. It's a very difficult environment. It was a little strange year in 2020 in terms of, to be on a compier basis, the beginning, as you pointed out, of the year had stronger comps versus the second half of the year, which is also against very strong comps. You probably should expect a more normalized curve of the quarters than what you saw in 2021 so you are correct okay all right well thanks and best of luck thank you anthony and our next question comes from the line of sam douglas with mario river capital please proceed with your question hi thanks for taking my question i just wanted to i know you touched on

container availability, but just wanted to see how you're seeing container freight rates in Q1 and for the rest of 22 relative to the last couple of quarters and how you think about substituting, you know, ocean with air. Yeah. Okay.

A couple of things. To begin with, we don't really find air to be an appropriate and cost effective means of shipment for what we do. We basically don't, maybe samples, but we don't do everything. Secondly, our focus as the world has had global supply destruction has been on Availability over cost, because we can still make money at some ridiculous container rates. And we focused in, because we've been growing a lot, we think it's a big competitive advantage. A lot of people we compete with are much smaller. And as we talked, we've invested in inventory and stability to be there to support the wholesale channel as well as direct to consumer. And so availability has trumped price for us. It's had some impact on our gross margins as a result, but also in a rising, I'm getting off question a little bit, but in a rising cost environment, there's always going to be a lagged impact for us to catch up on a margin basis. So far this year, there's been some jumps. The spot market jumped up to almost 25,000 a container to the west coast. They're different by coast. and of course different to Europe, but it's all linear. It came back pretty fast. More importantly, we purchased our ocean freight on contract rates in a normal environment over 90% of what we ship is on our contract rates. Last year, It was hard to get people to, and that's how it works, it was hard to get people to actually ship you, even though you had a contractual rate, to ship you on a contractual rate. Our total shipping cost is a function of how much we had to buy on spot and how much we had to buy on contract. Rates have stabilized a little bit. More importantly though, in February we shifted about 90%, which is the first time. Last year we probably did 55% on contract. We did 90% on contract in February. It appears, and from what we understand, the carriers are doing more and supplying more in terms of their longer, bigger relationships on contract. which is much lower than spot, contract rates still will be higher in 2022 than when they were in 21, still much below spot.

Okay, thank you. And I guess it sounds like being able to push price, you know, through on the top line should probably be able to offset those increased contract rates year over year. Is that the way to think about it?

Yes. We focus on maintaining gross margin dollar in a rising parity with our price increases and our cost decreases, for that matter. And that's our focus. So yes, to maintain gross margin dollar parity.

Thank you very much.

Our next question comes from the line of Justin Putnam with Talanton Investment Group. Please proceed with your question.

Yes, good morning. I just wanted to get a little more maybe results on your net debt picture for next year. I understand that you invested strategically a lot in inventory this year, but yet you still lower your net debt. My calculations are correct, somewhere around $25 million this year. I think you said you're not really expecting an increase. inventory the same degree next year. So what are kind of your target debt levels? Can you remind us about that? And then maybe your uses of cash for next year, just generally.

Yeah, first of all, good to hear from you, Justin. We generate a lot, as you know, we generate a lot of cash. And we keep on growing, we generate more cash. We use that strategically in the business to our advantage, but we continue also to de-lever. We're creating value for our shareholders by paying down debt as well. We did just use, although it's pretty immaterial in terms of our leverage ratios, but we just made an acquisition of a very creative business and great brand. We used some cash for that. When we did the filament lifetime transaction, we were high as a leopard, right? And we said our target level of the public company was three times and below. We've been below that for a while, right? And we have opportunities to use the cash. We don't expect getting to the lifetime leverage. So it's all within the guidelines that we've have been vocal about. And like I said, the acquisition we just made, you're not going to see an impact in terms of our net debt levels.

OK. So do you expect net debt to decrease fairly materially next year then?

In all likelihood. As far as I know, oil is going to hit $200 tomorrow and there's going to be a whole bunch of things. I'm not giving guidance today on the spot, but we consistently generate a lot of cash and deleveraging gives us dry powder on the balance sheet and increases stakeholder value just by doing it. That's what we've been doing. We use our cash. We used to fund our European business on a We have a separate line for that, but we now fund that out of the U.S. because we're picking up a little bit of the negative arbitration on the interest rates there because we funded it. We got the cash.

Okay, great. Well, thank you for that color.

And as a quick reminder, if anyone has any questions, you may press star one on your telephone keypad. Our next question comes from the line of Chris McDonald with Kennedy Capital. Please proceed with your question.

Good morning, Rob and Larry. Congrats on the results.

Thanks, Chris.

Yeah, just wanted to talk about share gains a little bit. So clearly pronounced share gains really once COVID started and just want to hear about the company's ability to hold on to that share, and then perhaps some of the other areas looking forward where you're most excited about share gain opportunities, either new products or expanded customer relationships.

Yeah, we even focused, you know, as we did the transformative strategy that we, you know, called Lifetime 2.0 of gaining share and focusing on categories where we had a right to win. In 2021, you saw a tremendous impact in our financial statements because a lot of share we retained. In our business, holding onto the share is a lot easier than gaining it. You saw the benefit of that in 2021. But we've also been expanding to a lot of plus one opportunities in adjacent categories. The launch of Beautiful has gotten traction, which is exclusive to Walmart, but it's a new brand there. It's Beautiful by Drew Barrymore, and it's very well received. We're actually looking into expanding that into additional categories, all plus one opportunities, and in one area getting us into some new category we're very big in, but we do nothing today in Walmart. We've been scratching our heads about that one, and now we may have that in front of us, and that could be very big. KitchenAid cutlery, which I mentioned in my remarks, we took that over and launched that in 2020, and it helped. It helped our growth in 2021, but it was only a half-year result. We'll get the other half-year this year. That just keeps on providing opportunities. So in terms of we've launched a lot. Macasa Hospitality is probably the biggest area that I'm very bullish on. It's a tremendous opportunity. We believe we have a very strong right to win. The market's been disrupted, obviously, in terms of the hospitality market. But we're getting traction there. But still, look, it's an investment. We could have shut that down. We'd be $100 million. but we're investing in the future. Year and day is the same thing. It's losing money for us, but we think that it's going to be not too long. That's going to be $15 million to $20 million business for us, highly profitable. It's a great brand, great product offering, and we're seeing tremendous results since we relaunched it. We still have a lot of investments out there. which are negative, which will start positive. International, we've made tremendous progress. That is going to be a huge driver for us. Everything we've done over the last three plus years, which has been hugely transformative from a financial perspective, has been while we've been losing money over that. Now we've closed that gap in 2021, but as that becomes positive, that's going to have a huge impact on our business. The things we've talked about, When we cleared up to Justin's question, there's a lot of dry powder on our balance sheet. We think we can use that, and we're very disciplined about that, so we can use that to gain positive value creation. We're looking for that opportunity, one opportunity that we have as well, which we just transacted.

Thanks for walking through that. Would you expect there will be new opportunities perhaps to reinvest the earnings associated with some of these areas where you've been investing thus far back into the business? Or do you think some of these strategic priorities inflecting to be positive contributors fall to the bottom line?

Yeah, Chris, that's a good question. Look, even while we were transforming the business, and that's why we're yielding it now, we were investing in the business. So we're not looking to maximize a quarter or a given year, so we're always investing in the business, which again, like I said, we could be generating a lot more cash income today if we weren't making these investments. So that's just the nature of our strategy. We will continue to reinvest in the business to give us future growth opportunities.

Okay, great. And then just two other quick ones. One, are you seeing any change in the either the nature or the cadence of your customer discussions on either seasonal planning or any other sort of normal program rollout discussions that you would have tied to all these supply chain disruptions? Is there any change in how that's played through here or what you expected?

Yeah. Yes, we have. So as a rule, planogram resets are being pushed off because of this. In some cases, you know, postponed significantly. That's good for us, you know, having a good part of the planogram. It's bad for us in trying to get new stuff in, right? But yes, there has definitely been a delay in resets on the wholesale community, obviously not in e-com, as a result of supply chain disruption.

Okay. And so, Hans, that probably ties back to your comment from before. that 2022 is a more typical seasonal year where Q1 starts out smaller and then you expand a bit through the year than what we've seen some unusual patterns here these last couple of years?

Chris, it's not like we stand alone on this, but people might have different opinions. We don't see the supply chain issues resolving themselves in 2022. But in 2020 was a very strange year because of the impacts of the COVID pandemic. As a result, we ended up having a tremendous 2020, but the first half was impacted by that. If you look at 2021 on a comp year basis, copier performance and we also just achieved a lot and it flowed over into 2021. We had a tremendous back half of 2020 and a tremendous front half of 2021. 2021, the growth in the first half was highly unusual on a copier basis. It's normal now and sustained, which is why we significantly beat our own guidance, let alone everyone else's, year to year. 2021, we've now gone through a complete cycle of that impact, really, which was COVID-related. We would expect a much more normalized rollout of the year. Because our business does have some seasonality in it. And it differs by product category, right? But normally we do more in the second half.

Very good. And then just last one for me, back to the working capital discussion. So the business, if I combine the last two years of cash flow, you've generated a little more than 25% of your market cap in free cash flow in those two years combined. And that was in spite of about a $30 million net operating working capital build, so a non-trivial headwind from there. Just thinking through, even a neutral thought process on working capital clearly is additive relative to the run rate that you've been at. And it sounds like, I realize this is difficult to predict in this environment, that's kind of within the scope of planning. assumptions that you could be neutral on a working capital investment basis through the year relative to where you were at the end of this year, or maybe even a little positive if some inventory can burn down. Is that fair?

Yeah, that's fair. I mean, the market cap, for instance, we talked about that. I mean, we view that there's a huge gap between our intrinsic value and our market cap. But, yeah, from a working capital perspective, that's fair.

Yeah. Okay, great. Thanks again, and congrats on the year.

Oh, thank you, Chris.

And we have reached the end of the question and answer session, and I'll now turn the call back over to Rob K. for closing remarks.

Thanks, Jamal. Thank you, everyone, for your interest, the time with us today, and we look forward to future dialogue. We will actually tomorrow attending a fireside chat with Linda Bolton-Weiser, which I'm sure will be available as well for people to listen to. Have a great day and thank you for your support.

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