Lifetime Brands, Inc.

Good morning, ladies and gentlemen, and welcome to Lifetime Brand's second quarter 2023 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer portion of the call. If you'd 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, Carly King. Ms. King, you may begin.

Thank you. Good morning, and thank you for joining Lifetime Brand's second quarter 2023 earnings call. With us today from 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 guaranteed the 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.

Thank you. Good morning, everyone, and thank you for joining us today. I'm pleased to share that we delivered second quarter results that surpassed analyst estimates, a testament to the strong progress we are making to position the company for growth and improve profitability while we continue to navigate macroeconomic headwinds. As companies across our industry and the broader market feel the ongoing impact of inflationary and recessionary pressures on demand, our prudent balance sheet management, disciplined approach to capital allocation, and careful evaluation of investment opportunities have positioned Lifetime for growth as macroeconomic conditions improve. In the second quarter, we delivered $146.4 million in net sales compared to 151.3 million in net sales in the same period last year. In the 12-month period ending June 30, 2023, we generated adjusted EBITDA of $54.6 million. We're pleased that our strong market share position and focus on execution have allowed us to continue to perform well in comparison to the market and our peers. I'll start with our core US business, which performed in line with our expectations for the quarter. The oversupply issues that retailers across categories faced in 2022 continue to abate a key positive indicator that has begun to translate to upticks in shipment activity. While we expect consumer demand in this market to remain under pressure due to macroeconomic factors, We were encouraged to see continued pickup and order flow throughout the quarter and expect these positive trends in purchasing levels will continue as we move through the balance of the year. Additionally, our continued focus on profitability allowed us to deliver greater than expected gross margin improvement for the quarter. As wholesale unit price declines resulting from normalized supply chain costs are passed on to consumers, we expect to see positive impacts on point of sale. It's important to point out that our results reflect the impact of a large-scale distribution conversion at one of our largest customers, which resulted in decreased orders and in-stock levels. We expect this temporary disruption to be fully restored in the second half of the year. Now, turning to our international business segment. As I've discussed before, we've already realized significant benefits from the restructuring of our Europe-based operations, and we continue to expect that these efforts will result in a substantial improvement in profitability. However, the ongoing recessionary environment in the United Kingdom, which accounts for over three-fourths of our international business, continues to impact consumer demand. While we expect these macroeconomic factors to persist in the short term, we remain focused on solidifying our international positioning with the goal of delivering top-line improvement in 2024. In Asia Pacific, the seamless implementation of our go-to-market strategy in Australia and New Zealand has translated to significant margin improvement compared to last quarter. We are encouraged by this success and are now rolling out an e-commerce driven strategy in our other Asia-Pacific markets. We are already seeing increased orders at better margin levels as a result of our expanded product offerings and believe these trends will continue throughout the second half of the year and into 2024. While challenges in the operating environment remain, we are encouraged by the growth we are seeing in several key areas of our business. We continue to focus on innovating and introducing new products to bolster our market position. In cutlery, we introduced a new Farberware forged knife set that helped Farborough regain the number one position in market share and earn the brand's first placement in Costco USA. In kitchenware, the introduction of Kamenstein ceramic and core products created a new revenue stream with this product line extension, while the introduction of Chicago Metallic everyday bakeware creates an avenue to pursue market share at value-based price points. We recently signed a license for a line of Dolly Parton branded products across several categories. This is a plus one opportunity to sell in existing channels with a strong new brand and also in new channels as it expands our reach to consumers in a channel that we currently do not participate in. Separately, our food service business continues to gain share with Mikasa Hospitality becoming a recognized industry player. we are encouraged by the progress we are making. Consistent with the nature of this market, the new business wins we are achieving in 2023 should drive significant growth in 2024. Additionally, consistent with our strategy of entering adjacencies, we capitalized on our relationship with the retailer Meijer to take over their outdoor product category. which will be a springboard for Lighttime to enter this new adjacency. This opportunistic expansion into a new category through a strong relationship will provide us with an opportunity to expand distribution of this category in 2024. I'd also like to highlight our record-breaking performance at this year's Amazon Prime Day, where we outperformed in almost every category compared to both historical performance and our peer set. We saw a 47.5% increase in revenue versus our prior year Prime Day performance. We've been working closely with Amazon to optimize our advertising spend and drive sales. We are optimistic that our demonstrated momentum will continue in this key channel through the balance of the year. We continue to take active steps to reduce our exposure to the supply chain issues in China through strategic diversification efforts. Through a transitional supply agreement, we are working to ramp up production at the plastics manufacturing facility that we expect to acquire in Mexico later this year. The facility in Mexico represents a key opportunity to enhance sourcing from third-party factories in the region. Continuing on the strategic sourcing initiative, in the next 15 months, we expect to have resourced product supply so that approximately 25% of our source spent on goods will be outside of China. I'd like to briefly touch on the impairment charge of $4.4 million we recorded in the second quarter, which Larry will discuss with you in additional detail. This non-cash charge on our investment in Grupo Basconia represents the write-down to record the investment at its fair value. It is important to note that this does not negatively impact our cash flow and is consistent with our view that this stranded asset from an investment made in 2007 is not strategic to our company. Primarily, as a result of this charge, we provided revised full-year 2023 financial guidance metrics for net loss and diluted loss per common share. We reaffirmed our 2023 guidance for net sales, income from operation, adjusted income from operations, and adjusted EBITDA. Turning to our balance sheet, we have continued to strengthen our balance sheet through a combination of disciplined cash management and deleveraging. This approach has put us in an increasingly strong position to deploy our capital at the right time to create value for our shareholders. For example, this quarter we prepaid nearly $50 million on our term loan, which resulted in a gain of $2.4 million before fees and expenses. Additionally, this will reduce annual interest expense by approximately $2 million. The gain was recognized in the second quarter of 2023. As we look ahead and as the economic environment improves, we will continue to be thoughtful and opportunistic in our capital allocation approach as we evaluate value-enhancing opportunities to drive growth, including potential M&A. We are confident that we are taking the right steps to position our business for long-term growth. We have a leading portfolio of widely recognized brands with multi-channel growth opportunities, a strong innovation engine, a resilient and efficient business model, and a healthy balance sheet to support our growth initiative. Our ability to outperform in the quarter, despite the challenges facing our industry and the broader market, reflects the progress we have made in the last several years to strengthen our company's foundation and ability to achieve our long-term goals. I am thankful for all of our team members, unrelenting focus on execution, and am excited about the opportunity we see ahead. With that, I'll now turn the call over to Larry.

Thanks, Rob. As we reported this morning, our net loss for the second quarter of 2023 was $6.5 million, or $0.31 for diluted share. compared to a net loss of 3.5 million or 16 cents for diluted share in the second quarter of 22. The net loss of the current period includes a non-cash impairment charge of 4.4 million related to our equity investment in Grupo Vasconia. Adjusted net loss was 300,000 for the second quarter of 23 or two cents for diluted share compared to an adjusted net loss of 200,000 or one cent for diluted share last year. Income from operations was $4.4 million in the second quarter of 2023 as compared to the loss from operations of $500,000 in the 2022 period. Adjusted income from operations for the 2023 quarter was $8.4 million compared to $4.2 million in the 2022 period. And adjusted EBITDA for the trailing 12 months ended June 30, 2023 was $54.6 million before a pro forma synergy adjustment, and credit agreement limitation. Adjusted net loss, adjusted income from operations, and adjusted EBITDA are non-GAAP financial measures which are reconciled to our GAAP financial measures in the earnings release. Following comments are for the second quarter of 23 and 22, unless otherwise stated. Solidated sales declined by 3.2%. From 2022, the U.S. segment sales modestly decreased by 1.6% to $135 million. As Rob discussed, open supply issues that retailers across categories faced in 2022 have continued to abate. The decrease in the U.S. segment sales are driven by this factor and a warehouse club program not repeated. In addition, a large customer experienced a new system implementation disruption which delayed orders. We expect orders to normalize as the system matter is resolved. The U.S. segment's decline was partially offset by strong sales for our tailor-branded measurement products. For international, sales were down 18.9% to $11.5 million, or 18.8% on a constant U.S. dollar basis. The decrease was driven by slowing prices. of replenishment orders in the UK due to weaker end market demand and a decrease in e-commerce sales. Adverse economic conditions, notably high inflation, are challenging in Europe, especially in the UK. Consolidated gross margins increased to 38.2% from 36.5% last year. For the U.S. segment, gross margins increased to 38.3% from 37.1%. The improvement is due to lower inbound freight costs and favorable product mix. For international, gross margins also increased to 37.7% from 30.5% last year. The improvement reflects lower product costs, including the benefit of currency hedges, lower inbound freight costs, and product mix. The current year also reflects the benefit of lower duty costs on goods sold to EU customers now distributed from the Netherlands rather than The U.S. distribution expense as a percent of goods shipped from warehouses, excluding non-recurring expenses, were 9.7% versus 11.3% last year. This improvement was driven by direct labor productivity, lower storage costs, and lower pallet expenses. for international distribution expenses as a percent of goods shipped from warehouses was 25.1% versus 22.1% last year. The increase was due to unfavorable overhead absorption on lower shipment volume. Selling, general, and administrative expenses declined to 35.9 million in 2023 from 38.3 million last year. U.S. segment expenses decreased by $1.7 million to $27.4 million. As a percentage of net sales, expenses decreased to 20.3% from 21.2%. This decrease was primarily due to the integration costs related to swell that were incurred last year. And for international, SG&A expenses decreased by $300,000 to $4 million, driven by lower employee expenses as a result of the restructuring actions taken in the fourth quarter of 2022. As a percentage of net sales, international segment expenses increased to 35.1% versus 30.5% due to the effect of non-variable costs on lower sales volume. On allocated corporate expenses, it decreased by $400,000 to $4.5 million on lower compensation expense, including the elimination of the executive chairman role The decrease is partially offset by an increase in professional fees. Interest expense increased by $1.8 million due to a higher SOFA rate on our variable rate debt, which was partially offset by lower average borrowings. The repurchase of a portion of our term loan had a small favorable impact on interest expense in the current quarter. On an annual basis, the savings will be favorable by approximately $2 million. Looking at income tax for the 2023 quarter, the tax provision significantly exceeded income before tax. This is driven by the operating loss in foreign jurisdictions for which we do not record a tax benefit. In addition, there were certain other expenses that are not deductible for tax purposes. Grupo Vesconia, a Mexican company in which we have a 24.7% equity interest, for which we have 24.7 equity interest, we've recorded a loss of 1.4 million in 2023 versus earnings of 300,000 in 2022. Besconia has a recent history of operating losses and recently announced it will not make its debt service payments. Furthermore, its quoted stock price has declined by approximately 75% in the last year. Accordingly, the company reported a non-cash impairment charge of $4.4 million to write its investment in Besconia down to its trading value of $5.3 million. Turning to our balance sheet, in June, we repurchased $47.2 million in principal amount of our term loan at a 5% discount. Notwithstanding this use of cash, our balance sheet and liquidity position remain very strong. As of June 30, 23, our net debt was $208.8 million, approximately $24 million lower than at the end of 2022. And liquidity was approximately $190.5 million, which is comprised of $15.1 million of cash, plus availability under our credit facility and receivable purchase agreement. And at June 30, the net debt to EBITDA ratio was 3.8 times. As discussed in the release, we are reaffirming financial guidance for net sales, adjusted income from operations, and adjusted EBITDA. We have issued revised guidance for net loss and adjusted net income to reflect the second quarter equity and loss and the non-cash impairment charge on the investment in Basconia and lower interest expense estimated due to the repurchase of the term loan net of taxes. Guidance for 2023 is as follows. Net sales of $660 to $720 million, adjusted income from operations of $41.5 million to $46.5 million, adjusted net income of $11.6 to $13.9 million, and adjusted EBITDA of $50 to $55 million. This concludes our prepared comments. Operator, please open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 key. One moment, please, while we poll for questions. Thank you. Our first question is from Brian McNamara with Panaccord. Please proceed with your question.

Hi, this is Madison Town, and I'm on for Brian. Thanks for taking our questions. First, your implied second half revenue guidance is still a pretty wide range, implying anywhere from negative six to positive nine percent. What's driving that, and how should we think about the cadence of P3 and P4's revenue growth? Thanks.

Yeah, it was a little garbled, but I think I got it. And please re-ask if you missed, because we couldn't understand something. So in general, I think you've seen that across other public reporting companies, there isn't very strong visibility. So we were pleased that we've out-postformed And frankly, unlike a lot of our peers, you know, we're comfortable leaving guidance unchanged, but it is a wide range because of continued lack of visibility in the general economy.

All right, awesome. And then just secondly, Do you mind giving some clarity on which of your brands are particularly growing right now or which are lagging behind? Anything like that. Thanks.

I believe, yes, which brands are performing high. As a point of information, we look at the business by category, such as cutlery, kitchen tools, dinnerware, and we sell multiple brands to be able to capture most, if not all, of the channels and the opportunities. For instance, Barbaware, which is our biggest brand, is in kitchen tools. Cutlery, many different categories. KitchenAid is another example. That being said, giving you some color, I had mentioned in Prime Day, just using that, and that's just one, obviously, piece. Built and Swell, which has actually... been an area underperforming for us, did very well. It was up 125% year-over-year. Cutlery continues to remain strong from a brand perspective. Hardware is the biggest piece of it. We use Sabathier. There's KitchenAid, which is a small piece. But Cutlery was up 76.6% in Prime Day. But in general, Cutlery is also growing on a year-over-year basis. The biggest up for us in terms of a brand was Taylor, which encompasses kitchen measurement, weather measurement, and bath, which continues to perform very strong across all channels. We did mention that we had few impacts in the first six months of the year, which has negatively impacted our revenues. to date and therefore translates into market share and position. One is that one of our largest customers just had a systems implementation issue in the distribution side. And then in stock levels and orders went way down. That'll normalize. But they sell a lot of hardware, a lot of our brands. So that had some negative impact. And also in the club channel, there was just business that didn't repeat. For instance, Rabbit, which had a big presence in club. We didn't lose it to a competitor, so it's not like we lost market share. It's just the clubs will run something one year and just change. That's just the nature of the club business. So Rabbit's share is down in all the other channels, though Rabbit and Wine Accessories continue to do well.

Thank you.

Thank you. Our next question is from Alan Weber with Robati Advisor. Please proceed with your question.

Good morning. How are you?

I'm okay. How are you doing?

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

I'll make some comments and see if Larry wants to add to that. The world has been strange over the last few years. For a company that historically, if you trend back over any 10-year period, seasonality on working capital is very consistent. There's been so much disruption over the last couple of years such that those trends on a normal seasonality had went away. This year, we've seen a return to normalization. So if you look back in terms of our normal working capital trends, we expect to experience that and have seen that so far this year. So that means the second half of the year, Increased, we ship more in the second half of the year than we did in the first half. We're shipping a lot in the second half of the year. We collect some of that in the first quarter. So that is a big collection period. Inventories grow now through third quarter as we start shipping that stuff. So those would be the major trends. Anything you want to add?

Yeah. As Rob said, the last few years have been kind of odd. If you looked at the release of cash flow, it was much stronger this year than it was last year. And that was last year coming out of 21. We had purchased a lot of inventory, rather paying for it in 22, so we really got hurt. This year, we have brought down inventory considerably, and that's helped our cash flow. So this first half of the year is better than normal. The last year was, you know, I should say abominable. It's really atypical. But first quarter of the year is actually the strongest for us. Fourth quarter from a working capital point of view. Yeah, sorry, from a working capital point of view. So let me finish. So in the inventory, we still have some more inventory cuts to make, but most of it is done. It's going to be a lot smaller going forward, so we're not going to see what we've achieved by any means in the first half of the year. And then what drives really cash flow in the second half of the year, really the late part of the fourth quarter, are collections from customers. And it's very hard to predict for a couple of reasons. One is it depends on when you sell in the fourth quarter, whether you collect in the fourth quarter or you collect in the first part of the following year. So obviously, for example, if you're shipping in October, Good chance you'll collect it in the year. If you're shipping November, likely you're going to collect it in the following year. The other factor depends on customer, because not all customers have the same selling terms. Not getting into naming individual customers, so the actual mix of sales to particular customers could drive collections. You can have a really good December, but it will affect January and vice versa. I like to think of it more as a continuous period of time, a 12-month period of time. I gave you a lot of stuff. I haven't completely answered your question because it's really somewhat difficult to forecast.

That was just actually unrelated, but as you talk about how things have changed, Bob, can you talk about not asking for a five-year projection But can you talk about where you are today or where we are today versus when you had the five-year targets? I mean, obviously, things have changed. And how do you think about it longer term? I mean, are things, you know, is it just pushing out what you think those targets could have been? Or have things really changed where some of the expectations in terms of margins, revenues are just not realistic? Can you just talk about that?

Yes, Alan. So we still stand behind our long-term projections, but not in the original time frame because of all of the macroeconomic impacts. But we, you know, the drivers are still in place. We're still making progress on all those drivers. We've been set back in almost everything, but, you know, particularly international is having an impact and, you know, Ultimately, the world will normalize from an economic perspective and will well position. There's a lot of industry events in terms of people being hurt with higher interest rates and just general decline. We're well capitalized. We never factored that into our consideration. Will that give us tailwinds ultimately? Who knows? But I think bottom line is... We believe that our long-term plan that we had released is very achievable, but definitely delayed.

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

No problem. Thank you. There are no further questions at this time. I'd like to hand the floor back over to Rob Kay, CEO, for any closing comments.

As always, we appreciate and thank everyone for their interest and their support of Lifetime Brands. As a point of information, Larry and I will be in Boston next week speaking at a Canaccord Genuity investor conference, and we hope to see people there or at the minimum at our next call. Thanks again.

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