Lifetime Brands’ CEO Discusses Q4 2013 Results
Good day, ladies and gentlemen, and welcome to the Lifetime Brands’ Fourth Quarter 2013 Earnings Call. My name is Joe and I’ll be your operator for today. At this time all participants are in listen only mode. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.
And now I’d like to turn the call over to Harriet Fried of LHA. Go ahead please.
Good morning, everyone, and thank you for joining Lifetime Brands conference call. With us today from management are Jeff Siegel, Chairman and Chief Executive Officer and Larry Winoker, Senior Vice President and Chief Financial Officer.
Before we begin, I’ll read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this call that are not historical facts are forward looking statements and involve risks and uncertainties, including the Company’s ability to comply with the requirements of its credit agreement, the availability of funding under those credit agreements, the Company’s ability to maintain adequate liquidity and financing sources and an appropriate level of debt, changes in general economic conditions which could affect customer payment practices or consumer spending, changes in demand for the Company’s products, shortages of and price volatility for certain commodities, the effect of competition on the Company’s market and other risks detailed in Lifetime’s filing with the Securities and Exchange Commission.
The Company undertakes no obligation to update these forward looking statements. The Company’s earnings release contains non GAAP financial measures within the meaning of Regulation G promulgated by the SEC. Included in this morning’s release is a reconciliation of these non GAAP financial measures to the comparable financial measures calculated in accordance with GAAP.
With that introduction, I would like to turn the call over to Mr. Siegel. Please go ahead, Jeff.
Thanks, Harriet. Good morning everyone, and thank you for joining us to discuss our fourth quarter results. By stripping out the accounting noise caused by the write ups and write downs in the value of our investment in Grupo Vasconia, we delivered another strong quarter with sales up 6.5% and gross margin increasing to 38.4%. I’ll run through the highlights of the quarter quickly this morning focusing on our wholesale segment, since that represents the vast majority share of our sales and profits. After that I’ll turn to the many exciting things we have underway for 2014, including the three acquisitions we’ve already announced this year.
In our third quarter call this November, I said that we expected kitchenware to fuel our growth in the fourth quarter and that was the case. The consistent growth in this category is due to innovation and newness, which no one does better than Lifetime. The talents of Lifetime’s owned 120 plus designers, artists and engineers are supplemented by our open innovation network which enables independent inventors to submit ideas that Lifetime works with them to enhance and bring to market.
The new kitchenware programs we rolled out in early 2013 continue to do well and well into the fourth quarter and we also have been able to increase our penetration of the supermodel candle bringing kitchen tools and gadgets and programs with them to two major new customers. The Fred Friends acquisition we made in mid December 2012 again contributed nicely to our margins.
On the Tabletop side of our business, sales were up nicely in the quarter even though this category as a whole has been struggling at retail with less shelf space allocated by retailers. In both Tableware and Flatware we gained grounds in the more usual casual portion of the business, where the more formal portion of the business has been weak. We are committed to growing in the Tabletop category by emphasizing our strength in the casual segment.
Sales in our Home Solutions category were essentially flat, although we did make inroads with two major Pantryware programs. In November we began shipping Debbie Meyer brand storage products which are designed to extend the life all kinds of fresh produce, baked goods and snacks through a proprietary technology that absorbs ethylene gas. Sales got off to a great start and we expect a very strong performance from this licensing agreement in 2014.
Turning to the international side of our business, I’m pleased to report that Creative Tops had a good quarter. As we expected, the initial shock of anti dumping import duty, which took effect in the fourth quarter of 2012 has been wearing off and sales with several major customers have regained their momentum. And as we anticipated, the business is bringing us new opportunities in Europe as well as the UK.
Lifetime Brands Canada also have turned into good performance and GS International, our Brazilian based venture started supplying Walmart’s Brazilian operations, which include more than 550 locations. As I mentioned earlier, our investment in Grupo Vasconia did create some accounting noise during the past year due to its acquisition of Almexa Aluminio and a movement in the share price. But we continue to have high expectations for the future of this business.
With that quick overview of last year’s final quarter, I’ll turn to the many things we have on tap for 2014. As those of you who follow our press releases know, we’ve already announced several important developments. In mid January we acquired Kitchen Craft, a 165 year old business and one of the UK’s leading suppliers of kitchenware products and accessories. In its fiscal 2013 Kitchen Craft had net revenues of approximately $70 million. Its kitchenware products are perfectly positioned to fill in the tableware and gift assortments marketed by Creative Tops and we expect our global presence, capabilities and scale to boost Kitchen Craft’s growth both in sales and profitability. We also expect Kitchen Craft’s gross profit and EBITDA margins to enhance Lifetime’s future performance.
The Kitchen Craft acquisition was followed in quick succession by two smaller ones, Built New York and La Cafetire. Built is a designer and distributor of highly colored uniquely patterned neo premium products including lunch bags, coats, cases and baby products. Built’s products and distinctive look bring a new dimension to our portfolio and its great customer adidas gazelle base will enhance our distribution to find retailers worldwide.
And just this week, we acquired La Cafetire which designs and distributes products for brewing and serving coffee and tea under the La Cafetire and Wayne Wood brands. This latest addition for Lifetime’s global platform further strengthens our presence in the UK and Continental Europe.
La Cafetire has assembly and distribution facilities in the Netherlands that would be very useful to us as we expand our international business. In addition, we believe we can greatly expand the distribution of their products in North America. Acquisitions have always been a major part of Lifetime’s growth strategy, but we have other meaningful growth initiatives in the works for 2014 too. As you recall last year, we received a trading license in China that enables us to directly supply Wal Mart, China. Beginning in May we’ll begin supplying Wal Mart China’s approximately 400 stores with kitchen tools and gadgets, cutlery, cutting boards, dinnerware, flatware, thermal mugs, water bottles and other items. In other words, a very expensive assortment.
I already mentioned that our Pantryware partnership with Debbie Meyer has had a strong start and in next week’s international home and Houseware show in Chicago we’ll launch our Mossy Oak branded, a collection of Beverageware, Food Prep, Tabletop, and Home Dcor Products. Mossy Oak is one of the Country’s most recognized camouflage brands and we’ve already seen an enthusiastic reception from retailers who have seen the line.
Another significant debut we’re planning for the Houseware show is our new Brick Oven brand which will provide all the tools consumers need to recreate the gourmet pizza experience at home. We’ve seen a big increase in demand for specialty products and enable people to replicate professional food experience in their own kitchens. We believe pizza offers a great opportunity in retail and our Brick Oven brand is designed to fill the void in that market.
Finally, we continue to expand our international presence with the launch of Reo, a global collection of kitchenware products that provide simple and functional solutions for Food Prep. Reo reflects our strategy of developing new brands that Lifetime can control and use on a wide range of products all over the world. Reo features intuitive designs, trend bright colors and inviting forms to make cooking more enjoyable. The products will be available at retail beginning in December of 2014. If you are at the Home and Houseware show next week, please stop by at our booth and we’ll give you a preview.
With that overview, I’ll turn the call over to Larry to give you more details on our fourth quarter and full year financial results, as well as our guidance for 2014. Larry.
Thanks Jeff. As we reported earlier this morning, net income for the fourth quarter of 2013 was $9.4 million or $0.72 per diluted share, as compared to net income of $15.2 million or $1.19 per diluted share in 2012 period. Adjusted net income for the quarter was $10 million, $0.76 per diluted share as compared to adjusted net income of $8.7 million, $0.67 per diluted share in 2012. A table which reconciles this non GAAP me adidas gazelle asure to reported results was included in this morning’s release.
Income from operations was $16.6 million for the 2013 quarter, compared to $14.5 million in 2012. Consolidated EBITDA, a non GAAP measure as reconciled to our GAAP results in the release was $21 million for the current quarter and $17.9 million for the period in 2012 and consolidated EBITDA was $43.5 million for the full year 2013, and $41.2 million for 2012.
Looking at our wholesale segment, net sales in the 2013 quarter increased by 7.9% to $158.2 million. The increase reflects an increase in kitchenware and tableware sales. Home solutions was essentially unchanged. Kitchenware’s increase was $7.4 million, primarily due to the inclusion of the Fred Friends business acquired in December of 2012. and UK, partially offset by lower flatware sales. Wholesale segment gross margin was 37.4% in the 2013 quarter, up from 34.4%in the 2012 quarter. The improvement reflects favorable product mix, including the expected improvement due to the inclusion of Fred Friends. warehouses was approximately 7.6% in both 2013 and 2012 quarters. For our UK operations, the expense ratio improved on higher volume and better labor management. Wholesale SG expenses were $25.9 million in the fourth quarter of 2013 versus $22.4 million in 2012. This increase was due to the inclusion of Fred Friends and an increase in selling expenses and timing of certain other expenses.
For our Retail Direct segment, net sales was $7.7 million and gross margin was 66.8% in the 2013 quarter, versus net sales of $8.2 million and gross margin of 68.9% in the 2012 quarter. As a percentage of net sales, Retail Direct distribution expenses were approximately $29.3 million and $27.3 million in 2013 and ’12 quarters respectively. The increase is d adidas gazelle ue to lower sales volume and higher freight rates. Retai adidas gazelle l Direct SG expenses were $2.4 million in 2013 quarter and $2.5 million in the 2012 period.
Looking at non segment items, unallocated corporate expenses increased by $900,000 to $5.5 million in 2013 period, which was primarily due to the acquisition fee and expenses. Interest expense was $1.3 million in both quarters. The effective income tax rate increased to 40.6% from 19.5% in the 2012 quarter. The low effective tax rate in 2012 quarter was due to a $2.3 million deferred tax liability reduction related to 2011. Excluding this reduction, the effective tax rate in the 2012 quarter would have been 36.7% and for the full year 37.5%. For the full year of 2013 the effective tax rate was 39.5%.
Equity and earnings was $300,000 in 2013 quarter as compared to $4.5 million in the 2012 quarter. Excluding certain unusual items related to Grupo Vasconia in the 2012 quarter, equity and earnings in the 2012 quarter would have been $600,000. These unusual items are reflected in the table that reconciles net income to adjusted net income.
Turning to our financial position, at December 31, 2013, the outstanding balance on our revolving credit facility was $49.2 million and senior term loan balance was $20.6 million as we prepay a portion of that loan in anticipation of our debt refinancing.