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Edited Transcript of LCUT earnings conference call or presentation 9-May-19 3:00pm GMT

Q1 2019 Lifetime Brands Inc Earnings Call

GARDEN CITY May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Lifetime Brands Inc earnings conference call or presentation Thursday, May 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Squire

Lifetime Brands, Inc. - Head of IR

* Laurence Winoker

Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO

* Robert Bruce Kay

Lifetime Brands, Inc. - CEO & Director

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Conference Call Participants

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* Frank Anthony Camma

Sidoti & Company, LLC - Senior Research Analyst

* Timothy Paul Hasara

Kennedy Capital Management, Inc. - VP and Portfolio Manager

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Presentation

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Operator [1]

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Ladies and gentlemen. Good morning, and welcome to Lifetime Brands' First Quarter 2019 Earnings Conference Call. (Operator Instructions) I will now turn the call over to our host, Andrew Squire. Mr. Squire, please go ahead.

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Andrew Squire, Lifetime Brands, Inc. - Head of IR [2]

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Thank you. Good morning, everyone, and thank you for joining Lifetime Brands' First Quarter 2019 Earnings Call. With us today from management are Rob Kay, Chief Executive Officer; and Larry Winoker, Chief Financial Officer.

Before we begin the call, I'd like to remind you that our remarks this morning may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor 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.

With that introduction, I'd like to turn the call over to Rob Kay. Please go ahead, Rob.

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [3]

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Thanks, Andrew. Good morning. We appreciate you joining us today to discuss Lifetime Brands' first quarter 2019 financial results. The company is off to a solid start to 2019, and I am pleased with our performance this quarter as we are starting to produce results which reflect our strategic decisions in 2018. The quarter results were driven by focused execution, strong end-market demand and market share gain. Our performance for the quarter showed consolidated adjusted EBITDA growth of $6.6 million as we are starting to see results from our recently implemented initiatives. Importantly, the unique headwinds we experienced in the fourth quarter have not continued into the first quarter of 2019.

When we closed the Filament acquisition in March 2018, we embraced this change as an opportunity to relaunch Lifetime Brands and create a best-in-class company that is well positioned to capitalize on the rapidly-evolving macroeconomic and industry landscape. Our work in 2018 has built a strong foundation for profitable growth, and these efforts have begun to bear fruit in the first quarter with strong top and bottom line growth.

Customer demand was robust during the first quarter, which helped drive solid performance across the majority of our categories and channels. We also successfully implemented the planned price increases designed to mitigate tariff impacts put in place in 2018. These price increases were fully implemented by the end of February.

Our European operations delivered solid performance with year-over-year growth of $1 million in earnings from operations. Driving this improvement, we eliminated several product categories that had minimal or negative margin contribution. Concurrently, we added several growth brands in our existing markets, including the tabletop lines of Maxwell & Williams and London Pottery. As a result of these actions, revenues from our international operations grew by 9.9%, and more importantly, we saw increased profitability driven by this favorable change in product mix.

Touching on e-commerce briefly. In the fourth quarter of 2018, we restructured our e-commerce activities to better focus on effectively growing our sales and increasing product exposure and profitability. These efforts set the stage for accelerating profitable growth in this channel with our e-commerce operations now representing nearly 14% of total revenues. Of note, this number does not include meaningful e-commerce sales made to omnichannel retailers. Furthermore, pure-play e-commerce revenues grew nearly 30% on a pro forma basis as compared to the first quarter of 2018. This over-indexed compared with our categories for this growing channel.

Looking ahead, we are focused on building on the foundation we established in 2018 and executing on several growth initiatives in 2019. One of these initiatives is the introduction of a greatly expanded commercial food service line later this month. The expanded line is comprised of product categories in which we are already a global leader for a consumer offering and further will capitalize on our existing footprint in commercial food service, where we are a leader in North America for small wares. Among other categories, this new launch will include dinnerware, mugs, flatware and cutlery.

Another major initiative we're focused on in 2019 is positioning the core lines of business for growth by pivoting our business model from a sales and transactional focus to a strategic product- and category-driven process. This will allow us to make decisions that target sustainable growth and profitability. We expect to implement both of these initiatives by the end of the year, and we'll begin to deliver growth in the second half of the year from these efforts.

Moving to our outlook for 2019. As provided in more detail in our press release, we expect to achieve net sales of between $750 million and $755 million, adjusted EPS -- adjusted diluted EPS between $0.71 and $0.76 and consolidated adjusted EBITDA between $71 million and $73 million.

As we move forward in 2019, we are focused on executing our strategic priorities to capitalize on cost synergies implemented in 2018, optimize profitability and growth opportunities and increase investment in brand equity. We will continue to identify administrative cost-effectiveness opportunities and to optimize and grow our e-commerce market share as well as all of our channels. Further, we will continue to roll out our international and expanded commercial foodservice strategies.

We are proud of the significant progress we have made on our transformation, and we are excited about our prospects for the year ahead. We are confident that the path we are on will continue to drive improved performance, profitability and meaningful value creation for our shareholders.

I'll now turn it over to Larry to go over our financial results in more detail.

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [4]

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Thanks, Rob. As we reported this morning, the net loss for the first quarter of 2019 was $4.9 million or $0.24 per diluted share as compared to a loss of $11.6 million or $0.70 per diluted share in the first quarter of 2018. This is an improvement of $6.7 million or $0.46 per diluted share.

Adjusted net loss for the 2019 quarter was $4 million as compared to a $0.19 loss per share. This compares to an adjusted net loss of $8.3 million and $0.50 per diluted share in 2018. The table which reconciles this non-GAAP financial measure for quarter results is included in this morning's release. Loss from operations was $2.3 million in the 2019 quarter, an improvement of $11 million from a loss of $13.3 million in the 2018 quarter.

Adjusted EBITDA, a non-GAAP financial measure that is reconciled in our GAAP results in the release, was 67 -- $69.7 million for the 12-month period ended December 31, 2019. This represents an increase of 6.4% over fiscal year of 2018.

Net sales for the 2019 quarter increased $31.7 million to $149.9 million. And on a pro forma basis, assuming Filament have been acquired as of the beginning of 2018, sales increased $6 million or 4.2%.

On a pro forma basis, the U.S. segment increased $5.4 million or 4.4% to $127 million and reflects increases in all product categories. The international segment sales was $22.9 million, an increase on a reported basis up $600,000 and an increase in constant currency of $2 million to 9.6%.

Kitchenware sales were up in all customer channels but most notably in e-commerce. Tableware sales were lower, reflecting our plan for a full year repositioning, that Rob discussed.

Gross margin was 36.2% in the 2019 quarter compared to 38.1% in 2018. U.S. segment margin -- gross margin was 36.5% in the 2019 quarter versus on a pro forma basis 38.7% in 2018. This decline reflects both product and customer mix, spending to support new programs and channel growth, closeout volume and tariffs. For International, gross margin improved modestly to 39 -- 34.9% from tableware products on the planned portfolio repositioning.

Distribution expense for the 2019 quarter were $15.9 million or 10.6% of net sales and $17.8 million, 15.1% of net sales in 2018. For the U.S. segment, distribution expenses as a percentage of sales shipped from our U.S. warehouses, which excludes onetime expenses related to warehouse moves, was 10.8% and 13% for the 2019 and 2018 quarters, respectively. The 2019 quarter improvement was due to higher sales volume, labor efficiencies and synergies savings from the Filament acquisition. For the International segment, distribution expenses as a percentage of sales shipped from our U.K. warehouses was 11.3% and 13.9% for the 2019 and '18 periods, respectively. The improvement reflects higher sales volume, improved efficiencies from lower inventory levels and fewer prepaid freight shipments.

Selling, general and administrative expenses were $40.1 million for the first quarter of '19 versus $40.2 million in 2018. U.S. segment expenses were $28.4 million in '19 as compared to $27.4 million in '18. The 2018 quarter included Filament expenses from only the period beginning March 2, the day of the acquisition. As a percentage of sales, SG&A expenses were 22.4% and 28.6% for the 2019 and '18 quarters, respectively. The improvement in 2019 primarily reflects the synergy savings from the Filament acquisition.

SG&A expenses for the International segment was $6.1 million in the 2019 quarter compared to $8.1 million in the 2018 period. The 2019 quarter includes approximately $300,000 related to the reorganization of the International operations. The 2018 quarter includes approximately $400,000 related to unrealized mark-to-market foreign currency contract losses and a $1.5 million loss related to the settlement of foreign currency contracts.

Unallocated corporate expenses for 2019 quarter were $5.6 million as compared to $4.6 million in 2018. The increase reflects the full quarter impact of the Filament acquisition and an increase in legal fees, partially offset by lower acquisition-related expenses.

Interest expenses was $4.9 million in 2019 versus $2.1 million in the 2018 quarter. The increase in interest expense is attributable to higher borrowings incurred in March of 2018 to finance the acquisition of Filament. Of note, net debt as of quarter end was $293 million, and the net large ratio was 4.2x, both of which are favorable compared to the 2018 quarter end.

The effective tax rate for 2019 period was 31 -- 34.1% versus 24.6% in 2018. The components that drive the difference in the effective tax rate primarily relate to a foreign tax rate differential, state and local taxes and nondeductible expenses.

This concludes our prepared comments. Operator, please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from the line of Frank Camma with Sidoti.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [2]

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I'm sorry if I missed this, but could you just break down what was the -- just -- this will be the last quarter, I guess, to compare, but how much was Filament in the quarter itself? Or what would be organic growth?

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [3]

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Well, I don't have that currently in front of me, but I can tell you that of the increase (inaudible) about $1.5 million of the sales increase was Filament on a pro forma basis.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [4]

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$1.5 million?

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [5]

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Yes, and that's all U.S. So of the -- was it, $5.4 million, almost $4 million is what -- let's say, called Lifetime legacy.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [6]

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Okay. And so how much did you -- I'm trying to figure out like how much you've benefited from a timing standpoint because there was a timing issue at the end of last quarter. Because your sales number was quite a bit higher than what I was looking for, so how much of that was just sort of the spillover from sort of end of Q4, whether you couldn't ship the orders on time or just timing issues in general?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [7]

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Yes. It's a good question, Frank, which it's hard to discern all of that. In general, a lot of the shipping problems, both out of Asia and also out of port in the U.S. that we experienced in the fourth quarter, we did not experience that. It abated, so therefore, we didn't have losses which we experienced in the fourth quarter. It's obviously positive in terms of our performance. There wasn't -- we lost sales in the fourth quarter as a result of that. There wasn't a tremendous amount. There was some, which moved from the fourth quarter to the first quarter. But the majority of what we shipped was just fourth quarter business, and we didn't have obstructions in the quarter.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [8]

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Okay. It looks like from my model at least, you're making really good -- I'm looking at this as a percentage of sales. You're making pretty good progress in your distribution expense. I assume part of that is just the new warehouse. Am I right about that assumption?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [9]

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Yes. I mean, we've been working hard in the last year on a lot of initiatives, including the warehouse. That is a piece of it, but the more driving our ability to realize the new warehouse is that the combination is allowing us to more fully utilize the infrastructure, and that's driving down our distribution cost as a percentage meaningfully. Not unexpectedly, and we said we'd start to see those benefits roll through the income statement in '19 and beyond.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [10]

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Conversely, (inaudible) the big variance in my model, is really on the gross margin. So I was wondering given the sales level, I would have thought a little better, maybe absorption plus I thought maybe product mix was then in your favor given you've kind of got rid of some of your lower-margin SKUs. So wondering if you could just like go into, just you know on a big picture basis why that would be [indiscernible] see an impact of tariffs.

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [11]

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So as we mentioned here, and we've gotten for the tariff implemented last year by the end of February, we had most of the price increases. So we were impacted for a couple of months as a result of that. Also, from a tariff perspective, we really focused on maintaining profitability and not margin percent, so we gave up percent and focused on dollar. And so there was some impact in there. A lot in the first quarter though we had mix. So if you look at the channels that we sold in, we had a lot of success in certain channels, such as the club channel, which is lower margin. So mix definitely had an impact. We also had some launches where we had to buy out the space, but we expense that. That has an impact. So it's a combination of factors which impact the year-over-year launch.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [12]

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And (inaudible) for your guidance, are you still building in the increase in tariffs? How are you looking at that? How does that flow through your model?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [13]

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So we prepared our guidance without knowledge of the current discussions going on in Washington. And obviously, we and the world will be impacted by the outcomes of those discussions. We do know having gone through this, the process. And similar to what we saw last year, if there is an increase from -- which will impact us on List 3 for some of our goods, a decent amount of them, from 10% to 25%, we are already paying 25% on some of our goods today, dating back to the beginning of fourth quarter. So you'd see a similar pattern of what we did. We'd be able to -- it's actually easier on 25% because the whole market has to move, there's no confusion. So there would be a lag period, and we would do the same things we did in the past that would mitigate it.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [14]

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Okay. Just one quick question on just cash conversion here. So the inventory was a little bit higher than I modeled, but that could have just been because of the way Filament rolled in. But the AR was actually lower, so I'm wondering, was there some timing on AR that would have [impaired] down there? Like did you make some collections and benefited from that?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [15]

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I'll let Larry answer AR. On inventory, we did have some new products that we were introducing, and we've built up some inventory as a result of that. We haven't focused -- our focus in '18 and to date has been on execution and service levels and less so in maximizing our working capital as it pertains to inventory. But we did have some -- a big launch of KitchenAid, a whole new line of KitchenAid, and that product had a impact on the first quarter inventory levels.

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [16]

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Frank, on accounts receivable, nothing stands out for the quarter. And I think I've discussed this in the past that collections, the exact timing of collections is something obviously we can't control. And depends on when you ship in a particular quarter beginning versus late in the quarter, it could spill into later periods and not all customers have the same terms. So those are factors too. But we saw it averaging it out over a longer extended period. It's like looking at performance one moment to another. You've got to do that over a trailing -- we have a 12-month, 18-month period, and then it tends to normalize.

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [17]

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But I think on a macro perspective, you just look at total work comp and cash flow, while we may have a little higher inventory levels than we may be wanting, this is a peak cash flow period for us. We did generate the cash flow, we did delever, well, I think meaningfully so.

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Operator [18]

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Your next question comes from the line of [Patrick Larwen] with [Egon].

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Unidentified Analyst, [19]

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2 housekeeping items and then a follow-up on the tariff situation. I noticed you added the lease liabilities to the balance sheet. Were there any changes to EBITDA, related to that kind of change?

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [20]

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No. It's -- yes, the balance sheet gets grossed-up considerably, but all the expense on the new accounting rules still go through lease expense. So it hasn't -- there is no adjustment through EBITDA. In fact credit agreements. Our credit agreement and others say you can't change it because of the exchange in repronouncement. So it's exactly -- it's 100% unaffected.

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Unidentified Analyst, [21]

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Okay. And then your EBITDA guidance, does that include some portion of synergy add-back or is that a clean number?

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [22]

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Yes. So we have assumed that all the -- there may be some synergies that were not fully realized as of 1/1/19. But in this guidance, we've assumed that everything we've announced [here at on24] was effective as of beginning of the year, so there's no addition. And there is a -- there's an EBITDA reconciliation, in near the tables, so you can see the isn't anything.

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [23]

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And obviously, in '19, there's less add-back as we go through and convert that, and you saw that in the first quarter.

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Unidentified Analyst, [24]

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Okay. And then on the tariffs, have you guys disclosed how much of your business directionally is currently impacted by tariffs? And then if the administration elected to go through with the final trough of tariff at some point, how much of your business would then be affected?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [25]

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So we have previously disclosed that of the 3 lists that were previously announced, they cover approximately 20% of our revenues. The majority of those are on the last of the list that were issued, and that's what we've been focused on mitigating through several different actions and have so as of today. It's hard to answer the second question because we have no idea. I mean, the administration has said $0.5 trillion, which would be everything in the world, and therefore, it'd be everything. But I mean, there's -- we really need to react to what's there. There's no published next list and what would be on it. We continue, though, to move things to different geographies where applicable and where it makes economic sense, which mitigates some of that proactively. But I really can't opine on that knowing what the administration will do. The only thing we do know is what would be impacted by the announced increase in tariff rate to 10% -- excuse me, 25% from 10% of a portion of what's already been implemented.

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Unidentified Analyst, [26]

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That's helpful. So the Chinese sourcing operation primarily, is there a tariff level where that would -- you guys would need to look outside China? And then I guess, what steps are you taking to prepare yourself for that situation if this does occur?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [27]

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Yes. I mean one of the biggest challenge we've had with the tariff regime, hasn't been the stated amounts or the implementation of the tariffs. Has been the balancing of amounts and implementation dates. That uncertainty, because we can mitigate through reducing cost of product, moving things to different geographies. But when you have a 25% tariff, you can't mitigate that completely, you need to pass on price increases. So there is no doubt in terms of the marketplace that at 25%, the customer will absorb it. It will get pushed through, the retailers will just push it through. But when there's uncertainty in terms of the implementation date and the amount, the market being our market, not your market or The Street, the market in terms of our goods and services, in terms of the retailers both online and in brick-and-mortar, have a very difficult time because it has to move in tandem. You're accepting that and there's delays, and we saw that in the last year going into this quarter as well up until February, as we mentioned. That's the biggest problem.

That being said is one of the advantages of being one of the bigger players in our industry is we have the resources, which we put in motion to mitigate. So we're already working on additional cost reductions in terms of the products that we sell on a proactive basis. We have moved goods already and still are moving goods outside of China into other geographies, particularly Vietnam and India. For certain our goods -- certain it's not applicable and it just -- it's going to be a huge -- [there has to be] a huge tariff regime to be able to make it cost-effective in other geographies, and we could put things and make them in the U.S., but I don't think the U.S. consumers going to pay 75% more for that, so it's not a reality. Tariff or no tariff for some of those goods.

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Unidentified Analyst, [28]

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Okay. And one final housekeeping. What was your revolver availability as of quarter end?

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [29]

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The revolver availability, including $6 million of cash, was [$116 million, so it's about $110] of revolver and fixed cash.

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Operator [30]

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Your next question comes from the line of Tim Hasara with Kennedy Capital.

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Timothy Paul Hasara, Kennedy Capital Management, Inc. - VP and Portfolio Manager [31]

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What do you expect for CapEx for 2019?

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Laurence Winoker, Lifetime Brands, Inc. - Senior VP of Finance, Treasurer & CFO [32]

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About $10 million to $11 million. The big impact -- the big difference between what we normally have is the reorganization and then we'll consolidate the U.K. operations into a single facility in the summer this year.

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [33]

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Yes. Tim, as we mentioned before, while there will be a tremendous payback on that by consolidating all of our warehouses and operations into one location, which will be live in July of this year, it will make 2018, while still very low, a little bit -- 2019, we'll have a little bit higher total corp CapEx for the company this year.

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Timothy Paul Hasara, Kennedy Capital Management, Inc. - VP and Portfolio Manager [34]

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Okay. And then with just the free cash flow generation, would that be used to pay down your term loan or your bank debt?

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [35]

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Yes. And then that's what we have been doing, as you see.

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Operator [36]

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There are no further questions. Mr. Kay, you may continue with closing remarks.

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Robert Bruce Kay, Lifetime Brands, Inc. - CEO & Director [37]

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Thank you. Thank you again for joining us today. We are pleased with our performance this quarter and remain focused on executing on our strategic priorities to deliver sustainable growth in 2019. We will be participating in the D. A. Davidson conference on May 30 and look forward to seeing some of you there. As always, we appreciate your continued support of Lifetime Brands.

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Operator [38]

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This concludes today's conference call. You may now disconnect.