Q3 2023 Lifetime Brands Inc Earnings Call
Participants
TJ O'Sullivan; IR; Lifetime Brands, Inc.
Rob Kay; CEO; Lifetime Brands, Inc.
Larry Winoker; EVP, Treasurer, and CFO; Lifetime Brands, Inc.
Brian McNamara; Analyst; Canaccord Genuity LLC
Linda Weiser; Analyst; D.A. Davidson & Company
Anthony Lebiedzinski; Analyst; Sidoti & Company, LLC
Presentation
Operator
Yes, good morning, ladies and gentlemen, and welcome to Lifetime Brands' third-quarter 2023 earnings conference call. (Operator Instructions)
I would now like to introduce your host for today's conference, TJ O'Sullivan. And Mr. O'Sullivan, you may begin.
TJ O'Sullivan
Thank you. Good morning and thank you for joining Lifetime Brands' third-quarter 2023 earnings call. Present 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 relates 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 Act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and other factors are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake an 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 the press 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.
Rob Kay
Thank you. Good morning, everyone, and thank you for joining us today. We are pleased to share that our results in the third quarter once again exceeded analyst expectations with our performance driven by the continued rebound of our core US business and supported by our ongoing focus on actions to drive growth and profitability in a dynamic operating environment. As the industry headwinds we have been observing for the last several quarters begin to abate, the actions we have taken are positioning us to perform well in comparison to the market and our peers. The results we reported today are unchanged from preliminary estimated third quarter results we announced a few weeks ago in connection with the launch of an amendment and extension of our existing term loan B facility, which we'll discuss in further detail shortly.
First, I will walk through our results. In the third quarter, we delivered $191.7 million in net sales compared to $186.6 million in net sales in the same period last year. In the 12-month period ending September 30, 2023, we generated adjusted EBITDA of $55.5 million. Our year-to-date performance reflects a stabilization in our end-market demand and continued strong operational execution.
We've also maintained or grown our gross margin percent, driven by favorable product mix and improved supply chain availability and costs. Entering the fourth quarter, we expect to see relative stability in our core US markets as well as some stabilization in our international markets. For the quarter, we delivered year-over-year growth in our core US business, supported by the continued recovery of our domestic end markets.
In prior quarters, we have discussed the impacts of ongoing global supply chain issues on retailer purchasing behavior with retailers across channels altering inventory and distribution strategies in response to significant oversupply. We are now seeing sustained positive trends in shipment and ordering activity for the first time since 2021, giving us confidence that these issues have been resolved.
We hope to see a return to typical order flow levels as we move forward. That said, while we are experiencing positive year-over-year comparable revenues in all our markets, we remain defensive as we monitor continued macroeconomic factors such as inflation and recessionary pressures.
We also remain focused on driving gross margin improvement, which was supported in the quarter by a combination of mix and positive macro factors. Of note, the ocean freight cost environment remains favorable to prior year, reducing our cost of goods sold.
Turning now to our international business, we continue to execute our international growth strategy and are pleased with the initial traction we are gaining despite ongoing challenges in European end-market. We are benefiting from the investments we have made in our infrastructure for this business, including our Netherlands facility, which is already allowing us to better compete and win on the continent.
We saw several key new business wins in the quarter, including two new large retailers in Continental Europe. In terms of cost structure, the restructuring of our European operations we completed in the fourth quarter of 2022 continues to positively impact our bottom line, strengthening our foundation as we drive forward towards our goal of improved profitability for this segment in 2024.
Outside of Europe, we are also encouraged by the progress we are seeing in Australia and New Zealand following last quarter's implementation of a direct go-to-market strategy. This change will translate to significant margin improvement.
In Southeast Asia, we are continuing to rollout our e-commerce-driven strategy across channels such as Temu and Alibaba and Shopee and are seeing strong receptivity among consumers in these markets. The continued rollout of our direct go-to-market strategy in major geographies driven by our core brands, including KitchenAid, S'well, and Macassa, is expected to provide top line growth beginning in 2024.
Of note, our market shares remain strong. And as we work to bolster this strong market share position, we are pleased with the successes of several key growth initiatives in creating incremental plus one opportunities that support our top line.
Throughout 2023, we have made significant investments in infrastructure for our foodservice business, which continues to gain market share. We are seeing these efforts begin to pay off and are confident that they will drive meaningful growth and profitability in 2024.
Separately, last quarter, we mentioned that we signed a license for a line of Dolly Parton branded products across several categories. We are already adding new products across many categories and have gained placement. Therefore, we expect this line to begin adding incremental growth with shipments beginning in the second half of 2024.
In pure-play e-commerce, we saw continued strengthening in the third quarter, and we expect this momentum will continue into the fourth quarter. Now to provide an update on the execution of our strategic sourcing efforts to diversify our supply chain and reduce our exposure to China. We are well on our way to meeting or exceeding the goal we originally set six months ago, which was to reduce our product supply such that approximately 25% of our spend on goods is outside of China.
To that end, the plastics manufacturing facility we invested in Mexico is now operational, and we continue to ramp up production with the expectation that we will reach full capacity by 2024. Other initiatives include expanded sourcing capabilities in various Asian geographies that we continue to expand as well as further identifying sourcing opportunities in Mexico.
Turning now to our business outlook. While there is still uncertainty due to macroeconomic factors, the positive trends that we have produced year to date, combined with our confidence in executing the fourth quarter have provided us with a revised outlook on the full year 2023. To reflect these tailwinds and our positive performance, we are raising the low end of our full year 2023 guidance.
We now expect net sales in the range of $670 million to $690 million and adjusted EBITDA in the range of $52 million to $55 million. We are pleased with the strength of our balance sheet and remain disciplined in our approach to cash management and deleveraging to ensure we maintain our strong financial position moving forward in line with our commitments to conservative balance sheet management.
This quarter, we launched an amendment and extension of our existing term loan B facility, which was due in March of 2025 through an extended maturity of August 2027. Given the ongoing uncertainty in the macro environment, we believe it is prudent to take proactive steps like this to minimize our exposure to event risk over the next several years.
At this point, we have finalized the participation in the amended facility and expect to close this refinancing during the fourth quarter. We will provide an update to the transaction once it is closed. We continue to evaluate value-enhancing opportunities, including M&A, in line with our commitment to investing for growth. While pressures on the cost and availability of capital in the current market have translated to increasingly attractive valuations, we remain disciplined and will act only on those opportunities we believe best support our long-term growth prospects.
We believe that our anticipated amendment and extension of our term loan B will serve to bolster our strong balance sheet. We expect to continue to be prudent with our capital and be opportunistic with investment initiatives where we see value enhancement. We are pleased with the improving trends we are seeing across the business and our annual operating environment as we enter the fourth quarter.
The significant transformation we have completed over the last several years has positioned us for success even in the face of macro headwinds. And we are confident we have the business model and strategy in place to continue accelerating our progress.
With that, I'll now turn the call over to Larry.
Larry Winoker
Thanks, Rob. As reported this morning, net income for the third quarter of 2023 was $4.2 million, or $0.20 per diluted share compared to a net loss of $6.4 million or $0.30 per diluted share in the third quarter of 2022. Net income for the current and prior year quarters each include a non-cash impairment charge related to our investment equity investment in Grupo Vasconia of $300,000 and $6.2 million, respectively.
Adjusted net income was $7.7 million for the third quarter of '23 or $0.36 per diluted share compared to $6.2 million or $0.29 per diluted share in 2022. Income from operations was $13.6 million in the third quarter of '23 as compared to $7.6 million in the 2022 period. Adjusted income from operations in the third quarter of '23 was $17.7 million compared to $16.8 million in 2022. And adjusted EBITDA for the trailing 12 months ended September 30, '23, was $55.5 million before the pro-forma synergy adjustments.
Adjusted net 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 third quarter of '23 and '22, unless stated otherwise. Consolidated sales increased by 2.7% from 2022. US segment sales increased by 3.8% to $179.4 million. As Rob discussed, our core US business continues to rebound and retailer purchasing behavior continues to normalize. This factor as well as a new warehouse program drove the current quarter increase with partial offset from lower sales for hydration products.
International segment sales were down 10.9% to $12.3 million or down 16.6% from a constant US dollar basis. The decrease was driven by continuing weakness in end-market demand, the timing of customer shipments, and as expected, implementation of the new growth go-to-market strategy in Asia. Gross margin percent increased from -- to 37% from 36.4%.
For the US segment, gross margin increased to 37.3% from 36.6%. This improvement is due to favorable product mix and lower inbound freight costs. For international, gross margin decreased 10 basis points to 32.5% from unfavorable product mix, which was lost -- which offset the benefit of lower inbound freight costs.
For the US distribution expenses as a percentage of goods shipped from its warehouses, excluding nonrecurring expenses, were 9.1% and 10.4% last year. This decrease was driven by lower storage and pallet expense. Direct labor productivity improvements offset higher wage rates.
For international distribution expense as a percentage of goods shipped from its warehouses was 22.4% versus 22.9% last year. The benefit of lower outbound freight rates was partially offset by the effect of lower shipments on warehouse operations.
Selling, general, and administrative expenses increased to $40.2 million in '23 versus $36.5 million. US segment expenses increased by $3.3 million to $31.6 million and as a percentage of net sales, SG&A increased to 17.6% from 16.4%. Decrease is primarily attributable to the timing of incentive compensation accruals.
For International SG&A expense, decreased by 5% to $3.7 million from lower foreign currency exchange losses. As a percentage of net sales, international segment expenses increased to 30.1% from 28.3% due to the effect of period expenses on lower sales volume. Unallocated corporate expenses increased by $600,000 to $4.9 million on a timing of incentive compensation accruals, partially offset by a decrease in the salary costs due to the elimination of the Executive Chairman position.
Our interest expense increased by $600,000 due to higher interest rates on our variable rate debt, but partially offset by lower average borrowings. For income taxes, the effective income tax rate was 36.5% for the current quarter, which differs from the federal statutory income tax rate of 21%, primarily due to foreign operating losses, to which no tax benefit is recognized.
Related to Grupo Vasconia, the Mexican company, for which we have a 24.7% equity interest, the Company recorded a loss of $700,000 in '23 period versus a loss of $2 million last year. Vasconia has a recent history of operating losses and recently announced that we will not make its debt service payments. Furthermore, its quota stock price continues to decline. Accordingly, the company recorded an additional noncash impairment charge of $300,000 to write down the investment to which trading down of $4 million.
Our balance sheet continues to be strong. At September 30, our liquidity was approximately $198.8 million, which was comprised of availability under our credit facility and receivable purchase agreement and cash on hand. Net debt was $221.7 million, approximately $11 million lower than at the end of 2022. And the net debt to EBITDA leverage ratio was 4.0 times.
As Rob commented, we are very pleased to report that we have received the required commitments to amend and extend our term loan B agreement to August 2027. The principal loan amount will be $150 million, priced at 96 OID and bears interest at SOPA plus 550. The definitive agreement will be filed after closing, which is expected shortly.
On a pro forma basis, as of September 30, after giving effect to the amendment, liquidity would be approximately $140 million. As discussed in the release, we have updated our financial guidance, raising the low end of our full-year 2023 guidance.
Guidance for 2023 is as follows: net sales of $670 million to $690 million, adjusted income from operations of $43.5 million to $46.5 million, adjusted net income of $11.1 million to $12.3 million, and adjusted EBITDA of $50 million to $55 million.
This concludes our prepared comments. Operator, please open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Linda Bolton Weiser, D.A. Davidson.
Linda Weiser
So I was curious about -- it's good to hear that your ordering patterns are more normalized, but that doesn't match some of the information we're seeing out there about weak consumer demand. So I'm wondering if your retail customers may change their behavior as they see here the weak consumer behavior may be continuing in terms of POS demand. So can you kind of square those two things in terms of the better ordering versus what seems to be still a very weak environment? Thanks.
Rob Kay
So addressing each one of those independently, the order demand is really addressing the environment that we saw for some time where there was a mismatch between ultimate POS and order demand from retailers because there was tremendous over inventory in every channel -- across every channel. And we are pointing out that that environment has normalized, so there is no overstock situation, which is creating mismatch because ultimate end-market demand and the shipments to whether it's e-commerce, brick-and-mortar, omnichannel, whatever.
Relatedly, but separately, the end market is still not robust. We're seeing pickups in certain channels like off-price. If you look on a year basis, that's been positive and that's coming off a low base last year or lower base, right, where there was very little open to buy in that channel created because they had too much inventory. So that put them in a position to buy much more to meet their demand because there wasn't that mismatch with PO. So we are still seeing not a robust end-market demand and the larger, more sophisticated retailers have already taken action earlier this year to lower their safety stocks, and therefore, lower shipments to compensate for lower POS that they were seeing.
For the holiday season, there's no visibility, right? The consensus in what's [the economy] believes, right, which is NPD and IRI now, is that it will be a decent holiday season, but probably more discounting and the curve -- the bell curve will be a little different.
Linda Weiser
Okay. Thank you. And then -- so you pointed towards -- I mean, you really sound kind of optimistic that you'll have sales growth in 2024. Do you see that as being a gradual improvement in growth as the year progresses starting lower in the first part of the year and then building up? Is that the way we should think about it for next year?
Rob Kay
So we're not counting -- so the another way, the visibility to the end market is poor, so maybe someone else can figure out where that's going. We don't. And I don't think the retails now either. So we're not in 2024 are anticipating much rebound, if any, in the end markets, in the US in particular. And international markets, we're pretty convinced there will be no rebound in 2024 and not until 2025. But we are doing things to gain market share.
The go-to-market strategy in Europe, we're picking up some significant retailers. And obviously, if that sells through, that's big market share gains, which will help our changing in how we're going to market in Australia, New Zealand, which is decent market for us actually. It is -- will provide meaningful growth because we're selling a much broader retail base now at a triple profit -- level of profitability.
More importantly, in our core market, if you look at foodservice, we're expecting just on what we built in and it's kind of an annuity as you start selling at a sixfold increase in that business. It's low base. But in 2024, more importantly, it gets us to profitability in that business segment.
The Dolly Parton line is getting -- we've done a lot of work. We've developed a lot. We have already landed placement, which we think will expand. That'll start shipping early second quarter, so yes, we'll build up per your point as a result of these things. But these are built-in initiatives that we've been working on. If the end market grows, that will be above what our current expectations are.
Linda Weiser
Okay. And then do you have any estimation as to how the refinancing would affect annual interest expense?
Rob Kay
The offsetting -- I'll let Larry comment, but the offsetting factors are if you look at -- remember we bought back at a discount some of the term loan B about $50 million, almost fairly recently. And we're also in conjunction with this repaying another almost $50 million. So the outstanding of the term loan B as much declined, but the interest rate is higher.
Larry Winoker
Yeah, roughly. The amount we've calculated approximately $2.5 million, which is pretty close -- position, which is pretty close to what we say when we did that -- the auction back in June.
Rob Kay
So higher overall interest expense, but we downsized the amount of the indebtedness and the term loan B, so that kind of (inaudible)
Linda Weiser
Okay. Thank you very much. Good luck with everything.
Operator
Anthony Lebiedzinski, Sidoti & Company.
Anthony Lebiedzinski
Hey, good morning, and thank you for taking the questions. Nice job certainly. It's nice to see US sales growth in the quarter here. So just curious what we've -- as we look at pricing versus unit volumes, anything to call out there? Or just curious if you have any thoughts on that?
Rob Kay
Yeah, look, I mean, the inflationary environment is impacted by -- and helped from the sense of you're getting higher sales on a same volume basis. But more -- for us, makes us more of an impact of that. So like Larry mentioned, we had a big program in the third quarter in club, right? So that help volume hurt margin. But for year to date in club, we're down, which helps margin percent right but hurts volume. .
Anthony Lebiedzinski
Understood, okay. Got you. Okay. So if we were to use the midpoint of your updated '23 guidance, so the implied guidance for the fourth quarter is revenue decline of 5% from last year. So is that really all international that is driving that down?
Rob Kay
No. Actually, Anthony, it's club. So we had a big program in fourth quarter of last year, which we're not doing this year, and that's really driving that.
Anthony Lebiedzinski
Okay. Got you. And then just curious, as far as the international segments, obviously sales were down here in the quarter, as you explained. Now though strategically and kind of longer term, how do you think about the potential for the international segment? I mean this quarter, admittedly was not the first time that you had some challenges there. So how do you guys think about this -- of the international segment longer term?
Rob Kay
That's a very pertinent question, but it's been a drag on our earnings as we've grown tremendously over, since we really took over the business. And we've restructured. We put it in a position, then it's heavily dependent on the UK. Brexit had a major impact along the war in Ukraine and many other factors. So we've continued to restructure that.
Ultimately, we need to be comfortable. So the potential is there. The growth is probably one of our greatest growth opportunities. And we are gaining traction. I mentioned here some of the retail gains. I mentioned what we're doing in Australia, New Zealand, and other places, and we're winning on the continent. So we are gaining share in a very depressed market. We need to be very firmly comfortable in our path and obtaining long-term profitability or we need to take other actions.
Anthony Lebiedzinski
Okay, understood. Okay. And then lastly, gross margin yield, nice improvement there. Just curious as to whether we should expect additional improvements in gross margins here going forward.
Rob Kay
No, look, we've improved our gross margin profile meaningfully over the last few years. We're comfortable sustainable, but we don't see -- and it will still bump because of channel mix or anything else over any given quarter. But we don't expect a continuing upward trend in gross margin percent.
Anthony Lebiedzinski
Got you. All right. Well, that's all I had. Thank you very much and best of luck.
Operator
Brian McNamara, Canaccord Genuity.
Brian McNamara
Hey, good morning, guys. I think a lot of my questions have already been answered. But Rob, I think you've mentioned the lack of visibility for the last couple of quarters now. I'm just curious, you've been in the business a long time. Is this kind of unprecedented? Like what typical data points, mileposts you typically look out to kind of inform your view for market growth moving forward? And why is this time different?
Rob Kay
It's just the general macro environment and there's a lot of inputs, what's going to happen, trade wars, will that accelerate, which is something we've fought over the last couple of years. For that matter, we can't predict the weather, but it's a very cold winter, that's going to particularly impact negatively Europe because of the tremendous impact of fuel costs. So there's a variety of factors. I think it's fairly unprecedented.
There are certain things that we've seen over the years. So when Linda asked the question in terms of basically reaction by the sophisticated retailers in terms of paring back inventory levels, that's standard. So Walmart, Target, they're very sophisticated. Their finance departments are very sophisticated and very powerful within the organization.
So we've seen -- it's a leading indicator of tough economic times because before really it makes the press, we see those guys really tighten up on safety stocks, shift the burden to us. Because they don't care if we over inventory our warehouses, right, put us out of business. Let us take a risk, right?
So that shift started to occurring in 2022, and we saw a lot of that. So some of these trends are normal to us -- normal over the long term. Paring back on inventory at recessionary times is not normal, but the general market is just very choppy. There's really no visibility.
There is firmness in terms of looking what channels are winning and the like. But there's no firm data. And we look at POS data historically. We -- the best metric for us is order flow, right? And order flow by channel and understanding why.
As I mentioned in, off-price, good channel, there was no open to buy, right? It's not planogram, so you need open-to-buy. They had no money to buy, which is a frightening situation in 2022. It did rectify this year. And frankly, we've grown nicely. It's been one of the things driving our growth at the moment.
Brian McNamara
Great. And then on international, I mean, you guys have done a ton of work there, restructuring and everything. But I think investors are looking for growth there. So I think your eight consecutive quarters are pretty hefty double-digit declines. And you mentioned new business wins in Q3. I'm just curious like what would the growth have been without those new business wins and kind of when can investors kind of expect a return to growth there?
Rob Kay
Yeah. So year over year, the improvement in profitability is meaningful. The wins that I'm talking about and the changes we made in Australia, New Zealand, all that have yet to flow through the income statement. We've gotten those wins, but we haven't started shipping.
Brian McNamara
Got it. And then, just I mean, I think we touched on 2024 before is -- myself and my peers' consensus expects about 5% revenue growth, or at least that's the current estimates lie relative to the midpoint of your revised guidance. Is that aggressive?
Rob Kay
We have not issued our guidance on 2024 yet.
Brian McNamara
And care to share any high-level comments? We've gotten a lot from our other coverage companies. Basically the theme has been kind of talking down 2024.
Rob Kay
Yeah, we haven't issued any guidance, Brian. As I mentioned before, we're not expecting much end market growth in '24. But we have a bunch of initiatives that we're working to finalize and see the impact, but that's where we'll get growth from.
Brian McNamara
All right. Sounds good, guys. Best of luck.
Operator
And we have reached the end of the question-and-answer session. I'll now turn the call over to Rob Kay for closing remarks.
Rob Kay
Thanks. Once again, thank you for your interest in Lifetime Brands. Thank you for listening our call, and we look to be updating people shortly. Have a good day.
Operator
And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
