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Lifetime Brands Inc (NASDAQ:LCUT)Q4 2018 Earnings Conference CallMarch 14, 2019, 11:00 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to Lifetime Brands Fourth Quarter and Full Year 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 speakers' remarks, there will be a question-and-answer period. (Operator Instructions).
I would now like to introduce your host for today's conference, Andrew Squire, Mr. Squire, you may begin.
Andrew Squire -- Investor Relations
Thank you. Good morning, everyone, and thank you for joining Lifetime Brands Fourth Quarter and Full Year 2018 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'll read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements regarding the Company and its consolidated subsidiaries that are about to be made in this call that are not historical facts are forward-looking statements. Such statements include all statements regarding our current and projected financial and operating performance, results, and profitability and all guidance-related thereto, as well as our future plans and intentions regarding the Company and its consolidated subsidiaries. Such statements involve risks and uncertainties, including the Company's ability to comply with the requirements of its credit agreements, the availability of funding under those credit agreements, Company's ability to maintain adequate liquidity and financing sources and an appropriate level of debt, possibility of impairments to the Company's goodwill, changes in US or foreign trade or tax law and policy, the impact of tariffs on imported goods and materials and whether the actions we are taking will mitigate the impact of tariffs, changes in general economic conditions, which could affect customer payment practices or consumer spending. The impact of changes in general economic conditions on the Company's customers, customer ordering behavior and our expectations relating thereto, the performance of our newer products, expenses and other challenges relating to the integration of the Filament Brands business and future acquisitions, whether the benefits we expect to realize from the acquisition of Filament will materialize, our expectations regarding our cost savings initiatives, whether the reorganization of our European operations will create profitability, whether the actions we are taking will create shareholder value,changes in demand for the Company's products, changes in the Company's management team, the significant influence of the Company's largest stockholder, fluctuations in foreign exchange rates, changes in US trade policy or the trade policies of nations in which Lifetime or its suppliers do business, uncertainty regarding the UK's exit from the European Union, shortages of and price volatility for certain commodities, significant changes in the competitive environment and the effective competition on the Company's market, including its pricing policies, financing sources and ability to maintain an appropriate level of debt, and other risks detailed in Lifetime's filings with the SEC.
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'd like to turn the call over to Rob Kay. Please go ahead, Rob.
Rob Kay -- Chief Executive Officer
Thanks, Andrew. Good morning, and thank you for joining us today to discuss Lifetime Brands Fourth Quarter and Full Year Financial Results -- Full year 2018 Financial results. Our fourth quarter and consequently our full year performance were below our expectations and previously provided guidance. On a pro forma basis, including the Filament results for both 2017 and 2018, the fourth quarter was basically flat with prior year. However, we had anticipated growth in top and bottom line, while our GAAP results for the full year showed growth related to the acquisition of Filament Brands. As a result of the fourth quarter performance, we saw a noticable decline for the full year in both pro forma and our net sales and EBITDA. Simply put, we are disappointed in these results and they are not what we expect to deliver to shareholders. We believe this underperformance was due to a combination of factors, but primarily the adverse impact of certain unforeseen macroeconomic events, which I will discuss before turning over the call to Larry, who will go over the numbers. I'll also discuss with you important achievements from throughout 2018, as well as highlight some positive indicators we are seeing in the first couple of months of 2019.
It's important for me to emphasize that we are optimistic these macro events, while meaningful in impact, are predominantly singular in nature. They include European softness, primarily due to Brexit and the inconsistent implementation of a new US tariff program that hindered our ability to pass along timely price increases. Additionally, our sales were adversely affected by stocking levels and inventory management decisions by retail customers, including our largest e-commerce customer. In Europe, as you know, in the second half of 2018, we announced a plan to reorganize our European-based operations, including the consolidation of our European operation into a single, more profitable business.
We expect this reorganization to create profitability starting in 2019. However in 2018, our European business was adversely impacted in the fourth quarter by meaningful softness in the retail markets in Europe, primarily due to the uncertainty and instability of Brexit, as well as the yellow vests protests in France. With regard to tariffs, on our earnings call last quarter, I addressed the newly announced US tariff program that was expected to affect 20% of our Company's revenue. Despite taking proactive steps to mitigate the potential impact such as reducing the cost of goods sold and resourcing our products to countries who exports were not subject to the tariffs. The inconsistent implementation of the US tariff program hindered our ability to pass along our planned, timely price increases, in turn creating a more impactful outcome on our revenue and margin than initially expected and resulting in meaningful losses in the affected lines of business. And additional unforeseen consequence of the tariff program was an inability to book adequate containers to ship our products from Asia and the inability to move goods delivered to US ports to our customers in a timely manner. These situations resulted in missed shipping windows and consequently reduced revenues for Lifetime. Finally, certain of our North American distribution channels delivered disappointing sales due to a combination of poor holiday sales from certain channels and a change in policy regarding stocking level and inventory management by several large customers, including our largest e-commerce customer. Both in the US and Europe, this customer noticeably reduced inventory and in-stock levels, even though sell-through of most products to the consumer remained high. At this retailer, our average in-stock levels reduced from over 20 weeks at the end of 2017 to under six weeks at the end of 2018.
Significantly, as just mentioned, across all of our markets, our sell-through to consumers at this customer has remained strong with substantial year-over-year growth. We also saw a combination of canceled and postponed orders from our largest food service customer as a result of our reorganization of their merchandise program, which has led to a downsizing of their offerings. Combined, these issues resulted in a meaningful miss (ph) compared to our expectations that were based on product sell-through to consumers. The unique headwinds experienced in the fourth quarter have not continued into 2019. And we are encouraged by the early results of 2019, as our shipping and supply chain has normalized and as we now have successfully implemented the planned price increases designed to mitigate tariff impacts.
We feel confident that these initial results indicate a normalization of customer ordering and promising performance of our newer products. With these events in the rearview mirror, we were eager to refocus on serving the needs of our customers and providing high-quality houseware products, while driving growth for shareholders. Notably, we accomplished our primary 2018 goals of seamlessly integrating the Filament business into Lifetime, reorganizing our European operations and executing our opportunity to reduce the cost of infrastructure to achieving synergy cost eliminations in excess of $11 million. Now that we have successfully integrated the Filament business, we expect to realize the many benefits of the merger, including leveraging our expanded portfolio of brands, products and distribution platforms and forging partnerships in new channels. Furthermore, we laid a strong foundation for repositioning our product portfolio which, as you may remember, reaccelerated during the third quarter of 2018 in an effort to achieve greater cost saving benefits and provide for a revised platform to pursue organic growth opportunities. The associated ERP systems integration that went live in January is already off to a great start and we expect to see a substantial impact from our implemented $11 million in annual savings beginning in 2019, which represents an increase of more than a third from our original projection.
In addition, we are currently executing our wholesale restructure of our e-commerce operations focused on more efficiently promoting our products and brands, and designed to grow our e-commerce revenues and product recognition and ratings. We are also continuing with investment in our brand equity development process as a way to increase our visibility and recognition of brands among consumers. These efforts have begun to show results in the first quarter of 2019.
So, as I've mentioned, we expect our 2019 results to show meaningful top and bottom-line growth. This expectation is supported by our results for the first two months of the year. We plan to release 2019 full-year guidance on our Q1 2019's earnings call this May at which point we'll be able to provide benchmarks of targets and opportunities created by our strategic review of the newly integrated Filament business.
We are confident that the path we're on to create a leaner and more growth-oriented Lifetime Brands will be strong drivers of enhanced results, profitability and value creation for Lifetime as we move forward. Larry?
Laurence Winoker -- Chief Financial Officer
Thanks, Rob. As we reported this morning, net income for the fourth quarter of 2018 was $10 million or $0.49 per diluted share as compared to net income of $1.3 million or $0.08 per diluted share in the 2017 period. Adjusted net income for the quarter was $11.2 million or $0.55 per diluted share as compared to adjusted net income of $7.1 million or $0.40 per diluted share in 2017. A table which reconciles this non-GAAP measure to reported results was included in this morning's release.
Income from operations was $22.9 million for the 2018 quarter compared to $10.9 million for 2017. Adjusted EBITDA, a non-GAAP measure that is reconciled to our GAAP results in the release was $65.5 million. $64.9 million reflecting the credit agreement limitation, that's for the year ended December 31, 2018. This included permitted pro forma adjustments for Filament and projected unrealized synergies of $8.5 million. As a result of reorganizing certain management responsibilities, the US wholesale segment now includes the US Retail Direct channel. Therefore, our comments today and in the future will reflect this reorganization, including on a comparable basis with prior periods. Net sales for the quarter increased $45.5 million to $228.3 million. This reflects the acquisition of Filament, which added $51.6 million. Organically, net sales decreased $6 million. The US wholesale organic sales decreased $3.4 million. This decrease reflects, as Rob noted, retail and inventory reductions and transportation difficulties due to tariff concerns. A decline in kitchenware and tableware products was offset partially by an increase for home solutions products.
In international, sales declined by approximately $2.6 million, but that's $1.8 million decline in constant US dollars. This reflected retail inventory reductions and consumer concerns about the potential impact of Brexit. Gross margin was 37.2% in '18 compared to 39% in the comparable 2017 period. US gross margin was $37.3 million in 2018 versus $40.2 million in 2017. This reflects both product and customer mix, as well as approximately 40 basis point decline associated with the effect of the tariffs. For international, gross margin improved from 33.2% to 36% from tableware products on fewer off price sales and portfolio repositioning.
Distribution expenses as a percent of sales shipped from our warehouses, including Filament and this has largely been integrated with the rest of our US operations during the quarter, were 9.3% in 2018 versus 10.4% last year. This excludes warehouse relocation expenses. For the US, wholesale distribution expense as a percent of shipments, also excluding relocation, improved to 8.8% from 9.8% last year, due to increase in products shipped. For international, expense and the distribution improved approximately one point 12.4%. The 2017 period reflected an additional lease of termination expense recorded in connection with the planned warehouse move. SG&A expenses were 40.6% in the fourth quarter of '18 versus $41.3 million in the 2017 period. US expenses including corporate unallocated were $34.4 million versus $34.6 million last year. The 2018 period includes Filament that was offset by lower employee compensation and acquisition expenses, as well as an estimated reduction in contingent consideration related to an acquisition. As so much of Filament's operations have been integrated with Lifetime, there is no stand-alone Filament expense to identify except for purchase accounting amortization, which added $2.4 million. International SG&A expenses decreased by approximately $600,000, which largely represents a benefit for the change in the mark-to-market of foreign currency contracts and foreign currency statement translation.
Interest expense was $5.6 million in 2018 quarter as compared to $1.2 million last year. The increase in interest is attributable to the financing obtained to acquire Filament. The effective tax rate for 2018 primarily reflects non-deductible expenses and reserves for uncertain tax positions, while in the 2017 period, the rate reflects the charge for the remeasurement of deferred taxes related to the tax reform act.
At December 31, '18, liquidity under the revolving credit agreement, net of cash -- liquidity net of cash was $7.6 million, liquidity was approximately $112 million.
This concludes our prepared comments. Operator, please open the line for questions.
Questions and Answers:
Operator
(Operator Instructions) Our first question comes from the line of Frank Camma of Sidoti.
Frank Camma -- Sidoti -- Analyst
Hey, guys. Good morning. Thanks for taking the questions.
Rob Kay -- Chief Executive Officer
Good morning, Frank.
Frank Camma -- Sidoti -- Analyst
I know, Larry, you called out the organic, but could you just give us if you have them handy the numbers for Filament for the quarter and for the year, the revenue?
Laurence Winoker -- Chief Financial Officer
Yeah. So, yeah, it was $51.7 million. Last year, it was about $49 million. And so that's -- and obviously (inaudible).
Frank Camma -- Sidoti -- Analyst
That was the revenue in the quarter?
Laurence Winoker -- Chief Financial Officer
Yeah, that's $51.6 million, last year approximately $49 million. So, that was up about $2.5 million. For the year, it's on a full year basis, we only had 10 months, but it was $154.5 million.
Frank Camma -- Sidoti -- Analyst
Okay. But how much of that $154.5 million did you actually book those?
Laurence Winoker -- Chief Financial Officer
Yes, thanks. Yes, that's 12 months. So we -- based on the 10 months, it was about $129 million.
Frank Camma -- Sidoti -- Analyst
Okay. Good. All right. So Filament, I mean year-over-year in the quarter actually did OK, correct? I mean like -- because last quarter, that was actually down year-over-year?
Rob Kay -- Chief Executive Officer
Yeah, the same trends we saw across the business were related to all of our lines of business equally, but yeah, Filament had a good fourth quarter.
Frank Camma -- Sidoti -- Analyst
Yeah, I guess where I'm going with that is, I mean, I know you're not...?
Rob Kay -- Chief Executive Officer
But it was lower than our expectations, Frank.
Frank Camma -- Sidoti -- Analyst
Sure, sure.
Rob Kay -- Chief Executive Officer
For the year-over-year, but it was lower. So as we said, the fourth quarter year-over-year were flat on a pro forma basis. But our expectations were for more growth (multiple speakers) that's what we were addressing. But we were -- Filament was a bit opposite.
Frank Camma -- Sidoti -- Analyst
Okay. Now my concern though is, with Filament was the fact (ph) and I know you didn't mean customers, but you did say the largest food service, we know who that is. Now, so what can we expect, I know you're not giving guidance, but what can we expect from that customer going forward? Does that mean you lose that customer, does it mean they greatly scale it back. Can you give us like some color on that?
Rob Kay -- Chief Executive Officer
So, we did not lose that customer, but year-over-year, there was a noticeable decline, as they dramatically changed what they -- their merchandise strategy and therefore their purchases. So, no, it's just a decline, not -- it's still a big customer.
Frank Camma -- Sidoti -- Analyst
But that will flow into, I guess, where I'm going is, that will flow into next year, right, I'm assuming and is food service is Q1 typically, a decent quarter for food service, is that not at seasonal, I guess?
Rob Kay -- Chief Executive Officer
That is not as seasonal as the retail business, Frank. There -- as we mentioned, some of the transportation issues both on getting containers added China and then actually getting goods out of port, well, in this case, what you're referring to is only added China, that was also impact ,because it's all DI added China. So some of that rolled over into the first quarter.
Frank Camma -- Sidoti -- Analyst
So, you would actually benefit from that in Q1 now, because it's just sort of a timing issue?
Rob Kay -- Chief Executive Officer
You would.
Frank Camma -- Sidoti -- Analyst
Okay. And then I guess the other item and I know you didn't call the customer again, but like you said 20 weeks for e-commerce customer down to six weeks. That sounds like they almost didn't order in the quarter at all. I mean given that dramatic decline in the stocking.
Rob Kay -- Chief Executive Officer
This is across the industry, everyone has agreed this, and a matter of fact, this is a big customer of us in Europe as well and they did the same thing. So they operated globally along these lines. As we pointed out, we're able to track, sell through to the consumer, which is quite good, which is also contributing to why the in-stocks went down so much. It happened and there's a lot of press on it. A lot, not for the full quarter,but it started in November, a lot of analysis and press in it. Again that is a customer, which he came -- really six weeks is too low. So we've seen some nice order flow year-over-year so far in 2019.
Frank Camma -- Sidoti -- Analyst
But aren't they changing their business model somewhat, so that they don't actually hold the inventory in that the whole point like they want you to sort of be -- they just want to take a (inaudible), I mean, it's sort of their shop and the shop model, if you will. I mean can you address that, like does that change your model?
Rob Kay -- Chief Executive Officer
Yeah, I mean, two things. First of all, you know, look, if there is -- if anyone doesn't matter brick-and-mortar e-commerce changes their inventory strategies and it happens, last forever, because as you know, in this case, you can't run out of stock, right. You need inventory. So, the impacts are finite. That being said, you're talking about someone who changes strategies often. So it's really hard to comment on that and I think what you're referring to would really impact people that are smaller than us.
Frank Camma -- Sidoti -- Analyst
Right. Because you have the ability to hold the inventory and ship direct?
Rob Kay -- Chief Executive Officer
For sure, we do and we can drive ship and we are certified appropriately. So, there's all that, which creates a different relationship, but also if you look at the press, you know the sort of eliminations are focused on people doing smaller amounts and does -- we are not nearer where those cut off.
Frank Camma -- Sidoti -- Analyst
Okay. So the biggest shock to me is sort of the gross margin. You know Larry, excuse me, if I missed this, but you mentioned $2.4 million purchase accounting now, did that flow through to the gross margin lowering your gross margin, or it was through somewhere else?
Laurence Winoker -- Chief Financial Officer
No, the purchase accounting amortization goes through SG&A.
Frank Camma -- Sidoti -- Analyst
So that's SG&A, so that had no impact there.
Laurence Winoker -- Chief Financial Officer
I mean there was no...
Frank Camma -- Sidoti -- Analyst
Go ahead, I'm sorry.
Laurence Winoker -- Chief Financial Officer
I just comment, it is down for the quarter, but it was more pronounced in the quarter than it was for the year.
Rob Kay -- Chief Executive Officer
Yeah, it's a bit of a mix issue and of course in the quarter as Larry pointed out, we had an impact on the tariffs that would be a fourth quarter impact.
Frank Camma -- Sidoti -- Analyst
Okay. So it was really more of the tariffs. Now, have you consequently in Q1 started to push through those price increases?
Rob Kay -- Chief Executive Officer
So the tariff situation as I tried to explain, Frank, we had reacted, and as part of that, as we mentioned, you can't mitigate all of the tariff without a price increase. So, we implemented a portion and then we had implemented price increases, but unfortunately when the government started moving the target of the tariff from potentially 10% to 25% to 10% and the timing of the implementation of that. So it was impossible for us to get a price increase through in the fourth quarter, because there was flip-flopping and uncertainty. As of now, we have been able to do that subject to change if the tariffs change percentage and implementation dates or if they go away.
Frank Camma -- Sidoti -- Analyst
Okay, fair enough. And just may I -- as I'm looking at these adjustments that you put in there is just a housekeeping, so like the contingent consideration fair value adjustment that I assume is an SG&A issue, correct?
Rob Kay -- Chief Executive Officer
Correct.
Frank Camma -- Sidoti -- Analyst
Okay. So the only one that does and it looks like to me that of the ones of top that don't flow through SG&A is probably the warehouse relocation, is that distribution?
Rob Kay -- Chief Executive Officer
Yes.
Frank Camma -- Sidoti -- Analyst
Okay. And that the bottom three, I assume, are to effect the tax, they flow directly to your tax rate?
Rob Kay -- Chief Executive Officer
Yes.
Frank Camma -- Sidoti -- Analyst
Okay. So then looking at then, this will be my last one, I will hop off then. It looks like your effective tax rate is still pretty high and is that just because your jurisdictions, I mean it comes about, and this is after I adjusted it to about like 42% for the year. Is that just because of where you booked the income?
Rob Kay -- Chief Executive Officer
It's an anomaly. It's (inaudible) looking at the small numerator that hurts, but this is nothing that is -- let's say, is persistent that would cause it to be that high going forward.
Frank Camma -- Sidoti -- Analyst
Okay. Yeah, because I have modeled about much less like 27.5% (ph) going forward is that sounds like a more realistic model like number?
Rob Kay -- Chief Executive Officer
Yes.
Frank Camma -- Sidoti -- Analyst
Okay. Thanks, guys. I'll hop off.
Rob Kay -- Chief Executive Officer
All right, Frank.
Operator
Your next question comes from the line of Justyn Putnam of Talanta Investment Group.
Justyn Putnam -- Talanta Investment Group. -- Analyst
Good morning.
Rob Kay -- Chief Executive Officer
Good morning.
Justyn Putnam -- Talanta Investment Group. -- Analyst
My first question is a clarification question. The food service customer that you discussed on the call, is that the same customer that you mentioned on the last call, where you may have sales from that customer going into the new year?
Rob Kay -- Chief Executive Officer
Correct, Justyn.
Justyn Putnam -- Talanta Investment Group. -- Analyst
Okay. So now the update is not only do they get pushed into the new year, there are also a lot less than we were expecting, is that right?
Rob Kay -- Chief Executive Officer
They ended up for the first time in our relationship over 15 years canceling some orders, but there was some orders that got pushed off.
Justyn Putnam -- Talanta Investment Group. -- Analyst
Okay. And my next question is, I guess, Larry, this is for you. I was wondering if I could get maybe a more updated net debt balance. And the reason is because I think we talked about in the last call, lot of cash flow comes in after the first of the year. I was wondering, we can get maybe update on the net debt figure?
Laurence Winoker -- Chief Financial Officer
Yeah, that's I have given to you at obviously end of the year. So net debt at the end of the year was approximately $307 million.
Justyn Putnam -- Talanta Investment Group. -- Analyst
What about, say, January 31st?
Laurence Winoker -- Chief Financial Officer
Yes, I don't know, we're not going to comment on going forward, but we did say that this is typical for the Company year after years, because we sell so much in the fourth quarter, our debt balance does significantly decline in the first quarter, but I can't (inaudible) but we generally don't give out that information. We will get it for you, Juystyn.
Justyn Putnam -- Talanta Investment Group. -- Analyst
Okay, then my next question is, I mean obviously you've got -- you have a lot of moving parts in this right now, transition and macro issues and so forth. But just taking a trip down memory lane here looking back at least in the 22nd 2017 when our price is about 50% higher than it is now. I think you announced the acquisition was expecting -- hoping to have around $770 million in net sales and EBITDA of $85 million. Once that settlements the acquisitions, is that still fundamentally your expectation for the business or going through this integration process, you realize perhaps...?
Rob Kay -- Chief Executive Officer
Yeah. You know our expectations are to -- Justyn, it's a fair question. The expectations are to get there are the same. It's just -- we didn't get there as fast as we thought.
Laurence Winoker -- Chief Financial Officer
Justyn, just one thing maybe you have this, but just clarification, you're referring to with Filament on a 12-month basis, there was another $25 million that Filament had in sales in the first two months of '18 that are not in our numbers. So, the $700 million change, the full-year report is $730 million on a 12-month basis, still up what we projected, but just wanted to point that out.
Justyn Putnam -- Talanta Investment Group. -- Analyst
Yes, the sales figure, but EBITDA is still even with your adjustment $20 million below that like Frank noted?
Rob Kay -- Chief Executive Officer
Yes.
Laurence Winoker -- Chief Financial Officer
Yes.
Justyn Putnam -- Talanta Investment Group. -- Analyst
Right. Okay. I think that's my question on high level. So, thank you.
Rob Kay -- Chief Executive Officer
Thanks, Justyn.
Operator
(Operator Instructions) At this time, there are no further questions. I will now return the call to Rob Kay for any additional or closing remarks.
Rob Kay -- Chief Executive Officer
Thank you, operator. For everyone on the call, thank you again for joining us today. We are looking forward for improving the results and profitability throughout 2019 and are confident that the steps we are taking will help us achieve our goal of becoming a powerhouse in the housewares industry across all channels. As always, we appreciate your continued support of Lifetime Brands. Have a good day.
Operator
Thank you. That does conclude the Lifetime Brands fourth quarter and full year earnings conference call. You may now disconnect your lines, and have a wonderful day.
Duration: 32 minutes
Call participants:
Andrew Squire -- Investor Relations
Rob Kay -- Chief Executive Officer
Laurence Winoker -- Chief Financial Officer
Frank Camma -- Sidoti -- Analyst
Justyn Putnam -- Talanta Investment Group. -- Analyst
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