of Lifetime Brands, ticker symbol L-C-U-T or LCUT. With us from Lifetime Brands, we have Rob Kay, the CEO, and Larry Winoker, the CFO. The format for today will be a fireside chat. We will have a total of thirty minutes. I will kick it off with questions, and we'll take questions from the audience as time permits. If you do have questions, you can type those into the Q&A box at the bottom of your Zoom screen, and I will do my best to incorporate them into this fireside chat. So, Rob and Larry, again, welcome, and thank you for joining us here at the Sidoti Conference.
First, I think it would be helpful, especially for those new to Lifetime Brands, to do a general or high-level overview of the company, talk about your main product segments and your top sales channels and customers.
Sure, Anthony. Thank you for hosting us. Glad to be here. Good morning, everyone, so just to give you an overview, you know. Lifetime is a consumer durables business. The company was founded in 1945. Our brands actually go back to the 1600s. We sell stuff that people use every day in the house. You know, we're the very strong usually number one or number two market share. Cutlery is a big category. Kitchen tools is our biggest category, tabletop, and then, you know, lifestyle things like beverage containers, wine openers, like the Rabbit and the like, so brands that you know. The company is a very stable business, you know, very strong value proposition. We have very, very strong free cash flow from a diverse, consistent revenue stream.
Even if you look at some of our big customers like Costco, Walmart, you know, Amazon, you know, we're selling in multiple parts of those businesses, multiple departments, many, many different SKUs, you know. So it's a very, very strong source of cash flow. You combine that with an asset-light model, steady and strong end markets and very strong market positions, is a really very strong free cash flow profile. Additionally, if you look at our business, you know, our core business is in consumer durables, and we are able to grow at an above-average industry growth rate, and that's a function of gaining market share through innovation and new product development, as well as channel management.
You know, a good example for that is our recent expansion into the dollar channel, particularly Dollar General, with the Dolly Parton line that we established, created, and as we told everyone, that's over a $10 million incremental revenue opportunity in this year alone. But we focus on selling the consumer wherever they are shopping, you know, so whether it's our own branded transactional websites, whether it's a specialty independent mom-and-pop or Williams-Sonoma, or whether it's a dollar channel or mass and off-price, you know, we are there, and we are there in force. If you look at another aspect of our business is there are multiple avenues for growth, and we continue to gain share in our core markets and focus on that. We also use our internal capabilities of product development to get into adjacencies.
We also, though, use our balance sheet and look at M&A opportunities to expand into adjacencies, like we're actively looking at pet and outdoor, both on an organic basis, but there is an area where we'll likely continue to buy. Our international business, which when we took over the business, we were losing a lot of money. We've turned it around, we've made a lot of investments, but we're losing a lot of money again through volume, mostly in the U.K., negative impacts of volume of the end markets. But you know, that business has lost $10 million in the most recent year, so just getting that to break even is gonna have a huge impact in the bottom line. But our brands play over there. We are well-positioned in the steps we've taken.
We think there's tremendous growth opportunity, and we've also talked about our food service opportunity, which we were able to get in organically. We've said that we believe that's a $50 million-plus revenue opportunity for us. We've made tremendous investments. We continue to invest in that infrastructure. We are getting very good traction in that industry. We'll see substantial growth this year, even more next year, and we will turn that business unit profitable next year. Again, very, very big opportunity for us. As I mentioned, M&A and strategic partnerships, whether it's things like Dolly Parton, acquiring businesses, getting into new categories, we have the balance sheet, and plus, we have tremendous experience to identify, to execute and to integrate, and make money on these acquisitions.
We've done plenty over the years, and we have a very robust pipeline, and finally, you know, Lifetime has been public since 1991, but it was really run as a private-public company. You know, when I took over in 2018, in conjunction with a combination of a company I was running, we've launched a business which we've dramatically improved the profitability, grown the business, changed the trajectory, and now with that infrastructure and some of the things that we've talked about, we think there's a tremendous pipeline to continue to grow this business and get to the next level, and finally, we own a lot of the company, right? You know, we understand we're very undervalued, in our mind, and we need to change that paradigm.
but we see tremendous upside in the stock and are very interested in that, both as a fiduciary, but also as an owner.
Gotcha. I wanted to follow up about the Dolly Parton. So, I know that relationship is off to a pretty good start. You raised your guidance as far as the contribution for that. You know, just, you know. I think you talked about on your last call where you're looking to expand that beyond Dollar General, so maybe you could talk about that. And do you see any other possibility as far as getting in with other product lines in the dollar store channel, how should we think about that?
Sure, Anthony. Look, our sales strategy is to, we call it win with winning customers, but also sell, be agnostic to where the consumer shops. And we've always liked to say we're sold everywhere, but in truth, we weren't sold in the dollar channel. So we were looking at how to do that and do it on a profitable basis. So one. Two is Dolly Parton's brand is phenomenal, and she was looking to do more with the brand as opposed to just, you know, a deal she had with Conagra and selling, you know, frozen food in grocery.
So we established across multiple categories a relationship with her and launched it, and we decided to launch that 'cause there was tremendous interest at Dollar General, not exclusively to them in terms of a commitment, but we decided to work and launch it exclusively there, our choice. It's been one of the most successful launches ever for Lifetime. And Dollar General, it's been, they say, in terms of performance, the most successful launch ever at Dollar General. So that's why we've told the public, you know, just launch year, which is a half year, we'll ship over $10 million this year. We are, because of that success, talking about selling different brands, potentially in Dollar General and expanding there.
So a big opportunity which could, on a multiple basis of what we're doing this year, increase our sales there. But we're also selling Dolly, which is a phenomenal brand that appeals to all parts of the spectrum. We're looking to expand that internationally. But right now, we're placing that in Walmart, Kohl's, Meijer, and we think there's a lot of potential to expand that beyond what we're shipping now. The Dollar General program, there are four programs that we were looking to ship there. All we've shipped is program number one at this point.
Gotcha. Okay. So that sounds like there's a lot of opportunity there. So just curious, so obviously, you know, we're continuing to be in an environment where there's ongoing macroeconomic and geopolitical uncertainty. So, how should we think about as far as Lifetime Brands' positioning with its price points, products, and potential market share gains? Do you see that as an opportunity?
Yeah. I think I was involved in politics in college. That was a long time ago, so I have no comment on, you know, the political direction. But-
Right
... look, we're well-positioned. We've been around for a while. You know, people, it's a, you know, low ticket. We like to use the example-
Mm
... of can openers. We sell over $10 million, excuse me, 10 million units a year, you know? And in bad times or in inflationary times, you know, people don't exactly go to their toolkit and take a hammer, you know, and a screwdriver, open their can opener. They buy one of ours, you know. So, you know, we do good, and we also generate cash flow and, you know, historically have in bad times, in all different times. So we think we're well-positioned. You know, we basically focus more on the good and better categories, right? So it's more affordable. What we're seeing is, you know, some of the retail base is shrinking, so more people going after the pie, you see that.
But you're also seeing a lot of our competitors, either going out of business, big guys like Tupperware and World Kitchen, are famous ones, you know, that have gone into bankruptcy. But a lot of our competitors are $50 million and under, and, you know, sole proprietary-owned, and, you know, they are facing financial struggles. It's giving us a robust M&A pipeline, but also some of our bigger financial-backed, you know, sponsor-backed private equity situations, they're highly levered, and they're hurting in this environment. So we think we are well-positioned. It's one of the reasons why we continue in this environment to gain market share and it's why we maintain guidance when even our public company, large peers, lowered theirs.
Mm-hmm. Right. So, I know you, Rob, you mentioned earlier about expanding into other categories like pet storage, organization, and so on. And so I guess some of these could be potentially done organically, some through M&A. But I guess if we were to separate those product categories, I mean, which ones... Like, what stands out as really having the most growth potential in your view?
I think it depends upon the particular opportunity. But, you know, we like the end market demographics in pet and outdoor, outdoors. Those are two areas where we are more likely to buy. We are already in both on an organic basis, but in terms of speed to market, and the ability to get bigger market share is likely where we might do M&A in those areas. But they're both good areas and good growth opportunity for us since we're starting from a base of zero. You know, some of the more fold-in acquisitions are highly accretive day one, right? Because, you know, we basically are acquiring just brand or, or, you know, product category and the like, and put it right through 100% our infrastructure.
So they're highly accretive day one, and we'll see a bigger impact to the bottom line day one. Some of them, if they're in a troubled situation, don't give us as much growth, but we aren't looking to buy things just to fold in on a negative growth basis. Everything we're looking at is we want to have accretive growth.
Mm-hmm. Just wanted to also follow up about your professional food service program. How is that doing? Can you give us some more specifics? What are the opportunities going forward and the margin profile for that segment?
So the margin profile on a gross margin basis is phenomenal, but that business has a lot of program cost in it, so when you look at the net margin as opposed to the gross margin, it is similar to the higher end of what we do on the consumer side. If you look at the contribution margin, you know, once we're at a steady state basis, 'cause we're in invest mode at this point, it's highly accretive because we're using our infrastructure, right? So, you know, a lot of it'll fall to the bottom line. And, you know, that being said, we continue to invest in that business. We're gaining meaningful market share. The end market at this point in time is not in good shape. It's not in bad shape, but it's stopped growing.
As the economy has forced fewer store openings and delays in capital expenditures by a lot of restaurants, they're not investing in new dinnerware and tabletop and the like. We've seen a slowdown in that, but we continue to gain market share. We're very optimistic and, you know, we are working on a few things that we hope to elaborate further to the public once finalized, which we think will be meaningful to that business.
Mm-hmm. Gotcha. Okay, understood. And then, as far as your infrastructure, so, you know, you have, you know, warehouse and manufacturing spaces, in the U.S. and internationally, do you think it's sufficient for the growth of the business, or do you think you'll need to expand your distribution network over time, to grow, to handle the growth?
In our international business, we have overcapacity, partly because there's been such a downturn in the volume in those markets, right? So as we get volume to that business, it's gonna be highly profitable for us because we are underutilizing, and that's why that business isn't profitable today. In the U.S. business, we're efficiently utilizing our distribution capability. We have plenty of distribution capability. We are looking right now, which would be a one-time capital use, to optimize our distribution footprint in the U.S., but it's not a capacity issue. On a capacity, we are in good shape.
Mm-hmm. Gotcha. And just curious to get your thoughts on just overall your cost structure. You know, what are you seeing there from a cost perspective, you know, freight? I know, you know, ocean freight costs obviously went crazy during the pandemic. Things kind of moderated, but they've seen some uptick, I guess, this year. So maybe just talk about that, and what are you seeing also from a labor cost perspective as well? We'd be curious to get your perspective.
So in terms of cost of goods sold and a lot of the material inputs, they've actually been favorable to flat and, you know, part of that is in this economic environment, volume is down, right?
Mm-hmm.
So, you know, that helps you on a cost of goods sold basis. If you look at, you know, our biggest use of domestic labor is in our warehouses and, you know, the environment has gotten better in terms of labor availability, but the cost of labor continues to rise. We've been very effective at combating that with, you know, continuous improvement in our DCs, so we've been improving our cost efficiencies, and therefore our all-in labor costs by efficiency is not the overall cost of labor. In terms of ocean freight, there's two impacts for a company of our size. You know, we import containers on contract. Smaller companies cannot do that, but. And of course, there's the cost of the freight.
So your contracts are set, but in high spot rate or, you know, current rate, freight costs, you can't book everything on your contract. So, you know, when the global supply chain crisis, we were booking zero as an extreme, and earlier this year we were at 60%, but we're back up to 100% on contract, which is a much lower rate than spot. So it's been a stable, and better than our anticipated view in terms of freight cost for us. So both availability, and cost.
Mm-hmm. So I wanna switch gears to the international segment, which I know you touched on earlier, but, maybe if you could just give us some more details as far as, you know, what the work you've done so far, as far as restructuring that business and, you know, how should we think about, you know, the, just the long-term financial goals for, for, for that? Yeah, you know, could we, could we see a, a scenario where the international business has margins comparable to the U.S., or is that just not really feasible, you know, at, at this time? You know, just wanted to get, you know, get your strategic, you know, roadmap for, for that.
Yeah, so I mean, let's look at a contribution margin basis, and the first thing we're focused on is getting to breakeven. And look, if we just look getting it to breakeven, that's a $10 million improvement to the bottom line from last year. We will see improvement this year. We won't be breakeven this year, and, you know, we're on a trajectory to next year. We've taken out a lot of the costs, and it's really a volume play now, but segmenting Europe from Asia-Pacific for a second, and we've restructured that business. We've talked a lot about, particularly in Australia and New Zealand, we changed our go-to-market, and it's paying dividends. It will continue to pay dividends, and that business already is profitable and is growing nicely.
But we also needed to change our product offering internationally, you know, particularly on the tabletop side, where we now are starting to sell Jamie Oliver. We're taking our Mikasa brand big time in those markets. KitchenAid, which we didn't always have, is driving growth in those markets. And as a result, we continue to expand market share, particularly on the continent, where we're now going directly in the European continent. KitchenAid is helping us there, and other initiatives, including S'well, you know, which is an acquisition we made, is doing well internationally. But as a result, big retailers like Leclerc and Carrefour and Lidl, which we didn't do business, you know, we're now starting to sell, and we'll pick up some this year. It'll drive more into next year.
But also in the core U.K. market, where historically a lot of our sales were to cook and dine shops, you know, specialty gourmet equivalent in the U.S., you know, people have declined. But there are national retailers, which we never were that big in, like Dunelm and Next, which we're now growing meaningfully in, as well as grocery, Tesco, and the like. And that'll help that business on a volume basis.
Right. Yeah, sure sounds like it, you know. So, and then as far as acquisitions, just wanted to get your take on that acquisition on your acquisition front, and I'll try to incorporate a question that came in through the Q&A function here. So how do you guys think about acquisitions? You know, what types of companies are you looking for? And, as far as, you know, what types of multiples you're willing to pay. Do you guys also use look at free cash flow conversion targets, or any other metrics that you set as necessary benchmarks?
Look, high free cash flow conversion is attractiveness. You know, our basic approach from a valuation perspective is DCF, or discounted cash flow, and, you know, we're looking at multiple of invested cash, and then return on that. Different businesses which have different characteristics or have different, you know, multiples applied to it, food service will trade at a little higher multiple, but, you know, over time, it's a higher growth rate, so, you know, you're paying for growth. And we are interested in paying for growth as opposed to buying a business that, folded in, is gonna be, you know, two times, but it's gonna be a declining business. We're not interested in that.
That being said, you know, there's a very active and robust pipeline, particularly for a strategic right now, and we have a lot of dialogues, everything from fold-ins, where we're buying the businesses folded in to two to three times, but you know, so it's accretive day one, to new categories, you know, such as pet and outdoor, you know, which gets us some new categories, has a lot of other attractiveness in terms of plus one opportunities, and gives us kind of a new platform within the company. So there's a lot of areas that we can take those businesses, and therefore, you know, is more attractive from a multiple perspective for us.
But multiples overall have declined across all these different categories, one to two times, from where they historically have been over the last 10 to 15 years.
Got it. Okay, and then there was a question that came in also as far as the pet care market, as far as, do you guys have a sense as to how big that could be? I mean, obviously, I know that the, you know, just overall pet ownership has continued to increase over time, and people are spending money on their pets. Some people treat their pets better than their family. So just overall, you know, what do you see. Like, do you have any potential as far as what the total addressable market for that space could be?
Look, the pet market's a great market. It had come down until recently, because it had a post-COVID hangover when everyone was getting a dog and a cat, but yeah, it's a very, very good market. Now, the biggest part of that market is food, which is a market that we're not interested in, just not in core, not what we do, you know, so we're really looking at durables, you know, a good, you know, and some of those are consumable, and some of those are not, but it is a sizable market.
You know, we are actively looking at it in terms of opportunities, but also, because it's not core to what we do, even though we've designed, you know, leashes and all that from Built and S'well and Fred and other areas, and bowls. We've actually recently engaged a consulting firm to help us get more data to refine the market, give us more intelligence, and also target, you know, opportunities better.
Mm-hmm. Gotcha. So as you mentioned, Lifetime Brands is a very good free cash flow generating company. I mean, so and part of that is also that your CapEx tends to be pretty light, you know, so. But so as far as just ongoing capital spending requirements for the business, how should investors think about that on a go-forward basis?
Look, the profile's very established, right? You know, from a capital allocation perspective, you know, we like having a dividend. We intend to continue that. We generate a lot of cash. We use it, you know, to de-lever, you know? And even when the last year or so, EBITDA declined from its peak, which hurt leverage ratios on an absolute basis, we continued to de-lever, right? 'Cause we generate significant cash. And we will continue to do so. But you know, we see M&A as a good use of cash and a highly accretive use of cash over the near, medium, and long term, you know, for our stakeholders, and we'll continue to do that. We don't have a model that requires heavy capital investment.
You know, our big area of capital investment is distribution centers, which is why, you know, we spent over $10 million, you know. Correct me, Larry, was that 2018, 2019, 2017, when we built-
Yeah
... the hub in Birmingham? And, you know, we are looking at opportunities to optimize our distribution footprint in the U.S., which would be a one-time use of capital, but with a return on it.
Right. All right, so just to follow up on this last point as far as... I know it's something that you guys had discussed previously as far as optimizing the distribution network, and then kind of business slowdown after COVID, but now, kind of as things kind of settle in, you know, post-COVID, can you, you know, share more details as far as, like, what you could do as far as that optimization, or is it-
We're doing-
... just too early to say that?
... Yeah, we're doing a lot of analysis investigation. You know, in the post-COVID environment, you know, we were running out of warehouse space, right?
Mm-hmm.
You know, so we were looking at changing our distribution footprint 'cause we needed more. We're not looking at it from that perspective. We're looking at what we have, and geographically, and a lot of it is just math, and you know, how do you optimize that, and so it's along those lines, and not in terms of immediate need for incremental space.
Mm-hmm. Gotcha. Got it. All right, so, as far as your capital allocation priorities, can you talk about that? I mean, I, as far as, you know, debt reduction, you've paid a dividend, which has been kind of steady. You've purchased- repurchased some shares in the past. So how do you guys think about all these things? Obviously we talked about, a little bit about acquisitions as well. So just maybe kind of go over your capital allocation priorities, so investments-
We're very committed-
... Yeah
... to keeping leverage, you know, at a ratio which is comfortable in the public markets. You know, said another way, you know, look, if you look at the free cash flow of this business, yeah, we're comfortable at, you know, six times leverage, but it's not appropriate in terms of... and our promises to the market. So, you know, we've continued to drive that down and into the threes neighborhood and below. But, you know, we do have a strong balance sheet. You know, we do think it's highly value added to use that, you know, from an M&A perspective, and we will, which could temporarily, you know, put your leverage ratios up on a temporary basis. We do, we'll continue to at least maintain, if not increase the dividend.
No plans to change it, you know, at this point in time. Those are sort of the, you know, the main focus. In terms of buyback stock, we constantly evaluate that. We think the stock is way undervalued, which is why we have bought back a lot. You know, we also want to increase the float, which we think is, you know, in the benefit of our stakeholders in the company. You have the competing there, you know. Like, at this price, we'd be buying all day, but it's not where we're gonna be using all of our capital to do so.
Right. Right. Okay. And then, and as far as, you know, the leverage is concerned, so do you guys have, like, a optimal target leverage ratio that you wanna have at some point? Or, you know, I'm just curious to get your thoughts on that.
That would be under three times.
Okay. Gotcha. All right, so certainly, I think you're, you know, heading in the right direction here, and then, you know, it sounds like the Fed should cooperate with lower rates, so that should also help you with your interest expense as well. All right, so I guess, you know, as we're kind of closing in on, you know, our allotted time here, do you have... I guess, you know, do you guys have any, you know, closing remarks that you wanna highlight about Lifetime Brands? Any topics that you think are important for investors to remember as they leave the presentation here?
Yeah, Anthony, thank you, and thank you again for hosting us. I think we've talked a lot about it, you know, it's a very strong cash flow profile that we have. You know, you know, we do well in good times and bad. We have a lot of avenues for growth beyond just, you know, the core of what we're doing. But one thing we haven't talked about, I think, in people's mind is that, you know, historically, we moved all manufacturing to China 'cause it's the best place to make goods. And it still is, but, you know, a couple of years ago, we saw that the decoupling of China and the West is not reparable in the near term, so we started moving production out of there, and we continue to accelerate that.
We're well on the way, and, you know, a lot of our customers, everyone from, you know, Walmart to Williams-Sonoma, you know, are asking. You know, are giving us feedback that we're ahead of, you know, a lot of our peers in moving out of there, and we continue to accelerate that, so that we insulate ourselves from political shocks, both in the near term and the medium term, so we think we know that, you know, we are well-positioned, and, you know, we continue to do that.
That's why we made that acquisition in Mexico, and we did that at the time to say, not that just so we have a plastics manufacturing facility that we continue to ramp up, but to give us a base to source more, and we are starting to source more products now in Mexico because of that base.
That's great to hear that you're taking proactive steps with your supply chain. So all right, well, looks like we're at the end of our allotted time. I wanted to thank you again, Rob and Larry, for sharing the Lifetime Brands story. Thank you also everyone participating as well. So hope everyone has a productive day at the conference. Thank you very much.
Thank you, everyone. Thanks, Anthony.
All right, take care. Thanks.