Sequential Brands Group, Inc.
Q4 2019 Earnings Call Transcript

Published: 13 Mar 2020

[Operator:]

Thank you, and good morning. Before we begin, I'd like to bring your attention that statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company. This may cause the actual results, performance or achievements of the company to materially differ from the results, performance or achievements expressed or implied by such forward-looking statements. We refer you to our public filings and the press release we issued this morning for a summary of such factors. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identify forward-looking statements.Listeners are cautioned to not place undue reliance on these forward-looking statements, which may speak only as of the date that the statement was made. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements whether as a result of information, future events or otherwise. Additionally, the terms adjusted EBITDA and non-GAAP net income are all non-GAAP metrics and reconciliation tables for each can be found in the press release distributed today in the Investor Relations portion of our website, www.sequentialbrandsgroup.com. On today's call are Sequential Brands Group's CEO, David Conn; and Interim CFO, Dan Hanbridge.I'll now turn the conference call over to Mr. Conn. You may begin when you are ready.

[David Conn:]

Thank you, and good morning to everyone joining today's Fourth Quarter 2019 and Full Year Earnings Call. It's been a busy two months since I joined Sequential. I've been immersed in the business, meeting with employees, brand partners and key licensees, and I'm energized by the opportunities that the company has in front of it. Sequential is in the midst of a transformation. That transformation began last year when the company divested the Martha Stewart and Emeril Lagasse brands. Following the divestiture, the company spent the remainder of 2019 and first part of this year focused on optimizing the cost structure of the business, which included a significant reduction of headcount, SG&A and lease-related expenses.The culmination of this process will be the consolidation of our two New York City offices into one space when we exit our current corporate headquarters. We will then move the team into our existing Active division's office in Midtown later this year. In connection with this, we have already subleased over 60% of our current corporate headquarters and continue to actively pursue all sublease opportunities for the balance of the space. As a result of these cost-cutting initiatives, we anticipate an operating expense base of approximately $30 million on an annualized run rate basis starting this year.This is a meaningful reduction compared to the company's approximately $70 million operating expense base prior to the divestiture of the Home division. We expect the savings from these cost reductions to drive a significant margin improvement in 2020. As part of these efforts, last year, we also amended our lending agreements with Bank of America and KKR, who continue to be supportive partners. Our updated lending agreements further improve our liquidity and cash flow.Across the company, we are focusing on implementing long-term growth strategies for all of our brands. The team is actively exploring new revenue opportunities for our existing brands, such as category growth and international expansion. Our largest brands are GAIAM, AND1, AVIA, Jessica Simpson, Joe's and Ellen Tracy. Jessica Simpson and GAIAM, in particular, have entered 2020 with strong momentum. First with Jessica. Just last month, she released her memoir, Open Book, which quickly became a New York Times best seller. The media coverage from her book as well as her book tour has been positive for the brand, retail partners and prospects for new business.GAIAM continues to be a leading brand in the yoga industry and is also uniquely positioned in the health and wellness space, which is one of the fastest-growing consumer product sectors. We are actively pursuing opportunities for the brand to capture more market share beyond its core yoga business. Our previously announced strategic review process continues. After joining the company, the Board of Directors paused the process so that I had a chance to become familiar with Sequential's operations and its brands. I believe there are several interesting opportunities regarding the strategic direction of this company, and we are evaluating all of them.We're working closely with our financial adviser on a broad review of strategic alternatives focused on maximizing shareholder value. As the company has stated previously, alternatives may include the divestiture of one or more existing brands, the acquisition of one or more new brands, a stock buyback program and other long-term growth initiatives. In closing, 2019 marked the start of the company's transformation. We made progress simplifying the business with the divestiture of our Home division, optimizing our current cost structure and amending our lending agreement. As we move ahead, our focus is centered on driving revenue growth across our portfolio of brands, finishing the last part of expense reductions and completing the strategic review process. We believe these initiatives, coupled with the work already completed in 2019, will help further position the company for long-term success. I look forward to keeping you posted on our progress.With that, let me turn the call over to Dan to take you through the financials for the fourth quarter and full year 2019.

[Dan Hanbridge:]

Thank you, David. Total revenue from continuing operations for the fourth quarter ended December 31, 2019 was $24.2 million compared to $35.2 million in the prior year quarter. As mentioned on prior calls, for the fourth quarter, results were impacted by one-time items included in the fourth quarter of 2018 and not included in 2019. In addition, 2019 fourth quarter revenue came in slightly below expectations due primarily to unexpected softness in the quarter from one of our retail partners.On a GAAP basis, loss from continuing operations for the fourth quarter 2019 was $7.9 million, or $0.12 per diluted share, compared to a loss from continuing operations for the fourth quarter 2018 of $5.7 million, or $0.09 per diluted share. Non-GAAP net loss from continuing operations for the fourth quarter 2019 was $8.9 million, or $0.14 per diluted share, compared to non-GAAP net income from continuing operations of $2.6 million, or $0.05 per diluted share, in the fourth quarter 2018. Adjusted EBITDA for the fourth quarter of 2019 was $8 million compared to $17.8 million in the prior year quarter.Total revenue from continuing operations for the year ended December 31, 2019 was $101.6 million compared to $127.3 million in the prior year. As mentioned, 2019 results were impacted by one-time items included in 2018 and not included in 2019. On a GAAP basis, loss from continuing operations for 2019 was $34.3 million, or $0.53 per diluted share, compared to a loss from continuing operations of $17.5 million, or $0.27 per diluted share, in the prior year. Included in 2019 were previously disclosed non-cash impairment charges of $33.1 million for indefinite lived intangible assets related to the trademarks for certain brands.Non-GAAP net loss from continuing operations for 2019 was $16 million, or $0.25 per diluted share, compared to non-GAAP net income from continuing operations of $8.1 million, or $0.13 per diluted share, in the prior year. Adjusted EBITDA for 2019 was $45.8 million, compared to $69.9 million in the prior year. As David mentioned, we expect the savings from our recent expense reductions to drive a significant improvement in adjusted EBITDA margin this year. We closed the fourth quarter of 2019 with $8.3 million of cash including restricted cash and $459.9 million of debt net of cash, down from $618.7 million of net debt at the end of 2018.With the strategic review underway, we believe it would not be prudent to provide full year 2020 guidance at this time. However, as David outlined in his remarks, we are on track and expect to achieve an operating expense base of approximately $30 million before minority interest on an annualized run rate basis starting this year. This is a significant reduction compared to the company's nearly $70 million operating expense base prior to the divestiture of the Home division.Thank you for joining us for our call today. I will now turn the call back over to the operator.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our call for today. Thank you for your participation and interest. You may disconnect your lines and have a wonderful day.