Sequential Brands Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[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 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 Web site, www.sequentialbrandsgroup.com. On today's call are Sequential Brands Group's CEO Karen Murray; President, Andrew Cooper; and Chief Financial Officer, Peter Lops. I'll now turn the call over to Mr. Lops, when you are ready to begin.

[Peter Lops:]

Good morning, and thank you for joining our first quarter 2018 earnings call. It has been a productive two months for me here at Sequential. The company's strong diversified portfolio of consumer brands coupled with its proven track record of organic growth makes this an exciting time to have joined. I will start by taking you through the financial results for the quarter, and then Karen will provide the business highlights. As required by public companies, this quarter we adopted the new accounting guidance for revenue recognition ASC606. This new standard requires us to recognize revenue from our contractual guaranteed minimum royalties on a straight line basis for most of our licensing agreements. The revenue impact varies based on where we are in the terms of each particular contract. This new methodology resulted in a positive adjustment to retained earnings of $1.1 million, and first quarter 2018 revenue, that is $1.3 million lower than revenue recognized under the previous standard. Most important, the accounting change does not impact the underlying business momentum, and has no impact on cash flows. And the company's earnings release provides a reconciliation of the impact of the adoption of ASC606 and the first quarter financial results. On this call, I will review the quarterly results under both the prior revenue recognition standard for comparative purposes, and also under ASC606. Let me start by walking you through the results under the prior revenue recognition standard. Results for the first quarter 2018 were slightly above expectations. Total revenue for the first quarter 2018 was flat at $39.4 million, which was impacted by certain expired legacy licenses in the home division. The net loss for the first quarter of 2018 was $1.3 million or $0.02 per diluted share, compared to a net loss in the prior year's first quarter of $1.2 million or $0.02 per diluted share. On a non-GAAP basis, net income for the first quarter was $4.9 million or $0.08 per diluted share, compared to $5.9 million or $0.09 per diluted share in the prior year period. Adjusted EBITDA for the first quarter of 2018 was $22.5 million, compared to $23 million in the prior year's quarter. Our adjusted free cash flow was $6.2 million, which is calculated as adjusted EBITDA plus cash interest, cash taxes, and capital expenditures, and excludes items that are not core to our business such as balance sheet changes and costs related to prior acquisitions. Now, turning to results under ASC606; first quarter 2018 revenue was $38.1 million. On a GAAP basis, the net loss for the first quarter of 2018 was $2.3 million or $0.04 per diluted share. On a non-GAAP basis, net income for the first quarter was $3.6 million or $0.06 per diluted share. Adjusted EBITDA for the first quarter of 2018 was $21.2 million. We closed the first quarter of 2018 with $25.4 million of cash, including the restricted cash and $612 million of net debt. Looking ahead, for the full-year of 2018, we continue to expect mid to high single-digit revenue growth, and low to mid single-digit adjusted EBITDA growth. Similar to the first quarter, the second quarter of 2018 will be impacted by certain expired Martha Stewart legacy licenses that were included in the second quarter of 2017. Of note, the second quarter of 2017 is the last quarter that includes these expired legacy agreements. Overall, we continue to expect revenue for 2018 to be weighted to the back-half of the year given the national seasonality of our business and plans new business. Lastly, we have made significant progress on our refinancing efforts and expect to complete it in the second quarter of 2018. With that, let me turn the call over to Karen.

[Karen Murray:]

Thank you, Peter, and good morning to everyone joining us on the call. It's been a strong start to 2018 as we continue to execute on our strategy to drive organic growth through both existing and new business, manage our expenses, and improve our balance sheet. As Peter said, our refinancing efforts are progressing nicely, and we look forward to providing more news on this in the second quarter. Our focus continues to be on building the leading global brand management and media company with powerful consumer brands in the home, active, and fashion divisions. Since joining a year ago, we have, one, rebuilt our management team with a new CFO, new President of Home, and a new President of Fashion. Two, added a robust new business development team. Three, increased our footprint in digital and international. Four, better aligned our resources internally to maximize organic growth initiatives and focus on execution. And five, we've made incremental strategic marketing investments for many of our brands. Across our company, we have six core brands that represent 80% of our business and are the largest growth drivers of our business. These brands are AND1, Avia, GAIAM, Martha Stewart, Jessica Simpson, and Joe's. And they distinguish us from our competitors because of their authenticity, powerful connection with consumers, and significant retail presence. As we've said in the past, we consistently review our portfolio of brands, and would consider divesting certain brands that are no longer growth drivers. To that end, in the quarter, we divested the Revo brand in line with the strategy of focusing management's efforts on key priorities. As I outlined on our last call, we have four key levers that we have identified across our business to drive organic growth. Those include international growth, digital initiatives, category and distribution expansion, and strategic brand integration. We've made progress in the quarter in each key area, which I'll address after I outline the highlights by division. First the Active division, which is our largest division and includes core brands GAIAM, AND1, and Avia. GAIAM is one of the leading yoga and fitness lifestyle brands and well positioned in the growing health and wellness industry. In the quarter, the brand performed well with increased sales at Amazon and Kohl's, which was a direct result of the marketing activation strategy we have deployed for the brand. A key component of that strategy is our partnership with the brand's global ambassador actress Jessica Biel. Coming off a strong holiday season, in January, Amazon featured Jessica Biel's favorite products from GAIAM on its homepage. During the first quarter, polls introduced Jessica Biel with in-store imagery and promotion, and within a month we saw a positive impact on our sales. To say the least, we are our partners are very pleased with the early results from investments we've made in our brand ambassadors and other marketing initiatives. The GAIAM hard goods and soft goods business continues to be strong. In fact, USA Today recently cited GAIAM's yoga mat as one of the top 17 rated and most loved fitness products on Amazon. In addition, we recently launched organic supplements and beverages, and we are actively exploring additional untapped categories such as food, home, nutrition, and beauty. AND1 remains a key performer. There is a lot of excitement around the brand and the marketing campaign we've created in celebration of AND1's 25th anniversary. As part of the campaign, we are taking the brand back to its street-ball root celebrating both its heritage and its future. A few aspects of the campaign include the AND1 documentary which will feature current and past NBA greats describing their own personal connections to the brand. Also, a Paint the Park program, a powerful branding opportunity dedicated to revitalizing select urban basketball court and fostering the next generation of street-ball players. The brand's global ambassador and creative director Kevin Garnett has been instrumental in setting the direction of these marketing initiatives. Kevin has been an incredible partner and has provided the inspiration for the development of a new premium A1 by AND1 collection which will be launching in specialty stores and boutique later this year. The AVIA brand has seen an increase commitment from Walmart with a significantly expanded rack space in their active apparel section as well as a larger product assortment. The brand has also gain momentum internationally. As recently announced, we signed a multi-year agreement with a leading sports manufacturer and distributor to expand the brand to greater China. We are excited about this new opportunity to develop the brand in such an important market. Our team was just in China last week to launch the partnership. And we are very encouraged by the enthusiasm from the market as well as our partner's prototype of an AVIA store. In the short time since signing our deal, our partner has already created the full product line and plans to open the first AVIA store by the end of the year with plans for additional stores including flagship stores in key Chinese cities over the next few years. In addition to China, we also signed an agreement in the quarter to take the AVIA brand into South America as well as the Caribbean. Moving to the fashion, which is driven by anchor brands Joe's and Jessica Simpson. There is a lot of exciting around the Jessica Simpson brand. We recently expanded the brand into the beauty category for the first time with the signing of a new beauty accessories partner. We expect to announce a beauty ecommerce partnership soon. Through this partnership, we will be launching a fragrance and color cosmetics line later this year and hair & skin care in 2019. This new partnership is important for a couple reasons. First, beauty is a growing category where we know Jessica has strong brand equity. And second, we are targeting consumers online, a growing channel for beauty shopper. Jessica continues to be engaged on social media driving business and excitement around her brand. She plans to launch new music in the fall and will be releasing a book in 2019. Joe's was a key growth driver in the quarter and has gained traction in its ecommerce business. All categories continue to perform well for the brand including its kid's line. As I mentioned on prior call, Joe's sells very well internationally. We are currently launching the brand in Mexico through retail stores and ecommerce. And we've seen significant growth in Japan. We've also broadened its category offering by signing a new men's tailored clothing and accessories licensee. And, the team is in the midst of preparing for the upcoming fall '18 campaign shoot with NFL star Julian Edelman. Now to the home division, which we continue to view as one of the largest growth opportunities at the company; anchored by Martha Stewart, the company's largest brand, the home division had a strong start to 2018. As a reminder, the division's year-over-year results for the first quarter are masked by the expired legacy businesses included in last year's results. Excluding these legacy businesses, the Martha brand would have been up double digit in revenue growth year-over-year in the quarter. In the quarter, Macy's launched two new categories. Martha Stewart Food as well as Martha Stewart Essentials, a new line of cookware set, top of table, textiles, and bath items at an affordable price point. Macys.com continues to represent a growing and significant portion of our Martha Stewart business. We are also pleased with the traction that the Martha Stewart business is receiving in China through its presence on macys.cn as well as Alibaba's Tmall. We launched the Martha Stewart brandline of Celebrations at Michaels Stores across the country. The line adds more than 300 SKUs to the brand's already robust offerings, which now equates to approximately 25 feet of space in the store. We debuted the line on Good Morning America in April and it's off to a terrific start. Martha had another successful quarter on QVC. We continue to be pleased by the brand's performance and are on track to expand our product department throughout the balance of the year. One of the many benefits of the QVC platform is the opportunity it allows us to create and test new Martha Stewart product line. A great example of that is the Martha Stewart brand's garden partner Snow Joe and Sun Joe. Due to the successful launch of the brand's garden line on QVC, we are currently in the midst of expanding that product line to more retailers across the country. In fact, Martha is scheduled to make an appearance at the National Hardware Show to showcase the line today. This is a great example of the multiple expansion opportunities that exist for the brand. We launched the Martha Stewart storefront on amazon.com, which provides a terrific opportunity to showcase some of the brand's categories to Amazon customers. Our product assortment includes the new Martha Stewart pet collection as well as Martha Stewart books and Martha and Marley Spoon meal kit. The media initiative for the Martha Stewart brand continued to play a central role in driving brand awareness and engagement. And there have been many exciting developments that are worth noting in the quarter. Martha was named a guest judge on the upcoming season of Food Network's Chopped. She has also been busy promoting her 90th book, Martha Stewart's Flowers, which went on sale in February. Season 10 of Martha Stewart Bakes is scheduled to premier on PBS in July and the second half of season 2, Martha & Snoop's Potluck Dinner Party is slated to air on VH1 later this year. In addition, in the quarter Martha appeared in the Super Bowl commercial lineup for her second year in a row; this time in a Jack in the Box ad. All of these media initiatives underscore the strength and popularity of the Martha Stewart brand and its strong connection with consumers. As I mentioned in my opening remarks, we have four key levers that we have identified across our business to drive organic growth. They are

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Camilo Lyon of Canaccord Genuity. Please go ahead.

[Camilo Lyon:]

Thanks. Good morning everyone.

[Karen Murray:]

Good morning.

[Peter Lops:]

Good morning.

[Camilo Lyon:]

Karen, it's great to hear all of the initiatives that you've gotten underway here and it sounds like you've made some real good progress on many of these fronts. I was hoping you could delve a little bit deeper into the international [technical difficulty]. I think it's obviously a big focus of yours and basically if you can just help remind us what your penetration is for your online mix [ph] and how you see that evolving over the next 12-24 months given that for a lot of the pieces to grow that element of the strategy and when we should start to see that really start to accelerate?

[Karen Murray:]

Okay. Hi, Camilo, how are you? Okay. Let me talk a little bit about international. As you know we've said that both international and digital were underpenetrated. International is under 10% of our business currently, but we really feel we've put a great roadmap in place specifically for growth and expansion in China, Japan, Southeast Asia, Mexico and South America. I would say that we're starting this with our active brand specifically we mention today AVIA. And we really have a great partner that we're working with there that is not just expanding the brand but also looking at investing in brick and mortar stores as well as e-commerce. So AVIA is our first entree, but we really look to expand this for all of our international brands and we're working with a partner that we believe can help us expand all of our brands. So again, under 10%, we're not happy with that. We really wanted to get a roadmap going where we can expand successfully with one or two brands and then move it throughout our portfolio. So I think I mentioned earlier about a half a year ago, maybe two calls ago that we were looking to make sure that the international part of our business was close to 20% of our business. And at the same time we talked about digital being about 25% of our business. So we have a long way to go, but we're making great inroads.

[Camilo Lyon:]

So from a timeline perspective, it seems like a lot of it's really materialized through the P&L in '19 and beyond, is that the right way to think about the timing of the investment strategy you're making now?

[Karen Murray:]

That's exactly right. I would say 2019 and on.

[Camilo Lyon:]

Okay. And then -- just a housekeeping item; Peter, could you -- is there any way to quantify what the dollar amount of the legacy impact for Martha was during the quarter?

[Peter Lops:]

I don't think we've broken that out and rolling into the impact for one more quarter, so that's part of the reason we'll see more growth in the back after the year.

[Camilo Lyon:]

Okay. Sure. And then you mentioned that the discussions on the refinancing have gone well. You talked about a Q2 update on that. Any more detail you could provide on the composition or the expected structure of the refi that we may expect to see?

[Peter Lops:]

There's not much more to add than we addressed in our opening remarks. We're extremely encouraged based on all the conversations we've had. There's been a lot of progress. Things are going well, and we're looking forward to closing it in May second quarter, and we'll update you then.

[Camilo Lyon:]

Okay, great. That's it from me. Thanks guys, good luck.

[Karen Murray:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Dave King of ROTH Capital. Please go ahead.

[Dave King:]

Thanks, good morning.

[Karen Murray:]

Good morning, Dave.

[Peter Lops:]

Good morning.

[Dave King:]

I guess to follow-up on Camilo's last question there on the refi. I guess is the thought there still to get the costs down. I think in past you had talked about getting the margin at least down 150 to 200 basis points. I guess just what are the thoughts on rate given the move we've seen in interest rates? And then is the plan to try to get something that's lower AM. And then what are the thoughts there in terms of just -- with that being freed up is the plan to kind of get back into the acquisition sort of mindset or how should we think about that? Thanks.

[Peter Lops:]

Yes. So our goals really haven't changed from what we last talked about. We do want to reduce our weighted average interest rate, and the refi will allow us to do that. We're looking to free up some of our cash flow and also have additional flexibility. As far as acquisitions go, we're always in the marketplace. We wouldn't be doing our job if we weren't addressing and reviewing all potential acquisitions. We haven't done one in over a year-and-a-half, but it is part of the role of management and the Board to continue to review. And should we run into the right one that was de-levering we'd consider it then. But we just haven't come across one recently.

[Dave King:]

Okay, that's good color. And then in terms of divestitures, saw you sold Revo. Do you have what cash impact of that was in the quarter? And then what are your thoughts on timing of other potential sales of non-core assets?

[Peter Lops:]

It's a similar answer where our non-core brands, Karen focused on the core ones in her remarks, where a lot of the growth lies. But the non-core ones we're always exploring some opportunities. They will be immaterial as Revo was. What it does is it allows management to focus its resources and energy in time when the core ones that are growing, Karen touched on the digital opportunities and the international one. So, smaller brands, immaterial financial amount, but much like acquisitions, wouldn't be doing our job if we weren't in the marketplace looking at opportunities.

[Dave King:]

Okay, that helps. And then lastly, in terms of as we think about the rest of the year, it's still fair -- understanding you don't want to give the dollar impact of the Martha Stewart license transitions. I guess, trying to get some context around how we should be modeling the business. Is it still fair to think about top line growth in the mid to high single digits, and EBITDA growth in the low to mid single digits? And did that change at all post the accounting changes? Thanks.

[Peter Lops:]

No, we haven't changed our guidance. I get your point on the new accounting rule, it does make things a little complex, which is why we try to give results under both the previous revenue recognition guidance so that you can have something to compare to prior year which the guidance was based on which presumably your model's mostly your work was based on as well as the new revenue recognition guidance which is required under GAAP and by the FASD. So we're giving you both. No change in the guidance. That's really based on the old approach, so we could take any noise out from the accounting change. And I'll underscore one thought on that new accounting guidance that I mentioned earlier; it has no impact on cash flows nor the underlying business momentum. It is just the timing of revenue recognitions on some of our license agreements which were required to be straight line now.

[Dave King:]

Understood. Do you think I'll be a similar kind of dollar impact in each of the subsequent quarters of the year or is it because of the way overages run through and kind of hurts certain quarters but helps other -- I mean, what's the right way to think about that?

[Peter Lops:]

Yes, it can vary a little bit, not dramatic swings from where we are now, but it will vary. It's based on timing of agreements, when they expire and where we are in the lifecycle of agreements. So it's not exactly the same each quarter, but it's not drastic swing.

[Dave King:]

Okay. Thanks for taking my question.

[Peter Lops:]

You are welcome.

[Operator:]

Do you have any closing comments today?

[Karen Murray:]

No, we don't.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.