Sequential Brands Group, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Thank you, and good morning. Before we begin, I'd like to bring to 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 company's control. 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 website, www.sequentialbrandsgroup.com. On today's call are Sequential Brands Group's CEO, Karen Murray; Chief Financial Officer, Peter Lops; and President, Andrew Cooper. I'll now turn the conference over to Mr. Lops. You may begin when you are ready.

[Peter Lops:]

Good morning, and thank you for joining our second quarter 2018 earnings call. We're pleased to report strong second quarter results this morning, as well as a successful refinancing of our debt. Over the past six months, the company has explored multiple refinancing alternatives to ensure we would achieve the best possible terms with the right long term partners. Our existing group of lenders led by Bank of America and KKR have affirm their support for the company. This refinancing extends the first lien debt maturity to 2023 and the second lien to 2024. This refinancing also optimizes our capital structure by shifting over $100 million of junior debt into the first lien credit facility, thereby meaningfully reducing our weighted average interest rate. This renewed and extended commitment from these leading institutions and the additional flexibility under the credit agreements provide a great runway for the company to continue to pursue its long term growth strategy. As outlined last quarter, effective January 1, 2018, the company adopted a new revenue recognition standard ASC606 on a modified retrospective basis which impacted the company's reported revenue. This new standard requires us to recognize revenue from our contractual guaranteed minimum royalties on a straight line basis over the license period for most of our licensing agreements. The revenue impact varies based on where we are in the term of each particular contract. In the second quarter 2018, revenue is $778,000 lower than if it was recognized under the prior revenue recognition standard ASC605. For comparative purposes and to be consistent with guidance, I'll review the quarterly and year-to-date 2018 results under ASC605 and direct you to the company's earnings release for results under ASC606. Total revenue for the quarter was $43 million compared to $42.1 in the prior year's quarter. Net income for the second quarter 2018 was $4 million or $0.06 per diluted share compared to net income of $2.5 million or $0.04 per diluted share for the prior year. On a non-GAAP basis, net income was $7.8 million or $0.12 per diluted share, flat compared to the prior year's quarter. Adjusted EBITDA for the second quarter 2018 was $25.3 million compared to $24.7 million in the prior year's quarter. It's worth noting that this is the last quarter in which results were impacted by expired Martha Stewart legacy licenses indicated in last year's results. Total revenue for the six months ended June 30, 2018 was $82.4 million compared to $81.5 million in the prior year period. Net income was $2.8 million or $0.04 per diluted share compared to net income for the six months ended June 30, 2017 of $1.4 million or $0.02 per diluted share. Non-GAAP net income for the six months ended June 30, 2018 was $12.7 million or $0.20 per diluted share compared to $13.6 million or $0.21 per diluted share in the prior year period. Adjusted EBITDA for the six months ended June 30, 2018 was $47.8 million compared to $47.7 in the prior year period. Our adjusted free cash flow was $14.5 million for the first half of 2019, 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. We closed the second quarter of 2018 with $15.6 million of cash including restricted cash and $614.3 million of net. In closing, we're pleased with our results for the first half of the year. As we head into the second half of the year, we continue to be focused on executing against our pipeline of new business deals and achieving full year 2018 result of mid to high-single-digit revenue growth and low to mid-single-digit adjusted EBITDA growth. 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 productive first half of the year with a lot of activity underway as we continue to execute against our strategy to drive organic growth, improve our balance sheet and maintain a disciplined approach when it comes to our expenses. As Peter mentioned, we're very pleased to have the refinance complete with the support of our existing lenders. It's a strong vote of confidence and will benefit the company by extending the maturities, providing a lower overall weighted average interest rate and offering more flexibility to the company. We continue to focus on our six core brands that represent 80% of our business and are the largest growth drivers, AND1, Avia, GAIAM, Martha Stewart, Jessica Simpson and Joe's. We frequently review our portfolio and consider divesting certain smaller brands not material to our business when the opportunity arises. Similar to Revo, this quarter, we divested our interest in the field brand. While this was not a material transaction, it is consistent with our strategy to focus management's efforts on key brands and priorities. Organic growth of our existing portfolio still remains priority number one for our organization. As outlined on prior calls, we focused on four key levers across our business to drive growth, international, digital, category and distribution expansion and strategic brand integrations. We've made progress during the quarter in each key area, which I'll highlight as I walk through the divisions. First, the active division, which includes core brands, GAIAM, AND1 and Avia. GAIAM had a strong quarter with expanded distribution and new category growth. The broad range of retail placement for GAIAM speaks to the versatility of the brand. For instance, we're launching a higher end apparel line with actress Jessica Biel's capsule collection for GAIAM, which will be sold in Bandier, Bloomingdales, Macy's and Lord & Taylor. The brand's core apparel line has expanded a cause and a new premium line of hard goods will be launching at DICK's Sporting Goods in September. The brand extends nicely into the health and wellness space with its GAIAM restore line which is carried at retailers such as CVS and Walgreens. We also recently announced a new partner for the brand in several home fragrance categories. AND1 continues to be a key performer enacted and the business is performing well. AND1's global brand ambassador and creative director Kevin Garnett and the marketing team were out at the NBA Summer League in Las Vegas in July. This was a great opportunity to showcase the AND1 brand with top young players wearing our sneakers. The premium A1 by AND1 collection is on track to launch in specialty stores and boutique later this year. We're also excited about the upcoming launch of eight new AND1 stores in China in the fall. The store renderings look incredible and will be a great way to introduce our brand to the Chinese market. The Avia brand at Walmart continues to be strong, benefiting from increase shelf space and added product assortment. Avia categories such as capris, leggings and socks has been particularly strong. We have a social media campaign underway with a powerful group of authentic influencers to drive awareness and engagement for the brand. International expansion is a key priority to grow the brand. We recently announced that we're expanding into China and the first store there is on track to open later this year. We also have new partnerships in Argentina and Central America. Turning to our fashion division. We're very excited to have in place our new President of Fashion, Karen Castellano. Karen has over 30 years of fashion experience and worked with well-known brands including Tommy Hilfiger, Burberry, Tracy Reese and Liz Claiborne. Since joining, she has hit the ground running meeting with key retailers, partners and working to drive growth across the business. A top priority of Karen's is expanding the Jessica Simpson business into new categories, distribution channels and international markets. We're particularly excited about the opportunity that exists for the brands in the beauty space. In July, Jessica made her debut at the beauty festival, Beautycon to launch her new line of makeup brushes. We are on track to launch a fragrance and color cosmetics line later this year and hair and skin care in 2019. Joe's continues to show strength domestically as well as internationally. All key categories for the brand domestically continue to perform well, especially the kids' line. The brand is carried in the best department stores across Japan and is the number one premium denim brand in Saks, Mexico. We are further strengthening our international efforts and collaborating with our partners to position the brand for growth in key markets such as Europe, Middle East, China and Korea. Now to the home division, which is anchored by the Martha Stewart brand. Martha on QVC continues to perform well. Apparel is a growing part of the Martha brand's QVC business. We're currently planning new apparel and accessory launches in the fall including handbags, outerwear, scarves, holiday dressing and an extended assortment of top and bottoms. QVC continues to be a great platform for us to introduce and test new product categories. As product offerings are successful on QVC, we then have the ability to extend those products to other channels of distribution. We're currently expanding Martha's lawn, garden and food business beyond QVC to new retail channels. We've been actively building out the Martha home decor business and find several new partnership for key categories including accent furniture, lighting, decor, window treatments and more. We've also renewed our long time partnership for rugs with Safavieh. We plan on launching this carefully curated mix of home decor categories at market in this spring. We recently extended Martha's meal-kit partnership for multiple years with Marley Spoon which completed a successful IPO in July. The extension speaks to the strength and success of the partnership. We continue to work closely with our partner on new customer acquisition and marketing efforts. For example, in September, we plan to feature recipes directly from the pages of her ninety first book, Martha Stewart's Pressure Cooker. In conjunction with the book, we will also be selling the Martha Stewart Everything Cooker at select retail locations and online. The Martha Stewart's store front on Amazon.com continues to provide a terrific opportunity to showcase some of the brand's categories to Amazon customers. We launched the shop with pets, area rug, books and food and have plans to add additional categories in the second half of the year. The Martha brand has incredible reach and engagement online and across its media platforms. In addition to Martha Stewart Living magazine, and MarthaStewart.com, the brand has close to six million followers across its social media platforms, which is up 15% from last year. In addition, the brand's presence on television remains strong with the continuation of Martha Stewart Bakes which is in its 10th season and season 2 of Martha & Snoop's Potluck Dinner Party. Martha is also currently a guest judge on Chopped. As we reflect on the first half of the year, we feel great about the progress that we've made. We've completed multiple new business deals, renewed several partnerships and we have a robust pipeline of activity that we're focused on executing. Most important, we have completed the refinance which strengthens our financial profile and provides us with additional flexibility. We are also currently evaluating several potential acquisitions that could be a good fit for our company. We will continue to be disciplined and only consider transactions that we believe could be both accretive and de-levering on a debt-to-EBITDA basis. We look forward to updating you on our next call. Thank you for joining us today. I'll now turn the call back over to the operator for Q&A.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Dave King with Roth Capital Partners. Please proceed with your question.

[Dave King:]

Thanks. Good morning, everyone.

[Peter Lops:]

Good morning.

[Karen Murray:]

Good morning.

[Dave King:]

I guess first on the on the guidance, it seems to imply sort of mid-teens top line growth in the second half versus sort of flattish since the first half. I guess first, how much of a negative impact did license transitions a year ago have, on either the second quarter revenue or the first half revenue however you prefer to characterize it. And then if you think about the growth drivers of the second have, is it mainly overages kicking in on the existing business or is it mainly from some of these new launches that you mentioned Karen? Thanks.

[Peter Lops:]

Okay. Thank you. As I think you know, this is our last quarter with the legacy comp issue. So you will see a pick-up in the second half of the year in the Martha business. And Karen talked a bit in her opening remarks about some success we're having with that brand, success the QVC, the growth with Marley Spoon and some of the other things that the Martha Stewart brand is involved in. As we've talked about. There's a mix of things happening in the back half of the year. We have both existing business and we have some new business driving that and a couple of our key brands, our larger brands are leading away there.

[Dave King:]

Okay. And so then it might take out, I mean then it's these sort of new initiatives with those that's really kind of driving that growth then versus overages on existing?

[Peter Lops:]

It's a blend of both. We have some both in the back half of the year. There is both new business, we've got a pipeline, we've got our strong business development team very focused on that, but we also have our existing business in the second half of the year.

[Dave King:]

Okay, that helps. And then if I heard you correctly, please correct me if I'm wrong. I sounded like you ended the quarter with like $643 million of net debt. Curious, where will that go as a result to the refinance and then what's the new level of amortization, what's the interest rate and then your model interest expense along those lines?

[Peter Lops:]

So, yeah on the refinance, we're very happy with the outcome. As we mentioned and as I think you know we looked at several options and we're very excited to receive this commitment and support from our existing lenders. We're able to extend our debt maturities. We improved our capital structure by shifting over $100 million of debt into the cheaper first lien, so that winds up saving us a significant amount of interest. On an apples to apples basis, when you sort of, it with respect to LIBOR and other scenario, we're going to save about $3.5 million each on an annual basis. So, very, very significant savings there. And it was an outcome we're very pleased if we looked at several options including one that was a public option and this one had the best terms and it was the shirt for us. We're very pleased with what we've received as terms of the commitment from our existing lenders.

[Dave King:]

Great. And then do you have the amortization requirement lower than it was on the previous or is it similar?

[Peter Lops:]

It's very similar to the previous situation, previous capital structure.

[Dave King:]

Thanks for taking my questions. And good luck with rest of the year.

[Peter Lops:]

Thank you.

[Karen Murray:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.

[Unidentified Analyst:]

Thanks. Good morning. This is [indiscernible] on behalf of Camilo. Thanks for taking our question. Karen, first of all can you provide some more color on how brands that you talked about, the core brands, if some of them are exceeding your expectation and on the other side, if you know some of the brands are underperforming relative to your plan and what are you doing to get those brands back on plan?

[Karen Murray:]

Okay. So top performers for the first half of the year but specifically in the second quarter in the fashion business, Joe's business was performing and is performing very well, specifically in the kids' area which is a new launch and a fabulous category for us. And Joe's business is also growing internationally. With the GAIAM business, we're in a perfectly situated category of health and wellness which as you know is trending in the marketplace. Our business is very strong at Kohl's, it's also very strong at Amazon and we are now looking at growing also in new categories such as home fragrance. And also in addition, in the active area beyond the GAIAM business and one is also very strong. And as I mentioned last quarter, we're launching in China later this year, but the AND1 business is strong, as well as via in Walmart. So all parts of our active business is strong, Joe's in fashion. And with Martha, when you exclude the legacy business, the Martha business would actually be up. And that brand as you know is very strong on QVC. We are continuing to sign new home big core categories but the brand is performing well. It's also performing well at Macy's, but the QVC business has been a nice new additional business for the Martha brand. And there we've got a lot of strong categories. We are doing well on apparel, garden decor, flameless candles, wine, food is performing well and then as I mentioned in my opening remarks, will be launching fall apparel categories, handbags, outerwear, scarves in the fall season for the second half of the year. So business is stronger QVC. Amazon also is doing very well for not just Martha but GAIAM. So across the board in all three verticals, we have some strong businesses.

[Unidentified Analyst:]

Great, thank you for the color. And in your discussion with your retail partners, are you seeing any change in how they are viewing their business now and you know looking to the future versus let's say two to three months ago when you last spoke on the call, is there any shift in how they're planning their business you know positively or negatively?

[Karen Murray:]

You know I don't - the brick and mortar business has been strong. I think the only continuing conversation is about how we drive more traffic, bringing experiences to the stores but then the constant shift to online is an ongoing conversation. But nothing really that different in the way they're planning the business, if anything I think you'll hear with the second quarter report that retailers are doing well and it's not just the online business, it's also you know what's going on in brick and mortar. So focused on experiential is still a big part of the way the retailers are planning their business and trying to bring that into their businesses and you know a constant conversation about driving online business and what we could do to market aggressively and build those businesses online. Social and digital is an important new component that I think all retailers are looking for all brands to really invest in driving social and digital awareness. So you know besides how we drive marketing online and in-store, it's relying now not on traditional ways of marketing brands, but also social and authentic and want us to drive business in traffic as well.

[Unidentified Analyst:]

Great, thanks for the color. That's all I have, thanks and good luck.

[Karen Murray:]

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