Sequential Brands Group, Inc.
Q3 2018 Earnings Call Transcript

Published: 7 Nov 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 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 in the press release we issued this morning for a summary of such factors. The words belief, 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 and adjusted free cash flow 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 CEO, Karen Murray; and Chief Financial Officer, Peter Lops. I’ll now turn the conference call over to Mr. Lops. You may begin when you are ready.

[Peter Lops:]

Good morning, and thank you for joining our third quarter 2018 earnings call. As I went on previous calls effective January 1, 2018, the company adopted the new revenue recognition standard ASC 606 on a modified retrospective basis, which impacts the Company’s reported revenue each quarter this year. 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. Reported revenue in the third quarter of 2018 is $0.5 million lower and year-to-date revenue of $2.5 million lower than if it were recognized under the prior revenue recognition standard ASC 605. For comparative purposes and to be consistent with guidance, I’ll review the quarterly and year-to-date 2018 results under ASC 605 and direct you to the Company's earnings release for the results under ASC 606. Before I review the financial performance for the quarter, please note that this quarter includes a $4.2 million charge related to a settlement with a licensee as part of a positive and strategic shift to a direct to retail license with Walmart for the AVIA brand. It's worth noting that while this non-recurring item is expensed in this quarter, the cash payments will be made over multiple years. Karen will further discuss this new partnership with AVIA and Walmart during her remarks. Total revenue for the quarter was $41.2, million compared to $39 million in the prior year's quarter. The net loss for the third quarter of 2018 was $9.3 million or $0.15 per diluted share, compared to a net loss of $24.2 million or $0.38 per diluted share in the third quarter of 2017. Included in the net loss this quarter was a noncash impairment charge of $17.9 million for indefinite-lived intangible assets related to the trademarks of two of our non-core brands. Non-GAAP net income $3.1 million or $0.05 per diluted share, compared to $6.5 million or $0.11 per diluted share in the prior year's quarter. Adjusted EBITDA for the third quarter of 2018 was $21 million, compared to $23.3 million in the prior year quarter. As I mentioned earlier, this quarter includes a $4.2 million settlement expense. Excluding this non-GAAP net income would have been $7.3 million or $0.11 per diluted share. And adjusted EBITDA for the third quarter of 2018 would have been $25.2 million. Total revenue for the nine months ended September 30, 2018 was $123.6 million, compared to $120.6 million in the prior year period. Net loss for the nine months ended September 30, 2018 was $6.5 million or $0.10 per diluted share, compared to a net loss of $22.8 million or $0.36 per diluted share in the prior year period. Non-GAAP net income for the nine months ended September 30, 2018 was $15.8 million or $0.24 per diluted share, compared to $20.1 million or $0.32 per diluted share in the prior year period. Adjusted EBITDA for the nine months ended September 30, 2018 was $68.8 million, compared to $71 million in the prior year period. Excluding the $4.2 million settlement charge, non-GAAP net income would have been $20 million or $0.31 per diluted share and adjusted EBITDA would have been $73 million. Our adjusted free cash flow was $20.5 million for the first nine months of 2018, which is calculated as adjusted EBITDA less cash interest, cash taxes and capital expenditures. And exclude items that are not core to our business, such as balance sheet changes and cost related to prior acquisitions. We closed the third quarter of 2018 with $14.1 million of cash including restricted cash and $627.8 million of net debt. As we mentioned on the last call in the beginning of the third quarter, we closed on the refinancing of our debt facilities with Bank of America and KKR. The refinancing extends the maturities under our first and second lien facilities through 2023 and 2024, respectively, lowers our overall weighted average interest rate and provides us with greater covenant flexibility. As we approach the end of the year, excluding the onetime settlement related to the transition to a direct to retail license with Walmart for the Avia brand, we are maintaining our current guidance and expect that we will be at the lower end of the range of mid to high single-digit revenue growth and low to mid single-digit adjusted EBITDA growth. On our next call, I look forward to providing fourth quarter and full year results as well as 2019 guidance. 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. We've had a productive and exciting third quarter of the year as we continue to execute against our strategy to deliver organic growth, maintain a disciplined approach regarding expenses and strengthen our balance sheet. Since I joined the company over 1.5 years ago, we have made progress strengthening our business and positioning our portfolio of brands for long-term success. We completed the refinance in the quarter, which enhances our financial profile and provides us with additional flexibility. We have a dynamic new team in place, including experience division leaders with a clear strategy as well as our most recent hire, a new executive to lead our global business development efforts. Our team is firing on all cylinders. So far this year we've signed significantly more deals compared to this time last year and we have a robust pipeline in place as we look ahead. We've also assessed our portfolio of brands this year, which led us to divest two small brands with a purpose of ensuring that all efforts are focused on the key growth drivers of the business. We have made strategic marketing investments in our brands as we said we would at the beginning of the year. These investments support our brands so that they continue to evolve and be top of mind for consumers, which is critical in today's competitive and crowded marketplace. We're pleased with the initial results we've already seen from many of these incremental investments, especially as it relates to our brand ambassadors, which I'll highlight in a moment. As I've discussed on previous calls, six core brands; AND1, Avia, Gaiam, Martha Stewart, Jessica Simpson and Joe's represent approximately 80% of our business and are the largest growth drivers. We have several key levers to drive organic growth across the company. Those include international, digital, category and distribution expansion and strategic brand integrations. We've made progress in each of these areas. First, the Active division. We're very excited about the momentum surrounding our Avia brand. As a result of our new direct-to-retail partnership with Walmart, the brand has seen increased shelf space and product assortment in store. This is a very positive development for our brand in today's marketplace, especially as we've seen competitors lose their in store presence or have their shelf space reduced. We also expect additional positive momentum for the Avia brand based on initiatives related to our new brand ambassador, which includes the opportunity to grow the brand domestically into a higher tier of retail distribution, as well as internationally. Just last Wednesday, our Avia partner opened its first store in China and we are in discussions with them for larger strategic initiatives. Gaiam continues to be a top performer with strength in both hard goods and soft goods business. In the quarter, we launched our Jessica Biel Gaiam collection at BANDIER, Bloomingdales, Macy's, as well as other brick-and-mortar locations and online. We kicked off the launch with a celebratory event for top tier media and key retail partners. Overall, the launch garnered approximately $75 million media impressions and 2.5 million social media impressions and sales are off to a strong start. AND1 had a very strong quarter, driven by its core products at Walmart. In recognition of AND1’s 25th anniversary this year, we've implemented several new marketing initiatives celebrating the brand streetball roots. One recent initiative that we launched was our paint the parks program, designed to improve basketball court conditions in inner city parks nationwide. The first park that was completely refurbished and repainted was in West Oakland, California, and included a launch event with popular musical artists and celebrity guests. TNT aired the program during NBA season opening broadcast. AND1's global ambassador and Creative Director, Kevin Garnett has been instrumental in setting the direction of these marketing initiatives. Internationally AND1 continues to gain traction. The brands first two stores in China just opened and plans are underway for three more stores to open there next month. Turning to our fashion division. The Jessica Simpson brand has an incredible consumer appeal as we introduce it into new categories and distribution channels. Just yesterday, Jessica’s footwear line was renewed for multiple years with our long time licensing partner Camuto Group, demonstrating continued support for the brand in its largest category. Beauty is a sizeable opportunity for the brand as I've discussed on past calls. Earlier this year, we launched the brand into the beauty category for the first time with makeup brushes and we will be rolling out a new fragrance in the fourth quarter of this year, followed by color cosmetics in 2019 and then skincare. Each of these new beauty lines will be available on a unique online platform, which we know is a growing channel for beauty shoppers and millennials as well. Joe's continues to be a strong performer. Their denim business has seen positive results, especially in men's wear. The kids line has been a huge success for the brand. It is currently the number one kids denim brand at Nordstrom. Plans are now underway for the kid's line to expand to all Joe’s stores. Women's intimates and men's loungewear are also performing well for Joe's at Nordstrom and the brand continues to be strong internationally. In Mexico, the brand is growing both at our retail stores, as well as at Palacio de Hierro, where it is the number one premium brand. The brand is also performing well in Japan, where it is carried out the country's top department stores. Across many of our fashion brands we partner with key influencers who serve as global brand ambassadors. Those influencers include celebrities such as country singer Brett Young; and models Irina Shayk and Sara Sampaio. These brand ambassadors help propel our brands forward allowing us to engage with new and younger consumers. Now to the Home division. We continue to be pleased with the performance of the Martha brand on the QVC platform. Apparel and home décor were the top performing categories for the brand on QVC in the quarter. This fall in fashion we added new categories including elevated sweaters, outerwear, handbags and scarves. In fact, Martha is on QVC today, showcasing holiday trim and her pressure cooker along with her cookbook. As we move into next year, we'll be expanding into more categories including active wear, lounge wear, jewelry, and cold weather, just to name a few. The high demand of Martha's fashion line on QVC has been incredible and has led us to explore additional new growth opportunities for that category outside of QVC. Last week, we announced an exciting new partnership with Aerosoles to create a line of fashionable footwear inspired by Martha's style. As part of the partnership, Martha will also serve as the brand ambassador for Aerosoles footwear and accessories. We also recently signed two new partnerships to build out Martha Stewart's presence in food and beverage in a big way. The first is an agreement to expand Martha Stewart branded cafes across the country and internationally. As part of the deal, our partner is taking over the Martha Stewart cafe in our company headquarters and plans are underway for additional Martha Stewart cafes throughout the city. In addition, we signed an agreement to create a line of Martha Stewart branded coffee that will be sold at retail locations across the country. We also recently signed a new floral subscription partnership for Martha Stewart with bloomsybox.com. Starting December 1, just in time for the holiday season, customers will receive a monthly delivery of fresh cut roses curated by Martha from sustainable flower farms across the globe. Similar to our partnerships with Marley Spoon and Martha Wine, this direct-to-consumer partnership is a great platform for the brand and an area where we believe we have more opportunities to expand. In closing, as we near the end of 2018, we feel great about the progress that we've made against our strategic priorities. We completed the debt refinance, made incremental marketing investments in our brands and have seen positive initial results. We have a talented team in place with a clear strategy across our divisions. We have executed a significant number of new business deals and renewals and we have a robust pipeline of new activity underway as we head into 2019. We look forward keeping you updated on our progress and we appreciate you joining us on our call today. I 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. Please proceed with your question.

[Dave King:]

Thanks. Good morning, everyone.

[Karen Murray:]

Good morning, Dave.

[Peter Lops:]

Good morning, Dave.

[Dave King:]

So, if you sort of back out the loss of Martha Stewart or JCP that happened last year, it was weighing through the first half. Now that you've anniversaried that, it looks kind of like the organic growth deaccelerated a bit this quarter. It sounds like most of your brands are doing well and you've got some new agreement signed for them. I'm just curious which ones are declining right now. And then what are sort of thoughts on and when you might be able to get those to turn positive. Thanks.

[Karen Murray:]

Hi, Dave, it's Karen. Okay, I'll start with the top performers and then I'll move to some of the underperformers, if you will. Joe's has been really strong the whole year actually in both men's and women's denim, kids is really strong and there is nice international growth. Gaiam has also been very strong at retail, both hard goods and soft goods. And as you know, we employed a new brand ambassador Jessica Biel and the traction on that business has also been very strong. AND1, the business there and the core business there is very, very strong with Kevin Garnett as our brand ambassador. We have incredible momentum on AND1. The product is retailing very well. And all of the momentum with the grassroots efforts there have drawn a really strong emotional connection with the customer that I think is resonating at retail. Martha, QVC, we talked about introducing last year and that was only for the fourth quarter. This year the Martha business on QVC has been incredibly strong. And you're right, without the legacy businesses we're starting to see real increases in momentum in that business. I'd say the categories that are most – that are the strongest for Martha, are apparel, home, home decor and craft, as well. Our business at Macy's is strong, Michael's is also a strong. So all around Martha is performing really well. The underperformers are our brands like our smaller brands Heelys, I would say still is – we’re disappointed in what's going on with our international distributor. And that brand has not gained traction overseas. And the other brand is Caribbean Joe. Caribbean Joe has underperformed, but there I have to tell you, we're very focused on a repositioning strategy, we're engaging with new partners and we see a turnaround in that business coming up shortly. So that's just some color on some of the brands. Avia is also very strong. But the real new exciting good news there is what's going on with our retail relationship with Walmart. So all in all, our core brands which represent 80% of the business are really strong. And then we have a few underperformers which are really the smallest brands within our portfolio. But we feel really good about the traction with all the brands in a quarter.

[Dave King:]

Okay that’s great color. That's great color. So then in terms of some of the new agreements, I think, you said the two with Martha and then maybe some of the Avia stuff. How should we be thinking about how much those should contribute? And then it looks like deferred revenue came down a bit sequentially, I think, from like $23 million down to $20 million. With these new agreements, do you expect to see that line, sort of go back up again, or is the structure of these deals starting to change? I guess some color there would be helpful.

[Karen Murray:]

Yes, I mean, I'll have Peter answer the financial part of this. But as we said we're maintaining towards the low end of the range. But we still have some more deals to get done and there's some timing. But all in all, we're expecting to hit our numbers for the year towards the low end. So Peter, do you want to add to that?

[Peter Lops:]

Yes, good morning Dave.

[Dave King:]

Good morning.

[Peter Lops:]

I think Karen answered a lot of it with the guidance answer. I think it's also important to note, no surprise that each deal is different and unique in its structure and what it does for us. And so it can vary. So there's not one size fits all. And so depending on the timing of the deals and the way they're structured, the revenue can come in, in different ways.

[Dave King:]

Okay. And then one more real quick, guaranteed minimum royalties or lifetime GMRs, I think, it was like $340.8 million as of last quarter. And do you have what that number is currently?

[Peter Lops:]

Yes we're just over 300. It's fairly consistent. Of course there's a little burn off each quarter. And it goes up and down each day as we sign new deals and as it burns off each quarter. So we’re just over 300 at the moment, or at 9.30, I should say at 9.30.

[Karen Murray:]

But Dave keep in mind GMRs are still a very meaningful part of the business. And we're fortunate that our brands really command that as you heard in our statement, we just renewed with Camuto for a multiyear agreement which is fabulous. And we have long-term partnerships that also don't include some GMRs like QVC, for example, but we have really strong sales there. And then we have our DPR with Walmart and a lot of direct relationships with Martha, like the Bloomz Box relationship that we just spoke this morning as well.

[Peter Lops:]

And I emphasize that this number was as of 930 days. Just as Karen talked about a couple of new deals and some new activities that have happened, subsequent to that that will be captured when the number gets updated next quarter.

[Karen Murray:]

Okay, perfect. So it sounds like that might go back up even with some of the normal runoffs?

[Peter Lops:]

Correct.

[Karen Murray:]

Yeah.

[Dave King:]

Okay, great, great. Fantastic. All right, thanks for taking my question.

[Peter Lops:]

You're welcome.

[Karen Murray:]

Thanks Dave.

[Operator:]

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

[Pallav Saini:]

Thanks. Good morning. This is Pallav on for Camilo. Karen, my first flip question is on digital. Can you give us an update on some of the recent initiatives that you have undertaken and how they're performing? And also on China you talked about the store openings for some of the Active brands. What are some of the initiatives in place that would drive growth in the business there for the rest of this year and next year?

[Karen Murray:]

Sure. Okay. Let me begin with digital and then I'll move to international. Our digital business is strong and growing. Understand that it comes in a format, like three different types of formats. We've got our direct businesses, which we spoke of earlier where we have businesses with meal kits with Marley Spoon and Wine in the Martha Business, and we just signed as I just announced the BloomsyBox for direct business. But we've also re-launched AND1 and Avia online and we are continuing to grow on Amazon. We talked about the fact that we are opening up a Jessica e-commerce beauty business, which is an online platform that is really unique in the space, not reliant on brick and mortar, this is all online. And, again, keep in mind that real retailer dot-coms such as Macy's are a really growing part of our business with all of our brick and mortar partners. Our brick and mortar business is strong, but our dot-com business is double-digit ahead with our retail partners. So remember, even as far as last call, we talked about the fact that we were opening up a Martha store on Amazon. We continued to add more categories to that business. Our Gaiam business has been strong on Amazon. So Amazon, jessicasimpson.com and all of the different retailers are all trending very well. So that business is off. With international, we're really excited with what's going on in international and the brands. Our brands are expanding. We talked about the fact that Avia, AND1 and Gaiam already has presence in many different countries, but the recent announcement is that we are opening up retail stores in China for both Avia and AND1. So it's a great opportunity for our brands there to not just expand with retailers, but even expand with our own retail freestanding formats. So we're really excited about what's going on with the expansion for Avia and AND1 overseas.

[Pallav Saini:]

Thank you. And my second question is, on your guidance for the year. You've maintained the guidance, but are suggesting that might be even these results might come in at the lower end. Has anything changed in your view for next year as it relates to what you are seeing right now?

[Peter Lops:]

Thank you. I think as we mentioned in the opening remarks, we'll talk more about next year on the fourth quarter call. But as we look towards next year, we're building off of the momentum from 2018. Karen talked a lot about the growth initiatives we have in place and some of the strategic investments we've made. So we've been very pleased with the momentum we built thus far and carrying that forward into next year.

[Karen Murray:]

I have to tell you, we've got, as you know, we've got a really strong pipeline that we're executing against for 2018. We feel really good about what is already in place and some announcements that are coming and we feel really, really good about 2019 as well.

[Pallav Saini:]

Thanks and good luck.

[Karen Murray:]

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