Sequential Brands Group, Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Thank you and good morning. Before we begin I 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 to differ materially 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 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 will 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, 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's CEO, Karen Murray; and Chief Financial Officer, Peter Lops. I'll now turn the conference call over to Mr. Lops. Mr. Lops you may begin when ready.

[Peter Lops:]

Good morning. And thank you for joining us on our fourth quarter and full year 2018 conference call. As outlined on previous calls, effective January 1, 2018 the company adopted the new revenue recognition standard ASC 606 on a modified retrospective basis, which impacted 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 fourth quarter is $1 million lower and full year revenue is $3.5 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 once again review the results under ASC 605 and direct you to the Company's earnings release for the results under ASC 606. Please note that this will be the last quarter that we'll be discussing the results under ASC 605. Total revenue for the quarter was $49.9 million, compared to $46.9 million in the prior year's quarter. Net loss on a GAAP basis for the fourth quarter of 2018 was $1.2 million or $0.02 per diluted share, which includes a $3.2 million expense related to a legacy litigation matter. This compares to a net loss of $162.9 million or $2.58 per diluted share in the fourth quarter of 2017. Non-GAAP net income for the fourth quarter was $9 million or $0.14 per diluted share, compared to $7.8 million or $0.12 per diluted share in the prior year's quarter. Adjusted EBITDA for the fourth quarter of 2018 was $26.3 million, compared to $27.4 million due to planned marketing investments that we made in our brand, most notably, our brand ambassadors in the Active Division. For the full year ended December 13 – December 31, 2018, total revenue was $173.5 million, compared to $167.5 million in the prior year. Net loss on a GAAP basis for the full year 2018 was $7.8 million or $0.12 per diluted share, which includes the $3.2 million expense related to a legacy litigation matter and charges reported in the third quarter, a $4.2 million 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 and the noncash impairment charges of $17.9 million related to the trademarks of two of the company’s brands. This compares to a net loss of $185.7 million or $2.95 cents per diluted share in the prior year. Non-GAAP net income for the full year ended December 31, 2018 was $24.8 million or $0.38 per diluted share, compared to $27.9 million or $0.44 per diluted share in the prior year. Adjusted EBITDA for the full year ended December 31, 2018 was $95.1 million, compared to $98.4 million in the prior year period. Excluding the $4.2 million settlement charge for the AVIA brand that is included in this year's third quarter, adjusted EBITDA would have been $99.3 million. Our adjusted free cash flow was $32 million for the full year ended December 31, 2018 which is calculated as to adjusted EBITDA, less cash interest, cash taxes and capital expenditures and therefore excludes items that are not considered core to our licensing business. We closed the fourth quarter 2018 with $16.1 million of cash including restricted cash and $618.7 million of debt net of cash. As we mentioned previously, at the beginning of the third quarter, we closed on the refinancing of our debt facilities with Bank of America and KKR. The refinancing extended the maturities under our first and second lien facilities through 2023 and 2024 respectively, lowered our weighted average interest rate and improved our covenant flexibility. For full year 2019 we expect low-single digit growth for both revenue and adjusted EBITDA. As a reminder, moving forward, we will be reporting results only under ASC’s success. With that, let me turn the call over to Karen.

[Karen Murray:]

Thank you, Peter. We had a solid finish to 2018 with progress made across the portfolio. We completed the refinance, we added key executive level talent, completed multiple new business fields, renewed several key partnerships and strengthened our brands to best position them for long-term growth. Building on that, in 2019, we remain focused on our organic growth across our brand, while also understanding that the licensing model continues to evolve and that we must evolve with it to remain competitive in today's marketplace. As always, we are continuing to look at strategic opportunities for our brands. Jumping into quarterly results, consistent with previous quarters, I'll focus on the highlights around our six core brands AND1, Avia, GAIAM, Martha Stewart, Jessica Simpson and Joe's, which represent the largest growth drivers for the company. Let me take you through each of them by division. The active division is our largest and most profitable division and includes brand such as GAIAM, AND1, and Avia. Active is an area where we believe we're uniquely positioned for further growth, both domestically and internationally. According to industry sources, the global active wear market is expected to reach $567 billion by 2024, which makes it very compelling as we think about our position in that marketplace and evaluate opportunities to strengthen it. A key component of our active strategy is the talented, passionate ambassadors that we have partnered with to help accelerate growth for each of our brands. Actress Jessica Biel for GAIAM and NBA legend, Kevin Garnett, for AND1 have been phenomenal. We most recently announced a new brand ambassador for Avia, the talented actress and singer, Vanessa Hudgens. Vanessa's star power and her 55 million social media followers help to expose the Avia brand to current customers and attract new ones as well. All of these ambassadors are authentic, passionate, and engaged with the brands they represent. Avia and Walmart continue to benefit from increased shelf space and product assortments in stores. The women's apparel line was a top performer, especially during the holiday season. Plans for capital collections co designed by Vanessa are underway and expected to debut in stores this spring. The GAIAM brand remains the top performer driven by its hard goods and soft goods business. The full GAIAM line at Kohl's is performing well and Kohl's is expanding the brand's presence in store. We are also testing a GAIAM men's line at Kohl's for future development. We recently expanded the brand into the beverage space with the launch of GAIAM Organic Green Teas which will be available at whole foods market stores nationwide this month. The expansions speak for the brand's strength in the health and wellness space and is a great example of one of its many untapped categories that aligns us closely with a terrific grocery chain. AND1 had a very strong quarter driven by its core products at Walmart, particularly apparel and accessories in men's and boy's performed well. We continued in the quarter to implement new marketing initiative tied to the brand’s 25th anniversary, which celebrates its streetball roots. Our business in China for AND1 is off to a strong start. Our partner opened six stores last year and has an aggressive plan to roll out more stores this year. The brand also continues to gain traction domestically and we are exploring plans to launch in specialty stores for 2019. Turning to our fashion division, which includes our Jessica Simpson and Joe's brands, during the quarter we signed a multiyear renewal for Jessica's footwear line with long-time licensing partner, Camuto Group, demonstrating their continued support for the brand in its largest category. We are preparing for the brand's soon-to-launch e-commerce site, which will allow consumers to experience the world of Jessica while having access to byproducts such as fragrance, footwear, denim, luggage, handbags, and swimwear. We’re also on track to launch the brand’s beauty business this fall. Beauty continues to be a category with significant growth opportunity for the brand. There has been momentum with our Joe's brand. Denim continues to perform well for the brand, particularly in men and kids line. We've been closely – working closely with our partners to develop an elevated experiential retail concept for the brand. These concepts will leads to the development of new store designs in two flagship locations, New York City and Los Angeles. International continues to be a strong market for the Joe's brand and we're currently exploring opportunities in Hong Kong, Taiwan, and Australia. We also have many new categories we're planning to launch throughout the year, including fragrance, hosiery and more. Turning to the home division, which includes the Martha Stewart and Emeril Lagasse brands. Last week we announced a new partnership for Martha Stewart with Canopy Growth to develop a broad new line of CBD product offerings across multiple categories. As part of that partnership, Martha will be serving in an advisory role to Canopy Growth. Canopy will be leaning on Martha's vast knowledge of consumer products, while Canopy explores the effectiveness of CBD and other cannabinoids as they relate to improving the lives of both humans and animals. This is a very exciting licensing opportunity for us and Martha Stewart. Canopy Growth is a leading – world-leading diversified cannabis and hemp company, and this category represents a significant growth opportunity. We're in the initial stages with plans for the first line to focus on pets followed by a line for humans in the future. We're very excited to announce that we signed an agreement with California Closets to develop a co branded Martha Stewart California Closets product lines that will debut this fall and provide customers with a versatile, modular organization solution, which pairs great design with an accessible price point. This partnership is the first of its kind for California Closets and a great opportunity for the brand. QVC continues to be a strong platform for the brand and we're expanding into seasonal decor across multiple holidays. We continue to learn the Martha categories that resonate best with the customer. Apparel and accessories are major drivers for the business and in fact we're currently exploring opportunities with those categories to expand beyond QVC. On the global front, we're an advanced conversation with new partners to expand the Martha Stewart brand presence in territories such as Southeast Asia, South America as well as South Africa with new deals expected to sign this year. Our team is also focusing on capturing growth for the brand in the Middle East and the balance of Asia. We recently signed New Partnership for the Emeril Lagasse brand. Tristar products has developed a new branded line of small kitchen electric rails and grilling accessories. The products debuted online via digital and social media and on TV through Emeril Everyday an infomercial filmed in front of a live audience garnering over 20 million impressions per week across the country. In addition to the new partnership with Tristar, we expanded Emeril’s merchandise assortment with kitchen textiles, which includes products such as oven mitts, kitchen towels, and apron. The brand also recently launched a partnership with Home Dynamix available at TJ Maxx and HomeGoods. In closing, as you can see, there is significant amount of activity underway across our core brands. We remain focused on executing against our strategy of driving organic growth through international digital category and distribution expansion and strategic brand integration. At the same time, we are evaluating opportunities to evolve the business so that we remain competitive in today's marketplace and our best position to deliver long-term shareholder value. Thank you for joining us on our call today. I will now turn the call back over to the operator for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from the line of Steve Marotta with C.L. King. Please go ahead with your question.

[Steve Marotta:]

Good morning, Karen and Peter, how are you both?

[Karen Murray:]

Good, how are you?

[Peter Lops:]

Good Morning Steve.

[Steve Marotta:]

Good morning. Thank you. Peter just want to clarify one thing. You said, I believe you guided to low single digit revenue and EBITDA growth in fiscal 2019. Is that accurate?

[Peter Lops:]

That's correct.

[Steve Marotta:]

And is there any dodginess, lumpiness that will be occurring within the year that hadn't occurred in previous years? In other words, I assume that most of the sales– sales growth and earnings – and earnings growth will be occurring in the back half of the year, but is there anything more relevant than usual there?

[Peter Lops:]

No, you haven't, Steve that's correct. It'll be similar to past years where it is back loaded into the second half of the year. You're absolutely correct.

[Steve Marotta:]

Okay. Karen, can you talk a little bit about the largest brand opportunity or revenue and EBITDA drivers in fiscal 2019? I mean this probably would ducktail into licensing agreements that had been signed over the last 12 to 24 months that we'll be rolling on and more incremental of course this year than they had been previously.

[Karen Murray:]

Sosure Steve. In general, we have a lot of opportunities that have been presented within the home category, specifically Martha, but even Emeril. And as always, we – our active businesses are really gaining traction. We continue to grow those businesses online, we're growing them internationally. But pretty much the top performers for the quarter as well were the Martha, AND1 and GAIAM brands, and that's where we expect the growth as well.

[Steve Marotta:]

Great. In international, you touched on this more by division. I'm assuming Southeast Asia, South America, South Africa for Martha, those are areas that represent the most growth. But would you say that, that would encompass the balance of the brands, too? And when you think about international penetration now, can you talk a little bit about where it is now on an annual basis and where do you think you would be most comfortable with that number?

[Karen Murray:]

Sure. The international business is at a very similar level to our total business that we've quoted in the past. The good news is that we're learning a lot about the international business and which brands resonate. And fortunately, many of our brands are resonating and we've made traction in several countries. But I would say that the more substantial revenue is when we really start to roll out these active agreements that we've talked about at the end of the year as well as early in this year. We'll roll those out in 2020, wherein we've mentioned that in AND1, we opened up six stores in China. There is an aggressive rollout planned for later this year. We are growing all of the active businesses in the countries you mentioned, but also I would say, China – Avia is in China, Brazil, Japan, Mexico, Canada and U.K. And GAIAM is in Canada, England, Germany, France and soon to be South Korea. And then we talked about the AND1 rollout in China, but we're also currently in Israel, Chile, Austria and U.K. So all the active brands are really setting up with new agreements, but the full rollouts will start to occur later this year into 2020. And then – and Martha, it's really conversations, but they're advanced conversations, mostly, as I said, in Southeast Asia, South America and South Africa. So we're looking to sign those this year.

[Steve Marotta:]

Terrific. That's very helpful. Last question is you mentioned Avia in specialty stores in fiscal 2019. Is that something that we could actually see traction in from a revenue standpoint? Or that's more of just an announcement? And if you could give us a little bit more color – I know you don't want to disclose too early, but if you can give us a little bit more color on how that brand will be segmented? Now obviously, it's mostly in the mass channel. And could you talk a little bit about how you plan up the chain.

[Karen Murray:]

It is mostly in the mass channel today. But I think you'll recall, the last – our last call, we mentioned a partnership with Vanessa partnership with Vanessa Hudgens, and that partnership will start to roll out in fall of this year. And we have not expanded beyond the mass channel, but we are looking with Vanessa to start to position the line in the upper tier. So you'll start to see that at the end of this year. But a more aggressive rollout, again, with Vanessa's partnership. She's a very active ambassador. We have great plans for her to elevate the brand outside of the mass channel late this year into 2020.

[Steve Marotta:]

Very helpful, best of luck.

[Karen Murray:]

Thank you, Steve.

[Operator:]

The next question is from the line of Dave King with Roth Capital. Please proceed with your question.

[Dave King:]

Thanks and hello everyone. Karen. I think you mentioned opportunities you're evaluating to evolve the business and you might be considering. Does that mean brand sales? And I think in the past you maybe talked about some of your noncore brands potentially being up for sale. Are you considering others at this point? How should we be thinking about that? Thanks.

[Karen Murray:]

Great. Hi, Dave. Okay. We – as we say pretty much every call, sounds like a broken record, but we are always evaluating opportunities for our whole portfolio of brands. We did sell Revo and a few small noncore brands. But I would tell you that, again, we're very focused that the industry and the retail landscape is changing, as we all know. We look at opportunities all the time. Today, our active and our athleisure portion of the business is a growing space, as I stated during the script. And we believe it's an opportunity for us to increase our presence in that area. So our focus is on active, athleisure and evaluating opportunities for all the brands.

[Dave King:]

Does that mean that you're considering potential acquisitions in active then as well? Am I hearing that correctly?

[Karen Murray:]

It could be a focus, whether it's in investments in that space or it could mean an acquisition. But at this point, we're really talking more about really understanding where our understanding where our brands can grow in that space, and not just investing in brand ambassadors, but investments across the board in that portion of the business. It's almost profitable. As I stated in our script, it's the most profitable part of our business and one that is growing. I think the plans, as I mentioned in the script, going to – looking out to 2024, it'll be a $567 billion business, so it's an area that we definitely are focusing on.

[Dave King:]

Okay. Perfect. That's helpful. And then the new CBD deal for Martha. But I know you probably don't want to share much. But just what can you share? I know it's early, but what can you share in terms of royalty rate, and to stated revenue, annual minimums, lifetime GMRs? Just how should we be thinking about that, the potential there, over the near and longer term?

[Karen Murray:]

Could we ask you, Dave, to repeat the first part? Because for some reason, it was muffed, and we didn't hear the first sentence.

[Dave King:]

No problem. On the – it was on the new CBD deal for Martha. I was just curious about what you can share in terms of royalty rate, revenue, minimums, et cetera.

[Karen Murray:]

Okay. Sorry, we didn't hear the Canopy part of it. Okay. As you know, we just announced this last week, and we're really excited about this partnership. Canopy Growth is the leading cannabis and hemp company and real leaders in the space. The partnership is a twofold partnership, where Martha is serving an advisory role, and that's her involvement with Canopy. But in addition, we did sign a licensing partnership and we will be developing a full line of multiple categories and products focusing on pet then human. But in general, I would tell you that 2019 is a development year, and 2020, we'll be rolling out these products and these categories. In general, this is a great deal for us. It's similar, though, to other licensing arrangements that we've had in the past. It's just that we think this space is really an important space, and the growth from a revenue perspective will really come into 2020. This is really a development year. I also think it's a great opportunity. This space is a great opportunity for many of our other brands, and specifically, the active arena.

[Dave King:]

Okay, perfect. That's helpful. And then just lastly for me. It looks like debt came down about $4 million sequentially in the quarter. Can you talk about potential to further reductions as the year progresses? And then do you have rate end of the[ph] year on lifetime GMRs? I think last quarter, it was at $300 million or so. Thank you.

[Peter Lops:]

David, it’s Peter. Your GMR question, yes, we're about $320 million at year end. As you know, that can fluctuate as we – as deals expire and we renew deals and things like that. So it's maintained that area for quite a bit. And I missed the first part of your question. You broke up a little bit.

[Dave King:]

But it was on debt. I think it came down $4 million sequentially. Can you just talk about further reduction in that field.

[Peter Lops:]

Understood, thank you. So you know, we recently completed our refinance. We've lowered our cost of debt and so we saved some on our interest. We still have an aggressive paydown schedule. We're working $28 million a year to reduce our debt, and so that's why you see that decline.

[Dave King:]

Yes, perfect. Thanks for taking my question.

[Peter Lops:]

Thank you.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. We this time. We want to thank you for your participation.