Sequential Brands Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good morning, and thank you for joining Sequential Brands Group Third Quarter 2017 Earnings Call. 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 and the press release we issued this morning for a summary of such factors. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identify forward-looking statements. Listeners are cautioned to not place undue reliance on these forward-looking statements, which may speak only as of the date that statement was made. Other than as required by the 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 of 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. I'd now like to turn the conference over to Andrew Cooper, Interim Chief Financial Officer of Sequential Brands Group. Mr. Cooper, you may begin when you're ready.

[Andrew Cooper:]

Good morning, and thank you for joining Sequential’s third quarter 2017 earnings conference call. Today, I will review our third quarter results and outlook for the full year 2017 and provide commentary on our outlook for 2018. Karen Murray, our CEO will then provide an update on our strategic initiatives. Total revenue for the quarter ended September 30, 2017 was $39 million, compared to $42 million in the prior year quarter. On a GAAP basis, the net loss for the third quarter 2017 was a loss of $24.2 million or a loss of $0.38 per diluted share compared to net income for the third quarter 2016 of $1.3 million or $0.02 per diluted share. Included in the third quarter 2017 were non-cash impairment charges of $36.5 million related to the company’s indefinite-lived intangible assets for certain non-core brands. This charge resulted from our regular asset valuation review and pertains to brands that together represent approximately 3% of the company’s sales. Excluding the impairment charges and other non-operating expenses, non-GAAP net income for the third quarter 2017 was $6.5 million, or $0.10 per diluted share, compared to $7.5 million, or $0.12 per diluted share in the prior year’s quarter. Adjusted EBITDA for the third quarter of 2017 was $23.3 million, compared to $24.9 million in the prior year quarter. Total revenue for the nine months ended September 30, 2017 increased 10% to $120.6 million, compared to $110.1 million in the prior year period. On a GAAP basis, the net loss was $22.8 million or $0.36 per diluted share, compared to net income for the nine months ended September 30, 2016 of $0.2 million or $0.00 per diluted share. The results for the nine months ended September 30, 2017 include charges of $1.9 million related to the company's realized loss on the sale of available-for-sale securities, $6.7 million related to costs associated with the departure of our former CEO, and non-cash impairment charges of $36.5 million related to the company's indefinite-lived intangible assets for certain non-core brands. Non-GAAP net income for the nine months ended September 30, 2017 was $20.1 million, or $0.32 per diluted share, compared to $13.7 million, or $0.22 per diluted share, in the prior year period. Adjusted EBITDA for the nine months ended September 30, was $71 million, compared to $58.9 million in the prior year period. The quarter was impacted in recent weeks primarily by a few factors. There were some delays in certain new business deals which we had anticipated would offset the expiration of legacy Martha Store businesses in 2017. We still expect these initiatives to have a positive impact on 2018. Additionally, despite a very successful launch of QVC, there was a change to the number of air dates for one of the QVC categories. And finally, there were some unexpected softness for Heelys with a specific international distributor. As a result of the Q3 shortfall, we are revising our outlook for the full year 2017. We now expect revenue in the range of $165 million to $169 million and adjusted EBITDA of $95 million to $98 million. We closed the third quarter 2017 with approximately $14 million of cash including restricted cash. On previous calls, we have reported adjusted free cash flow which focuses on the cash flow profile of the underlying licensing business. Adjusted free cash flow is calculated as adjusted EBITDA, less cash interest, cash taxes and capital expenditures and excludes both changes in balance sheet items and acquisition-related and other costs not core to the licensing business. For the first nine months of 2017, our adjusted free cash flow was $27.8 million. For the year, we now expect adjusted free cash flow to be in the range of $37 million to $39 million. For the full year 2018, we are projecting mid to high-single-digit revenue growth and low to mid-single-digit adjusted EBITDA growth to reflect additional marketing support for our brands. Our contractual guaranteed minimum royalties for 2018 are approximately $116 million. We continue to target a refinancing for Q1 2018. Based on our current capital structure, we expect to pay down $28 million of debt and end the year with approximately $596 million of net debt. With that, I would now like to turn the call over to Karen.

[Karen Murray:]

Thank you, Andrew, and good morning to everyone joining us on today’s call. While disappointed with our third quarter results, we are focused on driving long-term sustainable growth through a number of strategic initiatives. I have spent the past seven months working closely with my executive teams to identify our key priorities for the business, specifically focusing on augmenting our team to ensure the right people are in place to drive the business forward, prioritizing growth at our core brands by focusing on execution, maintaining disciplined cost controls, and in parallel, focusing on improving our capital structure. Specifically, in the quarter, we announced the hiring of Carolyn D'Angelo, our President of Home. Carolyn is a seasoned executive with over 25 years of experience managing and growing several well-known brands in the Home space. We are in the process of making key hires to our business development team with expertise in digital and in the international business. We are taking a more disciplined approach to brand management, honing in on the brands that are growth drivers for the company. We are also evaluating the best options for some of our legacy brands that we wrote down in the quarter including Revo, Nevados, Caribbean Joe, Franklin Mint, and FUL. We continue to focus on managing our expenses and construction has begun on our reduced office space footprint. As we reported last quarter, we are moving forward with our advisors and continue to pursue a first quarter 2018 refinance. We are encouraged by the strength of our core brands and our initiatives into next year. Let me walk you through some of the highlights by division. Our Active division remains strong performing above plan with consistent growth. AND1 continues to be a big driver and had successfully captured additional market share as a lifestyle brand. Plans are currently underway for a new marketing initiative celebrating AND1’s 25th anniversary in 2018 including a brand endorsement by a globally-recognized NBA player. We expect to have more information to share on this exciting initiative during the quarter. AVIA continues to exhibit strength at Walmart and we anticipate further growth in shelf space going forward. In the quarter, we announced the first ever brand ambassador for GAIAM. Actress Jessica Biel is now the face of the highly popular yoga and wellness brand and will appear in a new marketing campaign this spring. We also plan to launch a capsule collection co-designed by Jessica Biel that is expected to debut in stores fall of 2018. We are excited about this partnership as it broadens the brand’s exposure to a wider audience and opens up the brand to more retail distribution. We are also on schedule to launch the GAIAM Yoga Experiential store inside New York City’s Lord & Taylor this month with plans to expand to additional stores next year. We continue to believe that we have only scratched the surface with the GAIAM brand as we see several opportunities to expand it globally and into new categories. In the Fashion division, the Jessica Simpson brand continues to hold its own in this retail landscape. We have many plans underway for the brand including a relaunched e-commerce site and expanded categories. As announced last quarter, we continue to grow the Ellen Tracy brand in key categories including dresses, outerwear, handbags and beddings. Joe’s core business with global brands groups continues to grow year-over-year. The brand has great traction at retail as a result of innovative merchandizing and product development which are driving the business. The brand’s footwear line is performing well with great placement and sell-through. There has been so much activity happening in the Home division starting with the kick-off of the Martha Stewart partnership on QVC in the quarter. Martha launched apparel, garden and food and outperformed above QVC’s expectations. In fact, the launch of Martha’s apparel line, according to QVC was one of the best apparel line launches in their history. Martha heads back to QVC tomorrow to launch their latest new category Skincare and next month should be launching Martha Wines just in time for the holidays. It’s clear that Martha really resonates with the QVC consumer and we are looking forward to an expanded assortment of categories in 2018. Also in the quarter, we rolled out the soft launch of our new relationship with Michael’s starting with our holiday assortment. We are on track for the full launch of our craft business at Michael’s in 2018. Our Martha Stewart holiday line at the Home Depot also launched at all stores across the country recently and the line looks fabulous and it’s also a strong performer. For Macy’s, we’ve developed a strong partnership with a new team and are working closely with the team on opportunities to expand the brand throughout the store. We are projecting significant growth for our Martha Stewart Wines business due to marketing partnership that has been successful for the brand as well as expanded distribution into channels such as QVC as I just mentioned. Sales of our meal kit business with Marley Spoon continue to grow month-over-month. We have been introducing new product offerings such as our Thanksgiving box and will be rolling out a holiday cookie box kit at the end of the month. On the media front, Martha has been incredibly busy. She launched her 88th book Martha Stewart’s Slow Cooker in the quarter and on Tuesday, she launched her 89th book Martha Stewart’s Newlywed Kitchen. Last weekend, she did a cooking demonstration from this book in Scottsdale at our latest USA Today Food and Wine Event. This was a third event that featured Martha since launching our partnership with Gannett. These events have been a great marketing opportunity for the brand getting Martha out to key local markets across the country, as well as showcasing our retail partners and branded product offerings to all consumers who attend. During the quarter, the second season of Martha and & Snoop's Potluck Dinner Party on VH1 premiered with phenomenal ratings second to Monday Night Football for the night with over 1.8 million people tuning in. The show offers the brand exposure to an audience of all ages, but specifically millennials which had an increased viewership of 17% during the premiere. As we have mentioned on previous calls, the Martha business is a key growth driver for the company and we have many initiatives underway that are very exciting for the future of the brand. It’s important to note that we have been careful to take our time in building out the Martha Stewart business in a selective manner pursuing only those opportunities that we see benefiting the brand over the long-term. Also in our Home division, we have been gaining momentum with our Emeril business, which recently expanded into Lowe's and Sands Club, both terrific retailers and new distribution partners for the company. Emeril continues to be a terrific and committed partner most recently appearing on QVC two weeks ago to promote his food and air friar. The Emeril brand has a strong consumer following and combined with its core licensees, we believe it has the potential for larger near-term growth. In closing, let me say that, while the quarter did not meet expectations, we are no less deterred about the work we are doing and the progress we are making. Growing our core brands and strengthening our capital structure are our main priorities heading into next year. We believe we are putting the right people and processes in place to deliver against our preliminary targets of high to mid single-digit revenue growth and low to mid single-digit adjusted EBITDA growth. Thank you for joining our call today and now, I will turn the call back over to the operator for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Steve Marotta with CL King. Please proceed with your question.

[Steve Marotta:]

Good morning, Karen and Andrew.

[Andrew Cooper:]

Hi, Steve.

[Steve Marotta:]

I wanted to just talk a little bit about revenue growth next year, you mentioned mid to high-single-digit. Can you please talk about the opportunities by brand? Obviously, not quantify, but at least qualify what do you think the driver, the brand drivers will be for that revenue growth? And maybe, what some of the laggards would be as well?

[Karen Murray:]

Hi, Steve. How are you? It’s Karen.

[Steve Marotta:]

Hi.

[Karen Murray:]

Okay. So, for 2018, we are really optimistic about the brands. As you know, I think we have probably the best brands, portfolio brands in the business. The brands are versatile and our pipeline this year is more robust than the exact time last year. To talk about the brands specifically, there is growth within Martha. As you know, it’s our most diversified brand in the portfolio. We could sign traditional deals, as well as non-traditional licensing deals for the Martha brand and we are doing that. Much of what we have in place will be annualized for 2018 and we are really excited about that. So, Martha continues to be a big growth driver for the business, as well as some of the other brands within our portfolio like GAIAM, which is one of the most exciting brands within the portfolio because of the fact that it fits within the health and wellness area. GAIAM is a brand that is nicely positioned today with hard and soft goods within the health and wellness space. But we are also expanding the apparel line in clothes and outside of clothes. We signed a new brand ambassador there Jessica Biel and that will help us really drive retail distribution in all different channels of distribution. I think we have global opportunities with GAIAM. We are also building out our space at Lord & Taylor that we talked about last time on the call. We are really focused on providing solutions with our brand, not just GAIAM but also Martha providing solutions to our retail partners and driving traffic. The Lord & Taylor example is just one of the examples where we are providing solutions with a different type of experiential space. And there is also expansion opportunities with nutritional food and beverage with the GAIAM brand as well. So, in addition to that, AND1 is a really exciting partnership where we are also about to announce a new NBA player as our brand ambassador for AND1. That brand continues to grow and it’s a really strong brand for the Active division.

[Steve Marotta:]

That’s helpful. And talking about the cost side, looking ahead to 2018, I believe, I remember correctly, from a least savings standpoint, you’ve got about $4 million to $5 million there. Can you talk a little bit about the other puts and takes associated with the sales line becoming the EBITDA line?

[Andrew Cooper:]

Yes, absolutely, Steve. So, with respect to the rent, you are right, we’ve – the good news is we’ve begun construction where cutting the space in half. It’s going to be a beautiful space having very functional for the company. A good portion of the savings ultimately ended up impacting 2017, which is good news and we will continue to see those savings in 2018. With respect to other expense categories, we had very robust margins in 2017. As we look ahead, what we talked about is mid-to high single digits growth on the top-line, which we are very excited to achieve and low-to-mid on the EBITDA line. So what that translates basically is, some additional marketing expense which we believe will really help fuel that growth that we are looking ahead to in 2018.

[Steve Marotta:]

That’s very helpful. Thank you.

[Operator:]

Our next question is from Camilo Lyon with Canaccord Genuity. Please proceed with your question.

[Camilo Lyon:]

Thanks. Good morning everyone. I was hoping you could just talk about how the e-commerce portion of your sales are unfolding in your key brands? And what the outlook is for the international growth component of those key brands as we go into 2018?

[Karen Murray:]

Hi, Camilo, it’s Karen. So, even on the last call, we talked about the digital and the international opportunities and I still believe they are by far the biggest – one of the biggest opportunities that we have within Sequential with each and every one of our brands. Digital to be specific, we are looking, as I stated last call to bring in some new talent that really has expertise in this area. We are getting close to announcing some new hires. It’s an opportunity for all of our brands because, as you know, we are underpenetrated in the digital area. We continue with a three-pronged approach. The first one is, really figuring out a way that each and every one of our brands are represented in the right way on Amazon and they are all moving forward and building their partnership with Amazon. In addition to that, we continue to grow with all of our retail partner sites, such as Macys.com. And the third opportunity is really building out branded ecommerce sites. So, again, three opportunities to grow in the digital space as well as really focusing in on all of our brands and ensuring that we have a digital strategy that makes sense for substantial growth in the future. As far as, international, that also is an area that is underpenetrated, but I believe is one of our biggest opportunities, probably even more so than digital at this point because of the fact that, we again are hiring some key talent to help us figure out the roadmap to grow our brand. We have tremendous opportunity with the Martha business and bringing that to Asia and building that brand, we already are in dialogue with Alibaba in a substantial way. We are doing Macy’s through T-Mall. But there are many opportunities to grow our brands, specifically in Asia. But globally as well. So, big opportunity for us.

[Camilo Lyon:]

Thanks for that, Karen. Shifting gears just a little bit here on the brands that you are looking to dispose. Is there any contemplation of what the value is that you could receive for those brands? And is that influencing the – some of the refinancing discussion that are ongoing now? In other words, will you use those dollars to pay down some of that debt? And have that be a portion of the refinancing discussion or is the refinancing discussion irrespective of any sort of potential sale of non-core brands?

[Andrew Cooper:]

Right. I’ll answer the last question first. So the refinancing discussion is irrespective of any of these sales of non-core brands. And I say that because – not because we don’t want to achieve a couple of divestitures. But really because it’s our smaller brands and ultimately, as we talked about on previous calls, while we are pursuing that, and actually in some advanced discussions on a couple, it’s not going to be a hugely material amount. So it will be helpful to the company, helpful to the balance sheet and also, I think helpful strategically as we really focus, when you look at 2018, and as Karen has talked about, we've got some real growth drivers with some of our core brands. And so, it will really allow us to focus our resources in the right place.

[Camilo Lyon:]

Great. Thanks and good luck with holiday guys.

[Andrew Cooper:]

Thanks.

[Operator:]

Our next question is from Dave King with Roth Capital Markets. Please proceed with your question.

[David King:]

Hi, morning.

[Andrew Cooper:]

Morning.

[David King:]

I guess first off, in thinking about that mid-single-digit to high-single-digit top-line growth that you are targeting in 2018, can you talk a little bit about which brands, it sounds Karen, like you sort of touched on the segments being international and e-com but, which brands do you expect to sort of be the biggest drivers of that growth? And where do you see the biggest opportunity?

[Karen Murray:]

Yes, I think, it’s the same that I talked about earlier. I definitely think Martha, I didn’t really touched on QVC. As you know, that we just launched QVC with Martha in just three categories. And all of those categories performed so well and surpassed QVC’s plan. So, as we look to 2018, we are in active dialogues for probably six to eight new categories. So when you think about the business annualized for 2018, there should be substantial growth within the QVC business with Martha. So we are really excited about that and excited about the new opportunities and the new categories that we could open up. In addition to that, it’s the other brands that I just spoke of, GAIAM can be expanded as I said, in categories, in experiential opportunities within existing retail partners, internationally. We didn't even talk about the global expansion. So there are just so many opportunities and by signing Jessica, I think that will open it up to more elevated experiences as well and a bigger portion of our business will come from GAIAM. AND1, we wouldn’t have signed a new ambassador if we weren't serious about our intentions to grow that business. That will be announced shortly. So we have big growth plans for AND1. And in addition to that, Joe’s has been a bit of a sleeper, because this year, we introduced some new products into the marketplace and they really performed well. And we have opportunities with Joe’s to not only extend out categories, but to build the core business. So, Joe’s has been an exciting brand for us as well. So those are the four that I think would contribute most to our growth for 2018.

[David King:]

Okay. That’s helpful. And then, - excuse me – Andrew, do you have where things stands currently in terms of lifetime GMRs. I think you ended second quarter with three $397.7 million. Just wondering where that was at the end of the third. And then as you think about the refi, what's the primary goal there? I think, we’ve talked in the past about it being to reduce interest expense. But just curious about what's the ability, willingness et cetera to try to give yourselves some additional dry powder, particularly given some of the challenges, maybe that are out there facing some of your peers. And I think one of those peers for example at one point – and you guys had I think that investment that you took a loss at one point was related to one of those peers that available for sale of securities investment. So, I am wondering, what’s the appetite to maybe look at that situation? Again, when they are having challenges and try to be more acquisitive in the environment, what’s the capacity? Thanks.

[Andrew Cooper:]

Right, okay. Yes, so, absolutely. With respect to the financing, primary objective number one is to reduce the interest cost to the company and ultimately, the best way for that to happen is to reduce our weighted average cost of the debt. And we are optimistic as we head into Q1 and in pursuing that opportunity, we’ve begun that process and ultimately, the market will dictate how far we can push that. There has been some good comps in the marketplace recently in terms of successful refinancing. Authentic Brands is a prime example of that and I think we can really achieve some of those savings on the interest rate. But flexibility to pursue M&A as part of our core strategy is, it’s something that is also an objective of that refinancing. And so, as we look ahead, whether it’s iconics or it’s many other brands out there in the marketplace, there will be opportunities. As we sit here today, we will be opportunistic. We will – if we could get something done that was accretive, and that was deleveraging, we would do that. But as we look at the refinancing, certainly a core objective is to open up that flexibility to be more aggressive in the M&A market.

[David King:]

Okay. That’s good color. And then, do you have that GMR number?

[Andrew Cooper:]

Yes, so, when we look at – I am going to get you some more details on a quarterly basis, but when we look at 2017 and beyond, the number is actually north of the 470 that we talked about on the last call.

[David King:]

Okay, okay. Perfect. Thanks for taking my questions and good luck for the rest of the year.

[Andrew Cooper:]

Thanks.

[Karen Murray:]

Thank you.

[Operator:]

[Operator Instructions] Ladies and gentlemen, we’ve reached the end of the question-and-answer session. This concludes today’s conference. You may disconnect your lines at this time and we thank you for your participation.