Sequential Brands Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Thank you and good morning. Before we begin, I'd like to bring your attention that statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties, and other factors, all of which are difficult or impossible to predict, and many of which are beyond the control of the company. This may cause the actual results, performance, or achievements of the company to materially differ from the results, performance, or achievements expressed or implied by such forward-looking statements. We refer you to our public filings and the press release we issued this morning for a summary of such factors. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identify forward-looking statements. Listeners are cautioned to not place undue reliance on these forward-looking statements, which may speak only as of the date the statement was made. Other than this, 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 of 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 turn the conference over to Andrew Cooper, President and Interim Chief Financial Officer. Mr. Cooper, you may begin when ready.

[Andrew Cooper:]

Good morning. Thank you for joining Sequential's fourth quarter and full-year 2017 earnings conference call. Total revenue for the fourth quarter increased 3% to $46.9 million compared to $45.4 million in the prior year's quarter. On a GAAP basis, the net loss for the fourth quarter 2017 was $162.9 million or $2.58 per diluted share which includes one-time net charges of $171.7 million related to both the recent federal tax reform legislation and the company's goodwill. The tax reform impact was $132.4 million non-cash positive benefit in the fourth quarter. Specifically, the company revalued its deferred tax liabilities based on the new lower federal tax rates and released the valuation reserves on its federal deferred tax assets. The goodwill adjustment represents a one-time, non-cash charge of $304.1 million that was driven by the company's stock price during the fourth quarter, as well as the increase in the company's book value related to tax reform, which resulted in an assessed fair value of equity that was below its net book value. This adjustment is unrelated to the carrying value of the company's trademark which have not been impaired and it is not in our view reflective of the underlying value of our brands. This compares to a GAAP net loss in the prior year fourth quarter of $1 million or $0.02 per diluted share. On a non-GAAP basis, net income for the fourth quarter was $7.8 million or $0.12 per diluted share compared to $7.3 million or $0.12 per diluted share in the prior year period. Adjusted EBITDA for the fourth quarter of 2017 was $27.4 million compared to $24.2 million in the prior year quarter. Total revenue for the year ended December 31, 2017, increased 8% to $167.5 million which includes approximately 4% organic growth. This compares to $155.5 million of revenue in the prior year. On a GAAP basis, the net loss for the year was $185.7 million or $2.95 per diluted share which includes the previously mentioned one-time net charges in the fourth quarter of $171.7 million related to both the recent federal tax reform legislation and the goodwill adjustment. Also reflected in the net loss for 2017 were the non-core charges of $45.1 million highlighted on previous calls. This compares to a net loss in the prior year of $0.8 million or $0.01 per diluted share. Non-GAAP net income for the year was $27.9 million or $0.44 per diluted share compared to $21.0 million or $0.33 per diluted share in the prior year. Adjusted EBITDA for 2017 was up 18% to $98.4 million compared to $83.1 million in the prior year. We closed the full-year of 2017 with approximately $20.4 million of cash, including restricted cash, and $624.3 million of net debt. Our adjusted free cash flow for 2017 was $39.4 million which includes 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 our licensing business. Looking ahead for the full-year 2018, we continue to expect mid-to-high-single-digit revenue growth and low-to-mid-single-digit adjusted EBITDA growth reflecting additional marketing investment into our brand as we described last quarter, but excluding the impact of any acquisition. Similar to our historical results, we expect revenue for 2018 to be weighted to the back half of the year, given the natural seasonality of our businesses, and planned and new business. Additionally we are coming up against certain expired Martha Stewart legacy licenses that were included in the first half of 2017. Finally, our refinancing efforts continue to progress and remain on track for an early 2018 refinancing. We believe a successful refinancing will enable the company to reduce its weighted average interest rates, increase overall free cash flow, and provide additional flexibility for the company to both continue to pay down debt and pursue accretive de-levering acquisition opportunities. With that, let me turn the call over to Karen.

[Karen Murray:]

Thank you and good morning to everyone joining us for our fourth quarter and full-year 2017 earnings call. It's been a strong productive year and a solid fourth quarter. We ended 2017 in line with expectations with $167.5 million in revenue, up 8% over last year, and organic growth of 4%. Adjusted EBITDA was $98.4 million, up 18% over last year. It's worth noting that our adjusted EBITDA margin was particularly strong at 59% over last year's margin of 53%, as the company lowered its expenses and demonstrated operating leverage. For 2018, our team continues to build the leading global brand management and Media Company with a powerful portfolio of consumer brands in home, active, and fashion. Sequential is focused on brand building, licensing, and our activation capabilities which grow our revenues through existing diversified categories, as well as a prioritized focus on new business development which I'll talk more about in a moment. We remain disciplined when it comes to managing our expenses, and as Andrew mentioned, our refinancing plans are underway. We believe a successful refinancing will allow us more flexibility when it comes to our balance sheet and to be opportunistic on the acquisition front, focusing on deals that are both de-levering and accretive to the company. Prior to discussing the highlights of each division, as we announced in the press release this morning, I am pleased to share that the company's CFO role will be filled by Peter Lops, a strong candidate who is an experienced public financial and operating leader. He joins us from Viacom Media Networks where he was CFO and COO for the Content Distribution Division; we look forward to him joining the team. Andrew and our finance team have done a terrific job and we can't thank them enough. Now taking a look at the highlights in each of our three divisions. The Active division is up year-over-year due to a number of activities. This year marks the first full-year with GAIAM which continues to be a success in our portfolio. As announced previously, Jessica Biel is the brand global ambassador, and plans are currently underway for a Jessica Biel capsule collection to be distributed at better department stores, starting this fall. In November, we launched an experiential shop and shop inside New York City's Lord and Taylor which incorporates a health and wellness concept inclusive of Yoga classes, care massages, and virtual reality meditation, as well as a GAIAM branded shop. The concept is off to a successful start and has been a terrific traffic and sales driver for Lord and Taylor. This is a great example of solutions we can provide to our retail partners as we continue to activate through experiential marketing and sales. There are several new categories where we can take the GAIAM brand going forward. Examples of those categories include home, food and nutrition, which is a space we recently entered with the launch of GAIAM branded organic supplement. AND1 continues to be a key performer in Active, with its core business performing well, socks, underwear, and sporting goods, have grown dramatically over the past year. We recently announced an exciting new partnership for the brand with NBA legend Kevin Garnett as the brand's new global brand ambassador and creative director. There are many new initiatives in the work that we have planned with Kevin, including the launch of his capsule collection as well as other marketing activation opportunities which will further escalate the brand in the marketplace. We also signed a new brand ambassador for AVIA that we will plan to announce in the coming weeks. This soon to be announced ambassador plus Jessica Biel and Kevin Garnett reach more than 16 million consumers on social media platform. This vast reach, coupled with our powerful group of credible, authentic influencers, is impactful in raising the awareness of our brands and driving brand engagement, which ultimately drives sales. The AVIA brand continues to show organic growth of existing categories including active sportswear, socks, and footwear. We've also seen expanded square footage of selling space for the AVIA brand inside our retail partners. Our second vertical is Fashion, which was up in 2017 versus the prior year. We just launched the new spring marketing campaign for the Jessica Simpson brand and have identified a number of growth opportunities in home, nutrition, and beauty. In fact, we just signed a new partner for beauty accessories and have plans to further expand that category. The Joe's brand was a big performer in the Fashion division and continues to be one of the leading premium denim brands in the market. Joe's has seen growth at both brick-and-mortar and online. One of our key fashion brands Ellen Tracy recently launched its spring campaign with Irina Shayk and we're presenting her co-branded capsule collection to retailers next week at fall market. Ellen Tracy continues to gain traction at retail and has seen nice results in categories including beauty. Moving to our last vertical, Home continues to be our biggest growth opportunity for the company. However it should be noted that certain legacy Martha Stewart discontinued businesses mask the true organic growth year-over-year. As previously discussed, these legacy businesses include the expected expiration of J.C. Penney, and a former Kraft partnership which has since been replaced with a direct to retail partnership with Michaels. In addition, there was a pet business at PetSmart and now we have a new pet collection launching on Amazon in QVC this spring. Excluding these discontinued revenues from last year, our Home division would have grown 14% year-over-year. Martha on QVC continues to be a huge hit. The brand is unique on the QVC platform as it spans many different categories from skincare to apparels, garden and food. We're projecting significant growth this year with plans to expand our product assortment to include new garden products, household cleaning products, lighting, accessories, outerwear, loungewear, craft, and seasonal décor. At Macy's, the Martha Stewart collection remains strong and Macy's is projecting it to grow more than 15% in 2018. Macy's is launching a new Martha Stewart Essentials Collection in April at a new opening price point including categories such as bedding, bath, tabletop, and cookware. And in the spring, we will be debuting ready-to-assemble furniture on Macy's.com and we're in discussions for further category growth in the latter part of 2018. New categories and licenses include a new line of package food that includes baking mixes, couscous, sauces, confections, and more. At Home Depot, the brands business continues to perform well in focused categories such as kitchen, bath vanities, and holiday. Last, we're looking forward to the full launch of the Martha Stewart line-up Michaels in early April. The Martha Stewart celebrations line will include 25 day of party supplies spanning 10 different themes. We continue to feel bullish on our pipeline of new business activities for the Martha brand which includes exciting non-traditional high margin partnerships that we expect to update you on during our next call. We are pleased with the momentum we're seeing with the Emerald brand as well. The brand is now at Sam's Club and Lowe's on QVC, and starting in August, its cookware line will be launching in all Bed Bath & Beyond stores. As I mentioned in my opening remarks, looking ahead, we are focused on growing organic growth through existing partners and new business developments. To that end, we have bolstered our resources in the areas of business development and are particularly focused in the following areas. Number one, international. We have a roadmap in place to build our brand presence in the countries where we believe our brands resonate that. Those countries include China, Japan, Mexico, and Latin America. In fact, I just returned from Shanghai, where we met with trading partners, manufacturers, and marketing companies. We signed a partnership for one of our Active brands in Asia that we will be announcing soon. And our team just had a meeting in Mexico with key retail partners to discuss opportunities across our portfolio. One of the brands that has started to gain traction internationally is Joe's, the brand is particularly strong in Japan, Canada, and Mexico. Number two, e-commerce. Our strategy is a three-pronged approach that includes building out our own brand website, growing our presence on our retail partner sites such as Macy's.com and Walmart.com, and expanding on third-party sites such as Amazon. We've made progress. Our e-commerce business with our top brands Martha, Joe's, and GAIAM are collectively up 24%. The Martha brand benefited from new pure-play e-commerce partnerships such as our meal kit business with Marley Spoon, and our Martha Wines business, while GAIAM experienced 69% growth on Amazon. We have a focus plan in place for 2018 which includes new growth activations such as the launch of our Martha Stewart branded shop on Amazon in May. Number three, strategic brand integration. Due to the authenticity and power of our brands, we believe, we have the ability to further monetize our portfolio outside of the traditional product licensing partnership. Examples include our Martha Stewart connect partnership, endorsement opportunities for several of our celebrity brands, content distribution, experiential events, as well as numerous opportunities in the health and wellness space for GAIAM. Number four, domestic category and distribution growth. As mentioned throughout my remarks, we have a number of untapped growth opportunities across our brands. Additionally, we have multiple discussions underway regarding the broadening of our distribution channels for our four brands. Some examples include our AND1 Kevin Garnett capsule collection that we plan to launch in specialty stores and boutique as well as the launch of Emeril Lagasse's cookware line in all Bed Bath & Beyond stores in August. In closing, we are focused on executing across all of these opportunities as we drive towards our full-year 2018 projections. We look forward to updating you throughout the year on our progress with these revenue initiatives and the refinancing activities. Thank you all for joining the call. I'll now turn the call back over to the operator for Q&A.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Steve Marotta with C.L. King & Associates. Please proceed with your question.

[Steve Marotta:]

As it relates to the sales and EBITDA target for 2018, you previously discussed I believe mid-to-upper-single-digit growth for sales and low-to-mid-single digit growth for EBITDA or at the very least sales growing faster than EBITDA. Has that been reaffirmed today and can you talk a little bit about the puts and takes and investments necessary in order to generate those numbers?

[Andrew Cooper:]

Yes, thanks Steve, yes. We are reaffirming that guidance framework of mid-to-high-single-digit growth on revenue and low-to-mid on EBITDA, and Karen can touch on some of those drivers.

[Karen Murray:]

Regarding EBITDA, you're right. It's a little bit lower than revenue growth and that's due to investments that we are making for our key brands. As you know, we invest in brand ambassadors and that's part of the reason why our EBITDA growth is slower rate than our revenue growth. But we think it's really important to do for the health of our brands.

[Steve Marotta:]

Okay. And Karen you are quite comprehensive in the prepared remarks, I just have one other question regarding the brand website where do you stand in that process, how long do you think it'll take to have e-commerce related brand websites across your portfolio?

[Karen Murray:]

Right. Again we think that's one of the -- and we have been talking about this, but one of the most underpenetrated areas for our brand. And brand websites, I would tell you that the platform -- our platform is unique in that we really need to, if we're going to grow our brand websites, we really need to work in partnership with an operator, and we're very close to doing that. We have real growth on our partner retail sites such as Macy's.com and Walmart.com and we're expanding greatly on Amazon. Regardless our e-commerce business is up from Martha, Joe's, and GAIAM, about 24% but the branded website is an absolute opportunity, but we need to do that in partnership with an operator. But we feel really good about our progress regardless in digital.

[Operator:]

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

[Camilo Lyon:]

Good morning. Can you talk about the international roadmap and what you're gaining some traction with some of the key brands in some of the key markets? Could you just delve into that roadmap and maybe the timeline around when some of the fruits of that labor shall we say will start to pay off? And how do we think about that opportunity from a mix perspective representing what it represents today and what that can ultimately become?

[Karen Murray:]

Yes. Thanks, Camilo. Yes, I think we've been talking since I joined almost a year ago about digital being underpenetrated and real growth opportunities there, and international is the second callout. And we do have a roadmap in place now for expansion into specifically China, Japan, and then, Mexico, and Latin America, which wasn't on our radar screen as much as it is now. I would tell you that we already have nice growth with -- in 2017 with Joe's. We had strong growth in Japan, Canada, and Mexico. But I did just return from Shanghai and we had several meetings with -- we had meetings with Alibaba, but also potential suppliers and trading partners. It's just not that easy to do significant business overnight with Alibaba and Tmall and what we needed to do was meet with the suppliers, understand cross-border, work with trading partners, and we now have also hired an agent to help us with that process. We're also doing business in with [Macys.cn.com] [ph] and that continues to grow. And what we really need to do is bring the key brands there and penetrate that territory much more extensively than we are today, but we are meeting with agents, so we hired an agent and they're helping us really lay out a plan for China. And, in addition, we will be announcing within the next week or so a new partnership that we signed for one of our Active brands. And then, last but not least, I mentioned Mexico. We had our team in Mexico meeting with potential key retail partners and suppliers and that's pretty much across our portfolio of brands. So we're expecting to join forces with some of our retail partners in Mexico shortly. So again it's laying out the roadmap in place to expand and we're -- we've identified China, Japan, Mexico, and Latin America, and have hired some agents to help us move that agenda along and get that percentage as a bigger percentage to our total business.

[Camilo Lyon:]

Great. And just remind us what does international make up and let's assume that all these initiatives come to fruition this year, does that setup, what kind of growth trajectory does that setup for 2019?

[Karen Murray:]

Well I think we talked about international being at approximately 10% of our business and some of these conversations that I just alluded to will happen for the latter part of 2018 but yes 2019 is the real growth. We expect that international could and should represent 25% of our business.

[Camilo Lyon:]

Got it. Great. Thanks very much guys. Good luck here.

[Karen Murray:]

Thanks, Camilo.

[Operator:]

Thank you. Our next question comes from the line of Dave King with Roth Capital Partners. Please proceed with your question.

[Dave King:]

Following up on the earlier question, how do you expect the first half revenue growth - first half 2018 revenue growth compared to the mid-to-high-single-digit target, you gave for the year? Is that the right number or could that be down given the legacy Martha Stewart licenses that are expiring, how should we think about that?

[Andrew Cooper:]

Yes, I think from a framework perspective, you're thinking about it right. Overall we're excited about the growth heading into 2018 or as we are now proceeding through 2018. But in the first half of the year sure you should think about how business from a seasonality perspective has being weighted towards the back half of the year, and again, as we highlighted in the prepared comments, the legacy expirations on the Martha Stewart business would also be a factor there. So, yes, I do believe you've articulated it correctly.

[Dave King:]

Okay. So I guess maybe in terms of the legacy licenses that are expiring, what was the revenue contribution in 2017 or the first half of 2017 or how material is that dollar amount?

[Andrew Cooper:]

So those legacy expirations center around three things, the historical J.C. Penney revenue stream, the PetSmart business, and the craft business which in both cases pets and crafts we're transitioning to what we believe will be very successful partnerships. So we haven't spoken about specific deals and specific numbers. So we're not going to do that on this call but it was meaningful enough for us to call it out here as a comp item as we head into the first half of 2018.

[Dave King:]

Okay, okay. And then in terms of Martha the QVC, you have what that generated in the quarter for the year, and then, more importantly, can you talk about your expectations for that in 2018, how many more categories are you going to be doing versus previously, what's the planned increase in airtime and then just how much more revenue do you expect that business to contribute versus 2017?

[Karen Murray:]

I think we talked on the last call about it was primarily a fourth quarter launch in 2017 where we introduced four categories

[Dave King:]

That’s great. And then, the 48 number do you have how many segments you did in the fourth quarter of 2017?

[Karen Murray:]

In the fourth quarter of 2017 we did about five to six segments I think somewhere around there.

[Dave King:]

Okay, that's great. Really encouraging. Thanks again.

[Karen Murray:]

Yes, yes, very exciting.

[Dave King:]

In terms of the goodwill write-down in the quarter was that associated with any brands in particular?

[Andrew Cooper:]

No. So it’s an important distinction that you're making there. The goodwill impairment really was a result of our stock price in the fourth quarter which resulted in a market cap that was well below our book value of the equity. So that's just let us to reevaluate the goodwill and ultimately determine to write-down the goodwill, but the goodwill is unrelated completely unrelated to the strength of our brands, unrelated to any impairments or anything like that on our brands which we did not have this quarter. So no it does not reflect that all on the value or the trademarks, it's not associated with any of the trademark, and doesn't reflect at all on -- as our positive view on the strength of the brands going forward.

[Dave King:]

Perfect. Okay. And then I guess last one for me what are Andrew your updated thoughts on re-fi I guess what sort of rate you expect you can get, how much do you think you can reduce your amortization requirement, and then, where do you think your leverage might end up versus that what I think about 6.2 times of this net leverage currently? Thanks.

[Andrew Cooper:]

Yes, so it's progressing really well and as we said on our remarks we are still progressing towards our objective of early 2018 events. Just to give a little bit more color we were finalizing preparations with our advisor. We've had productive discussions with rating agencies and we are optimistic as we look and based on all those conversations we're optimistic as we look forward over the next 45 to 60 days here and getting going. So we feel good about that. In terms of the objectives, our primary objectives are to reduce our weighted average interest rate. And when you look at other transactions and other similar profiles from companies, you see opportunities to reduce 150, 200 basis point on the interest rate in terms of how we're thinking about it. We certainly expect to be able to increase our cash flow profile as a result of a potential refinancing and of course provide additional flexibility in continuing to pursue accretive de-levering acquisitions.

[Dave King:]

Okay, thanks. Thanks for the color and good luck for the rest of 2018.

[Andrew Cooper:]

Thank you.

[Karen Murray:]

Thank you.

[Operator:]

[Operator Instructions]. Thank you ladies and gentlemen. This concludes the Q&A session and thus concludes our call for today. Thank you for your participation and interest. You may disconnect your lines and have a wonderful day.