Sequential Brands Group, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good morning and welcome to the Sequential Brands Group 2014 Third Quarter Earnings Conference Call. Please note that this conference call will be available for the next 30 days on our website, www.sequentialbrandsgroup.com. Before we begin, I would 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 be materially different from the results, performance, or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident, or similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. Other than as required by law we undertake no obligation to update or revise such forward looking statements, whether as a result of information, future events or otherwise. Additionally, the terms adjusted EBITDA and non-GAAP net income are all non-GAAP metrics and reconciliation tables for each can be found in the press release distributed today and on our website, www.sequentialbrandsgroup.com. I will now turn the conference over to our host today Chief Financial Officer, Gary Klein. Mr. Klein. Please proceed.

[Gary Klein:]

Good morning and thank you for joining Sequential’s third quarter earnings conference call. On today’s call, we will review our 2014 third quarter results and provide an overall update on our business. For the third quarter that ended September 30, 2014 the company earned revenue of approximately $10 million, representing an increase of 65% to our prior year quarter revenue of approximately $6.1 million. Adjusted EBITDA for the third quarter increased 60% to approximately $6.1 million, compared to approximately $3.8 million in the prior year quarter. Non-GAAP net income for the third quarter was approximately $2 million or $0.06 per share compared to approximately $2 million or $0.08 per share in the prior year quarter. In addition to our strong financial metrics for the quarter our balance sheet remains well-positioned for growth as we closed the quarter with approximately $27 million of cash on hand. For the nine months that ended September 30, 2014 the company earned revenue of approximately $23.3 million, representing an increase of 93% to our revenue of approximately $12 million earned in comparable prior year period. Adjusted EBITDA for the nine-month period more than doubled to approximately $12.9 million compared to approximately $5.1 million in the prior year period. Non-GAAP net income for the nine-month period was approximately $3.9 million or $0.13 per share, compared to $1.4 million or $0.09 per share in the prior year period. A brief note about our tax rate, although our GAAP pre-tax income was negative in the third quarter and is expected to minimal for the year, primarily due to one-time deal cost associated with the Galaxy transaction, the company is expecting to record approximately $2.8 million of taxes for the year, of which $2.5 million is expected to be non-cash. We believe this is an anomaly, and in future years the company’s tax rate will be approximately 35%. Therefore, we have adjusted our non-GAAP results to reflect a normalized tax rate of 35%. I would now like to turn the call over to our Chief Executive Office Mr. Yehuda Shmidman.

[Yehuda Shmidman:]

Thank you, Gary, and good morning, everyone. We are pleased to report another quarter of strong financial results from our portfolio of 12 consumer brands. Our primary focus continues to be on executing our core organic growth initiatives. Here are some highlights from this past quarter and overall as it relates to our plans for the full-year and beyond. First, this past quarter we announced the signing of movie star Paula Patton as the new brand ambassador for Ellen Tracy. Ms. Patton follows in the footsteps of Cindy Crawford, Stephanie Seymour, and Christy Turlington, all of whom have been previously featured in the brand’s ad campaigns. We are working with Ms. Patton in multiple ways to promote Ellen Tracy, together with our licensees and retail partners. Also this past quarter, we successfully launched William Rast in the U.S., in all Lord & Taylor stores with both men’s and women’s shops. The launch was promoted to the public with a concert performance by Jessie J on the roof-top of Lord & Taylor’s Fifth Avenue flagship store. The event was attended by members of the media and garnered over 425 million media impressions, including coverage on Justin Timberlake’s social media platforms. Another highlight from this past quarter was the successful launch of Avia into women’s sportswear and socks, which was marketed with circular and national TV advertising. With these example initiatives and others that are all designed to derive organic growth we are projecting revenue of $36 million to $40 million for the full-year 2014, with an adjusted EBITDA margin of 55% to 60%. Looking ahead to fiscal year 2015, we are projecting revenue of $61 million to $64 million, and adjusted EBITDA of $38 million to $40 million. Our revenue projections for each of this year and next year includes high single-digit organic growth driven by the addition of new categories for a number of our brands including William Rast, Heelys, Revo, and Avia. It includes international expansion for our brands with a focus on Avia, AND1, William Rast, and Ellen Tracy. And market share gains within our current licensee base for our brands, especially Avia, AND1, and William Rast, which are in their launch phase with best-in-class retail partners. In addition to our continual focus on growing our brand portfolio we are also continuing to actively pursue new brand acquisitions to achieve our goal of acquiring two to three new brands per year. We believe that we are well-positioned with our platform and our financial capacity to execute on this goal, especially in today’s environment where our pipeline includes more than a couple of hundred million dollars of potential royalty from multiple opportunities. As we head into 2015, we are encouraged by the transformation of our company to-date and even more excited about our potential in the future. In just over two years Sequential has grown to become one of the largest and one of the fastest growing pure-play brand licensing companies in the world, with a portfolio of 12 consumer brands generating $2 billion in retail sales. We have recruited an extremely talented activation team, the core secret sauce of our platform, who drive organic growth every day with our 75+ licensees. And we have strong partnerships on the financing side of the business, giving us confidence in our ability to continue growing our platform with new brands. Even still, I truly believe that this is just the beginning, and our future potential of achieving our three year goal of $3.5 billion in retail sales, $100 million in royalty revenue, and $70 million in Adjusted EBITDA is all within our reach. I like to sincerely thank all of our stakeholders for their continued partnership and thank you all for listening this morning. We will now open the call up to questions and answers. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question today comes from the line of Erinn Murphy of Piper Jaffray. Your line is open. Please go ahead.

[Erinn Murphy:]

Great. Thank you, and congratulations on a very solid third quarter. I guess my first question for you guys would be, for the eight brands that you owned prior to the Galaxy brand acquisition, could you just provide a little bit more color on what you’re seeing there in terms of organic growth rates? Are those brands growing in the positive direction? And then I’ve got a couple to follow-up on. Thank you.

[Yehuda Shmidman:]

Sure, absolutely. What we’re seeing in the business out in general, and certainly outside of the Galaxy brand, is a continued organic growth rate of high single-digit performance, despite a tough challenging macro retail environment as we all know. We are still seeing that organic growth within our business and so if you look at our full-year numbers. We’ve reiterated guidance today to be consistent with where we thought it was going to be when we last spoke about our guidance. And in those numbers includes the high single digit organic growth rate for this year and then again into next year.

[Erinn Murphy:]

Okay. That’s helpful. And then maybe just speaking a little bit more about Avia and AND1, it sounds like you guys have really been able to capitalize on this athletic trend through that acquisition. Can you just talk about kind of the future growth trajectory that you’re expecting as you continue to go deeper there? And then I think in your prepared remarks you did speak specifically about international as being one of those potential levers with those two brands, what do you guys have on deck as you think about 2015 for those brands across the pond.

[Yehuda Shmidman:]

Sure, sure, very excited about those brands. As you mentioned it being one of the core business units that’s really working out in the marketplace today and perhaps even over indexing is the world of athletic. And so with the ownership of a core basketball brand in AND1, and a core performance brand in Avia, we get very excited, we get very excited about the prospects for new categories within the core North American market, but also as you referenced into the international or across the pond area, we get even more excited frankly, because those brands have really just scratched the surface in terms of their distribution outside of America. If you think about Walmart International being one of the core anchors of our international strategies with both AND1 and Avia, when you think about general mass-market or mid-market distribution around the world for those brands. We think both have applicability and we’re very much exploring those opportunities as we speak.

[Erinn Murphy:]

That’s helpful and then just a last question from me. It would be just on the M&A environment. It clearly sounds very robust. It sounds like you guys are continuing to vet a lot of opportunities there. What are you just seeing in terms of multiples in this space for brands that are available and then how are you thinking about what you’re willing to pay for a brand if and when it becomes available to add to your portfolio?

[Yehuda Shmidman:]

Sure, sure, so there’s no questions that there is more competition in the space today than it has ever been before from what we can see. At the same time there are two other factors which are – it gives us confidence that we can execute on our plan. Number one is, as we mentioned early in the remarks the pipeline is incredibly robust which is very helpful giving us multiple opportunities to evaluate at the same time. And two, in terms of multiples, a lot of the multiple price, ultimately in our control in the sense that to the extent we can create value through new royalty and new licensing streams, new monetization, be it through new categories, be it through new international geographical growth, be it through new channel, the extent we can create that added value we can effectively bring down the multiples. So I think if you look at our track record of acquiring 10 brands in left two or so years, we kept that multiple range to responsible level to the disciplined level that we hope to be in. And over time we hope to be again within that range going ahead.

[Erinn Murphy:]

Thank you, guys. I’ll let someone else ask their questions.

[Yehuda Shmidman:]

Great. Thanks, Erinn.

[Operator:]

Thank you. Our next question comes from the line of Camilo Lyon of Canaccord Genuity. Your line is open, please go ahead.

[Camilo Lyon:]

Thanks and good morning, guys. Nice job in a tough environment. I wanted to ask about Galaxy and how this integration is progressing internally. Maybe you can talk about some of the synergies, the early synergies that you’re seeing, whether they exist in introductions to new retail partnerships that can lead to incremental distribution opportunities or even at the home office from shared best practices.

[Yehuda Shmidman:]

Sure, sure. Very excited about the integration overall. I think you highlighted some of the key areas where we see that integration happening and maybe I’ll try to add a few others, but first and foremost in terms of distribution there is absolutely a more diversified platform within Sequential today than ever before. So if you think about our 12 brands, they now trade from as high as, let’s say, Lord & Taylor and Nordstrom, all the way through the value equation to Walmart and other areas in the mass-market. So having that active business in multiple tiers of distribution is certainly very helpful, helpful in terms of evaluating new acquisition opportunities and as well looking at new opportunities perhaps within the other brand that we’ve already on. So the distribution is definitely one of the key synergistic benefits. Within the home office we were fortunate to get new talent together with the acquisition, so we did keep most of team that from the prior Galaxy office and thrilled to have them on-board. At the same time we’ve been sharing a lot of ideas together, it could be international ideas sort of partners that they had been working with or previously we had been working with, which now we’re working on together, so definitely seeing the synergy within the team. Then of course within the backlog, because all that was synergized immediately so finance, accounting, legal and the likes, so there was definitely a benefit that was baked in there. But by and large, big picture, the acquisition was transformational for us. It doubled the scale of our business, brought in new stakeholders, and we’re excited about it, as we look ahead into 2015.

[Camilo Lyon:]

If you can just drill down on the distribution opportunities, at what point can you start to see some leverage of that relationships, so that you can put some of your existing or pre-existing brands into those channels that you did not sell through prior to the acquisition.

[Yehuda Shmidman:]

Sure, sure, it happens case-by-case and step-by-step. I would say the biggest synergy if we were just sort of looking at it, right now this moment would probably be in terms of sort of new brand acquisition from how we’re thinking about new brands that could possibly trade within these channels. Within our existing brands we’re still very much staying in the course. So some of our brands which are positioned in department store level, we’re not looking to shift, but at the same time having that optionality is definitely something that gives us good comfort to the platform.

[Camilo Lyon:]

Great. And then if we can just focus on some of the brands specific commentary, I think you launched Revo during the quarter, was curious to see how some of that retail response or consumer response has been. And then on the U.S. launch of the William Rast brand, the similar question within the U.S., any initial reads there will be helpful? Thank you.

[Yehuda Shmidman:]

Sure, sure. On those two items, yes, Revo, we had our new product launch through our licensee in the core category of sunglasses. Well received that Sunglass Hut and excited about that prospect. Also we launched for the first time ever revo.com having a transactional e-commerce platform and that’s been an exciting development for us that will have a full year run-rate next year and beyond. And then on the William Rast side, we did launch successfully in all Lord & Taylor doors. We’ve been very pleased with that partnership, looking excited about new categories that are now rolling into that partnership over the next several seasons, and so excited about that transition as it’s now completed.

[Camilo Lyon:]

Sounds great. Thanks very much guys, and good luck in holiday.

[Yehuda Shmidman:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Eric Beder of Wunderlich Securities. Your line is open, please go ahead.

[Eric Beder:]

Good morning. Congratulations on a solid quarter. I apologize for…

[Yehuda Shmidman:]

Good morning, Eric.

[Eric Beder:]

I am going to pause a little bit. I came in a little bit late here. Could you talk a little bit about how you’re going to leverage Walmart relationship now that you are fully involved with the new acquisition and how you look upon the expansion of the Galaxy brand beyond just Walmart?

[Yehuda Shmidman:]

Sure, sure. So as it relates to Walmart, clearly an amazing retail partner for us and for anybody that works with them, just an incredible retailer. And certainly we are always evaluating opportunities of trying to present them with ideas of new business together. So in general, Eric, the way we think about Walmart is critical to have within our mix and in general the idea of having 12 brands in our portfolio and that now distribute as high as Nordstrom and Lord & Taylor and all the way through the value equation to Walmart. I think really bolsters our platform and as a company vis-à-vis our existing brand and new brand acquisition opportunities. As we think about the new brands, specifically, AND1 and Avia longer term, where we’re focused is on all three prongs of our organic strategy. So we are very much in active launch mode of new categories. For each of the brands we’re very much in active launch mode for new international expansion, and very much in active pursuit of new channels. So it’s not exclusive to any one retailer either brand, and you’ll see and continue to see both brands being distributed at multiple locations whether that’s in the U.S. or what. So those brands, we’re very excited about them both. And as I mentioned previously and today as well is really do believe that was transformational for us.

[Eric Beder:]

And just a conception on a philosophy, I’m kind of looking on a philosophy basis, this is on a DTR, what is your thought process on the DTR versus traditional licensing? I know that you guys are on mostly traditional licensing. Some of your competitors in your prior shop are very large into DTRs. What is thought process on kind of DTRs going forward?

[Yehuda Shmidman:]

Sure, both models have benefits to them. So in the – as you mentioned DTR or direct-to-retail model, certainly there is lot of value to that business model in many ways, retailers have tremendous excitement generally in those equation and we’ll typically treat those brand propositions with a lot of emphasis. On the other hand in the non-DTR model, for example, the way AND1 and Avia are constructed, you got the benefit of multiple channels of distribution. So in fact you’re not tied to call it comp store sale increases anyone retailer. And more importantly you can maintain a national brand status. So I think each one has a benefit as it happens in our business today, almost all of it is in the second equation in the non-DTR model.

[Eric Beder:]

Great, thank you. Congratulations again on a solid quarter.

[Yehuda Shmidman:]

Thank you, Eric.

[Operator:]

Thank you. Our next question comes from the line of Dave King of Roth Capital. Your line is open, please go ahead.

[Dave King:]

Thanks, good morning, guys.

[Yehuda Shmidman:]

Good morning.

[Dave King:]

I guess, first off, just kind of following up on some of these questions on organic growth. I guess, maybe Gary, as we look at the guidance for next year, for now $61 million to $64 million on the top line, I think that’s up about 8% or so, kind of from what your targeting post-Galaxy at least initially. I guess can you talk about what drove that increase in the context it sounds like you’re still kind of anticipating high single digit growth. On organic side is it – is it some of these Galaxy brands that you’ve got and you’re realizing there is more opportunity there than you originally thought or maybe just help us understand kind of what’s driving the trends there? That’s my first one, thanks.

[Yehuda Shmidman:]

Hey, Dave, it’s Shmidman. I’ll jump into this, just to give some added color in the organic side. As you said, the next year’s guidance takes into account for a high single digit organic growth, which is very much our continued goal and one we believe strongly and when you break apart it is, if you think about our business pre-Galaxy, and of course, Galaxy was very recent acquisition for us, those brands are continuing to grow high-single digit and as we acquired Galaxy very recently we put out a run rate for that in a forward 12-month basis, so when you combine it you see the organic. But what’s really driving it I think when you look through the brand, across the board we’re looking to execute on our strategy. So to give you some example, when it comes to category growth and think about William Rast having just launched in sportswear of Lord & Taylor, and behind that what we have which is not yet come, but is coming. The Taylor clothing, the dress shirts, on the women side, the various categories be it handbags, be it footwear, et cetera. So category growth is certainly one of those [Technical Difficulty] that across the board whether it’s William Rast, whether it’s DVS, whether it’s a Revo, or Heely’s. On the international side, again, continually focused on international, we spoke a little bit earlier about Avia and AND1, but it’s not just those brands, when you think about Ellen Tracy, we had a successful launch in South Korea, and we are looking at other markets in Asia and Middle East for Ellen Tracy at the moment and there are other international opportunities as well. And then, of course, on the channel side, each of our brands has a specific channel growth strategy with an emphasis on e-commerce and, of course, we were able to launch this year Revo and we are looking to launch each and every one of our brands into e-commerce by the end of 2015. So, hey, when you put all that together, Dave, is how you get to that high single-digit organic growth.

[Dave King:]

Okay, that helps, so it sounds like kind of strength across the board then it was encouraging. I guess, switching gears a bit then in terms of expressions on renewals, anything to report there in terms of once that have come up and anything about terms and then anything to note as we look forward, anything major coming up within the next year or so?

[Yehuda Shmidman:]

Nothing material within the next year.

[Dave King:]

Okay, perfect. Thanks a lot, guys, and congrats.

[Yehuda Shmidman:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Liz Pierce of Brean Capital. Your line is open. Please go ahead.

[Liz Pierce:]

Good morning. Thanks, I will add my congratulations. Just kind of, I guess, a few last. In terms of the types of deals that are coming to you, have you seen an increase in anyone particular kind of category are you seeing more in apparel that’s given the state of the apparel industry or is it just increases across the board?

[Yehuda Shmidman:]

It’s a great question, Liz. It’s interesting. We – acquisitions, of course, is an area where we don’t control a lot. But we do get, of course, very excited when the pipeline becomes as robust as it is today. What I would say to you is that most of the pipeline today is in the soft lines area in the apparel, fashion, and then related areas, athletic and sporting areas. We do have, of course, an eye for other categories, but we do believe this model works across multiple verticals in consumer. So we would consider brands in the electronic space or other related areas. But I think to answer your question directly in terms of where it happens to be today, it will be mostly in that soft lines arena.

[Liz Pierce:]

Okay. And then with AND1 and Avia kind of on the same node, as you think about potential category expansions, will they still be kind of true to the brand in terms of its athletic heritage or do you think that these brands can go into more traditional ready to wear, sportswear, or is that just doesn’t make sense for the brand?

[Yehuda Shmidman:]

Sure. For each of our brands and especially for the ones you mentioned Avia and AND1, we very much believe in the DNA of the brand. So when it comes to AND1 for example, with its basketball roots back in the early 90s, started with a – T-shirt and evolve from the there to become a dominant brand in basketball. We believe in that, and we believe that the category growth as it relates to its roots, gives us ample opportunity to achieve the growth that we are looking for. So we definitely plan to be core to the root, same thing for Avia, with Avia you got a brand that was found in the late 70s was a core brand throughout the 80s. And aerobics which has now evolved such a key world category of women’s athletic and general formats. And so we plan to be true to the roots, and again believe that within those roots you have the opportunity to grow pretty far certainly farther than we are in today.

[Liz Pierce:]

Okay. That’s good to hear. And then finally, any kind of update on Franklin Mint?

[Yehuda Shmidman:]

Sure. Franklin Mint, as we are getting closer to the end of the year, we still do plan to announce the retail partner who is on board for the launch. At a preference to that retail partner we are waiting to – until they are ready to announce that, which will be much closer to the actual launch date. And so while we can't announce it today, we are very much on track to have that launched before year-end.

[Liz Pierce:]

Okay, before year end. So will they be able to participate in – if it’s close to the launch date in kind of the holiday selling season?

[Yehuda Shmidman:]

Yes, that’s the plan.

[Liz Pierce:]

That’s the plan, okay.

[Yehuda Shmidman:]

Yes.

[Liz Pierce:]

All right, that’s the plan, thank you.

[Yehuda Shmidman:]

You got it, Liz, thank you.

[Operator:]

Thank you. And with no further questions in queue, I would like to turn the conference back to management for any closing remarks.

[Yehuda Shmidman:]

Great. Just want to thank everybody for their time and support on this call. And if anybody would like to speak with us further, we will be available for the rest of the day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.