Sequential Brands Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Good morning and welcome to the Sequential Brands Group Fourth Quarter 2014 Earnings Conference Call. Please note that this conference call will be available for the next 30 days on our Web site, 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 Web site, www.sequentialbrandsgroup.com. I will now turn the conference call over to our host for today, Yehuda Shmidman, Chief Executive Officer and Gary Klein, Chief Financial Officer. Mr. Klein. Please proceed.

[Gary Klein:]

Good morning and thank you for joining Sequential’s fourth quarter earnings conference call. On today’s call, we will review our 2014 fourth quarter and full year results and provide an overall update on our business. For the fourth quarter that ended December 31, 2014 the Company earned revenue of $18.6 million, representing an increase of 75% to our prior year quarter revenue of $10.6 million. Adjusted EBITDA for the fourth quarter increased 56% to $11.1 million, compared to $7.1 million in the prior year quarter. In addition to our strong financial results our balance sheet remains well positioned for growth as we close the year with $22.5 million of cash on hand and additional capacity under our existing debt facilities. For the full year of 2014 the company earned revenue of $41.8 million representing an increase of 85% compared to revenue of $22.7 million earned in the prior year. Adjusted EBITDA for the full year period nearly doubled to $24 million compared to $12.3 million in the prior year. For GAAP purposes the company recorded $10.3 million of taxes in the fourth quarter on $6.4 million of pretax income and for the full year the company recorded $2.9 million of taxes and $1.9 million of pretax income of which $2.5 million are non-cash. We believe this past year was an anomaly for tax purposes and the future years the company’s tax rate will be closer to a statutory rate of 35%. Therefore the non-GAAP tables including the press release today illustrate the current financials inclusive of a statutory rate of 35%. Of note working all this in mind we recently concluded a study of our historical NOL and based on this study we currently expect to have a tax yield of up to $27 million of pretax income for 2015 which we intentionally will substantially limit the amount of cash taxes payable in 2015. Further we expect to have additional benefits from our NOLs in future years and we’ll update you again later this year on how we expect 2016 to potentially benefit. Again even with this cash tax benefit for 2015 and perhaps beyond the non-cash table included in the press release today demonstrate the current financials inclusive of statutory rate of 35%. For the full year 2015 we are reiterating our guidance for revenue in a range of $61 million to $64 million and adjusted EBITDA of $38 million to $40 million. Of note the company’s minimum guaranteed revenues for 2015 are approximately $45 million. Similar to the company’s historical results we expect revenue for 2015 to be weighted to the third and fourth quarters of the year due to the seasonality in the businesses of many of our licensees. Therefore revenues for the first half of the year will be close to minimum guaranteed revenues with overages being recognized in the second half of the year. As a result of the seasonality we expect adjusted EBITDA margins to be lower in the first half of the year and higher in the second half. I would now like to turn the call over to Chief Executive Officer, Mr. Yehuda Shmidman.

[Yehuda Shmidman:]

Thank you, Gary and good morning everyone. 2014 was another transformational year for Sequential. The company delivered strong financial results driven by following the playbook of achieving both organic and acquisition growth. First a review of our organic growth scorecard. Organic growth increased 8% for our full portfolio brand in 2014 a strong performance was mainly attributed to increased distribution and broadened assortments from many of our brands. As we make our way into Q1 of 2015 we continue to pull on the organic growth levers of our business with the continued goal of achieving high single-digit organic growth. Here are some of the highlights of the organic growth drivers from our largest brands Avia, AND1, Ellen Tracy, and Revo. Both Avia and AND1 continued to perform at Wal-Mart with each brand demonstrating strong year-over-year sales growth. We expect to see further growth in these brands through new category expansions beyond core apparel and footwear which we plan to announce once they arrive in store. Additionally we've successfully expanded distribution for both Avia and AND1 to the supporting goods and specialty channels and we are continuing to focus long-term on international development. Ellen Tracy continues to perform through expanded distribution both in the U.S. and abroad. The brand is celebrating a 65th anniversary or women’s work in the world and we have several exciting new marketing and product initiatives planned for 2015 including the activation of a multichannel marketing campaign featuring movie star Paula Patton. Revo also had solid performance in the year experiencing sales increases driven mostly by new product launches with our core eyewear licensee. Distribution for the brand continues to grow at Sunglass Hut in the U.S. and with the addition of several new retailers in international markets opened during the year. Overall we continue to activate organic growth drivers across all of our brands including category and retail expansion, international and digital and e-commerce distribution. We believe we have a great deal of upside in activating each of these drivers. As an example from international distribution we ended 2014 with approximately 10% international penetration across our entire portfolio. As we compare this to the competitive landscape and the market share reported by our peers, we see the opportunity to at least double our international percentage overtime. Moving on to our second chapter of growth, acquisitions. In 2014 we completed the acquisition of portfolio brands which included AND1 and Avia. This acquisition was a significant win for us in many ways. It doubled the size of our business, increased our category diversification of our portfolio to activewear and expanded our distribution to key new accounts including Wal-Mart. Lastly the transaction added new stakeholders of the Carlyle Group & GSO Blackstone who joined our legacy partners Tengram Capital and Bank of America. Towards the end of last year we also completed a small strategic investment in fuel. The backpack and travel gear brand distributed widely at retailers including Target and Costco. In this investment we acquired a majority of the brand with the other stake controlled by Justin Timberlake. In tandem with the investment we simultaneously signed a long-term license for the core categories with a leading manufacturer named Concept One Accessories. Looking ahead to 2015 and our aspirations for continued acquisition growth we are very encouraged by robust M&A pipeline. We continue to focus on acquiring brands with global awareness and lifestyle appeal that we believe we can add value to through our unique platform. We believe we are well positioned to execute on our acquisition pipeline given our strong balance sheet and strong financing partners. In total our goal for this year is to acquire two to three new brands. In closing it’s been a little over two years since the current management team joined Sequential and the company transitioned its legacy wholesale platform into the licensing business that it is today. We are proud to say that Sequential has quickly become one of the largest pure-play brand licensing and brand management organizations in the world and with our platform now in place we feel great about our prospects for future growth ahead. Specifically our confidence level is high that we are fully on track and potentially ahead of schedule to achieve our three year goal of reaching $3.5 billion in annual retail sales equating to at least $100 million in royalty revenue and adjusted EBITDA of $70 million. We look forward to updating you on our progress in the quarters ahead. Thank you all for listening today and thank you for your continued support. Now turn the call over to the operator for questions-and-answers.

[Operator:]

Thank you sir. [Operator Instructions]. And our first question comes from Erinn Murphy from Piper Jaffray. Your line is open. Please go ahead.

[Erinn Murphy:]

Yehuda I was just hoping if you could elaborate a little bit more about acquisition pipeline. I am sure there is a lot that you and your team are kind of profiling right now. But maybe just help us think about those active opportunities. How deep is that pipeline when you try to prioritize what could be near-term opportunities?

[Yehuda Shmidman:]

Yes absolutely. In terms of our acquisition pipeline we feel very confident that we will be able to acquire two to three new brands this year on track with what our goals were set out to accomplish as we put those out last year and even the year before. For a variety of reasons the pipeline is robust, we are seeing a number of branded opportunities out in the world, multiple categories, consisting with our business model and most importantly brands that we believe we can add value to through our unique business model and our unique platform of licensing. So in total feel really good about it, obviously we don’t control the specific timing of when those acquisitions will close but do believe that we will be on track to acquire two to three new brands this year.

[Erinn Murphy:]

And then I guess as we think about the guidance for 2015 and then was helpful to have that context for the underlying organic growth in 2014. What brands as we look into this next year. Do you feel are best positioned with the near portfolio to kind of over index that organic growth target of a high single-digit number?

[Yehuda Shmidman:]

Absolutely a key focus for us to continue to achieve high single-digit organic growth. And to answer your question for 2015 we see a lot of opportunities to pull our organic growth levers and specifically if you look at the brands Avia, AND1, Ellen Tracy, look at our brands Revo, Heelys, really across the board we see a combination of international growth opportunities, category development opportunities and channel growth opportunities today in digital commerce of beyond. So I think if you look at those brands in particular you will see the number of the opportunities come to fruition this year. A lot of those opportunities we hope to really articulate as they happen we try to be sensitive to our retail partners to not reveal this specifics ahead of time but we do see those levers occurring and we do believe we will be on track to achieve continued high single-digit organic growth for 2015.

[Erinn Murphy:]

And then just last couple from me Jones New York which is a permutable competitor in the women’s apparel space and wholesale, they’re winding down that business, existing wholesale this year. So there is some pretty good square footage left kind of lot of key mid tier department stores and better department stores in United States. Is that something that Ellen Tracy could be concerned before as you're thinking about expanding some of those organic growth levers or are there other brands in your portfolio that could potentially buy for that incremental space of wholesale?

[Yehuda Shmidman:]

It’s a great point, 100% opportunity for Ellen Tracy and something we absolutely are aggressively pursuing through all of our licensees and our retail partners. Of course Jones is a great brand and I can’t comment anything specific to brand per se. But as it relates to our business and Ellen Tracy to your point we do agree and we are absolutely in focus of that market share to the best of our ability.

[Erinn Murphy:]

And then just last question from me and I’ll let someone else jump in. There has been a lot of conversation over the last several weeks on just the backup on the West Coast ports, fairly there has been a little bit of resolution, most recently the past weekend. So it seems like everyone is back at work, but there is still a lot of products on the water. Can you just help us think about your key licensees that you are indexed to and have you guys seen any potential slowdown in getting deliveries to the market this spring season?

[Yehuda Shmidman:]

As it relates to the specific issue with the ports and just in general as issues kind of come and go in the industry, one of the benefits of our business model is that we’re really not susceptible for wild swings in our business up or down based on these kinds of factors just by the nature of our business and the fact that we’re still diversifying. It’s possible there is some shipments that may have shifted in timing but we’re not expecting the port issues to have an impact on our results. And in addition to that what I would just say is as with the prior year and the prior years the bulk of the overages that we record in our business occurred in the back half of the business. So for the first half of 2015 consistent with 2014 and what we believe will occur in the future as well the first half of our business typically is at minimum level in our business and those overages will come in the back half. So again the port issue not seeing that as a big factor on Sequential.

[Operator:]

Our next question comes from Eric Beder from Wunderlich Securities. Your line is open. Please go ahead.

[Eric Beder:]

Could you talk a little bit about the infrastructure you have now and are you kind of ramped up to where you want to be in terms of people and systems that is kind of sort of leveraging all this going forward?

[Erinn Murphy:]

The platform and in particular the infrastructure our personnel our team is something we feel really proud about, it’s a team that’s come together really over the last two plus years. This is a team that by enlarge represents if you will the secret sauce of our business the execution of adding value both organically and as well as finding new opportunities within the acquisition landscape. So by enlarge I think we’ve made just about all the key investments in major infrastructure that we need to in terms of people as we see with our margins over time as they begun to expand we were at 1 point sub 50% EBITDA margin, now for the past year in the high 50s and then if you look at our guidance for this year sort of low 60s. So the margin should continue to expand over time especially as we acquire new brands and therefore sort of to answer your particular question we do feel good about our infrastructure long-term.

[Eric Beder:]

And for Avia and AND1 those have been historically less years primarily Wal-Mart brands. As you expand across how are you changing kind of the tweaks so that they’re not really perceived just as brands at Wal-Mart?

[Yehuda Shmidman:]

It’s really amazing actually when you look at each of the brands I’ll jump at the end first, of course we just had the NBA All-Star weekend here in New York City and across the streets in the Barclays Center during all the festivity that took place on Saturday and Friday at the arena, right for us as we get several pop-up shops from major competitors of AND1 and in addition you have AND1 present there. So we had a pop-up shop with media with bloggers the press and not just that community but as well as the retail community outside of Wal-Mart. So today you can find AND1 in multiple accounts all the way from disc to motels and other places. And the same for Avia, Avia we’ve been able to successfully place as well in other retails. These are two great national brands and in fact global brands. And not only that they are in two growth categories AND1 in the basketball category with that core D&A and Avia in the women’s performance category. So I think it’s a great question but really something we feel very strongly about which is -- these are simply global or national brands that can trade in multiple tiers of distribution.

[Eric Beder:]

And finally for Heelys and Revo both of those are kind of on the path to get to more of a life style brand. What should we think about 2015 for those brands as they move towards that piece, what should be kind of the signpost we should be looking for?

[Yehuda Shmidman:]

Continued growth from both to think about both Revo, we still have very much of focus on extending Revo as a true outdoor brand get a presence at as a retailer show recently and certainly to-date you really only seen the core eyewear category at market and long-term we see a number of new categories that we'd like to bring out there be it gear or footwear or activewear apparel. So there are number of areas Revo that we're exploring and we hope to launch in the coming not just this year but in future years as well. And Heelys has already began to expand beyond its core category we launched the backpack this past year, we've some hard good category that have started to come out and again long term for Heelys being a sort of a core lifestyle kids brand we see additional category potential as well. So both of those brands important brands for us and growth vehicles for the company.

[Operator:]

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

[Dave King:]

I guess, appreciate all the color on the acquisition pipeline I guess on that front one of my questions, I guess Yehuda, how are you thinking about the business on a go forward basis from a diversification standpoint. You talked about how diversified you're and how are able to benefit from that, was that on port stuff, et cetera. I guess as you look out to the future, is there a thought behind different categories and how diversified you want to be, whether that's men's, women's, sports doing something in home or bigger in home maybe moving into an entertainment like predecessor company, et cetera. I think any thoughts there in terms of on a go forward basis and then in terms of the current pipeline.

[Yehuda Shmidman:]

Yes, absolutely. So, there is really no doubt in our mind that this is a business model that works and works well across multiple consumer categories. Having said that, if you look at our business today that three verticals that we have include number one, make fashion apparel vertical and number two in activewear athletic outdoor vertical, and then number three sort of lifestyle vertical. And if you think about those three verticals, we see opportunities in the current acquisition pipeline that could fit each and every one of those three verticals. In the future we may add new verticals as well and you mentioned some of the categories Dave, in your remarks and I don't think there was a category that you mentioned that does not work in this business but again I think if you look at Sequential's business near-term I think you should expect us to near-term continue to fill the current vertical again be it fashion, athletic or lifestyle.

[Dave King:]

And then maybe in terms of we haven't talked really all that much I think about Franklin Mint. Any updated thoughts there post the launch on HSN and how did that go and how are you thinking about that today?

[Yehuda Shmidman:]

Sure, great partner in home shopping network but the company expands its leadership team over there and as well we think Franklin Mint is absolutely a great fit as a brand for HSN and for their customer base. We did launch in January with a series of shows over a weekend kickoff and we've a number of shows planned for the balance of this year, we did engage with HSN in the long-term contracts. So very exciting for us to get the brand back out there in a meaningful way. One part of the Franklin Mint long-term for us in the future might not be this year might be in future years but we do see a brick and mortar retail opportunity specially with the brand but as we've sort of acquired the brand enable to launch it through e-commerce and now been able to launch it with a great retailer direct commerce partner, we feel excited about the future prospects.

[Dave King:]

And then maybe lastly Gary, what I may have missed in the release, what were the updated cash and debt levels at the end of the year and I apologize if I did missed that. And then in terms of the free cash flow, are you able to talk about what sort of the outlook is for 2015 in terms of free cash flow given the tax shield that you talked about or is that too really kind of guide us to how to think about that?

[Gary Klein:]

Cash ended the year with 22.5 million, debt level was approximately 175 million, so the way that I would think about free cash flow is pretty simple. So, if we're projecting approximately 40 million of EBITDA, adjusted EBITDA for next year, less about 12 million in interest so that kind of gives you the framework, this is no tax and obviously depreciation has only impact on cash either. Minimal CapEx, so that's pretty much a good framework for how to think about it.

[Operator:]

And our next question comes from Liz Pierce from Brean Capital. Your line is open, please go ahead.

[Liz Pierce:]

Gary, just or Yehuda either one to go back on the SG&A question I just want to make sure so is this level kind of where you feel comfortable even if you took on some acquisitions outside of kind of the categories that you're in right now?

[Gary Klein:]

Sure, yes, I mean over time we absolutely are committed to achieving that long range plan of 100 million in royalty and 70 million of adjusted EBITDA of course implying at 70% adjusted EBITDA rate. So, I think the leverage will continue to grow as we acquire new brands. In terms of where we are today and if you think about sort of our guidance for this year the 61 million to 64 million royalty in the 38 to 40 of adjusted EBITDA that rate or that ratio does feel comfortable to us for where we are today to make the appropriate investments into the business and continue to drive organic growth.

[Liz Pierce:]

And then in terms of leveraging the relationship with Wal-Mart, I mean it sounds like from what you are talking about [Technical Difficulty].

[Operator:]

[Operator Instructions]. Our next question comes from Steve Marotta from C.L. King & Associates. Your line is open. Please go ahead.

[Steve Marotta:]

Just a couple of housekeeping issues. Gary did you mention what organic growth was in the fourth quarter, I caught it for the year but not the quarter?

[Gary Klein:]

So poor organic growth we continued to believe that the best way to evaluate it is on a annual basis, just in terms of our years as you know because the income levels and the overages tend to be back weighted towards the back half of the year and emphasis on Q4 and as well as an impact in Q3 that first half of the year typically becomes minimums for us. So to give you a real accurate picture of how our brands are doing, the health of our brand it is on a full year basis.

[Steve Marotta:]

What are the D&A expectations for 2015?

[Gary Klein:]

D&A is approximately 1.4, I think you can basically take what our run rate this quarter was and just multiply it by four.

[Steve Marotta:]

And lastly and that goes for my last question the SG&A came in, in the fourth quarter a little bit higher than I expected at 8.6 million, is that considered the run rate for SG&A on a go forward basis every quarter?

[Gary Klein:]

So the fourth quarter SG&A Steve was slightly ahead in terms of investments in the brands and marketing, but pretty much and a full year basis very much in line with where we felt we were. And again for this year in terms of 2015 very much feel the revenue will be back as we discussed and on a full year basis will be asset EBITDA ratio relative to the guidance. Again because of the income levels the EBITDA rates will probably be higher in the back half and lower in the first half.

[Operator:]

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

[Liz Pierce:]

So what I was asking about when you talk about international and curious if that’s coming from new relationships or combination of new and leveraging the Wal-Mart relationship and then I have another question?

[Yehuda Shmidman:]

So in terms of international just first broadly giving some context, last year we talked about the new initiatives that had begun last year such as Ellen Tracy in South Korea or Caribbean Joe expanding beyond Japan to other parts of Asia, William Rast in Europe. And so a lot of the seeds has begun to be planted. Of course with the addition of AND1 and Avia we see even more opportunity and as you referenced certainly one of those big opportunities is absolutely Wal-Mart International. So what I would say is in terms of the relationship and the partnership that we’re deeply exploring at the moment, these are partnerships and partners that we know very well, they will be new in a sense that likely new to the sequential platform, but very much people that we know well and we’re excited to pursue partnerships with them.

[Liz Pierce:]

And any comments or color on some of these other brands like Nevados what your thoughts are at this point with the brand?

[Yehuda Shmidman:]

Very small, so I think if you think about our full portfolio especially as we get bigger the big focus continues to be on the bigger brands and that rings true as well for new acquisitions in terms of size range that we’re looking at again those bigger brands being Avia, AND1, Ellen Tracy, Revo at the top end, of course Heelys, William Rast and some others in the mid range. So Nevados would be on the very small site for us.

[Liz Pierce:]

What was the name of the small acquisition you made, I just couldn’t quite understand that, FUL?

[Yehuda Shmidman:]

That’s correct, FUL, very small acquisition but strategically aligned and giving us further alignment with Justin Timberlake of course the core partner for us in William Rast.

[Liz Pierce:]

And you said the distribution with Costco and who else?

[Yehuda Shmidman:]

Key accounts include Costco and Target, FUL is a backpack and travel gear brand actually very cool product as it happens to be very-very small, but together with our partnership with Justin felt it was furthering our relationships and solidifies us as his single hub for ventures that he entertains in the consumer branded marketplace.

[Liz Pierce:]

And actually I do have one other thing, I just wanted to circle back I think Eric was asking about as you take AND1 and Avia to different points of distribution. Is there anything that you have to do to make sure in terms of protecting the business at Wal-Mart, I mean I presume there is things written into the contract?

[Yehuda Shmidman:]

Yes, I mean we were very pleased with our partnership with Wal-Mart and they are really great partners and of course they are obviously so substantial in their presence in the marketplace. Our focus with them right now is not just continued performance with the core categories be it core footwear or core power for each of AND1 and Avia, but what we're very excited about and hope to really speak about in detail as it occurs as the addition of the new categories which we have been very much working on with them and believe it will hit an impact this year 2015. So we feel real good about that and have the possibility to increase perhaps even other accounts Wal-Mart around the world.

[Operator:]

Our next question comes from Camilo Lyon from Canaccord Genuity. Your line is open. Please go ahead.

[Unidentified Analyst:]

This is [Palosini] on for Camilo. My first question is on Ellen Tracy. How do you see the partnership with Paula Patton helping the growth of the brand?

[Yehuda Shmidman:]

A lot of what we try to do here at Sequential to help all of our partners; be the licensees, retailers is really to deliver continued added value to our brand. So Ellen Tracy have a brand that celebrating its 65th anniversary, it's got a lot of heritage and incredible DNA and sort of market share brand awareness. But in addition to that we felt it’s important to invest in additional marketing dollars into the brands continue to excite the brand on a consumer basis. So we were able to secure partnership with Paula Patton of course she is a very well known movie star and in fact as we lead into the next season which will be critical seasons for us. You will see a lot of Paula and Ellen Tracy in the broader marketplace, lot of that will occur even in the balance of this quarter. So very excited about that partnership, Paula gives the way to communicate with the broader world about Ellen Tracy and tell the story.

[Unidentified Analyst:]

And are you looking for category expansion within the brand in the near future?

[Yehuda Shmidman:]

Definitely. Category expansion is actually one of the key levers for us to achieve our high single-digit organic growth marker. If you take category expansion, channel expansion especially within digital and e-commerce and then international growth and you pool that all together you really combine to see our organic growth picture.

[Unidentified Analyst:]

And lastly on the acquisition, during the last quarter’s earnings call you mentioned that the environment had become a little more competitive. Are you still -- the same view and has that led to higher expectations from the sellers in terms of the multiples they are seeking?

[Yehuda Shmidman:]

We are of that same view, competition has certainly increased in our space this year versus the prior years. And it is something that is a very reality out in the marketplace. At the same time what we do to combat that is we continue to refine our platform and ultimately if we can deliver the best results and the best overall experience for our partners, our partners will hopefully want to work with us again and again. So as we think about the acquisition environment that value creation is really what’s key. And so we are looking at the global brands, global awareness brands that we can apply our growth storage and if our platform is best and we can achieve those levers we'll be able to win those acquisitions and continue to grow as we hope.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to hand the conference back over to Yehuda Shmidman for closing remarks.

[Yehuda Shmidman:]

I just want to thank everybody for the time this morning, and appreciate all the support. If anybody has any follow-up questions we will be available. Thank you.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.