Sequential Brands Group's (SQBG) CEO Yehuda Shmidman on Q2 2016 Results - Earnings Call Transcript

| About: Sequential Brands (SQBG)

Sequential Brands Group, Inc. (NASDAQ:SQBG)

Q2 2016 Earnings Conference Call

July 28, 2016 8:30 AM ET

Executives

Gary Klein – Chief Financial Officer

Yehuda Schmidman – Chief Executive Officer

Analysts

Camilo Lyon – Canaccord Genuity

Erinn Murphy – Piper Jaffray

Dave King – ROTH Capital Partners

Steve Marotta – CL King and Associates

Eric Beder – Wunderlich Securities

John Kernan – Cowen

Operator

Thank you and good morning. Before we begin I would like to bring to your attention the statements that are not historical fact 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 for a summary of such factors. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident, or similar expressions identify forward-looking statements. Listeners are cautioned to not place undue reliance on these forward-looking statements which may speak only as of the date the statement was made. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements whether as a result of information, future events, or otherwise.

Additionally, the terms adjusted EBITDA 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’ll now turn the conference call over to Gary Klein, Chief Financial Officer of Sequential Brands Group. Mr. Klein, you may begin when ready.

Gary Klein

Good morning and thank you for joining us on our second quarter 2016 earnings conference call. I’ll start which reviewing our results for the quarter and the first half of the year and then turn the call over to our CEO, Yehuda Schmidman to provide an update on the business.

For the second quarter 2016 Sequential’s revenue was $34.2 million representing an increase of 69% from the prior year revenue of $20.2 million. Adjusted EBITDA for the second quarter increased 39% to $17.3 million compared to $12.4 million in the prior year quarter. Non-GAAP net income for the second quarter was approximately $3.6 million or $0.06 per share compared to $3.3 million or $0.08 per share in the prior-year period.

For the six months that ended June 30th, 2016 the company earned revenue of $68.2 million representing an increase of 101% compared to our prior-year period revenue of $33.9 million. Adjusted EBITDA for the six-month period increased 66% to $34 million compared to $20.4 million in the prior-year period. Non-GAAP net income for the six-month period was approximately $6.2 million dollars or $0.10 per share compared to $4.6 million or $0.11 per share in the prior-year period. We ended the quarter with approximately $37 million of cash-on-hand and approximately $540 million of debt, and following the Gaiam transaction that closed in July 2016 the company now has approximately $650 million in net debt.

We feel comfortable with this debt level for a number of reasons. First, with the closing of our Gaiam brands we now have an NOL balance and other tax benefits that are expected to offset over $500 million of aggregate future taxable income, which means we will not be paying taxes for the foreseeable future. In addition, for 2016 forward the company has approximately $500 million of aggregate contractual guaranteed minimum royalties under its existing agreements which represents approximately 77% of our net debt. Both of these factors make our company unique, especially when comparing us to companies with similar debt levels or operating companies.

Finally, in today’s press release, we reiterated our recently increased 12 month run-rate and full year 2016 projections. Our 12 month run rate is expected to be $172 million to $177 million of revenue and $112 million to $150 million of adjusted EBITDA. This run rate projection is anticipated after the colleagues of the integration of the Martha Stewart business. For the full year 2016 revenue is expected to be $155 million to $160 million and adjusted EBITDA is expected to be $88 million to $91 million.

I would now like to it turn the call over to our CEO, Yehuda Schmidman.

Yehuda Schmidman

Thank you, Gary, and good morning to everyone joining today’s call. It was a busy quarter to say the least. We delivered strong financial results. We signed and closed the acquisition of Gaiam. We launched a tour play e-commerce partnership for the Martha Stewart brand and we announced a new partnership with Amazon for a show starring Chef Emeril Lagasse. I will go into each one of these initiatives in a moment, but first let me start by walking you through the second quarter results.

In the quarter, And1 and Avia performed well as a result of their continued strong performance in core categories at Walmart driven also by increased shelf space an broadened category penetration in the sporting goods department. Q2 also marked the one-year anniversary of our ownership of the Jessica Simpson brand, and I’m pleased to report that the brand has achieved and continue is to deliver substantial growth as it did this past quarter. In the middle of the quarter we also launched Martha & Marley Spoon, a meal-kit delivery service featuring Martha Stewart’s award-winning recipes and smart cooking techniques.

Martha & Marley Spoon is an exciting partnership for us for a few reasons. Number one, it expands the brands into the large and new category of food. Number two, it activates Martha’s archive of thousands of recipes, videos and trusted how to-content. And number three, most importantly this partnership is the first pure-play e-commerce business for Sequential.

Even though we have only been live for just over a month initial response to the program has exceeded all of our expectations, especially in terms of site traffic, put throughs and conversion. In addition, we had a tremendous amount of brand exposure in the announcement, with over 24 million social media impressions and over 644 million press impressions in total. Long-term we believe that we are set up to generate significant royalty revenue from what we believe could be multi-hundred million dollar business or greater, as Marley Spoon looks to displace a portion of the estimated $900 billion grocery store market. This type of pure-play e-commerce partnership is a first of its kind for a brand management company to sign in an area we expect to do more business in going forward.

We also announced in the quarter a new show on Amazon with Chef Emeril called Eat the World with Emeril Lagasse premiering on Prime Video September 2. The docu-series follows Emeril as his master chef friends including Mario Batali and Marcus Samuelsson introduce him to the history, the techniques, and the cooking traditions of their favorite locales across the globe. We’re thrilled to partner with Amazon and provide the Emeril brand with another opportunity to expand our brand presence in media, which we view as a huge benefit to the brand at retail for a consumer merchandise sales.

Also in the quarter the popular Martha Stewart brand celebrated its tenth anniversary of the launch of the Martha Stewart collection at Macy’s. To celebrate we hosted over 200 Macy’s executives in our headquarters in New York City for a meeting and cocktail reception. Macy’s is a great partner and we look forward to the next ten years ahead.

As we approach the end of the MSLO business integration, we feel great about where we are with our progress to date. We completed the full transition of the legacy publishing business to Meredith, we expanded the Martha Stewart brand into Hudson’s Bay in Canada, we signed and launched the new food partnership with Marley Spoon, and we signed a new show on Amazon for Emeril. In addition, we have more initiatives in the works, including soon announcing a second recently signed new partnership for the Martha Stewart brand that I referenced on the last quarter’s call.

As I mentioned in the opening of my remarks, in the quarter we also acquired the Gaiam yoga brand. The acquisition of Gaiam aligns with our long-term playbook of acquiring brands with significant untapped potential where we can immediately lock value. The Gaiam brand built up significant market share in the hard goods arena with yoga mats and other related equipment, and our excitement around the acquisition includes further growth there, coupled with even larger growth potential on the soft lines side of the business which had just first been introduced to the market a couple of seasons ago. Studies show that over 35 million people in the U.S. practice yoga today, up 76% in the past four years, and another 80 million people aspire to practice yoga. With these stats and the demand that we see from our channel partners we see a strong future for the brand within our active division.

In closing, as we take a step back to reflect on the first half of the year we’re energized for the future. Our long-term strategy of acquiring untapped, high growth brands and positioning them for long-term organic growth is intact and, in fact, moving full steam ahead. Despite an ever changing macro retail environment, Sequential is delivering, and we remain focused on driving our brand and our business forward.

Thank you all for joining us today and I’ll now turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Camilo Lyon from Canaccord Genuity. Please proceed with your question.

Camilo Lyon

Thanks, good morning guys. How are you?

Yehuda Schmidman

Good morning.

Camilo Lyon

Very nice quarter, guys. I wanted to ask just kind of a broader question first before getting into some of the brands performances. Can you share with us – you mentioned in your prepared remarks some of the macro factors that are kind of influencing Stewart brands. Could you just share with us how your channels – the brands in your channels are performing if there’s any sort of difference between the mass versus mid-tier versus the higher department stores that you’re selling into?

Yehuda Schmidman

Sure. Sure. The focus of where we are and sort of how it relates to performance across channels is really related to the world of e-commerce. I think the NRF just recently raised their expectation for total retail sales for the broader year and overall we certainly see pockets of strength, pockets of weakness in various areas but across-the-board what we also see is strength in e-comm. So I think when you think about sort of the top 10 e-commerce retailers in the US as we have discussed before you think about Sequential’s positioning and we’re active with eight out of ten of those accounts. In addition to that the idea of launching a pure-play e-commerce business like peculiarly Marley Spoon to us validates the notion that we can grab a lot of that market share.

Camilo Lyon

Got it. Just drilling down deeper into the Gaiam brand there’s clearly an opportunity to leverage your existing franchise with the sportswear in the athletic vertical. If you could just give us some indications as to where you think you are going to first expand the brand distribution. Are you thinking more mass or sporting goods or specialty? And then I’m assuming you’re going to want to leverage Avia and And1 with that. And then secondarily just from the deal structure perspective it was a great deal for you that barely impacted your debt leverage ratio. Is that the kind of deal that we exclude expect to see from you going forward, or was that a one unique opportunity from the valuation perspective?

Yehuda Schmidman

Okay. So just starting with the second I guess part first. There’s no question that as we thought about acquisitions coming into the beginning of this year, our view was to try to fine tune and focus on the best possible multiples and metrics that we could. So we’re definitely pleased with the outcome of the Gaiam transaction, as you think about the multiple and that in turn, kept the leverage ratios as you mentioned sort of in line with where they were previously even while layering on a new brand.

As it relates to the future, I think for us there’s really no pressure. We just closed Gaiam within the last month, I guess, earlier this month in July. Certainly we foresee additional acquisitions in our three-year plan and we’re certainly evaluating new opportunities, but to us we believe we can continue to be opportunistic as relates to financing because we have strong financial partners on the other side.

As it relates to the first part of your question, Camilo – what I would say is if you think about Gaiam, Gaiam brings with it extensive distribution in a number of places including Amazon and Target and others and when we think about the growth and you mentioned our total active division and And1 and Avia, certainly we see growth across that division that’s been one of the best performing divisions for this company. Not just this year but last year as well. So that’s number one. And number two is when we think about Gaiam a lot of growth we see is in the soft lines side. The hard lines side, which is yoga mats and yoga blocks, that’s been out there, but the soft lines side namely the apparel just began a couple of seasons ago so for us expanding the apparel we believe is a big opportunity for growth next year and the years ahead.

Camilo Lyon

And any sort of channel preference that you would expect that apparel to launch first? Have you thought about that?

Yehuda Schmidman

Well, I think the way to think about that is if you look at the hard lines of Gaiam – Gaiam is in so many different locations. I believe Gaiam today is in over 38,000 points of sale, if you include all the doors and all the channels. So where the apparel began in just one location initially, we there I that could eventually go to many more locations.

Camilo Lyon

Okay. And my last one is regarding the Martha integration, it sounds like your near completion there. Could you just help us understand the leverage opportunities that you’re going to get once that integration is complete? And by leverage I’m talking about a lot of the pre-existing success that she has in her studios and how you’re able to leverage the production quality and materials that she has to really kind of drive the other brands within your portfolio market aspect?

Yehuda Schmidman

Yes. I think the biggest punch line on the leverage on the vantage point that you’re referencing is simply that today Sequential can offer each of its partners – and today we have well over 150 licensee partners and certainly we’re doing business with a number of channel partners ranging from Amazon to Macy’s to Walmart to many others, and today the offering of what we have internally is far broader than it’s ever been. Internally today at Sequential we have design resources, product development resources, merchandising, marketing, advertising, PR, and many other resources all of course except up to sourcing, which we license. So I think the sort of the toolkit has gotten broader and the offering and the value-add position to our partners has gotten stronger. And ultimately, that investment that we’re making in our brands we really do believe is worth it for the long-term sustained organic growth goal that we have.

Camilo Lyon

But it’s safe to say that there’s going to be some sort of cost leverage opportunity just by taking advantage of a lot of infrastructure that she had already – that she already has in place, correct?

Yehuda Schmidman

Yes. And I think – yes. And I think you can see that Camilo when you look at our long range three-year plan where we – where our goals remain to achieve $175 million of EBITDA off of $230 million of revenue, which would imply cost leverage.

Camilo Lyon

Got it. All the best, guys.

Yehuda Schmidman

Thank you.

Operator

Our next question comes from the line of Erinn Murphy from Piper Jaffray. Please proceed with your question.

Erinn Murphy

Great thanks. Good morning. I guess Yehuda for you, I was hoping to maybe kind of opine a little bit more on the recent M&A activity that we have seen in the markets. There’s been obviously you guys had the Gaiam acquisition, [BS] and Wolverine are talk about divesting within their portfolios, C3 obviously completed in acquisition or are in the process of one. So what do you make of the variety? It seems like multiples are coming in kind of all the over the place and I was curious on what you’re seeing out there big picture and if you can kind of anticipate the pace of activity that kind of accelerates going forwards?

Yehuda Schmidman

Yes. It’s a great point, Erinn. The – it appears that the M&A activity in general in our space has been pretty active. One of the things that we have discussed previously and we continue to see is that the pipeline of opportunities continues to be robust. I would say to you that even in some of the sort of references that you made, we’re just generally thinking what’s interesting is that our sort of competitors in the process are somewhat unique because we are specifically looking for brands that are really worth more than the businesses that can then be sort of unlocked or converted using our unique business model to achieve immediate accretion and immediate growth opportunities. Of course long-term as well. So when you think about last year, which was a really busy M&A year for us, in Martha Stewart, in Emeril, in Joes Jeans, and then this year already with Gaiam I think as we think about the M&A environment going forward, we are absolutely evaluating opportunities but we’re also being really highly methodical in what fits the Sequential business specifically.

Erinn Murphy

Okay. And then on multiples in the space? I mean it just seems like there’s been a lot of people BS obviously sold their contemporary business pretty inexpensively. C3 paid a decent multiple for [indiscernible]. Are you seeing more conflicting messages or based on your business model you’re still able to feel comfortable about how you kind of architect the deals?

Yehuda Schmidman

No Erinn. We definitely feel comfortable today that we’re able to sort of architect, to use your word, the structures along the multiples that we have been in historically. There has been a range in our historical multiples paid. Sometimes it’s been on the low end, sometimes on the high end, but always within the range. So we’re not seeing the band go farther in terms of what we’re considering here at Sequential.

Erinn Murphy

Okay. And then maybe just on the second quarter performance. If you look at your legacy brands in the portfolio, could you just maybe kind of pick through or walk through what the – what brands were above that high-single digit kind of hurdle rate for organic growth?

Yehuda Schmidman

Yes. Sure. So about you think about the legacy portfolio, clearly in the active world our brands in Avia and And1 have continued to deliver performance for us year-over-year and that’s core business. Certainly when you sort of move to other parts of the business you think about Heelys as well as we continue to see that brand do well, especially internationally especially with different markets in Europe and different markets in Japan and otherwise. Jessica Simpson, as we called up in the earlier remarks as well, has continued to perform and that combination of core categories as well as the this new activewear line that we have launched. In addition to the activewear line we have active footwear coming next season, so we’re excited about that. And then just across-the-board, I mean if you think about the business, certainly some brands are higher than others and some of the smaller brands aren’t as – aren’t as sort of large in their year-over-year performance, but the big ones, Avia and And1, Jessica Simpson and the others have certainly continued to deliver.

Erinn Murphy

And so you still feel comfortable with that I guess high single digit organic run rate?

Yehuda Schmidman

Yes. Yes. We haven’t made any changes to our revenue projections for the year.

Erinn Murphy

Okay. And then just maybe as we head into the fall specifically a time for like wardrobe replenishment denim seems to be a category that seems to gets a little bit more play as we get into the fall. Could you just about any strategies that you are for the Joe’s Jeans business as well as William Rast?

Yehuda Schmidman

Sure. So we plan for both. As it relates to Joe’s Jeans we’ll be out at MAGIC in a couple weeks and I think you will see the new collection and we feel really excited about Joe DeHaan and our core licensee and GBG [indiscernible]. It’s a great brand and the core customers are where we’re sticking. We’re not looking to take the brand to sort of a lower tier distribution or anything like that. We think the brands has really great credibility where it lives and the product is terrific. I think what you will see with Joe’s Jeans is an expansion of categories and so beyond the denim into sportswear. We have talked about some of the handbag expansion that’s coming and so that’s our focus with Joe’s.

As it relates to William Rast, our anticipation is that this fall what you will see is a major national retail partner who has bought into the program. I believe we’ll be able to say who that is pretty soon hopefully within the next couple of months. So we’re excited about that and we will have a new campaign surrounding that launch.

Erinn Murphy

And then just a couple of modeling questions for you or Gary. First just on the cash flow – how should we think about free cash flow on a pro forma basis for the full year of 2016? What is your forecast currently at this time?

Gary Klein

So for our free cash for the full year we see about $40 million.

Erinn Murphy

$40 million. Okay. And then I guess just on the cadence of overages as we get in the third and fourth quarter any kind of guidance how we should think about refining our models now.

Gary Klein

Yes. Sure. So cure with the holiday season will be a little bit stronger than Q3 and Q3 is a little bit stronger than Q2. So it kind of escalates up gradually.

Erinn Murphy

Okay. All right. Thanks. I’ll jump in the queue. Best of luck.

Yehuda Schmidman

Thank you.

Operator

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

Dave King

Thanks. Morning, guys.

Yehuda Schmidman

Good morning.

Dave King

I guess first off on Gaiam when should we expect the royalties there to begin to ramp? I realize that it closed in early July if I remember correctly some of your license partners acquired some of the inventory.

Yehuda Schmidman

Yes. So you’re correct, Dave. So in tandem with the acquisition, the two licensees which we signed and executed simultaneously with the transaction did acquire directly from the company some inventory so that’s their transaction. But the royalties certainly we expect the impact right away and we tried to reflects that in the – the recent increase in revenue projections. So if you look at that full rate $172 million to $177 million as being our new sort of long-term run-rate, that should be included is there.

But most importantly, Dave, what I would point you to is obviously short-term we do as much as we can as fast as we can, but with Gaiam and I know it’s a company that you followed and you know well what gets us really excited as I started to talk about earlier is the – is the idea of expanding the soft lines business. The whole apparel world where that business had just gotten started with Gaiam not long ago. So if you think about all that distribution with the hard lines if we can get even a portion of that in the soft lines in parallel, we see at that growth being really material long-term.

Dave King

Okay. That’s great. And then maybe along those lines so I think it was doing about $160 million in revenue previously and I think that included $15 million to $20 million dollars of apparel. So get to the incremental royalties you guys have of $22 million how should we be thinking about that whole revenue range.

Yehuda Schmidman

Sure.

Dave King

Based on your comments it should be higher including apparel but obviously you have the royalty rate in there. So how should we be thinking about that?

Yehuda Schmidman

Sure. It’s simply a combination of two factors. One is we typically earn about 5% to 10% royalty on wholesale volume and so in this case number one is we’re certainly on the highest end of the range. Number two is there is – we were working on this for some time and some of that expansion is already concluded for the – the first 12 months of business.

Dave King

Okay. That’s great color. And then as I think about the guaranteed minimums for Gaiam, I think I want to say it added about $140 million or so if I did that math right.

Yehuda Schmidman

Yes.

Dave King

And based on what I think was previously. So how should we think about the life on those deals, especially again as it relates to that $22 million or so that you have baked into guidance in revenue?

Yehuda Schmidman

Sure. So as it relates to guarantees as I mentioned and you are correct post Gaiam our total pool of guaranteed minimum royalties increased about $140 million to over $0.5 billion total for the Company. The first, the way to think about that just first that point is that as we thought about the Gaiam transaction in general, we wanted to make sure that the metrics were as attractive as possible essentially just given the overall environment and so one of the metrics that we really tried to hone in on was that metric of ensuring that we had significant coverage of guarantees relative to the purchase price and in this case I think we – we did pretty good.

So that was the point there. In terms of the $22 million that is our first 12 month relative to – as we discussed I guess just before relative to incorporating both the historical of what we inherited but in addition more importantly the growth that we have been able to already secure with our partners in the time that we had pre-closing because we had been working on this for some time. So I think the – the minimums are definitely strong per year, so there – that is a good factor and one that we always look for in any acquisition.

Dave King

Okay. And then switching gears on Martha Stewart. So if I am looking at this right, it seems to me that you guys expect to add $12 million or $15 million in incremental royalties. I think it was sort of a low $40s million kind of business the merchandising business previously. You guided $52 million to $55 million. So what’s all included is that incremental? So we have Marley Spoon now, we have the Emeril stuff, we have Hudson’s Bay, I think there is also a couple that they had signed previous to closing that wouldn’t have been in that prior run rate. So what I guess is that all of them and is there anything that’s no longer contributing to get at that sort of delta?

Yehuda Schmidman

Yes. I mean, Dave, in addition to the – all the that you mentioned I was trying to keep track I hit – that was a pretty good list but the two that come do mind that I think were not on that list perhaps were number one I would factor in core business growth within core partners so think about Home Depot that I about Macy’s as being the biggest. And the other one is that there is another – another new partnership that we have signed that we just haven’t been able it yet announce just because we’re waiting to time it right with our partner. So in addition to Marley Spoon which we were able to announce there is one other partnership thats factored in.

Dave King

Okay. So and then thanks for the color there. And then for Gary just one quick one maybe a follow-up to Dan’s question. What was the free cash flow during the quarter during the second quarter itself?

Gary Klein

Free cash flow during in the quarter was $6 million.

Dave King

Okay. Fantastic. Thanks, guys. Best of luck the rest of the year.

Yehuda Schmidman

Thank you.

Operator

Our next question comes from the line of Steve Marotta with CL King and Associates. Please proceed with your questions.

Steve Marotta

Good morning, Yehuda and Gary.

Yehuda Schmidman

Morning.

Steve Marotta

Could you please give an update on the international penetration and which brands still have the most potential there and when can we expect that could be tapped?

Yehuda Schmidman

Sure. For the international penetration is still for us relatively small and still one that we believe could be much larger over time. I would say the new developments that we have seen this year relative to the previous years where we already started to get some penetration with Heelys and some of our other brands. What we’re seeing this yeah especially quarter to quarter is the sort of success of And1 and Walmart Canada. And that began last quarters but it’s something now that we have a little more track record of And1 that gives us a little more conversation around what else we could potentially do with Walmart Internationally in other areas whether that’s in Mexico or UK or other place. So that’s been good.

In addition to that, Steve, what I would point to is longer term what we have been working on and continue to see is potential partnerships for Jessica Simpson and Martha Stewart which are certainly in work. And then finally of course with Gaiam – while we have spoken a bit on this call about really the soft lines opportunity, one other opportunity that is certainly a part of the puzzle long-term is the expansion of the yoga and fitness attributes of Gaiam outside of the U.S.

Steve Marotta

That’s helpful. And one other quick question on Joe’s circling back to the MAGIC. You said this summer I assume that is for spring launch. Has there been any other – is there a soft launch for fall or it’s going to be a complete unveiling for spring?

Yehuda Schmidman

No, no. The business is certainly there for fall and has been there for this spring. I guess the reference is just more towards – just what’s new in terms of the two collections in terms of new areas coming out. But the business is very much a continuation as it relates to let’s say this fall and GBG our partner who’s a terrific partner who came on as a core licensee, not only has done great work on the core wholesale business they also ended up keeping I believe about 17 of the freestanding Joe’s stores which they are continuing. So between the stores, between the wholesale and between the direct commerce, e-commerce business that’s where sort of the full picture comes together on Joe’s.

Steve Marotta

That’s very helpful. Thank you.

Yehuda Schmidman

Thank you, Steve.

Operator

Our next question comes from the line of Eric Beder from Wunderlich Securities. Please proceed with your question.

Eric Beder

Good morning. Congratulations on the quarter.

Yehuda Schmidman

Good morning Eric. Thank you.

Eric Beder

Most of my questions have been answered, but I’m curious this Martha Stewart online venture, when you look at your other brands, which ones you think has the potential to do things like that going forward? And which ones kind of have the best ability to kind of make that leap into that online world like that?

Yehuda Schmidman

That’s a great question, Eric, because it is one that we absolutely are studying very closely. It’s one thing to capture e-commerce business within traditional means and that could be through – as we all know through the traditional e-commerce sort of branches of our current partners. Then it’s another to be able to monetize our brands into pure-play e-commerce businesses such as Marley Spoon. So when we think about the rest of the portfolio to your point, Eric, we are absolutely studying ideas within Jessica Simpson, we’re studying idea within the athletic side. There are so many sort of new ideas out there.

What’s critical for is to filter those idea into areas that have really large scale. And so with Marley Spoon we’re attracted to the fact that there is an estimated $900 billion grocery store market of which this is looking to actually displace trips. So starting with a big size is important to us and then most importantly we’re making sure that our brand is in sync with the offering so that it makes sense and can be sustainable and can win market share within. So it’s unique. It’s the first of its kind. Certainly the first that we have ever done. We’re excited about the initial results. We will keep you posted as results continue over time to ensure that they’re still there and hopefully we’ll come back to you with some new ideas for some of the other brands over time.

Eric Beder

Okay. And when you look at – actually a question on the debt used to buy Gaiam. Were the terms basically similar to the prior – the prior setups before? I know you redid the lines about Bank of America and your other partner there. Were they pretty much the same terms?

Gary Klein

Yes. I think you could tell that from the – just extrapolate from the guidance pre and post Gaiam. The implied rate is about the same.

Eric Beder

Okay. All right. Guys. Thank you.

Yehuda Schmidman

Eric, thank you.

Operator

Our next question comes from the line of John Kernan from Cowen. Proceed with your question.

John Kernan

Good morning.

Yehuda Schmidman

Good morning, John.

John Kernan

That’s a great job negotiating the Gaiam transaction.

Yehuda Schmidman

Thanks.

John Kernan

Certainly kept that at a great price. Can you – Gary, can you help us understand how to model the NOLs and how to model that both on the income statement and cash flow statement into 2000 – obviously we have your guidance for this year but then I think it becomes a little bit trickier next year as we become more and more profitable?

Gary Klein

Yes. The easiest way to [technical difficulty].

John Kernan

Are you there?

Gary Klein

The NOLs and the amortization is intangible. They do cover us on a consistent basis through the next several years so past 2021, 2022 and the steady state business we would be covered almost 100% for cash taxes. Over time each year we do pay some AMTs to some states but the amount that we have today should cover us for the foreseeable future.

John Kernan

Okay. So how should we model the tax rate on the income statement? I guess maybe for next year.

Gary Klein

Yes. I mean if you are saying for GAAP purposes you’re probably around 35%, but I would say how we think about it it’s really just $1 million of cash taxes per year.

John Kernan

Okay. And then just helpful commentary on the free cash flow. The $40 million in free cash flow, we should be modeling your cash flow from operations somewhere around $40 million on a cash flow statement?

Gary Klein

Correct.

John Kernan

Okay.

Gary Klein

Again, exclusive of changes in balance sheet items.

John Kernan

Okay. So the working capital increases around receivables and stuff.

Gary Klein

Right and of course again this year, unique to this year is that we do have some restructuring deals that would also offset some of that free cash flow.

John Kernan

Okay. My final question is just it seems like there’s a theme here of you taking the content you own, intellectual property and extending it into the digital space which is obviously where the world is moving. Could you just talk about additional initiatives you may have around those – those opportunities?

Yehuda Schmidman

Sure. Sure. And we definitely agree with the way you characterized that, John, which is the ability to monetize content in the digital space is – is something we’re – we really get excited about because we’re seeing the effects of it. So where we’re thinking about that I’ll give you just another example that I can talk about that’s sort of happening now as opposed to sort of what’s in the pipeline. I would point to Facebook Live. If you look at Martha Stewart’s Facebook page, what you can see is broadcasts of the Live segment that we produce here that we broadcast here with Martha and the response has been just really phenomenal. I mean we get viewership in some cases that’s as high as shows on HGTV or Food Network.

And the point is monetizing that with all of our partners the commerce that comes with it is really the key. And so as you watch those segments, you will see the sort of integrations of our products and whether it’s it could be pots and pans or it could be cookware, whatever it might be. It could be kitchens that you buy at Home Depot, et cetera. So we’re looking at that now across-the-board and there’s no question that the more content that we can deliver to our partners, the more added value the more conversions we can sort of help initiate around commerce the better.

John Kernan

Okay. That’s helpful. Then I guess just actually one final financial question make for you Gary. Obviously you have got great debt partners with GSO and Bank of America. How do you balance the cost of debt and the cost of equity going forward with your current capital structure?

Gary Klein

Yes. So again we do we try to be as opportunistic as we can. Today at the equity level we don’t want to use too much equity, right? Because we don’t want to dilute the company. So at this point we have been fortunate to have these great partners so we can use the debt which over time, debt is a little bit cheaper than equity. As the stock price goes up we may be more willing to use it.

John Kernan

Okay, thanks. Thanks a lot guys.

Yehuda Schmidman

John, thank you very much.

Operator

There are no further questions in queue. I would like to hand the call back over to management for closing comment.

Yehuda Schmidman

Okay. Great. I just want to thank everybody, all our shareholders and stakeholders for participating in the call this morning and we look forwards to speaking with you on our next quarter conference call. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!