Sequential Brands Group, Inc. (SQBG) CEO Karen Murray on Q1 2019 Results - Earnings Call Transcript

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Sequential Brands Group, Inc. (SQBG) Q1 2019 Earnings Conference Call May 8, 2019 8:30 AM ET

Company Participants

Karen Murray - Chief Executive Officer

Peter Lops - Chief Financial Officer

Conference Call Participants

Andrew Mali - Roth Capital Partners

Steve Marotta - C.L. King & Associates

Operator

Thank you and good morning. Before we begin I'd like to bring to your attention that statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company.

This may cause the actual results to differ materially 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 in the press release we issued this morning for a summary of such factors.

The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identify forward-looking statements. Listeners are cautioned to not place undue reliance on these forward-looking statements, which may speak only as of the date the statement was made. Other than as required by law we will 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, non-GAAP net income and adjusted free cash flow 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.

On today's call are Sequential Brands Group's CEO, Karen Murray; and Chief Financial Officer, Peter Lops. I'll now turn the conference call over to Mr. Lops. You may now begin whenever you're ready.

Peter Lops

Good morning. And thank you for joining us on our first quarter 2019 earnings conference call. As announced last month, we are finalizing the sale of the Martha Stewart and EmerilLagasse brands, which is on track to close in the second quarter. At the time of close, we will provide an update on the financials of our continuing operations for active and fashion divisions.

First quarter performance, which includes the Martha Stewart and Emeril brands came in below expectations due to prior year non-recurring items in our fashion division, which was partially offset by growth interactive division.

Total revenue for the first quarter ended March 31, 2019 was 36.9 million, compared to 38.1 million in the prior year's first quarter.

On a GAAP basis, net loss for the first quarter of 2019 was 125.3 million or $1.95 per diluted share, compared to a net loss for the first quarter of 2018 of 2.3 million or $0.04 per diluted share.

Included in the net loss for the first quarter 2019 was a $161.2 million non-cash impairment charge related to the sale of the Martha Stewart and Emeril brands.

Non-GAAP loss for the first quarter of 2019 was 0.8 million or $0.01 per diluted share, compared to a non-GAAP net income of 3.6 million or $0.06 per diluted share in the prior year period.

Adjusted EBITDA for the first quarter of 2019 was 16.8 million, compared to 21.2 million in the prior year's first quarter, impacted by production costs for Martha and Snoop's Potluck Dinner Party, as well as marketing investments, such as AND1s initiatives for its 25th anniversary.

Our adjusted free cash flow was 2.3 million for the first quarter of 2019, which is calculated as adjusted EBITDA, less cash interest, cash taxes and capital expenditures and therefore excludes items that we do not consider core to our licensing business.

We closed the first quarter of 2019 with 17 million of cash, including restricted cash and with 610.8 million of debt net of cash. Upon closing the Martha sale, we expect to pay down approximately 110 million in debt and keep the remaining cash on the balance sheet as we evaluate potential strategic initiatives for the company following the closing.

We look forward to updating you on full year guidance for 2019 after the close of the transaction in the second quarter.

With that, let me turn the call over to Karen.

Karen Murray

Thank you, Peter. Today I'm excited to begin sharing the transition underway across the company. Last month, we announced that we signed a definitive agreement to sell the Martha Stewart and EmerilLagasse brands, which is a meaningful step in delivering. While we made progress growing the Martha Stewart brand, we were unable to achieve the high EBITDA margin that we have with our other divisions.

Following the close of the sale, we expect to realize significant cost savings, including plans to eliminate our current corporate headquarters, which was the former Martha Stewart headquarters. This year will include partial savings from these costs reductions and the full impact of the savings will be realized in 2020.

While first quarter results came in below expectations, we are excited to now focus our efforts on our active and fashion brands. There are significant untapped opportunities for several of our brands in areas such as health, wellness and beauty. In addition, we believe there are new innovative ways to generate recurring revenue streams beyond licensing. I plan to share more about our go forward strategy on our next call.

With that, let me jump into some of the highlights by division. Please note that while the first quarter still includes the home division I'll focus my remarks on our active and fashion brands. First, the active division which is our largest and includes the GAIAM, AND1, Avia and SPRI brands, these brands are well positioned with strong market share across multiple tiers of distribution and with several opportunities for category expansion.

International is a huge opportunity for American brands in the acid space. As the global population continues to shift their focus towards health and wellness, we are well positioned to benefit from this trend and plan to strengthen our presence abroad. Our AND1brand is performing well across all categories at Walmart.

We recently added two dynamic sportswear industry executives to our AND1 team who are focused on building the brand's presence in sporting goods chains and niche boutiques across the US. We implemented new marketing initiatives is a quarter tied to the brand's 25th anniversary, including establishing an AND1 foundation that gives back to the community.

Our yoga, health and wellness brand GAIAM is also performing well driven by performance from its core hard lines business at Target, Amazon and other retailers. We're excited about the reaction we've received on our men's line, which is a growing category in the activewear industry and an area where we believe the brand has an opportunity for future expansion.

We recently signed a new partnership for GAIAM for a line of personal care products. Additionally, the apparel selection, co-designed by the brand's global ambassador actress Jessica Biel is performing well at specialty stores including Bandier and plans are underway to expand it to more retail locations later this year.

The Avia brand continues to perform well at Walmart with strength in women's and children's apparel, footwear and accessories. In the quarter, we launched a new Avia capsule collection, co-designed by our global brand ambassador, actress Vanessa Hudgens, on avia.com, as well as at select Macy's and plans are underway to expand into more stores this fall.

SPRI, one of our smaller, but growing active brands is a leading line of exercise products for the health and fitness industry distributed through various retailers and found at gyms and hotels nationwide. The line includes medicine balls, exercise bands and other products. We're focused on growing the brand into new categories and areas of distribution moving forward.

For the fashion division, primarily due to last year's non-recurring items, we're expecting declines in the business. We have been transitioning certain partnerships and adjusting some of our marketing and distribution strategies, which impacted results this quarter and will continue throughout the year. We feel good about the work underway and the progress we're making to best position our fashion brands for 2020.

Starting with the Jessica Simpson brand we launched jessicasimpson.com and consumers can now experience the world of Jessica while having access to purchase products such as fragrance footwear, denim, luggage, handbags and swimwear. The launch is off to a great start. According to Shopify traffic to the site was in the top 2% of their online stores that launched the same week.

We're on track to launch the brand's beauty business this fall and beauty continues to be a category with significant growth opportunity for the brand. Also in September, Jessica will be on HSN showcasing her line of footwear, denim and more. We have a robust pipeline of new business and renewals of key licenses underway for the Jessica brands.

Moving to the Joe's brand, in the quarter we debut a collaboration for the brand with social media influencer Danielle Bernstein. The line was launched with overwhelming success selling out on joesjeans.com. In addition to online, the special collection is also performing well at REVOLVE, Bloomingdale's and Saks.

Denim continues to be the core category performer for the brand. We're rolling out new categories including a fragrance line and hosiery this fall. International remains a strong business for Joe's and we're currently exploring opportunities in Dubai and Australia.

In closing, we're pleased with the work underway to transition the company. After we close on the sale of the Martha and Emeril brands, we expect to have an improved net leverage profile, additional cash on our balance sheet and a focused portfolio of high margin fashion and active brands. I look forward to updating you then on our plan to deliver meaningful value to our shareholders.

Thank you for joining us today. I'll now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from a line of Dave King with Roth Capital Partners. Please proceed with your question.

Andrew Mali

Hi there. Good morning. This is Andrew stepping on for Dave. I guess just to first start off with Martha. We have that when you bought Martha it was supposedly contributing about roughly 34 million in EBITDA call it. Are we often thinking that businesses down about 50% since then, and then alternatively, where do you expect to be on leverage post-sale is about 5.5 times leverage kind of in the ballpark there.

Peter Lops

So Andrew, its Peter, I think Karen alluded to in her remarks, we're going to give some more information regarding the sale after the close. So you'll get some answers to your questions. And though I will tell you I think your numbers off by a bit, but we'll provide that information shortly when we close.

Andrew Mali

Great, that's helpful. And then just further, if you could maybe talk about any - if you have any further plans to reduce debt throughout the year. And then do you guys also have what the GMRs were at the end of the quarter? I think in 4Q '18 they ended about 320 million. Would you guys happen to have that number?

Peter Lops

Yeah, so GMRs at the moment, which includes Martha are about 330, so they're pretty consistent they have their natural ebbs and flows, not much has changed and of course be adjusted after the transaction, but the same ratio will hold true going forward where we'll continue to make up about two thirds of our revenue from GMRs. And was there a first part to the question that I missed?

Andrew Mali

Yeah, just if there's any potential plans to reduce debt further throughout the year.

Peter Lops

Yeah, so we're continuing to evaluate. We'll certainly pay down the 110 that we had talked about approximately 110 in the opening remarks. The remaining we're working closely with our board right now. We're in the middle of that process, evaluating a couple of options and sorting out what is the best use of that money and paying down debt is certainly one of the options.

Andrew Mali

Great, that's helpful. And then lastly for me, just on some of the proceeds that you're going to get from the sale, are you looking at any potential acquisitions and how do you feel about any opportunities may be in the activewear space and they've been kind of positive on that area so?

Peter Lops

Yeah, we're still very bullish on active. It's performing well for us. I think the category is doing very well. In terms of acquisitions we're constantly looking at acquisitions as part of what we do, as part that our board does, we're going to be very disciplined, we're going to be very smart and patient and make sure it is the right one for the company, something that continues to allow us to delever and also would be a accretive. So we're constantly looking at acquisitions and trying to set up sequential for future success.

Andrew Mali

Great, it's helpful. That's it for my questions. Thank you.

Peter Lops

You're welcome.

Operator

Thank you. Our next question comes from the line of Steve Marotta with Steve Marotta - C.L. King & Associates. Please proceed with your question.

Steve Marotta

Good morning, Karen and Peter. Karen, you alluded to fashion moves in fiscal '19 that are queuing up this year for a negative year-over-year comparison? Can you talk a little bit about what those were specifically?

Karen Murray

Sure. Steve, I mentioned in my script and we were against - we're looking at from prior year non-recurring items in fashion and they are impacting the quarter and the year. We had a few transitions in fashion, for example, Ellen Tracy footwear that was a licensee that we transitioned to a new partner and it's a strong partner that we are re-launching, but not until later this year. Initially we thought it would be earlier in the year, but it's moved out a quarter. We also have a partner that I alluded to during the last call that we were having some issues with and we terminated that partner in Jessica.

If you remember we sold Revo and Fuel that's not included in this quarter. And there's continued softness at Heelys. So between the transitions with partners, the partner we terminated, Heelys continued softness, Revo Fuel and additional expenditures in marketing, which again we could not - we had made commitments in marketing and we continue to feel that they're important for all of our brands. And in the quarter, there were marketing commitments for all three areas home, active and fashion. Throughout the year, we're cutting back on some of our advertising commitments. But we had marketing commitments in the first quarter that we still are executing against.

Steve Marotta

Okay, and with regards to the headquarters moving. Can you talk a little bit about the timing there and the magnitude? Would this occur immediately after Martha is divested, or is it going to be a lag of a quarter or two? And again, can you talk a little bit about the magnitude?

Peter Lops

Yeah. Sure, Steve. So certainly something we're in the middle of right now. We began looking to sublet the space. We're working with a broker. There's no one specifically found yet, there's been plenty of traffic and interest. So it's not immediate. So it's hard to sort of predict the time based on when you find that the right persons come in and take the space. And we expect that that will have a significant impact as we become a smaller company and have much lower rent.

Karen Murray

We had a little bit of a benefit this year, but there's a much more significant benefit next year.

Peter Lops

When the sublease is completed?

Karen Murray

Yeah.

Steve Marotta

And the last question is excluding Martha Stewart, have the balance of the brands within the portfolio in the aggregate exhibited consistent organic growth. And by extension, would you expect a similar going forward?

Karen Murray

Sure. Again, we spoke about active and we feel, really, as Peter said, bullish about that business. Activewear is and continues to grow. We're going to expand our active brands into health, wellness and beauty. But the Avia brand has not just strength at Walmart, but international strength. And as you know, we partnered with some global brand ambassadors that are really helping to propel the brands, but we feel very good about Avia, AND1, GAIAM is doing well. So the active brands are doing very well, including SPRI, which is again small, but growing.

And fashion has a lot of newness that's coming in towards the balance of the year as we transition these partners and I think almost every partner is upgraded and I believe that we'll start to see traction in that business as well. I mentioned that we launched jessicasimpson.com, the initial indications on that site and sales on that site are really strong. So we feel good about that and her coming back into the marketplace in a stronger way. She'll be on HSN this fall. So there's movement in fashion with new partners and with new marketing, and feel very good about the focus on all of our active brands. So we're just refocusing our efforts in the areas that we told you were high margin, and that we feel really good about and that's both fashion and active.

Steve Marotta

Very helpful, I'll take the balance of my questions offline. Thanks.

Peter Lops

Thanks, Steve.

Operator

Thank you. Ladies and gentlemen, this concludes the Q&A session and this concludes our call for today. Thank you for your participation and interest. You may disconnect your lines and have a wonderful day.

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