Monitronics International, Inc. (SCTY) CEO Jeff Gardner on Q3 2019 Results - Earnings Call Transcript

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Monitronics International, Inc. (OTC:SCTY) Q3 2019 Earnings Conference Call November 13, 2019 9:00 AM ET

Company Participants

Jeff Gardner - Chief Executive Officer

William Niles - Executive Vice President & General Counsel

Conference Call Participants


Good morning, and welcome to the Monitronics International Inc. Conference Call to discuss the company's Third Quarter 2019 Earnings. Monitronics International doing business as Brinks Home Security will be referred to as Brinks Home Security on today's call. The call today is being recorded. And a replay of the call will be available on the Brinks Home Security IR website, an hour after completion of this call.

This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies, including those with respect to our dealer and direct sales and installation channels, market potential and expansion, the success of new products and services, the launch of Brinks Home Security's consumer financing solution; the anticipated benefits of the Brinks Home rebranding; customer retention; account creation and related cost; anticipated account generation; future financial performance; debt refinancing; recovery of insurance proceeds and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of the company services, technological innovations in the alarm monitoring industry, competitive issues, continued access to capital on terms acceptable to Brinks Home Security, our ability to capitalize on acquisition opportunities, general market and economic conditions and changes in law and government regulations.

These forward-looking statements speak only as of the date of this call, and Brinks Home Security expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Brinks Home Security expectations with regard, thereto, or any change in events, conditions or circumstances, on which any such statement is based.

Please refer to the publicly filed documents of Monitronics International doing business as Brinks Home Security in the most recent Forms 10-K and 10-Q for additional information about Brinks Home Security and about the risks and uncertainties related to the company’s business, which may affect the statements made during this call.

On today's call, we will discuss certain non-GAAP financial measures, including adjusted EBITDA. The required definitions and reconciliations are included in our earnings release, which was made publicly available earlier today.

I would now like to turn the call over to your host, Brinks Home Security’s, Chief Executive Officer, Jeff Gardner. Please go ahead, sir.

Jeff Gardner

Thank you, operator, and good morning, everyone. I am excited to be joining all of you today for our third quarter 2019 earnings call. Our first since we successfully emerged from voluntary Chapter 11 restructuring on August 30th.

Joining me on the call today is William Niles, Brink Home Security’s EVP and General Counsel. I will keep my comments today brief and focus my remarks on providing an update on the business post emergence and a high level overview of our strategic priorities moving forward. Fred Graffam is unable to join the call today. I look forward to having Fred participate in our year-end call in early 2020.

It's been an exciting few months since we completed the recapitalisation of our balance sheet. Restructuring resulted in the elimination of over $800 million of debt, including $585 million of bond, and $250 million of the company's term loans. Our new capital structure will allow us to operate as a stronger organization with the resources available to execute on the growth opportunities ahead of us.

I want to again thank our dedicated team of employees, as well as our dealers, customers and suppliers, who work tirelessly alongside us to bring this to completion. I also want to take a moment to recognize our new Board of Directors, whose breath of experience and expertise, we view as a strategic asset to our business. The entire leadership team and I, look forward to working closely with them to maximize shareholder value.

We also look forward to re-energizing our engagement with all our stakeholders. We're planning to attend various investor conferences and other industry events in the New Year, where we would clearly lay out our strategic objectives and update you on our progress.

At this juncture, we're well into the process of completing a comprehensive strategic plan that will shape our path forward for the company. On this call, I plan on providing an overview of the key priorities that will form the foundation of this plan, and I'll have more to say in early 2020. For this call, we will not take questions, but will commence our traditional periodic earnings calls with full Q&A in 2020.

To kick-off today's call, let me jump into an overview of our key priorities. As an appropriately capitalized market leader, we are prioritizing our commitment around delivering one, a best-in-class tailored customer experience; two, a disciplined and simple approach to new account acquisition that accelerates growth and lowers new account creation cost. Three, improved retention through a comprehensive plan for customer lifecycle management and prudent capital allocation.

We believe that delivering a best-in-class, highly tailored customer service experience is foundational to our success. While we have made significant strides in recent years, we believe we have the opportunity to take our service to another level, which will clearly that bring some security apart from our competitors.

We believe that our best-in-class customer monitoring combined with highly personalized and meaningful customer interactions that continuously engage the customer from our initial interaction through the entire lifecycle is a winning combination. We are also looking to make smart and prudent investments to enhance our go-to-market strategies and improve our new customer acquisition.

This includes the use of business intelligence to better understand prospective customers, to tailor our product offerings, to anticipate and proactively address their needs and suggest solutions. Our sales process from hiring to training, to performance management will be transformed. Improve selling tools will be added to simplify the sales process, adding efficiency, engaging leads and improving sales conversion.

At the forefront of these efforts will be the Brinks Home Security brand name. As the number two nationally recognized name in Home Security, we will leverage a strong consumer recognition and trust as we expand our marketing efforts across both sales channels.

This trust was most recently evident by Brinks Home Security being ranked number one in customer satisfaction for the second straight year by the J.D. Power Home Security Satisfaction Study. This award not only enhances the strength of our brand, but also validates the value we place on delivering the highest levels of customer service across our organization.

Our customer retention efforts will be expanded as we fully leverage our business analytics to properly address customers throughout their lifecycle. Foundational to this approach will be our previously discussed best-in-class tailored customer experience.

This will be further expanded through the robust use of business analytics to identify and proactively engage those customers, who have a high propensity to churn. By addressing their needs, we have seen a substantial reduction in their attrition characteristics. We have used this model, albeit, on a limited basis over the last three years. And the evidence supports that this is one of our best uses of capital, the substantial returns.

Finally, we are in the fortunate position to have a balance sheet which will allow us to execute, on our strategy. With that said, we will maintain the discipline cost management with a prudent eye towards capital allocation. This will position our organization to remain strong going forward.

With that, let me quickly review our financial performance. As you've seen in our earnings release, our reported results are split between the predecessor period and the successor period, as a result of our emergence from Chapter 11 during the third quarter.

In order to provide a meaningful comparison, I'll be discussing the combined processor and successor period for both the three and nine months. Net revenue for the three and nine months 11.9% and 6.7% to $120.9 million and $378.6 million, respectively.

The decline in both periods is due to a lower average number of subscribers, along with a $5.3 million, fair value adjustment, that reduced deferred revenue upon the company's emergence from bankruptcy, in accordance with fresh start accounting. Excluding the fair value adjustment, net revenue for the three and nine months declined 8% and 5.4% respectively.

During the three and nine months, we added 21,228 and 63,974 subscriber accounts respectively to our dealer and direct to consumer channels, versus 33,065 and 91,995 accounts in the prior year periods. The decline in both periods was partially due to large bulk purchases made in 2018. Total unit attrition was 17.3% in the third quarter as compared to 17.6% in the second quarter.

The sequential improvement was driven by our continued efforts, around customer retention, including tightening of credit standards in our direct channel. RMR attrition totaled 17.6% in the third quarter as compared to 17.5% in the second quarter.

We expect to see improvements in both unit and RMR attrition as we began aggressive efforts to drive growth, in new subscriber acquisition and improved customer retention. Cost of services for three and nine months totaled $29 million and $84.3 million, respectively as compared to $35.1 million and $100.8 million in the prior year period.

Selling, general and administrative expenses totaled $32.4 million and $91.8 million in three and nine months, respectively as compared to $34.3 million and $98.9 million in the prior year periods. Declines in both costs of services and SG&A in the quarter and nine months were primarily driven by reductions in subscriber acquisition cost.

Net creation costs, which are expensed during the period, totaled $7.8 million in the quarter and $21.9 million in the nine-month period, down from $13.4 million and $35.4 million in the respective prior year periods.

Total consolidated creation multiple was $38.9 million in Q3, as compared to $38.4 million in the second quarter. In three and nine months, we had a combined net income of $673.6 million and $587.6 million, respectively, as compared to a net loss of $33.8 million and $301.8 million in the prior year periods.

The year-over-year increase in net income was driven by gain on restructuring and reorganization of $702.8 million and $669.7 million, recognized during the three and nine months, respectively, primarily due to gains recognized on the equalization and discounted cash settlement for the predecessor companies, high-yield senior notes in accordance with our bankruptcy plan.

Adjusted EBITDA totaled $62.5 million and $204.5 million in the three and nine months, respectively, as compared to $71.3 million and $213.5 million in the prior year periods. The decrease in adjusted EBITDA was due to reduction in net revenue offset by favorable decreases in costs of services and SG&A, including subscriber acquisition costs.

In terms of liquidity, at September 30th, we had short-term liquidity of $152.1 million to fund working capital and continuing operations, including $28.6 million of cash and cash equivalents, and $123.5 million remaining borrowing capacity under the $145 million successful revolving credit facility. As of September 30th, we have total long-term debt balance of $994 million outstanding, which will mature in 2024.

In closing, we are excited to have emerged from the restructuring as a strong organization with a vast amount of opportunity ahead. We are working diligently to implement a strategy that will position us to be a more competitive and dynamic organization for long-term.

We thank all of you for your support, and look forward to the opportunity to share more details around our strategic priorities come 2020. Thank you.

Question-and-Answer Session

End of Q&A

Thank you, ladies and gentlemen, this does conclude today's call. You may now disconnect.

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