Q1 2020 Earnings Call
[music].
Greetings welcome to I Mediabrands first quarter 2020 earnings call at this time, all participants are not listen only mode.
She then answer session will follow the formal presentation. If anyone's you require operator assistance during the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Tim Peterman CEO you may begin.
Good morning, everyone and thank you for joining this is Tim Peterman Mediabrands CEO.
Before I go into my prepared remarks, I would like to cover a few housekeeping items.
We issued our Q1 earnings release earlier. This morning, if he did not have a copy you may access it through the news section of our IR website at I'd Mediabrands Dot com.
This release is also an exhibit to the form 8-K filed this morning.
So like to remind everyone that this call will be available for replay through June 10th 2020, starting today at 11 30 am eastern time.
A webcast replay will also be available via the link provided in today's press release as well as on the IR section of our website.
Some of the statements made during this call are considered forward looking and are subject to significant risks and uncertainties.
These statements reflect our expectations about future operating and financial performance and speak only as of today's date.
We undertake no obligation to update or revise these forward looking statement for any reason.
We believe the expectations reflected in our forward looking statements are reasonable, but give no assurance such expectations or any of our forward looking statement will prove to be correct for additional information. Please refer to the safe Harbor statement in today's earnings release, and our SCC filings.
Finally, we will make references to non-GAAP measures on this call such as adjusted EBITDA.
The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures are included with our earnings release.
With those housekeeping items complete let's begin.
As with our last call I would like to begin this morning by acknowledging these uncertain and stressful time for everyone on this call and to reiterate that I'd Mediabrands continues to be focused on taking every step it can to keep its employees vendors customers guest and their families safe.
He turned our attention to the Q1 results, let's start with the 20 million improvement in operating cash flow in my experience. This kind of dramatic impact observed in one quarter can never really be attributed to just one thing going well and never attributed to the activities that occurred in just about three months. It is composed of many things.
And the impact of any story takes time to Bill we are a perfect case study and here are for examples of those things.
First and foremost we've completely restaged, our viewership opportunity with our customers.
Introducing and constantly improving our static calendar strategy in Q1, we successfully launched new static programs like Paula Deen Sweet home Savannah learning to Cook with shack as well as fashion talk on Mondays and Thursdays.
Wake up in style on Tuesdays and Indictor collectors room on Thursday.
Most of these new static program to attracting double digit growth in audiences compared to the same calendar time slot last year as I've said before viewership is not the same as revenue, but viewership is an early indicator for future revenue opportunities because customers in this industry tuned in and watch for awhile before they start to buy.
Second.
We have completely restaged, our gross margin model, our Q1 gross margin rate of 37.1%.
The highest Q1 margins since 2014, which was 37.6%.
This accomplishment like I said before was the result of many thing.
Better on air execution by our hosts inline producers.
Better planning discipline around price band Assortments and calendar adjacent sees and better viewership trends because of the news data calendar, nothing fancy, but not easy either.
Third we have introduced a good better best merchandising assortment and pricing strategy in all our categories that appear to be resonating with our customers. For example in jewelry our biggest categories Gem stones. We have worked hard over these past six months to position our core three brands differently to our customers.
Jim Insider would be our good gem treasures would be are better and jobs invoke would be our best this provides our customers better choices.
Another example is within fashion.
Kate <unk> Mallory would be our good brand from a pricing perspective, one world and a lot of would be what we call are better brand.
And our recent launches of designer brands Dk, and why and Karl Lagerfeld would be examples of our best friend.
Fourth we have continued to successfully reduce our distribution costs by collaborating more with our television distribution partners. Our pricing structures today are designed and ways to produce upside for both parties as we grow together I think about it this way shopping HQ is celebrating its 30 year anniversary intuitive this year that may.
Means we have been great partners to companies like Comcast Directv dish and charter for a long time and we expect to continue to do so in the future. We believe in their technologies and their abilities to provide us video distribution opportunities in emerging video platforms as well as the 24 seven linear platform.
Today as a reminder, our broader journey here is to become a leading interactive media company growing a portfolio of niche television networks niche advertisers and complimentary media services.
In Q4, we launched our Bulldog shopping network. The first television retailing network focused primarily on celebrating men's products and services.
Also in Q4, we completed the acquisition of flipped left interactive a leading technology provider delivering over the top OTI t. as we call it content and TV everywhere solution to media companies and consumer brands.
In addition, we completed the acquisition of JW in Q4, an iconic 114 year old multichannel Americana brand offering artisan crafted handbags and accessories.
So.
Hey tune for more interactive media successes from us in the near future.
As previously reported on her last earnings call in Q1, we signed definitive agreement for 4 million dollar equity financing transaction led by El Gallo Invicta, CEO and I immediately Vice chairman I cannot say enough about how El Gallo has helped our company from being the driving creative force behind and Victor.
To helping our merchants find new vendors to spur growth for shop HQ at Bulldog in different categories to helping actually finance I'd Media's growth.
Finally, let's talk about our balance sheet I think all our stakeholders would agree that in uncertain times like this especially is important to continually improve the balance sheet.
Immediate cash at quarter end was 16 million a 6 million improvement from year end. In addition, we reduced our net debt at the end of Q1 by $14 million moving from $56 million of net debt at year end to $42 million of net debt at the end of the first quarter, our credit facility provides up to a.
$90 million revolving line of credit as supported by our borrowing base and we also have a term loan which matures in July of 2023, our inventory balance at the ended the first quarter was $64 million.
Appeared to $79 million at the end of the fourth quarter 2019 regarding capital expenditures during the quarter. We spent approximately 1.2 million on capital projects, primarily reflecting investments and upgrades to our website and infrastructure from a tax perspective, we have approximately 380 million in federal and a wells that are.
Our available to us to offset future taxable income in terms of our outlook and our more recent financial performance. We expect our may revenues to grow between 6% to 8% when compared to May revenues last year.
This is obviously a very positive revenue performance report.
But I also want to temper revenue expectations for the remainder of this quarter and to here as I mentioned previously these remain uncertain economic times, given the ongoing covert 19 situation and therefore, we will not be providing guidance at this time.
However, as evidenced by our May revenue growth.
We continue to believe that television retailing will be less impacted the other businesses, because we can serve our customers without ever leaving their homes.
In closing I would like to say that these are important times here at I immediately as we continued to create measurable growth momentum.
Thank you for your time this morning, I will turn the call back over to the operator for today operator.
Thank you if he would like to ask a question. Please press star one on your telephone keypad. It confirmation tell indicate your line is in the question.
You May press star to if he would like to remove your question from the Q.
For a participant using speaker equipment, maybe necessary to pick up your hands that before pressing the star teas.
Our first question is from Thomas Forte with D.A. Davidson. Please proceed.
Sure. So two quick questions and I'll get back in the queue. So the first question is on distribution are you, suggesting that you're able to.
Potentially re negotiate terms on a shorter basis than historical my impression is historical youre distribution agreements with M.S. So those are three years in term <unk> or something you no longer term in nature and then second on your installment payment efforts to the extent the draw.
Offering consumers the opportunity to purchase products on an installments interest free basis, how should we think about any potential bad debt exposure.
Hey, Tom. Thank you good question good morning.
Regarding your first question distribution no we haven't changed the methodology, where the term of our our distribution arrangement. They they really range from two to four years and that's been.
Sometimes so you're correct on that what I meant was that when they come up for renewal, we're often talking about new ways to work together that would be a pricing structure that would be that would escalate as we grow and I think those are the key changes that we've been we've been able to do as those.
Contracts are complete until I think that's very positive thing for us and he will well.
Variety ways everything from you know do neighborhood.
H D nowhere neighborhoods in different ways additional channels that you know cross channel promotion.
Right of ways that we partner with our distribution.
Harder like that that just outright and those are the things.
I was talking about in my prepared remarks.
In terms of distribution that's the answer there in terms of the value pay we still do the same checks and the same balances as we've always done with value. So there's a there is no way. They just additional volume would create additional pressure because we're still having the same thresholds for where we do.
Provide credits customer so we feel good about where we are and it hasn't really grown as a percent sale.
Continues to be a distinguishing.
Competitive advantage, we believe in the marketplace, providing that that opportunity to our customers, but we don't see an increased credit risk as a result.
Thanks, I'll get back into queue.
Thanks, Tom.
Our next question is from Mark Argento with Lake Street Capital. Please proceed.
The jumbo no just want to go drill down a little bit on the gross margin improvement pretty impressive quarter was that mostly that's driven or maybe you can feel.
A little bit for us.
Sure. He I know, it's not really mixed driven what we.
As we talk about restating the business one of them one of the critical component was the way we plan our shows and the way, we and the discipline around what we call offered minutes. So the idea here of the gross margin being maintained like it is really not maintained reestablished is that and each.
Our category engage our of our shows we're making sure that we have a price band it begins.
As a balance hi, lifepoint low price point mid price point in an engaging way that these products makes sense to be together in a show that allows us to.
Offer a pea that doesn't require a lot of markdowns that allows the customer to engage better and that that conversion.
A more balanced S&P allows our planning team to be more disciplined about the pricing model. We have eliminated the notion that the only way to engage the customer is to reduce the price that is a race to the bottom and not something that we're willing to do anymore. So.
The first step about maintaining margin is making sure that you have a assortment they did engaging the customer it's not just about.
The discount the second piece is really the honor execution the way our line producers engaged with our home.
They they work on telling their unique selling proposition to the product.
Another way to engage the customer rather than just discount and we've really improved.
Women as well and then the third element of why the margin has improved is really around how we're buying inventory as we talked about earlier. He did the company really in the last couple of years has moved to be buying their entire season cost of goods as new receipt. We just we just don't believe that right way to run a bit.
So we're actually using our existing inventory.
Her way as we improve those first two things I described means that we can use existing inventory to complement the new inventory we call it sprinkled.
And that result in just a better turn of your inventory and also removes the pressure of having to move through an overloaded inventory at a scale or discount just divide the receipt. So if you take away the overbuying improve the honor execution and you offer price point band Alan.
That those are the three things that allow you to improve your margin and maintain that margin.
No.
Maybe just touch on.
Maybe environment, obviously shopping.
<unk>.
Really the only one of the only place or they could jump up and so what should we completed a lot of stage.
So how sustainable do they.
This is.
I know you you had said they may look strong double digit or single.
Did you grow year over year, but.
What's your outlook or thanks.
She shared ability on somebody's.
Yeah. It's an interesting question the I like to use the analogy the I think TV retailing I like the industry in general it's kind of public I'm sure boat after the hurricane where we have a certain amount of access to the customer in their home, there's a trucks factor because it engaged.
With our host we're not AD supported so we're not affected by the retail really uniquely positioned in terms of what I would call. The next six to 12 months, but I do think the.
Oh the situation that we're in today is actually going to have a permanent effect on the <unk> the.
The velocity of online migration of shopping so when you think about the retail experience you think about ecommerce.
In the genes in terms of E Commerce and retail I do think I think it'll accelerate the the situation will accelerate that online migration I think television retailing.
I will benefit from that acceleration so auto short term it will certainly be provide a lot of.
Benefit to.
Our industry I do also believed that long term.
Genie retail and E Commerce will also benefit.
Changing buying habits.
Right.
Right, but it's fitting into that sounds encore.
Thanks Art.
As a reminder to star one on your telephone keypad, if he would like to ask a question.
Our next question is from Alex Fuhrman with Craig Hallum Capital Group. Please proceed.
Great. Thanks, very much for taking my question I wanted to drill down a little bit burden.
On the strong result in May obviously, returning to growth there would be a pretty stunning turnaround from what we've seen the last few quarters, including here in in Q1, So we'd love to see if you could provide a little bit more color I'm really how about that came together in may mostly your new customers.
In buying.
Just in customers buy more.
You know more new customers coming in in the month of May and then.
Except that there have been new customers coming in in May.
Even buying you know things that you would expect to be kind of endemic related demand like into kicking in home categories or have they been buying.
General offerings across the board that you sell.
Hi, Thanks for the questions that was not even multi prong I think that was 12, probably we're going away and get that a shot so in terms of well start with the May performance. It is it is a strong performance for sure as we talked about.
And we think you know, it's we're finishing up the month that 8% growth last year is solid as we've talked about we're not really you know.
The idea of forecast in the year on that would be.
Opportunistic right now that's something we're doing so what the best question really is as you asked why is made doing well and it isn't really just related to the hot levels being higher at home. It really is as I talked about the thesis of my prepared remarks, because it's a lot of little things that all come together.
One and it really started last fall with.
When we introduced a static calendar.
Let's just bear with me here as we go through this debt that's got a calendar allowed customers to establish viewing habits and that each time, they establish viewing habits, they come back more and more and as we talked about viewership isn't revenue, but it begins to lay the ground.
Groundwork for revenue so.
That we saw the upside in Q4 on ratings reversal viewership increases for certain weeks March was the first time for the entire month of March in five plus years actually it may be forever, because we just started measuring Nielsen back in 2016, but for the full month our viewership.
As you know basically flat to where it was last years that that was a stopping a negative trend.
The benefit of this data calendar March was viewership and now you have may in revenue. So it does build in that fashion. The so that's the one that's called out one stream of things going well can you talk about the customer file we talked about in Q4, we did the hard work of investing in watches.
And turning that customer file around that took some expense to do but now in Q1 and as we move into Q2 that is also performed well because that has a flat customer file health you asked about health health is doing well and you know I would say that we were fortunate in that we were already planning a.
Hey, reduced receipt quarter in Q1, as we improved our working capital by 20 million or our operating cash flow by 20 million, but helped has certainly been and I I would characterize even more specifically at home care beauty and health have been very vibrant categories over the last several months and I think.
We'll be vibrant for the next year. So that has also driven the results, but our results having just been dominated by a health. Although health has been growing you've got as we talked about the watches you also have our core home hard brands have been working well. They have you know from everything from Mckenzie too.
Waterford have all provided record performances in terms of on the price band balance that I mentioned earlier to the earlier answer. So it's really the culmination of you guys Dallas static calendar coming through its driving viewership you have a stronger planning content.
It's creating viewership engagement in all categories, you have customer file growth and improvement in watches and in health and then.
The businesses that were really focused on re staging skill is around fashion and is around jewelry and we're making progress on those and we think that in Q2, those will perform even better but it's all of those combination that make may such a robust period for so when you when you ask if that's going to.
That's a trend that's going to stay we believe that the culmination of all our efforts over the last six months, we'll continue to drive performance and the idea of coded and the nature of folks watching more TV right now that the nervousness about the employment Erie.
Concern about the retrenchment in advertising all of those elements will continue to.
Move through the rest of the year, we think we have enough on our plate in terms of our own execution to drive our own result, so it's not something that we think we're going to be completely.
Captured or beholden to the Covance situation of answers your question.
That does that and that's really helpful and follow up the viewership.
Turnaround here with.
The downward trend of viewership finally were thing about that seems like quite an accomplishment here or are those programs that are really been capturing the viewership are those specifically the programs that have been been driving the revenue as we get into April and May or has it been more of a halo effect, you know, bringing customers and then they shop across.
Right.
Great question, Alex It it really is it's a combination right. So.
Think about the categories. We have introduced static program in Q1 in virtually every category and the ones that we introduced in Q4 are beginning to move from that viewership range to our you know what I would call conversion or revenue range. So think about we've done.
Fashion, we launched several different fashion shows because we know in the morning.
Our customers are more engaged.
More interested in being the same whos around the same format in the same category because there that they're viewing habits. We also introduced.
Weve introduced Paula Deen to a Sunday night program.
With shot from her home in Savannah, obviously, we've done a shaquille with learning to cope with shack and that has gone well and we've actually introduced learning to English Japanese tactical Jack shop, but there's all these different elements of why people engage with the with the television on a week over week.
Basis. So it's not just one category not one one hoster, one guess dr. Terry Dobro has done great things with consult select show that now folks are engaging.
Dr. Terry appointments ready to weekly show, where they're asking about health question and we have all these different elements isomers. Another great beauty brands of ours, where we've introduced weekly static shows jennifers alone with serious skincare. It I can think of every single category, having the benefits.
From engaging the customer on a regular basis, so I don't see it at one or the other I see it really just as a new fundamental other at least our business and certainly this is nothing new if you think about the entertainment World that is how you build network ratings that.
Cable World same thing you start with a show you build a day and that's really the fundamentals of we're introducing this network.
Last year this spring now.
Right. That's really helpful. Thank you very much.
We have a follow up question.
Please proceed.
Great. So I think I'd three so well go one of the time. So the first one is Tim can you tell us today what is the significant.
For you for OTI T. distribution such as broker.
Yes. He was one of the times I've got a pen I'll start with that one though I feel we think.
The LTC marketplace as important for sure obviously, we acquired flow left interactive and in Q4, because we believe that ecosystem, where you create a walled garden in an environment, where you have new customers dominating that ecosystem. So the we think it's important for the future.
Our network, we think that learning about the LGT system.
The way that.
Our like left provides services to entertainment networks into consumer brand, we're learning I'm just by participating in now.
Does engage the customer out do you from a rope who truly smart TV to these skinny bundles you know there's a lot of definitions of OTG, but we believe that it's important we believe that if we have the kind of personalities that engage those customers in a different kind of sale.
I don't think that.
A long form content that we're doing today on 24 seven television is the right.
Mechanism for what's going to create conversion and the LTG marketplace. We think someone like Jack would be a way that we would be relevant more relevant and more discoverable and LTT world, but we would have to make and we are making programs that are much shorter engage those customers differently.
So is it.
It's not I wouldn't say economically critical in the next year that we learn and engage the MTG customer in a way that would create dramatic effect on our financial results were viewership, but it is critically important as we talked about what do we trying to do here as an enterprise, where an interactive media comp.
Any oh geez very important five years from now and like hit like I said at the beginning it's a variety of things that get you to the finish line and just because it's not creating economic impact today doesn't mean that it's not very important to our agenda.
Okay, and then as a follow up to that one.
Can you remind us where bulldog is on distribution and are you distributing it on ODP.
Yes, we are certainly shopping HQ is on LGT everything from broke who to the Smarttv Samsung and several other environments and bulldog not yet on OTI tea and it is still relatively small in terms of distributions we.
Talked about in the last.
In the last release, we think because of the coded situation why is there had to prevail and we're going to.
Increase we were planning to increase the distribution on Bulldog at a significant way in Q1, we're now pushed that back to Q3 Q4 to make sure that we you know that that we had the opportunity would that niche business too.
Engage them if you think about how we're engaging the customer today. They really are focused as I talked about the at home beauty and help being the primary category along with fashion and other thing, but the mail and the categories that we are with with Bulldog, it's much better to launch that.
In an environment that isn't like today and more like it's going to be we believe in Q3 in Q4. So it stay the course Bulldog is still producing it online content don't building its social campaigns and still looking for the right distribution model.
As we talked about from the very beginning the combination of of 24 seven linear distribution.
The combination of partial block on regional sports networks, where it's not 24, seven as well as social is going to be how we reach our male customers with bulldog and it each single network that we launch will have a distinct programming and a distinct.
Distribution strategy with its shop, HQ, which is our brought US based network is still not trying to be all things to everybody right. We're not in the home saw category as a business today Bulldog is distinct it after a certain categories celebrating males mailed products and mail services.
The distribution again will be different so although we are in call. It under 5 million homes. Today 24, seven we think we're in a good position from a programming from a product assortment perspective, and a guess perspective to hit the ground running when the opportunity presents itself again in Q3.
Great. So last two that's still one of the time, Okay can you explain how you're managing your fulfillment center efforts in bowling Green.
Amazon talking about for Amazon, an incremental $4 billion spend in the June quarter, and a lot of that is managing kogan 19 at the logistics level.
So I think the in front of your question is are we seeing a spike in cost.
Related to the situation I don't center and our answer is no. We are not although we are certainly.
Being very thoughtful and proactive on all the protective measures for all our employees and and we certainly limited outside personnel from coming in.
We are a our facility in bowling Green is not only shipping out are good for shop, HQ and Bulldog. We also operate a threepl services there as you know.
Providing those services to a BG, which is GE threes direct to consumer group and we continue to provide those services.
Without interruption and we you know as we've talked about we have not had the company and he cases of Cove. It and we think that measure that we put in place.
Then implemented well by our teams and thoughtful and their design. So we continue to obviously watch the situation everyday but we have not incurred any kind of dramatic cost increases as a result, and we believe we've done a great job and protecting.
Checking our crew.
Right. So last question.
So this is so to summarize so while you're it's too early to suggest that the mail sorry, the sales trends in may our sustainable.
There's reason to believe that improvement on the sales trends for the quarter you just reported are sustainable.
And well it's unclear the.
Future of your improved profitability and cash flow.
It's also easy to suggest.
That.
The trends are improving.
So in both cases, while it's difficult to provide guidance because of Kogut 19.
Your confidence saying that.
The improving trends in both top and bottom line.
You're able to they say that.
Yeah, I would say, even I would say if you take the well we control right we control the the improvement.
This data counter improvement in viewership we control how we.
Improved the operating cash flow by 21 and continue to do that we control the discipline in fundamentals around how we plan and how we operate as a team and I think all of those will continue to drive the benefit not only on the bottom line now we're actually seeing benefits.
You know as probably some investor would say finally on the top line, which is very important to us but again, it's it's not the whole ball game for US we don't subscribe to we just need a bigger wheelbarrow before we make money right. We we believe at the size and this scale, we need to be making money right.
Now and that's why we're doing the fundamentals.
Improving the operating cash flow improving the viewership.
Staging the gross margin completely all of those elements are important and then if you do those well when you start to make more revenue that all drops to the bottom line. So we think all of the trends that we control our deriving the opportunity on the revenue side and we do believe that is something that is.
Scannable because we work for the last year to make those things haven't they just don't happen overnight and so they just don't also go away overnight. So we feel good about being able to push through 2020 with.
These improved trends.
Okay. So if I could talk on one quick then so just to be clear, what you're saying is the improvement in top and bottom line, while you're getting some short term benefit from covert 19 from the fact that physical stores are closed it's more a reflection of the efforts you've been putting in place basically since you took over to improve the business.
And so on the ground footing for.
At some point long term topline and Bottomline growth.
Yes, better said and shorter I appreciate that yes that is what I'm trying to communicate.
Thank you Tim.
Thanks, Tom.
This concludes our question and answer session.
During the call back over to Mr., Peter Man for closing remarks.
Thank you sharing we appreciate Everybodys time this morning.
And we will talk to anybody soon.
Thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
[noise].