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Edited Transcript of FTD earnings conference call or presentation 7-Nov-18 10:00pm GMT

Q3 2018 FTD Companies Inc Earnings Call

DOWNERS GROVE Dec 26, 2018 (Thomson StreetEvents) -- Edited Transcript of FTD Companies Inc earnings conference call or presentation Wednesday, November 7, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katie M. Turner

ICR, LLC - MD

* Scott D. Levin

FTD Companies, Inc. - President, CEO & Director

* Steven D. Barnhart

FTD Companies, Inc. - Executive VP & CFO

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Conference Call Participants

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* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the FTD Third Quarter 2018 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Katie Turner with ICR. Please go ahead, Ms. Turner.

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Katie M. Turner, ICR, LLC - MD [2]

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Thank you. Good afternoon, and welcome to the FTD Companies' Third Quarter Fiscal Year 2018 Earnings Conference Call and Webcast.

With me today on the call are Scott Levin, President and Chief Executive Officer; and Steve Barnhart, Executive Vice President and Chief Financial Officer.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws that address the company's expected future business, financial performance and financial condition. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in our forward-looking statements.

In addition to the company's reports filed with the Securities and Exchange Commission, please refer to the text in the company's press release issued today for a discussion of the risks and uncertainties associated with such forward-looking statements.

Also please note that on today's call, management will refer to certain non-GAAP financial measures, including adjusted EBITDA, free cash flow and constant currency comparisons. The company believes these non-GAAP financial measures provide useful information for investors. Please refer to today's press release for definitions and calculations of these non-GAAP performance measures as well as reconciliations of the non-GAAP performance measures to the company's GAAP financial results.

And now I'd like to turn the call over to Scott Levin.

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [3]

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Thanks, Katie. Good afternoon, everyone, and thank you for joining us on today's call. I will start with a brief business overview, then Steve will discuss our third quarter financial results and provide an update on our financing activities and our outlook for 2018 and 2019. Finally, Steve and I will be available to take your questions.

I'm excited to assume the role of President and Chief Executive Officer as announced today. It's an honor to work with our dedicated team every day. I look forward to leading FTD with our seasoned executives, including Steve Barnhart, Jay Topper, Tom Moeller, Rhys Hughes, Dale Perrott and Elizabeth Cimaroli. I am working closely with these business leaders to improve our operations and execute on our strategic objectives. We strive to provide best-in-class customer service to visitors to our floral and gifting websites and best-in-class tools and support to our member florists. Because of all of the hard work of our employees and member florists, FTD remains a leader in the floral and gifting industry, with widely recognized consumer brands and a global fulfillment network.

In fact, during the third quarter, FTD officially celebrated our 108th anniversary as a company. We are pleased that our third quarter results are consistent with our expectations, and we believe we are on track to achieve the full year outlook we provided in early October. Our organization has made progress on the continued optimization of our business to drive efficiencies and reduce costs. We believe these cost reductions, along with our technology investments, create a solid foundation for us to build upon as we execute on strategies to increase our marketing effectiveness in order to drive consumer demand, strengthen our floral and gifting brand propositions and help us return to growth in 2019.

We are also pleased to have amended our credit facility earlier this week with the support of our lenders. We believe these amendments provide us with the flexibility to execute on our current business plans and other initiatives, which Steve will touch on.

In conjunction with the strategic review process, we announced in July a corporate restructuring and cost savings plan designed to capitalize on opportunities to optimize our operations, drive efficiency and reduce costs. At the beginning of October, we announced that our team had identified incremental cost savings opportunities and we expect to generate approximately $32 million to $37 million in cost savings in 2019. Previously, we expected approximately $18 million to $23 million in 2019 cost savings. These additional cost savings are primarily a result of evaluating, consolidating and renegotiating supplier and vendor relationships. Steve will address the restructuring and corporate reorganization costs related to these savings.

From an efficiency and cost savings perspective, we have made progress on the continued optimization of our fulfillment and distribution network. We recently expanded our network by adding a Phoenix, Arizona distribution center. This affords us the ability to reach our customers in the Southwest at lower last mile delivery cost. Going forward, we will continue to evaluate opportunities to enhance our distribution and supply chain as we seek to reduce cost and also enhance service through both our internal operations and our strategic relationships with core suppliers and providers.

On the technology front, we have been rolling out our new e-commerce platform. These new mobile first experiences using the most modern, cloud-based modular technologies are yielding positive operating results, including improved conversion. We expect to have all traffic for the U.S. floral brands on the new platform before the upcoming Valentine's Day holiday period and have commenced work on our other brands to complete their migration later in 2019. This will enable us to retire multiple legacy platforms and further accelerate innovative solutions to drive our strategy and dramatically improve and scale our customer experiences. Our team is also working closely with our florist partners in the development of new technologies. These technologies include the work we are doing on our florist websites in the U.S. and U.K., which is expected to improve the florist website customer experience and increase order volume over time, driving a greater level of consumer engagement to benefit our florists. Providing our florists with the state-of-the-art technologies is a key priority for us, as we support and grow our businesses together.

We have placed a heavy emphasis on our need to improve FTD's marketing effectiveness. Through a collaborative organizational effort, with the assistance of our experienced partners, we are executing against strategies to drive demand and strengthen our floral and gifting brands. At the same time, we are intently working to achieve more favorable returns on our marketing investment. This includes leveraging customer insights and certain metrics to better target prospective consumers to drive orders and increase average order value. We have also sharpened our emphasis on consumer activities that will help us advance our long-term vision in a more targeted way. This includes heightened attention on quality initiatives and the overall gifting experience for consumers, including for both our drop ship and florist delivered products.

To further improve the customer experience, we are enhancing our florist order routing system to leverage key factors, such as quality, distance to recipient and NPS data by florist. We are also using market research, along with improved analytics to optimize our pricing strategies. While we are working diligently on our strategic objectives, there is much work to be done. Looking ahead, we believe we have a solid foundation to build upon to drive consumer demand and strengthen our floral and gifting brand propositions as we seek to return to growth in 2019.

As we announced in July, we retained Moelis & Company as our financial adviser to assist with our strategic alternatives review. This process is ongoing, and we are focused on strategic alternatives involving the company as a whole, including, but not limited to, a sale or merger of the company, our continuing to pursue value-enhancing initiatives as a stand-alone company and potential financings or other capital-raising transactions. As we stated previously, our Board of Directors has not set a definitive timetable for completing the review.

At FTD, we remain highly focused on execution to improve our financial performance. We have strong brands, an incredible network of member florists and talented employees to enable us to compete and win more effectively in today's marketplace. We believe our corporate restructuring and cost savings plan, along with our technology investments, create a solid foundation as we execute on our strategic marketing initiatives and will help propel FTD forward and position us to create value for stockholders.

I would now like to turn the call over to Steve Barnhart, who will discuss the third quarter financials and our outlooks for full year 2018 and 2019 in more detail.

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Steven D. Barnhart, FTD Companies, Inc. - Executive VP & CFO [4]

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Thanks, Scott. Good afternoon, everyone. For the third quarter of 2018, consolidated net revenues were $148.6 million, a decrease of 7.9% compared to $161.3 million for the third quarter last year. Foreign currency exchange rates had a $0.1 million unfavorable impact on consolidated net revenues during the third quarter of 2018.

Net loss was $31.2 million compared to net loss of $99.3 million for the third quarter of 2017. Included in the net loss is a pretax noncash impairment charge of $0.4 million related to goodwill, intangible assets and other long-lived assets for the third quarter of 2018 compared to $105.7 million for the prior-year period.

Adjusted EBITDA was a loss of $1 million or a loss of 0.6% of consolidated revenues for the third quarter of 2018 compared to adjusted EBITDA of $1.9 million or 1.2% of consolidated revenues for the third quarter of 2017.

In our U.S. Consumer segment, revenues were $91.2 million, a 7.2% decrease compared to the same period last year. The decline was primarily due to a 3.4% decrease in consumer orders and a 3.6% decrease in average order value. Revenues decreased 16.5% for FTD.com and 7.4% for ProFlowers in the third quarter of 2018 compared to the prior year quarter. These declines were partially offset by an 18% increase in Personal Creations and a 0.3% increase in Gourmet Foods revenues compared to the prior year quarter.

U.S. Consumer segment operating loss was $8.2 million for the third quarter of 2018 compared to an operating loss of $3.1 million for the prior year quarter.

The Florist segment generated revenues for the third quarter of 2018 of $31.2 million, down 10% compared to the prior year quarter, primarily due to lower services revenues from a reduction in clearinghouse order volume and a decline in online services revenues.

Products revenues were also lower, primarily related to a planned reduction in container offerings and related pricing, partially offset by an increase in fresh flower sales.

Florist segment operating income was $8.8 million compared to $9.6 million in Q3 last year. Segment operating margin increased to 28.3% for the third quarter of 2018 compared to 27.6% in the same period last year.

International segment revenues for the third quarter of 2018 decreased by $2.5 million or 8.1%. On a constant currency basis, revenues decreased 7.7% compared to the third quarter of 2017.

International segment operating income was $2 million, a $1.4 million decrease compared to the third quarter of 2017 on a constant currency basis. Operating margin was 6.8% in the current quarter compared to 10.8% in the prior year quarter.

As Scott mentioned, in July, we announced a corporate restructuring and cost savings plan. And in October, we updated our expected savings from that program to $32 million to $37 million. At that time, we also updated our estimate of the pretax restructuring and corporate reorganization costs to a range of $26 million to $30 million, $20.8 million of which we incurred in the third quarter. We still expect that approximately $5 million to $7 million of these costs will be noncash.

Now focusing on our balance sheet and cash flows. Net cash used for operating activities for the 9 months ended September 30, 2018, was $56.1 million. Cash and cash equivalents were $23.1 million at September 30, 2018, compared to $29.5 million as of December 31, 2017. Our free cash flow for the period ended September 30, 2018, was a negative $78.6 million compared to a negative free cash flow of $19.5 million in the 9 months ended September 30, 2017.

At September 30, 2018, the aggregate principal amount of the company's indebtedness outstanding under its credit agreement was $260.7 million, before reduction for deferred financing fees, compared to $192 million at December 31, 2017. Such indebtedness includes $123.7 million outstanding under a term loan and $137 million outstanding under revolving loans. As we announced yesterday, we are pleased that as a result of our continued work with our lenders, we have entered into additional amendments to our credit facility that are designed to align the requirements under the credit agreement with our current business plans. Our lenders have been very supportive and these amendments now reset our financial covenants and borrowing capacity, so that we may continue to pursue our planned investments in technology and marketing and maintain focus on our strategic initiatives.

In terms of our outlook for 2018, we are reiterating our guidance previously provided on October 1, which incorporates our year-to-date results as well as expectations for the rest of the year. For 2018, we continue to expect consolidated revenues of $1.02 billion to $1.03 billion, adjusted EBITDA of $37 million to $41 million and capital expenditures of $35 million to $38 million. We are also providing initial guidance for 2019. Based on our 2018 outlook, our expectations were $32 million to $37 million in cost savings for 2019 and the other initiatives on our 2019 operating plan, including the assumption of a 100% payout under our 2019 bonus plan. As a result, we expect consolidated revenues of $1.03 billion to $1.06 billion, adjusted EBITDA of $58 million to $68 million and capital expenditures of $35 million to $40 million.

That concludes our prepared remarks. Scott and I are now available for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Alex Fuhrman with Craig-Hallum Capital Group.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Congratulations, Scott, on officially becoming the CEO. That's certainly nice to see.

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [3]

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Thank you, Alex. I appreciate that.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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So I wanted to ask about the initial outlook for next year, certainly a lot stronger than we were expecting, particularly, on the bottom line and just curious, not to hold you to any kind of specific quarterly guidance here or anything, but obviously you've got Valentine's Day right at the beginning of the year. A big event for your 2 biggest brands, of course. It hasn't been the best Valentine's Day the last couple of years. Just wondering what we would need to see in Q1 around Valentine's Day in order to hit your guidance on the top line for the full year, and just kind of trying to unpack what we saw in 2018. I remember early in the year, I believe the company had said that, it was tracking about $20 million below expectations, in hindsight, the growth rate in Q1 last year or this year in 2018 was the best growth rate you've had in any quarter throughout the year. So wondering if you can remind us why, I guess, you were looking for that growth in Valentine's Day in 2018? And if there's still an opportunity to perhaps get that $20 million back looking into 2019?

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Steven D. Barnhart, FTD Companies, Inc. - Executive VP & CFO [5]

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Yes. Alex, This is Steve. And you're right. It was around a $20 million of bottom-line impact from -- versus our expectations for Valentine's Day last year, and what we were looking at last year is, we did invest additional marketing dollars for the holiday, we had invested in inventory, and the advertising, as we said, at that point, just didn't work. And with that, we obviously didn't get the sales, we ended up with all the advertising expense and we ended up with some write-off of the perishable products. As we go into this year, we certainly view that as a great overlap opportunity. We're way ahead of where we were last year. We've got ads out and being tested, so we're much ahead of the game in terms of the marketing program and making sure that everything we'll be putting out is well vetted and we'll be more consistent with what works for us historically in terms of how we approach the holiday. So we do view -- in terms of your calendarization question, we do view Valentine's Day as a great opportunity to get out of the gates very strong, but we should have good performance through the year, because in fact if you look at it, is our -- we've obviously -- we've given our guidance on EBITDA for 2018. We think, we've really solidified the performance of the business. We've got our $32 million to $37 million of cost savings on top of that. That really is -- although, obviously, it peaks with the peaks as well. It persists throughout the year. And then in addition to that, we've got the various initiatives to drive the business and improve marketing efficiencies throughout the year. We will have an offset as we'll go from a lower bonus -- fairly low bonus payout this year to presumably, at this point, 100% bonus payout for next year. So there is some offset there. So it should be a strong overlap in the first quarter, but we should see benefits from the cost saves, in particular, throughout the year.

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [6]

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Yes. And, Alex, this is Scott. We'll also have the traffic from our floral brands on our new mobile-friendly consumer website and hopefully we'll see -- and early tests have shown improved conversion from that as well.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Okay. That's very helpful. Appreciate that. And then thinking about just the cost savings, wondering if you can give us a sense just as we think about our models of how much of that cost savings is going to fall into G&A expense versus sales and marketing expense? And is it fair to assume that some of these savings are going to layer in incrementally more as we move throughout the year? Or do you feel that once the calendar flips to 2019, that you're pretty much going to be at that lower run rate?

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Steven D. Barnhart, FTD Companies, Inc. - Executive VP & CFO [8]

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So the first part of the question in terms of G&A versus cost of goods and other things, the initial amounts that we announced in July with the restructuring, those were largely personnel-based changes, and those will be spread across G&A; some would go into cost of goods, but it'd be more G&A focused and -- than product focused. The later changes, which are contractual changes, with a lot of our suppliers and vendors, those will primarily fall into the cost of goods area, some in marketing...

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [9]

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And naturally that would then run with the peaks.

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Steven D. Barnhart, FTD Companies, Inc. - Executive VP & CFO [10]

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Right. In terms of hitting the ground running, the personnel changes are in place, so it will be -- will be there January 1, and I believe essentially all of the contractual changes will be in place...

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [11]

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All the other cost savings are in place as well. They are not on the come. They're all in place.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [12]

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Okay. That's really helpful as well. And then, I guess, my last question as you head into the busy season in the first half of 2019, with some of your brands, curious about how you're thinking about the whole portfolio of brands. Of course, there's a strategic review that you're kind of going through looking at, at some of your brands and, obviously, we'll have to wait and hear how some of that turns out, but as you think about the big holidays upcoming, including the holiday season upcoming here in Q4, I'm curious, which brands you'll really be focusing on? Is it primarily going to be the namesake FTD brand and the ProFlowers brands or could we see some of the other gifting brands receive some marketing support for the holidays and then heading into your big first half holidays next year?

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [13]

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Alex, you'll see the brands having the marketing support they've traditionally had with ProFlowers, getting sort of the TV and a big part of the marketing spend for Valentine's Day and Gourmet Foods and FTD as well getting a marketing push and with Personal Creations more of a Q4, Father's Day type of business, so you'll see all of the floral and gifting brands market in a way that they traditionally have as far as tying into the respective peaks.

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Operator [14]

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This concludes the question-and-answer session. I would like to turn the call back over to Scott Levin for closing remarks.

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Scott D. Levin, FTD Companies, Inc. - President, CEO & Director [15]

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Thank you for your questions. We appreciate your interest in FTD.

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Operator [16]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.