Icon Energy Corp (ICON) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter Earnings Call for Candie's, Inc. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Should you require assistance during today’s conference call, please press “*” followed by “0” and the conference coordinator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. Your host for today’s conference call will be Deborah Sorell Stehr, Richard Danderline, and Neil Cole. I would now like to turn the program over to Deborah Sorell Stehr. Please go ahead.

Thank you. Good morning. I am going to read a statement under the Safe Harbor Act. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of known and unknown risks and uncertainties all of which are difficult or impossible to predict and many of which are beyond control of the Company. This may cause the actual results, performance, or achievements of the Company to be materially different from any results expressed or implied by such forward-looking statements. Words such as “anticipate,” “believe,” “our confidence,” “hope,” and alike are forward-looking statements. Listeners are cautioned not to place undue reliance on these statements; which speak only as of the date the statement was made. Thank you, now I would like to turn the call over to Richard Danderline.

Thank you, Deborah. For the first quarter ended April 30, 2003, of our fiscal year ending January 31, 2004, consolidated net revenues increased by 64.1% to $42m from $25.6m in the same period last year. Operating income increased to $1.6m in the first quarter of the current fiscal year compared to $953,000 in the prior year period.

Special charges, primarily related to the settlement of the Company's SEC investigations were $434,000 in the first quarter of the current fiscal year as compared to $15,000 in the prior year's quarter. Net income was $726,000 or 3 cents per fully diluted share in the first quarter of fiscal 2004 on 25.1m average diluted shares outstanding, compared to $1.1m or 5 cents per fully diluted share on $23.1m average diluted shares outstanding in the first quarter last year. Included in the last year's first quarter net income were $250,000 of income related from a reduction of the remaining liability in connection with the Company's acquisition of the remaining equity interest in Unzipped Apparel, LLC and $139,000 of income tax benefit resulting from the utilization of net operating losses to recover previously recorded minimum statutory taxes.

Comparable licensing income increased $165,000 in the first quarter, or 16.3%, as the licensing income for the prior year period included $414,000 of royalties the Company received from Unzipped prior to the Company's acquisition of the remaining equity interest in Unzipped. Licensing income as reported for the first quarter was $1.2m compared to $1.4m in the same period last year.

Consolidated gross profit was 28.3% of net revenues in the first fiscal quarter compared to 33.9% of net revenues in the comparable period last year, a decrease of 560 basis points. The decrease was primarily due to a shift in product mix that resulted from the inclusion of the financial results of Unzipped, which operates at lower gross profit margins. Selling, general, and administrative expenses were 23.5% of net revenues in the first quarter of Fiscal 2004, compared with 30.2% of net revenues in the comparable period last year or a decrease of 670 basis points, also primarily due to the inclusion of the financial results of Unzipped, which operates with lower selling, general, and administrative expenses. Interest expense for the first quarter was $873,000 as compared to $277,000 in the prior year quarter. The increase is due primarily from the $20m long-term debt offering completed in August 2002 and the inclusion of Unzipped in the consolidated results.

Since May 1, 2002, the operating results of Unzipped, which conducts the Company's BONGO Jeanswear business, have been consolidated with the Company's financial results. Unzipped contributed $17.2m of net revenue in the first quarter of Fiscal 2004. During the first quarter of fiscal 2004, gross profit of the Unzipped business was 19.2% of its net revenues and selling, general, and administrative expenses were 14.3% of its net revenues. Unzipped contributed $849,000 of operating profit during the first quarter of fiscal 2004.

Net revenues, including licensing income in the Candie's Footwear business, decreased by 3.2% to $24.8m in the first quarter of fiscal 2004 compared to $25.6m in the comparable period last year. As previously noted, licensing income for the first quarter was $1.2m compared to $1.4m in the period last year of which comparable licensing income increased $165,000 after adjusting for 414,000 of Unzipped royalties paid in the prior year period. Gross profit of the footwear business was 34.6% of its net revenues compared to 33.9% of net revenues in the comparable period last year, an increase of 70 basis points. Selling, general, and administrative expenses generated by the footwear business were 29.8% of its net revenues compared to 30.2% of net revenues in the comparable quarter last year, a decrease of 40 basis points. Operating income from the footwear business in the first quarter was $750,000 compared to $953,000 in the comparable period last year.

Turning to the balance sheet; working capital was $6.7m at April 30, 2003, as compared to a working capital deficit of $4.8m at April 30, 2002, an $11.5m improvement.

At this time, I would like to turn the call over to Neil Cole, President and CEO of Candie's, Inc. Neil.

Thank you, Richard. Good morning. Thank you for joining us to review the first quarter results of Candie's, Inc. As many of you are aware, last month Candie's licensed its Candie's Footwear business to Steven Madden and its BONGO Footwear Business to Kenneth Cole Productions. As a result, we are in a transitional period as we exit from our footwear operation and move forward with the new licensing structure. I will begin by discussing our first quarter results and then move to a discussion of our new licensing structure and the exciting prospects for that business.

We had a solid first quarter with the footwear segment sales relatively flat to last year's period. Our core product, mostly sandals for spring, are performing in what continues to be a very tough retail environment. Factors with which our customers have had to contend include the decreased mall traffic and a difficult economy. These factors have been compounded by a very cold and rainy spring.

Fortunately, we had anticipated these issues by reducing our overhead and planning our inventories very tight. The BONGO Jeanswear business performed according to plan in the first quarter contributing over $17m of net revenues. We are currently in a process of implementing our strategy to close remaining 11 concept stores.

Our outlet stores are continuing to perform and are a part of our strategy to liquidate inventory as we move out of our operational footwear business. Seven of our 10 outlets stores are being operated pursuant to an agreement with Casual Male Retail Group. Under that arrangement, we have the right to operate those stores through the end of the fiscal year and if we chose to return the operation to Casual Male Retail Group with no leasehold [risk or] liability. Alternatively, we can decide to operate the stores for another six months and see whether we want to keep them or return them at a later date.

In the change from what was previously announced, we will now continue to operate the Candie's Footwear business through the third quarter while we complete shipping in the fall 2003 season. As part of the transition out of the footwear business, we are closing our Valhalla office in which our footwear operations have been based. We are in the process of subletting that space and plan to have the office completely closed by the end of September. By that time, we will have consolidated our office into our New York City's space.

Once we complete the transition in addition to the licensing business, there will still remain two operational segments under the Candie's, Inc., umbrella besides the licensing. The first is our BONGO Jeanswear business, Unzipped Apparel which generated approximately $3m of operating income last year on over $17m in sales for the twelve since it has been consolidated.

Unzipped are projecting increased sales and profits for fiscal 2004 over last year as the demand for BONGO products increases. Under our arrangements with the third party manager of Unzipped, Sweet Sportswear, Candie's, Inc. is guaranteed at least $1.7m of net income for this year and next year; thereby substantially eliminating our downside. The second is Bright Star Footwear which sells men's casual boots predominantly to mass merchants. Bright Star, which has a letter of credit business and holds no inventory, is continuing to perform above expectations due to a high demand for men's causal boots and the success of our largest customer Wal-Mart.

Now, I would like to move the discussion to our new licensing business. We are very excited about our new structure and the prospects of bringing sustained guaranteed income through royalties. We've selected two of the industry's leaders for our footwear licenses in Steve Madden for Candie's and Kenneth Cole Productions for BONGO. With respect to the Candie's licensing business, Steve Madden is known for terrific product and we believe that our consumer will be respond very positively to the new offering. In addition our current apparel licensing initiatives is projecting a 30% increase over the next 12 months. We are enthusiastic about their all -- new all-female concepts and believe that will showcase the Candie's brands.

With respect to BONGO, we've signed six new BONGO licenses in the past year and we've had strong initial selling in all of them. We are enthusiastic about the future of the BONGO footwear business. Kenneth Cole Productions is planning for the women's line above the guaranteed minimum and is planning on launching a BONGO men's line sometime next year. We believe that by introducing men's product with BONGO name, it will open a whole new range of possibilities for increased revenue and new categories of BONGO product. As currently structured our licensing business has 15 licenses generating royalty income which will average $10m per annum in income or over $40m over the initial term of the current portfolios. This does not include revenue from BONGO jeanswear, Bright Star or any new strategic licensing opportunities that the company enters into; all this licensing income without any inventory risk, without the complexities of designing and importing footwear, and with a sharply-reduced overhead. The company plans on using the cash generated by the licensing business for strategic purposes, which we plan to disclose in more detail as the plans develop over the next few months. In addition both Candie's and BONGO brands have great opportunity in the future to capitalize further on the apparel markets. Apparel had historically been the cornerstone product for many brand and we believe it will bring substantially increased revenue to our business. It has been very difficult operationally and emotionally closing out the footwear business. We've had to say goodbye to many employees, loyal employees; however, we are confident that our new licensing structure will generate steady guaranteed revenue with reduced risks and overhead, and is the best way to deliver profits and increase shareholder value.

Our core competencies have always been marketing and brand building. In a marketplace that places premiums on the value of brands, we own two of the most recognized brands in the junior sector. We have spent many years and have invested over $100m in our two powerful brands Candie's and BONGO. Candie's will be celebrating its 25th anniversary later this year, and BONGO just celebrated 20th anniversary. We believe that our licensing strategy will allow our shareholders to reap the rewards of these investments.

I'd like to thank you all for your continued support and open it up for question and answer.

Ladies and gentlemen, if you have a question at this time, please press "*" followed by "1" on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press "*" followed by "2". Questions will be taken in the order they are received. Again please press "*" followed by "1" for questions. The first question is from Lear Begard (ph.) of Baron Capital. Please go ahead.

Hi, Neil. How are you?

Hi Lear. Good, thank you.

Quick question for you. You are going to have 15 employees or so when you get model rolled out completely, you think?

Yes, roughly.

And some of those employees are actually not going to be a cost to you, so you are going to pass through their costs to the licensees?

What we plan when we said 15-20 employees, those would be a cost to us.

Okay. So what would you expect SG&A then to kind of on a run rate basis be once you get up and going?

Our target was around $3m or possibly below.

Okay. Great. Thanks very much.

Thanks Lear.

The next question comes from Michael Wise (ph.) of Jenkins (ph.) Capital. Your question please.

Hi Neil, can you give a little more guidance on the model as far as -- I mean you mentioned the 15 licensees are, and I'm trying to understand, greater than 10m a year, but this is a range on what greater than 10m can be. I mean what do you see -- what do you see going forward as far as new licenses, current licenses that you are, you know, when you give some of that -- share some of that with us?

Right, what is exciting to us is roughly, you know, the licenses we have signed today in the $40m of guarantee, which flows out roughly 10m per annum, does not, you know, that lease is only for the remainder of the year and we have a transition period next year. So, Candie's Apparel will be available. BONGO apparel, we have another year and a half in our current structure with the Sweet Group. We have a lot of wonderful opportunities in Apparel and we get past just with general apparel category besides the jeanswear, you have activewear, you have intimate apparel, outerwear, you have home furnishing. There are so many great opportunities for our brands. If we market them well and we choose the right partners. And you know as far as guiding further, you know, if you take the $10m, you look at what Unzipped is doing and believe we can continue that and then you look at all these opportunities, hopefully you can build your model.

Okay. Question for you -- I want to make sure I understood something -- you said that BONGO is guaranteeing $1.7m on operating income this and next year?

Yes, we have our deal with the Sweet Group is guarantees at a minimum of $1.7m. This year we did substantially higher and we are on pace, our backorder is higher and there is a lot of excitement upstairs.

Then, you keep the overage or do they -- I mean how does that work?

We keep the profit. There is a management agreement where they get a piece of it, but you know, if the Company -- like this year, if the company earned a $3m and it all went to Candie's Inc. Next year there is a management agreement that will offset a percent of it, but you know, we have good hopes that we are going to continue that profitability and it is going to grow.

So, you see growth from the $3m, not from the $1.7m?

Oh definitely, definitely.

Neil, I also wasn't 100% sure, men’s footwear is doing well with Walmart, is that what you said?

We own a business called Bright Star which we've had for 10 years and--

That's the private label?

It's a private label and we make the Texas Steer boots for Wal-Mart and -- the Brahma boots for Wal-Mart, Texas Steer for Kmart. And over the last year, it started to really perk up again with what's happening with Timberland and that business has brought, you know, it is going to bring about $500,000 profit this year as a minimum we've already achieved and we have few months to go. And we have good prospects going forward. What is a great about that business is there is no risk and there is no use of capital.

Right. Now the $10m to the guarantee, is there any expenses against that or are those sort of go straight to bottom line and ex the SG&A?

There is small amount of advertising. Some of the advertising is not included, but if we do it well it should go to the bottom line.

Okay, so if I'm just like -- I want to back even--.

Michael, must you build a model for the whole group?

Okay, I'll let somebody else ask the question, I'll come back later.

Thank you.

The next question is from Alan Weichselbaum of Fulcrum, your question please.

Hi. How are you? Alright I'll build the model for the group. Basically, question I have just to follow-up a little bit on what Michael asked before, if you are… The [Gadzooks] when that comes off the license, can you give us the range what do you think the apparel licenses could be? It is fine to say that you have five or six other opportunities in outerwear etc. etc.? but, What could those -- can you put a range on what those could mean to you and are you in any type of conversation yet, or can you be in a conversation yet with, you know, other people who may interested in those licenses?

Alright, first of all, we do have a current arrangement with [Gadzooks] and they are pretty excited and they are rolling out their whole new concept July 7 and Candie's is a key part of it. And we look forward to seeing how that works and how it grows. But there are opportunities, I mean, you can look at what's happening with licensing today, and branding, and how important intellectual property is and looking, you know, obviously, one of the great success stories recently is the Cherokee story, and retailers are looking for brands, and we happen to have two great ones. And there's a lot of different ways we could execute. And we have not had -- you know, we know the places to go, we have ideas of how to handle it, but we're going to be very careful how we execute it and do the best for the long-term.

If you were to take the $10m that you think you're going to get in license revenues and you told us your corporate overhead is $3m and you also had -- I think I heard you say you had about $800,000 worth of interest expense this quarter, is that correct?

That's correct.

So you have another $3.2m in interest expense. So that would leave you at the end of the day with about $4m worth of income. Have we missed any expenses when we went through that quick-and-dirty analysis?

We have depreciation and amortization.

Yeah, we have -- our intangibles on the books, which will carry forward even after we get rid of our retail stores will average about $1.6m a year.

And you have $1.6m a year, so that leaves you with about $2.5m on that $10m and then you are guaranteed from BONGO about $1.7m, correct?

Yes, correct.

So that gives you about $4.2m. Assuming nothing else happens you guaranteed about $4.2m right now? Is that a fair assessment?

I think that's your model Alan.

Are we missing any -- well my question is, are we missing--?

Hopefully you're missing a lot of--?

Upside potential?

Upside potential, I mean these are minimum; these companies [are paying still] a lot more than that. You know, just what Unzipped did last year is double what you put in this year. And they're projecting a lot higher and budgeting higher, and we have lot of great licensing potential.

If you were to run out what was done last year and just assume that it was the same under these licensing agreements. Can you give us a sense of the $10m would be effectively what? Can you give us a sense of that?

I'd rather not because the tricky part of it is, you know, we as a company did roughly $75m or $80m worth of footwear, but how… You know Steven Madden Group and the Kenneth Cole Group transitioned, I'd rather not just immediately take the royalty against that because it could take an extra 6-12 months to get there. You know, we did our other royalty businesses over $5m and this year is projected over $6.5m, and when you take that royalty business you take how the footwear business evolves, you add Unzipped, and you add Bright Star, and look at new potential, I think you can get there.

Okay.

Or give you more insight.

Okay.

Okay. Thanks Alan.

Thanks.

The next question is from Jeffrey April (ph) of ALS Capital (ph). Your question please.

Yes. Can you give us a little bit of a breakdown of what the statistics are on the royalty arrangements? What percentages they are?

The arrangements vary, you know, from cosmetics which is at 5% to eyewear, which is at 9% and most of them are between that range which is customary in the business. But we'd rather not talk specifically about any one particular deal.

I mean, I'm more concerned about on the shoe business, obviously?

It would be fair to say we're in a good part of that range.

And I see there was a lot of insider buying. Is there any thoughts about maybe the company buying back stock, or you know getting little more visibility now that you've cleaned up the company a little bit?

Yes. The Board -- as the company's begin, you know, our models definitely generates a lot of cash and a -- we do believe it would be a good investment and the Board will definitely consider that at all times.

Thank you and good work.

Thank you Jeffrey.

The next question is from Eric Fell (ph.) with Casa Capital (ph.). Your question please.

It's [inaudible] [on] the royalty arrangements, [is there], I guess, any royalty?

I'm sorry can you talk a little louder?

Yes. On the royalty arrangements?

Yes.

Is there sort of a minimum volume threshold or anything along those lines?

Yes. Each agreement has a minimum volume kind of minimum royalty and a minimal advertising commitment.

You can’t sort of--.

I think I, kind of, gave a range and by telling you that they all add up to $40m and roughly $10m per annum, and with the growth we have, I think, it is kind of done that without giving out… Most of all other companies, we are doing business with, are public companies that would rather not specifically break down each deal individually, so we have to be careful how we do that.

Okay thank you.

Thank you.

Once again ladies and gentlemen, if you have a question, please press "*" followed by "1". There are no more questions at this time.

Okay, I would like to thank everyone one more time for listening and as you know I’m available for any further elaboration on what we discussed today. And I think we have a very exciting business, I think we have an innovative model and we have two up-starting brands that we have great revenue potential with the limited downside risk and I think that is strategy that our group management in the Board have worked on and we think we have a great opportunity and we thank you all for your interest. Thanks, bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. We now disconnect. Good day.