Icon Energy Corp (ICON) 2004 Q2 法說會逐字稿

Thank you for joining quarter two earnings conference for Candie's Inc. My name is Caitlin and I will be your coordinator today. At this time you are all in listen-only mode. There will be a question-and-answer session following your presentation and you will receive instructions on how to ask questions at that time. (OPERATOR INSTRUCTIONS) As reminder, this conference is being recorded for replay purposes. And at this time I would like to turn the program to your host, from Candie's Inc. General Council Ms. Deborah Sorell Stehr.

Good morning. We are going to commence our call with the reading of the Safe Harbor statement. The statements that are not historical facts contained in this conference call are forward-looking statements that may 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 the control of the company. This may cause the actual results, performance, or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements made in the conference call. The word confident, expect, anticipate, believe, and similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Now I would like to turn the call over to Richard Danderline, Executive VP of Finance and Operations of Candie's.

Thank you, Deborah. Candie's Inc. announced that as anticipated the operating results of the Company's footwear segments were significantly negatively impacted by the Company's transition out of footwear operations to its new licensing business. The company licensed its Bongo footwear to Kenneth Cole Productions Inc. and its Candie's footwear to Steven Madden Ltd. in May, 2003. In connection with the wind down of its footwear operations, the company reported a consolidated operating loss before special charges of 2.5 million, of $487,000 or 2 cents per share for the quarter ending July 31, 2003 of its fiscal year ending January 31, 2004, its second quarter, and consolidated operating income before special charges of 2.9 million of $1.5 million or 6 cents per share for the six months ended July 31, 2003.

After the special charges noted above, resulting primarily from the wind down of its footwear operations, the Company reported a consolidated net loss of $3.8 million or 15 cents per share for the second quarter and a consolidated net loss of 3.1 million or 12 cents per share for the six months ended July 31, 2003 as compared to consolidated net income of $3.3 million or 12 cents per diluted share, and consolidated net income of $4.4 million or 17 cents per diluted share for the prior year three and six-month periods, respectively. Consolidated net revenues for the second quarter were $42.1 million, a decrease of $7.5 million from $49.6 million in the comparable prior year period. Of this decrease in the second quarter, net sales for the footwear segment decreased to $16.6 million from $28.4 million, down $11.8 million from the comparable prior year period. For the six months ended July 30, 2003, net sales increased to $84.1 million, up $8.9 million from $75.2 million in the comparable prior year period. The $8.9 million net sales increase for the six-month period resulted primarily from $21 million sales increase in the Bongo Jeanswear business, operated through the Company's wholly-owned subsidiary, Unzipped Apparel, of which $17.2 million for the quarter ended April 30, 2003 was not comparable to the prior year quarter, when Unzipped sales were not consolidated. For the six-month period, the sales in the footwear segment decreased to $40.2 million, down $12.4 million from $52.6 million in the comparable prior year period.

In connection with the ongoing licensing business, the company reported an increase of $496,000 in licensing income for the second quarter to $1.8 million from $1.3 million in the comparable prior year period. The six-month results also reflected gains with an increase of $247,000 to $3 million from $2.8 million in the comparable period for the prior year. Comparable licensing income increased $661,000 as the prior year's six-month period included $414,000 of royalties the company received from Unzipped prior to its acquisition. The increase was due primarily to revenue generated by new licenses. The Company's Bongo Jeanswear business also reported positive results, with operating income increasing to $2.3 million versus $1.9 million for the comparable quarter in the prior year. Unzipped also increased revenues to $23.6 million, up $3.8 million from $19.8 million from the comparable period in the prior year. Unzipped recorded gross profit of $5.4 million compared to $4 million in the comparable quarter for the prior year, an increase of $1.4 million. Unzipped's gross profit margin increased as a percentage of its net sales by 270 basis points to 22.9 percent, as compared to 20.2 percent in the second quarter of the prior year. Unzipped's results have been consolidated with the company since May, 2002, when the Company acquired the division.

Included in special charges of $2.5 million relating to the discontinuance of footwear operations for the second quarter were $1.5 million of asset impairment charges for leasehold improvements, furniture and fixtures, computer hardware and software, and other capitalized costs resulting from the Company's cessation of its operating footwear business. The Company is also closing its remaining company-owned outlet stores, resulting in impairment reserve for unamortized fixed assets and leasehold improvements, plus additional special charges in the second quarter for lease termination liabilities relating to the closing of the Company's concept store chains, which charges together totaled $600,000.

Turning to the balance sheet, as of July 31, 2003, the Company reported working capital of $4.8 million. Inventory decreased during the quarter by $8.3 million to $12.1 million. Of that decrease, there was a $2.4 million decrease in the footwear segment inventory and a $6 million decrease in the jeanswear inventory. Active Accounts Receivable increased by $2.1 million during the quarter to $22 million, reflecting a decrease of $5.2 million in footwear segment Accounts Receivable, and an increase of $7.3 million in Jeanswear Accounts Receivable. Announced due under the Company's revolving credit facilities decreased by $2.4 million during the quarter to $22.5 million with the footwear segment decreasing by $5 million, partially offset by a $2.6 million increase in the Jeanswear segment.

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

Thank you, Richard. I will begin by briefly discussing our second-quarter results and then move to our discussion of our licensing structure and the exciting prospects of our business. The transition to our new licensing model is on schedule to be complete by year-end. With respect to the wind down of our wholesale business, we are in the final stages of shipping Fall 2003. As anticipated dilution on these shipments are somewhat higher than we customarily experienced in the past, due to the discontinuance of the footwear business.

In our retail division we have already closed the majority of our concept stores and have decided to close the three remaining outlet stores that we own. By year-end we will be completely out of the retail business, including the stores we operate through our arrangement with Casual Male Group. We have moved everyone but a skeleton staff out of the office in Valhalla and as previously planned, will close that office by the end of this month. The sub (indiscernible) has already moved in (indiscernible). In connection with the above transitional activity, we have taken a $2.5 million charge this quarter. Once we complete the transition, in addition to the licensing business, there will still remain two other operating segments under the Candie's income belt. Let me address those briefly now.

The first is our Bongo Jeanswear business, which is operated through our wholly-owned subsidiary, Unzipped Apparel, which is run by a third-party manager, Sweet Sportswear. Bongo Jeanswear increased its revenue this quarter to $24 million. We view this as evidence of continued success for the Bongo brand among consumers. This popularity of Bongo Jeanswear has fueled the growth of other licensed product categories, and will continue to be an important piece of our strategy going forward.

The second is Bright Star Footwear, a wholly-owned subsidiary of the company that operates out of a separate facility in New Jersey where we sell men's casual boots, predominantly to mass merchants. Bright Star which is factory direct business, and holds no inventory, is continuing to perform above expectations due to a high demand for casual boots and the success of Wal-Mart, our largest customer. The Company generated nearly $4.3 million in cash from operations during the quarter and reduced its revolving and long-term debt by nearly $3 million. Going forward we anticipate that the footwear segment will be consistently cash-flow positive as it no longer has fluctuating cash requirements for inventories and Accounts Receivable.

Now I would like to move to discussion of our new licensing model. We are very excited about the new structure and the prospects of bringing sustained, guaranteed income through royalties and leveraging our valuable intellectual property to generate revenue for shareholders. As previously announced, we have selected two of the industry's leaders as our footwear licensee, Steve Madden for Candie's and Kenneth Cole for Bongo. With respect to the Candie's footwear business, as you know we are working with Steve Madden which will begin shipping new products in the Spring of 2004. In addition our current apparel licensing, Gadzooks Inc. is projecting 30 percent increases on Candie's products over the next six months. Gadzooks has implemented its all-new female format and we believe this new format will increase visibility for the Candie's brand in addition to increased revenues.

We are pleased with the performance of our various other Candie's licenses and are entertaining a variety of opportunities in product categories that we have not yet exploited. With respect to Bongo, we are continuing to develop that program and are pleased with our progress. We have signed five new Bongo licensees aside from the footwear license in the past year. We believe that the products being offered will enhance the growing popularity while generating revenues for the company. In connection with Bongo Footwear, Kenneth Cole Productions is planning for a women's line above guaranteed minimum and will launch a men's line next Spring. We are optimistic that by introducing men's products for the Bongo name, we will open a whole new range of possibilities for increased revenue and new categories of Bongo products.

As currently structured, our portfolio of licenses has guarantees over $40 million of the initial turns, not including revenue from Bongo Jeanswear, Bright Star, or any new strategic licensing opportunity. All this licensing income comes without any inventory risk, without the issues of dilution and maintaining margin and without the significant overhead required for the business of designing, importing and selling footwear. The realistic goal of reducing our direct overhead by over 90 percent under the new licensing model is implemented, and will be in place by the year-end. In addition both Candie's and Bongo brands have opportunities in a variety of apparel categories. We have always been known for our innovative marketing and we are continuing to build the Candie's brand through celebrity driven campaigns. We are excited about the Candie's new marketing campaign featuring American idol Kelly Clarkson. Todate, the company has, the campaign has exceeded over 200 million impressions through prints and television. Kelly Clarkson exemplifies the Candie's girl and we believe our young consumer relates to her.

With respect to Bongo's, we have launched several new Bongo's print ads in top teen fashion magazines this fall and have aired a new television commercial that premiered during the Teen Choice Awards on Fox. The commercial is currently running a flight on MTV, both the print and TV campaigns have proven to be very popular with our merchants and consumers alike. We believe our business is particularly well-positioned because of the premium value that the marketplace places on brands. We own two of the most recognized names in the junior sector and believe that our new business model will allow our shareholders to reap the rewards of the investments in these two great brands.

Thanks for your continued support, and with that I would like to open it up for question-and-answer.

Ladies and gentlemen (OPERATOR INSTRUCTIONS) Your first question, sir, comes from Mark Kaufman (ph) of Lazard.

Good morning. Could you shed a little more light on the licensing? Do you pay for the ads, or does Kenneth Cole or Steve Madden pay for the ads? Do they do the design work and you basically have to support so much through the advertising? Also, if you can shed any light on what the break points are on the commission schedule on licensing.

Okay, the way the deals are structured each deal has a licensing royalty component and an advertising component. So each of the licensees pays, contributes for the advertising costs. When necessary, we will supplement if we don't believe -- if we think it can help add revenues to our business. And the licensee handles the direct obviously design working with us and coordination. Can you elaborate on the question as far as the last part about the break points?

Yes, what the fees are, if you move up, if you move up the ladder as far as volume, typically in these agreements you pay a smaller royalty. I was wondering if you can shed any light on that?

Most of our deals -- I think out of our 15, 16 deals, almost all of them have similar royalties across the board as sales ads increase.

Okay. If I can have a follow-on to that question, so when do you anticipate then the ramping up of the royalties? I guess it really is going to start at the beginning of '04?

Really with the Spring of '04 is when the two footwear companies are going to be in gear, and that is when you will start seeing the ramp up of the royalties.

Okay, thank you.

Your next question, sir, from Lee Backus (ph) of Buckingham Research.

Neil, could you sort of give us a sense next year when you've run through all the current inventory into the next year, what the company will look like. Maybe you can give us a sense of how much Bongo and how much your wholesale business will be, how much your licensing business should be at that point in time, and just give us a sense of once the transition is complete what the company will look like?

Right. Lee, I think a good way to look at the business is looking to two operating divisions separate on the royalty businesses. The two operating businesses, Bongo Jeanswear business is profitable this year and should make somewhere around 3 to $4 million. We see that continuing into next year. And the Bright Star business is going to make about $1 million this year. So the two operating businesses we see continuing into '04. As far as the royalty businesses, this year our royalty income I believe is going to be somewhere in the range of about $8 million and growing as the footwear businesses kick in next year. In the previous calls we've discussed that we see at least $10 million and as we see it ramping up, hopefully 12 and higher.

So you will get 10 million next year from royalties and you said 4 to 5 million operating profit from the wholesale businesses?

Those are once again, projections, and those are rough numbers based on --.

Rough numbers for next year. At that point in time, what will the balance sheet look like? How much debt would you have?

Yes, balance sheet at that point in time we are anticipating that by the end of the fiscal year, basically we will have liquidated all of our Accounts Receivable and inventory relating to the operating footwear business, as well as our factor (indiscernible) so the key components of the balance sheet will be the Accounts Receivable generated by the Unzipped business. And the Accounts Receivable from the licensing business and you can pretty much take about one-quarter of the projected balance for the year, and that should be our rough licensing receivable at any given point in time. On the liabilities end, again we are anticipating that we will be out of the factory in footwear segment, the Unzipped segment will continue to support its business through its revolving credit agreement. As of today they have about $19 million due to the bank. On the risk factoring facility, and then our long-term liabilities are today and will continue to be $11 million owed relative to the purchase of Unzipped and about $16 million net due on our bond issuance, which should be amortizing at the rate of about $3 million a year.

Okay, thank you.

I think an important part about that is the Company is generating cash flow and this year, as I've discussed, I believe we generated this quarter close to, I think it was $4.3 million in cash from operations. And one of the great things about the licensing business when we get in it fully operationally, it is a very cash positive business without a lot of up fronts and without owning inventory. And that is something that we do look forward to as we proceed into next year.

Now as you talk about the guarantees of over $40 million, is that just for royalty, or does that also include the advertising commitment?

It includes the advertising also.

Okay, thank you.

Your next question from Mark Kaufman of Lazard.

Sorry for another follow-up. What does the overhead look like then? You've got an idea of what the operations are producing and what the royalties are producing. Any overhead numbers that would go with that in addition to that?

Our direct overhead will be approximately $3 million just in the licensing segments of the business. The apparel side will be higher, however, it will be reported separately and in the apparel segment, which is run by Sweet Sportswear, we have a guarantee next year of $1.7 million profit no matter what their top and bottom look like. So we also have -- so our direct overhead is around $3 million prior to if we want to contribute to the advertising pool, and that is it.

(OPERATOR INSTRUCTIONS) Your next question Jeffrey Appeal (ph) Alios (ph) Capital.

Congratulations on doing a smooth transition into the agreement, and at some point when you go on the road I think the other people will start to realize the revenue stream going forward with a little risk that you have. Could you talk about other product lines that might be something that people have approached you with, possibly apparel or other things to add to the base of revenues that we are already seeing?

Thank you, Jeffrey. Obviously when we get into the licensing business when the transition is complete at the end of the year the Company will feel a lot better going forward. But as far as the licensing business goes we -- both of our apparel deals are short-term. And we think there is huge opportunities in them. Bongo Jeanswear, although it is performing, that deal goes for another year and we think there is a great opportunity there if we continue the jeans business or if we license it. The same thing on the Candie's side. And both of these licenses are pretty narrow today in product categories, so we can add a lot of different categories like outerwear and sweaters, intimate apparel. We think there is great upside in the brands as we add more royalty (inaudible) and add more deals, now that we get the focus on the licensing side of the business. Did I answer it, Jeffrey?

Slightly. Could you be a little more specific about some of the potential relationships with JC Penney or Wal-Mart or Target that possibly could be structured?

Well, obviously today the retailers are becoming very involved in branding and the licensing businesses and it's definitely a potential of our company. In seeing what's happened with Cherokee and Massimo and Starter (ph) and Bugle Boy and a lot of the other brands, and it is a potential for our future and we just have to look at those opportunities as they come. Today we are running our business projecting with our current licensing group, but those opportunities are out there in the future as we develop our brands.

Abba Horowitz (ph) of Yeoman (ph) Capital.

Okay, I just want to go through, according to what you just said you do about 17 million total operating with the royalties and the Bongo and Bright Star. Am I correct? That is an estimate.

I believe I didn't say that. I think what Lee mentioned to me was we talked about licensing income of around 10 and we talked about the segments being somewhere the possibility of 4 to 5. The licensing has the ability to go a lot higher than 10. Could go 12 or 14, but I don't think I threw a number out there of 17.

Okay, so let's say 15 million total then. And you said overhead will be about 3. So this is after paying for all your overhead and everything, so this should be an operating number. Am I correct?

No, that was the revenue side before we put in --.

So this is before the 3 million for overhead?

Correct.

Okay. While on the Bongo's and Bright Star that will be post the overhead?

Correct.

So your net number should be around 12 million? Your operating number should be about 12 million, would that be more correct?

That is the number that is possible depending on what we spend if we contribute to the advertising pool. That number is also pre depreciation and amortization which we have taken down considerably with the write-offs from the second quarter to about $1 million. And we also have an interest expense of around $2 million in there.

Does that include or not not include it?

Not included. That is a number before EBITDA.

So that could take us down to 9 or 10 million on an operating basis?

Correct.

And I assume you will pay no taxes, you have enough NOLs or?

Yes.

Okay so that 9 or 10 million would be a net number as well?

Yes.

Abba Horowitz Okay, now based on the current numbers that you have, both Kenneth Cole and Shoe, the total -- this is all you are estimating right now for the licenses, about $10 million from those two companies, is that correct?

I think we could do a lot better. It is tough to predict. We have our agreements and there are a lot of categories in the Candie's and Bongo's brand but a lot of it depends on how these companies, how the startups go.

Okay, fair. When will we get a sense of whether or not Kenneth Cole, how they are doing actually with the product?

I think its going to be an ongoing sense as the business goes. I think by the Spring time we will have a real good read because it will be their first complete season. Kenneth Cole picked up in the Fall and they shipped a lot of our product. With Steve Madden we have shipped the Fall product, but both companies will be in full gear by the Spring season.

Are there any exclusivities here where it will make it tougher for you to license outside of the companies?

No, just in the footwear side of the business. Of our 15 licenses, most are exclusive, but as I've mentioned, the apparel sides of the businesses do come up in the near future.

Okay. And one final question. Do you assume any other charges going into -- outside I think you said 2.5 million if I remember correctly on the call, another $2.5 million charge. Outside of that do you anticipate having to take any other charges in the next couple quarters?

Yes, actually with the accounting rules we can only recognize certain charges when they are actually incurred. For example, with the closing of our retail stores to the extent that we incur liabilities to terminate those leases, those charges will be made in the quarter in which the stores actually closed. We also subleased our Valhalla facility, which Neil mentioned earlier, and will be closing that facility sometime during Q3 and at that point in time we will recognize the loss on that sub-lease over its life. In the aggregate we are anticipating that all of those charges which should hit Q3 and Q4 based on the timing of when those events occur should be in the aggregate of somewhere about 1,750,000 and that also includes any additional severance charges for employees that will be terminated between now and the end of the year.

Okay, fair enough. When would you anticipate your first clean quarter?

First quarter of next year. Will be out of all the operating activities of the former footwear business by the end of this year.

Okay, so there will be no charges in that quarter, nothing. It should just be straight licensing and Bongo's business?

Correct. The only thing left today is the stores and we still have, I believe there's about 16 stores have to close between now and Christmas.

Abba Horowitz Okay. Thank you.

(OPERATOR INSTRUCTIONS) At this time, sir, it appears there are no further questions.

Okay, I would like to just conclude it. Thank everyone for listening. It is been a difficult decision six months ago when we decided to go forward with this model, but we really believe it is the right one. We are really on the right path. We have a great business model going forward with limited risk and a great upside, if we can get the focus on marketing our brands, which I think our company is good at, and we own two great brands and we hope to show you how good they are as we build profits going forward. Thank you very much.

Ladies and gentlemen, this concludes your program for today. You may now disconnect.