Icon Energy Corp (ICON) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Q3 2004 Candie's earnings conference call. My name is Gina (ph). I will be your conference coordinator today. At this time, all lines are in a listen-only mode. After our presentation, we will open the call to questions. (OPERATOR INSTRUCTIONS) Now I would like to turn the call over to your host, Mr. Richard Danderline, Executive Vice President of Finance. Sir, please proceed.

Thank you. First I'd like to start by mentioning that our earnings release was out on the wire a few hours ago. However, BusinessWire has informed us that they have been having some technical difficulties in disseminating that release to other services. So, the release has been and is available presently at BusinessWire.com, and hopefully, as soon as they clear up these technical problems, it will be distributed to all the various services where you all should be able to see it.

I will begin the call first by reading the Safe Harbor statement. The statements that are not historical facts contained in this conference call are forward-looking statements that involve the number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict, and many of which are beyond the control of the Company, which 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. The words "confident" and similar expressions identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only of the date the statement was made.

Candie's Inc. today announced its results for the third quarter and nine months ending October 31 of its fiscal year ending January 31, 2004. As announced in May, 2003, the Company licensed its footwear operations and it's in process of transitioning itself into a new licensing business model. As the Company previously anticipated, the transition has and will continue to materially adversely affect the operating results of its footwear segment for the remainder of fiscal 2004. The Company continues to operate its Bongo jeanswear subsidiary and Bright Star Footwear LLC, also a wholly-owned subsidiary, which sells casual men's boots on a direct basis.

The Company reported a consolidated operating loss before special charges of $764,000, primarily related to the discontinuance of the footwear operation of $327,000, or 1 cent per share, a consolidated operating income before special charges of 3.6 million of 1.2 million, or five cents per share, for the nine months ended October 31, 2003. After the special charges noted above, the Company reported a consolidated net loss of 1.9 million, or seven cents per share, for the third quarter, and a consolidated net loss of 4.9 million, or 20 cents per share, for the nine months ended October 31, 2003, compared to a consolidated net loss of $788,000, or three cents per diluted share, and consolidated net income of $3.6 million, or 14 cents per diluted share, for the prior year three- and nine-month periods respectively.

Primarily as a result of the Company's transition from the operating footwear business, consolidated net revenues for the third quarter were 27.1 million as compared to 43.2 million in the prior year quarter, a decrease of $16.1 million. For the nine months ended October 31, 2003, net revenues were $111.2 million versus $118.4 million in the comparable prior year period, a decrease of $7.2 million. Also as a result of the transition, consolidated selling, general and administrative expenses before special charges were $6.3 million for the third quarter as compared to $10.7 million in the prior year quarter, a decrease of 4.4 million, or 41.6 percent. The Company anticipates further significant reductions in comparable SG&A expenses in the fourth quarter as its transition is completed.

In connection with the ongoing licensing business, the Company reported an increase of $374,000 in licensing income for the third quarter to $1.8 million from $1.4 million in the comparable prior-year period. The nine-month results also reflected net revenue gains in licensing of $621,000 to 4.8 million from 4.2 million in the comparable period for the prior year. Comparable licensing income increased by $1 million as the prior year nine-month period included $414,000 of royalties the Company received from its jeanswear subsidiary, Unzipped, prior to its acquisition. The increase is primarily due to revenue generated by new licenses.

Turning to the balance sheet, the Company continues to reduce its accounts receivable inventory, accounts payable and revolving bank debt, primarily as a result of its exit from the operating footwear business. As compared to January 31, 2003, accounts receivable, including amounts due from factors (ph), has decreased by $12.5 million to $13.9 million. Inventory has decreased by $9.6 million to $9.4 million. At the same time, accounts payable and accrued expenses have decreased by $5.5 million to $9.9 million, and revolving bank debt has decreased by $11.1 million to $10.4 million at October 31, 2003.

The footwear segment had no borrowings outstanding under its revolving credit facility at October 31, 2003. The Company had working capital of $3.6 million at October 31st at a current ratio of 1.14 to 1. Long-term debt, including the current portion, was 29.5 million at October 31, 2003, versus 31.2 million at January 31st, 2003. At this time, I will turn the call over to the President and CEO of Candie's, Inc., Mr. Neil Cole.

Thanks Richard. I will begin briefly discussing the third-quarter results and then move to an update of our new business. We are very excited about the licensing structure, which we believe will generate substantial cash and profits without of the risks of our former business of importing and selling footwear. As previously announced, the transition from footwear operations to the licensing model will be complete by year-end -- year-end we are on (ph) a fiscal and this January '04.

With respect to the wholesale business, we have completed the wind-down and are in the process of final collections of receivables of fall 2003 footwear. We are experiencing higher dilution on these shipments than we have seen in the past due to the discontinuance of the footwear business. (indiscernible) note, we have successfully liquidated our inventory and eliminated the overhead related to that business. The Howe (ph) office is closed we have sublet the space to a third party. By year-end, we will have accomplished our goal of reducing our overhead by 90 percent and are positioned to move forward with the licensing structure with a streamlined staff of approximately 12 people, who all work out of 5,000 square feet in New York City.

In our retail division, our remaining 14 stores will be closed by January 11, 2004, when we will be completely out of the retail business. As reflected in our results, we have taken roughly $800,000 special charge in the third quarter, and in the upcoming fourth quarter, we have approximately $1 million remaining on charges to complete the transition. Once we complete the transition, in addition to the licensing business, there will still remain two other operating segments under the Candies Inc. umbrella.

Bright Star Footwear, a wholly-owned sub of the company that is operated out of a separate facility in New Jersey, sells men's casual boots, predominately to mass merchants. Bright Star, which is a factory-direct business and holds no inventory, is continuing to perform above expectations due to a high demand for men's casual boots and the success of Wal-Mart, our largest customer.

Our Bongo jeanswear business is currently operated through our wholly-owned subsidiary, Unzipped Apparel, by third-party manager Sweet Sportswear. Bongo jeanswear is on track to generate approximately $75 million in sales this year, reflecting the continued acceptance of the Bongo brand among junior 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.

Looking forward into next year, we believe we have eliminated a large portion of risks associated with the direct sales to teenagers for a more predictable business model capitalizing on our valuable Candie's and Bongos brand, with a very strong revenue flow and greatly reduced overhead. In first analyzing the Candy's licensing business, we are estimating royalties of between 7 and $8 million for next year. Let me break that down by category. Steve Madden's first year -- that encompassed 18 months -- has started slower than we initially hoped, but appears to have taken hold at the last market. We are projecting roughly $2.5 million in royalty for calendar '04 or fiscal '05 which ramps to a guaranteed $3.5 million the following year. The initial term of the Steve Madden license lasts for six years and guarantees Candie's Inc. over $21 million.

The Candie's apparel category is planned to bring in approximately $2 million in royalties in fiscal '05. Gadzooks is presently planned to do roughly $15 million in Candie's products the first six months, as they are in the process of remodeling to an all-female concept featuring better brands, such as Van Lutch (ph). The Gadzooks deal is no longer exclusive, giving us the opportunity to expand utilizing other sources. We are presently entertaining numerous opportunities to increase and diversify our apparel revenues through Candie's. Other Candie's licensees, such as eyewear and cosmetics, along with various new deals, should bring in approximately $2.5 million in royalties in the next fiscal year. We are also very excited about our new Candie's ad campaign, which breaks in February, which will bring tremendous excitement and brand awareness to Candie's.

Now, turning to the Bongo brand. We see Bongo continuing to grow, and we anticipate it generating between 6.5 and $7.5 million of royalty for next year, fiscal '05. Our Kidswear (ph) licensing naming Inc. (ph) will generate over $1.5 million in royalties this year, and we see it growing into next year. Bongo footwear through Kenneth Cole Productions is also on plan to generate over $1.5 million in royalties. Other licensing categories include tops, activewear, sweaters and swimwear. It should all generate over $1 million in addition to the current licensing revenue of $1 million.

Our management deal with Sweet Sportswear expires next year in January '05, and includes a net income guarantee of $1.7 million, with additional advertising support. The Company will be evaluating the best alternatives to secure a guaranteed revenue flow from the Bongo jeanswear business. We have recently signed Rachel Bilson from the hit TV show "The OC" for our new Bongo advertising campaign, which breaks this spring. Also, Bongo will continue to be on MTV with its recent commercial. Similar to this current year, Bright Star is also expected to contribute roughly $700,000 in profit in the coming year.

Moving down to the bottom, our current overhead is planned at approximately $3 million. Our interest costs are projected under $2 million, along with depreciation and amortization of roughly between $1.5 and $2 million. The one variable in costs as we move into next year is possible additional marketing support above current contributions by licensees. This is presently budgeted under $2 million. Our key initiative in the coming 12 months will be to solidify our apparel businesses for the future in both the Bongo brand and the Candie's brand, similar to what we have done in footwear this past year.

In '05 calendar, or our '06 fiscal, one of the reasons we are very excited is we believe our royalty revenue should far exceed $20 million. This will be accomplished by guarantees (ph) growth in the footwear business, solidifying our apparel revenues, while adding other categories to our present 14 licensees. While our royalty base will continue to grow, we see a continued reduction in cost to a lower cost in interest due to less borrowing, and less depreciation and amortization.

In summary, next year is planned to bring in well over 14 million in gross licensing revenues. In fiscal '06, we see the number should increase well over $21 million. All of this licensing income comes without any inventory risk, without the issues of dilution, maintaining margins, and without the significant overhead required for the business of designing and importing and selling products. We own two of the most recognized names in the junior sector. We believe that our new business model will allow our shareholders to reap the rewards of these investments in these two great brands and also other branded opportunities going forward. With that, I would like to open it up to questions. Operator?

(OPERATOR INSTRUCTIONS) Mark Kaufman (ph) of Lazard Freres.

This is Mark Kaufman with Lazard Freres. Could you go over the contract -- I'm not quite sure -- the management contract with Bongo's management on how that is going to work. Do you owe them the money, they owe you the money --?

They guarantee us $1.7 million in profit in this coming year. No matter what -- hopefully they'll do better, but no matter what results at Bongo jeanswear.

So, that expires this year. What would happen the following year? You do own them, right?

Yes, we do own that -- we own Bongo jeanswear and we are going to look at other continued opportunities ,either to continue with Unzipped or possibly with the other possible licensing opportunities.

Licensing opportunities -- I guess taking the names out with a different management team? I'm still not quite clear.

Possibly. It's open to -- we could possibly license it to a third party, similar to what we did with footwear, or we can continue under (ph) the same path.

I see. Certainly that would give you the opportunity to take out more working capital and reduce debt.

Correct.

Dave Ramwitz (ph) of Kirkwood Capital.

Close enough. Good morning. Can you -- (indiscernible) renegotiated the Gadzooks' deal, have you extended the term of that deal as well?

No, the Gadzooks deal, we have six months left but the last six months is nonexclusive. So we're watching very closely what is happening with Gadzooks and how their new model develops. But today, we have the opportunity to take the Candie's apparel business wherever we like.

You have no restrictions on what you can license to somebody in a package?

Correct.

Do you have an estimate for what your debt level is going to be at the end of the fiscal year?

This current fiscal year?

Um hmm.

As we already noted, the footwear segment has already satisfied all of its obligations under its revolving credit facility, and presently, we owe no money there. The Unzipped jeanswear business will probably have in the order of $10 million due under its own factoring arrangement, and our long-term debt should be just slightly below $29 million at that time.

What about the revolver -- do you think it will be untapped?

The revolver will be (ph) about 10.

Right. Last question. Do you have any guess as to why the Steve Madden business started off a little more slowly than you were hoping for?

I think they wanted to basically pull back and start a little more with using their own resources, rather than continuing some of the resources we had. We were hoping there would be more continuity in the business. But they are very good at what they do, and they just had a great market. We're pretty excited about the new collection and where they are going, and we have a great agreement.

I lied. One more question. I'm sorry, but thanks for that answer. Have you -- when you talk about potentially 20 million in royalty income, is that including marketing contributions from licensees, and if so, about how much of that would be advertising contributions?

It includes some. We have some outside of it, but out of the 20 figure, approximately 3, $4 million could be marketing contribution.

Okay. Gotcha. Thank you,

Mark Kaufman of Lazard.

Michael Weiss (ph) of (indiscernible) Capital.

Could you just give a feeling on how the discussions are going with -- what is the reaction out there on the lines that you are discussing currently? Are people excited?

We are having some really good discussions as far as expanding opportunities, and we're just being very careful about who we choose. We have found the key to a good licensing business is that the licensees who you marry (ph), and we're pretty excited. We think we are going to have some great partners like we have today and, more importantly, going forward.

New licensing, or would you rather just clean up the Bongos and the Candie's before you start getting into new lines or names?

We're going to be -- I wouldn't say the word "cleaning up." We are taking advantage of two great brands and we are going to be adding additional licensees to Candie's and Bongo. We have looked at a few opportunities for new brands, but we are kind of waiting until we close down the operating businesses before we looked forward. We have so much opportunity with those trademarks right now to build revenue is what we are going to probably be doing for the next 12 months.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Bill Gordon (ph).

Can you give us a little idea as to -- and again, this may be repetitive -- but who some of the industry or areas that you're looking at in terms of licensing that you have not done in the past? Will they be exclusive, nonexclusive?

For competitive reasons, and for other reasons of negotiations (indiscernible) right now, I cannot elaborate too much. But within the Candie's category today, we have numerous open categories -- most of the apparel side, which will add future revenue, and similar to Bongo. Right now, Bongo has three or four key categories available. But, I would rather not elaborate. It could be with a wholesaler, it could be with a retailer. Presently, we are looking at a lot of different opportunities as this interesting marketing continues to evolve. One thing that we know is important is that brands are critical in a competitive marketplace, and we believe we have something that people want; it has shown through discussions we have had.

Your relationship with Gadzooks, basically -- my memory is poor on this -- I'm not certain if it was exclusive or nonexclusive. But if it was exclusive, there must be certain requirements that Gadzooks has to deliver in terms of business, I would presume. Since they are in a state of restructuring and changing around things, (indiscernible) trying to get a grip on where they're going in life, how is that going -- or is that exclusive, nonexclusive, what do you expect, don't expect, etc.?

First of all, with the Candie's brand, Gadzooks has done a great job, and it has been growing every quarter and we were very excited -- we are excited about their future as they continue to upgrade with better brands. Presently, our deal with Gadzooks becomes nonexclusive in the spring, which is really the next shipping period. So we are continuing to evaluate all the different alternatives we have. But, so far, every -- the last two quarters, as they have converted to all-female, they have more than doubled the past Candie's business, and we hope they do well going forward.

Got it. Okay. Thank you.

(OPERATOR INSTRUCTIONS) Ivan (indiscernible) of Raymond James Financial.

You may have hit this, but I don't think I caught it. Can you go to the 2004 numbers, the revenues that you plan and the cost?

In our fiscal 2005? Next fiscal year.

The twelve months going forward?

Yes.

We put out there we believe that the number would be somewhere between 13.5 and $15 million in gross profit or net revenue, and we're hoping our overhead is somewhere between 8 and $9 million.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Sir, I am showing no questions at this time. Please go ahead with your closing remarks.

I would like to thank everyone for listening today and we are excited about where we are going. It has been a trying and interesting 12 months, as we have changed our business model. And I really, truly believe that we are on a great path of a safe business model that will generate profits and cash (ph) for our shareholders. Thank you for all of your support and if anyone would like personal questions, myself and Richard will be available today to take calls. Thank you. Goodbye.

Ladies and gentlemen, thank you for joining us on today's call. You may now disconnect your lines.