Icon Energy Corp (ICON) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Iconix Brand Group Third Quarter 2005 Earnings Conference Call. My name is Anne-Marie and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

The statements that are not [inaudible] Safe Harbor Statement under the Private Securities Reform Act of 1995. The statements that are contained in this conference call are forward-looking statements that involve a number of 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. This may cause actual results, performance or achievements of the Company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words, “believe,” “anticipate,” “expect,” “confident,” 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.

I would now like to introduce the speakers for the call. Joining us today we have Mr. Warren Clamen, Chief Financial Officer, Mr. Neil Cole, Chief Executive Officer of Iconix. Also joining us, we have Mr. David Conn Executive Vice President and also Mr. Bill Sweedler President of the Joe Boxer Division.

I would now like to turn the presentation over to Mr. Warren Clamen. Sir, you may proceed.

Good morning everyone. Iconix Brand Grouping today announced financial results for the third quarter of 2005 and condition income for the period increased 153% to approximately $9.2 million compared to approximately $3.5 million in the comparable period for the prior year quarter.

The Company reported fully diluted earnings per share of $0.14 versus $0.02 in the comparable quarter for the prior year. Net income for the quarter was approximately $5.2 million compared to approximately $600,000 for the quarter last year.

Third quarter 2005 net income was inclusive of a non-cash tax benefit of approximately $1.4 million. For the nine months ended September ’05, licensing and commission income increased over 100% to approximately $17.8 million compared to approximately $8.5 million in the comparable period for the prior year.

Fully diluted earnings per share were $0.26 as compared to $0.04 in the prior year and net income for the nine months increased to approximately $8.5 million as compared to $1.2 million in the prior year.

Results for the nine month ended September 30, 2005, were inclusive of a non-cash tax benefit of approximately $3.2 million or $0.10 per fully diluted share.

I’d like now to turn the call over to Neil Cole, the Chief Executive Officer.

Our third quarter results begin to provide visibility into the growth potential and the profitability of our unique licensing and brand management business model. These results demonstrate our ability to develop existing brands as well as the growth by acquiring new brands.

As released earlier this morning, we earned a record $5.2 million for the quarter which translate to $0.14 per share. We are presently updating our Company’s previous ’05 guidance for the full year to $0.39 to $0.41 compared to the previous range of $0.33 to $0.35.

These results are driven largely by the launch of Candie’s at Kohl’s, the acquisition of Joe Boxer and a small but growing contribution of revenue from our luxury brand Badgley Mischka. Our current portfolio consists of five strong and diverse consumer brands each with a unique set of opportunities. I will discuss each briefly.

The launch of Candie’s at Kohl’s has exceeded our expectations causing us to increase our revenue projection for the first 18 months to more than double the minimum guarantees. Candie’s has helped position Kohl’s as a destination for younger fashion-conscious consumers while Kohl’s vast reach and marketing investment is significantly raising the awareness for Candie’s and transforming it into a true life-style brand. With the success of our Hilary Duff and Candie’s to the end print campaign we will be building upon that campaign utilizing Hilary Duff again for spring ’06.

Based on these projections, we are currently claiming Candie’s could generate approximately $15 million in royalty revenue in 2006 and are excited about the long-term growth potential of the brand as Kohl’s launches new categories including fragrance, home, swimwear and sunglasses and implements its aggressive plan to increase its store base over the next five years.

Turning to Bongo, the transition from an operating division to a license proved to be more challenging than we anticipated; however, we are pleased that the brand has stabilized and are again building market share. Bongo’s two largest licensees Jeanswear and Kid’s Apparel have recently signed extensions to their agreements and the brand is beginning to expand internationally with our new licensee clout in Central America. We are currently working on new exciting advertising plans for Bongo that will be unveiled in the next two weeks. In 2006 we are planning to generate approximately $8 million in royalty for the Bongo brand.

Badgley Mischka today has eight licensees and is at an exciting turning point. Beginning in 2006 this exclusive luxury brand will be introduced to a much larger audience of consumers through an expansion into new categories and new price points. The Bridge Collection of evening wear has had a tremendous success at the sell-in level being placed in over 300 department stores and will be followed by new collections of handbags, eyewear, a fragrance launch along with hats and cold weather accessories. We are currently finalizing our advertising strategies that will be used in combination with new product launches to raise awareness and provide a foundation for long term growth. Royalty revenues for Badgley Mischka in 2006 is currently planned at approximately $2 million.

The Joe Boxer brand which we acquired in July 2005 is licensed exclusively to Kmart which is now owned by Sears Holding in the United States and to different manufacturers in Canada and Mexico. At a 90% brand awareness among its target market, Joe Boxer is the most recognizable brand in our portfolio with worldwide appeal and many intriguing growth opportunities. We have had very preliminary discussions with Sears Holding about the potential of expanding Joe Boxer into all Sears stores and are presently in discussions with a number of potential partners in Europe and Asia. The Joe Boxer brand is currently planned to bring in approximately $20 million in royalty revenue in 2006.

Our most recent acquisition is Rampage. Rampage is a leading brand of contemporary women’s sportswear distributed to better department stores across the United States. Rampage has 12 different licensees and the brand’s largest customer is Federated Department Stores which we believe represents a growth opportunity as it converts May Company doors to Macy’s. Rampage also has licenses with its retailer Charlotte Ruesse that operates 70 mall-based Rampage specialty stores. We have recently solidified exciting new advertising claims for Rampage that we will be unveiling next Monday and we are in the early stages of evaluating many different exciting licensing opportunities. In 2006 we are currently planning Rampage to generate approximately $9 million in royalty revenues.

Our Brightstar Division develops private label men’s footwear to mass market retailers of which Wal Mart is the largest customer and is planned to generate roughly $2 million in commission income from sales commissions in 2006 which is in line with volume that it’s achieved for the last several years. Our growth strategy has two “T” pillars - organic growth to existing brands that I have just discussed and growth through acquisition of new brands.

Our recent acquisition of Joe Boxer and Rampage demonstrates the potential of this business model which permits us the purchase properties with revenue streams that are accretive to our earnings without adding the risk or complexity of the corresponding operating businesses.

We are currently evaluating several possible acquisition opportunities that are consistent with our strategy that will further strengthen and diversify our existing portfolio. Also, in addition to the royalty revenue I’ve just laid out, our 2006 plan assumes one additional acquisition.

Next year we are planning to more than double our royalty revenue base to over $60 million driven by the increases in the Candie’s business at Kohl’s Department Store, also continued growth from the Bongo and Badgley Mischka brands and a full year royalty base of Joe Boxer and Rampage.

As we mentioned in our press release this morning, we are increasing our 2006 earnings per share guidance to a range of $0.65 to $0.70 per share.

In summary, next year our existing brands are projected to generate well over a billion dollars in retail sales at every channel of retail distribution from the luxury market to the mass market. We believe our industry is in transition and that our business model of managing a strong consumer brand portfolio without the risk of managing operations in a challenging retail environment provides us with a much different growth and profitable profile than our peers.

We have a strong management team in place that is committed to realizing the full potential of this exciting new business model and we are looking forward to the future. Thank you very much for listening to our call today. I’d like to open up the line to a question and answer from either Warren, myself or David Conn or Bill Sweedler-- are available for questions. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] And your first question will come from Kevin [Fowley] with Constitution Research. Please proceed.

Just want to clarify a few things. How much tax benefit assumption is there for ’06?

It’s approximately-- It’s actually a non-cash tax expense of about $0.03 per share.

And can you remind me of the size of the NOL and the--?

The deferred tax asset is about a little over $22 million and we estimate that the benefit that flows through in ’05 will be $0.13 to $0.15.

And for modeling purposes, what kind of rates should we think about if you were fully taxable?

I think somewhere between 38 and 42.

And share count assumption for next year?

For ’06?

For ’06. Correct.

43 million.

Which is in an acquisition which would issue another 2 to 3 million shares. If the acquisition doesn’t happen it would be roughly 39 to 40.

And if my math is correct, then you’re assuming you’re going to acquire about $6 million in revenues?

Our estimate is somewhere around $10 million.

If you look at the stable of brands that you have today, what do you think is the organic sustainable growth rate?

Based on our agreements and the contracts we have with our different licensing partners, we’ve been anticipating somewhere around 15 to 20%. However, with the success of what’s happening with Candie’s at Kohl’s we’re probably going to be running more 25 to 30%.

And then, final question, in terms of Candie’s and Kohl’s - obviously taking the number up significantly there – is it the extension of all the other categories or is it the existing categories just really booming and exceeding expectations.

It’s mostly the latter. The new categories haven’t happened yet; but with the initial acceptance the plan has been upped and in the future it will be a combination but in the beginning parts it is the core categories that are in the stores today.

So those category extensions could be a source for upside for next year potential?

Yes.

And your next question will come from Martin [Van Treist] with [Prefolette]. You may proceed.

Could you just address the free cash flow dynamics with your plan for next year?

I think free cash flow we’re estimating it will be in excess of $30 million for next year in ’06. Our business model allows us to have strong free cash flow because we don’t have a lot of CapEx investments.

[OPERATOR INSTRUCTIONS] And your next question will come from Richard Kniss with [J. McDonald Securities Group]. Please proceed.

I have a quick question in terms of the total assets, total reliabilities and shareholder equity and how it’s changed from the second quarter to the third quarter in terms of the dramatic increases. Could you go through that briefly?

Essentially, that is the two acquisitions that we made in Q3, Joe Boxer and Rampage; so it’s essentially the combination of debt and equity that we issued to acquire the assets or the brands, Joe Boxer and Rampage.

And your next question will come from Tim [Precole] with [West Free Capital]. Please proceed.

I was hoping you would comment on the reports that I’ve read in the Daily Deal and the New York Post that you guys are proceeding an acquisition for Massimo and how that would affect financial models for you guys for next year.

No comment. No. We’re not allowed to comment on the situation.

Okay. And can you just go again into what sort of revenues you are assuming you are going to acquire next year and the number of shares you are assuming you are going to issue and whatnot?

We estimate revenues somewhere around $65 million worth of licensing revenues and in there is one acquisition of roughly around $10 million of royalty revenues; but obviously, it could be a lot different. This year we did three acquisitions and we acquired - between Boxer, Rampage and Badgley - we acquired $30 million of royalty revenue and what we do is we look at each acquisition individually and based on our criteria of how strong the brand is and we basically – although we have ten down – it could definitely be more if great opportunities arise that are great brands that are creative.

And to the last point, the share count today without any acquisitions is around 39 to 40 million and in next year’s $0.65 to $0.70 forecast it would take the share count up to around 43 million shares.

And how much cash do you have on the balance sheet right now?

Well we have some restricted cash but I could tell you that the cash in the balance sheet is about $7.5 million excluding the restricted cash.

And your next question will come from Jeff [Seinburg] with Iconix. You may proceed.

Actually Jeff Seinburg with [JLFS]. A couple of quick questions-- I guess in one of the previous questions had asked about areas of opportunity, if you will, of upside to this preliminary vantage for next year and I think category extensions at Kohl’s were mentioned. Can you mention any other opportunities that might be potential opportunities for next year and is it possible to get a sense of the magnitude on those. That would be wonderful.

One area that we’re very excited about which we’re not really putting into our projections is the whole international opportunity. We’re getting demand around the world for some great opportunities with each of our brands and it’s something that we’re going to be focusing on. As far as trying to quantify the upside, it’s difficult because some of these deals could take time to develop especially in Asia where there’s some great opportunities. That’s why we’re not really putting them into our projections and our numbers. But we do think there’s a big upside and we will be announcing a lot of international deals over the next six to 12 months.

Other upside opportunities are the Badgley Mischka business as it goes into the bridge area and we start expanding our door count dramatically. We think there is some good upside of growing that business and we’re also excited with Rampage. We think we’ve been very conservative there and we’re finding great brand acceptance and a lot of good opportunities are coming our way with the Rampage brand.

I think across the board we’ve been pretty conservative in our estimate as far as going near minimums and I think there’s good opportunities if we execute and have success with our retail partners.

The second question I had was if I understood correctly, you mentioned one acquisition of approximately $10 million is in the guidance for next year; you did $30 million this year. If you could just talk a little bit about the acquisition environment - are you seeing much in the way of opportunities out there; is it possible we could have more than one acquisition next year; and availability of credit to finance such?

Yes. This is a very interesting environment with all the different consolidations and a lot of brands. There’s a lot of great opportunities. We are seeing new brands presented to us constantly. We have a very interesting process in how we evaluate. We do some pretty intense research and we really study the opportunities of the brands and each of the brands we are looking at we like it to diversify our portfolio. Obviously, we want it to be very creative, which they kind of all are because of the way our business model works; and there are a lot of great opportunities out there. And although we put one in our plan, it could definitely be two, three or four as we continue to look at the opportunities that are out there.

And is there any way to give a sense so we can understand the business model without targeting anything that would be competitive to you all; but if you were to acquire another $10 million in revenue, just so I can understand the economics, how much would that help your GPS? What’s the sensitivity?

A lot of it depends. Each brand has a different attribute to it but I’d say when we look at it we usually put an interest rate in there; let’s say a $10 million revenue would cost us somewhere around $45 million. Most of our brands we’ve been paying about 4.5 to 5 times royalty flow. If we did half cash and half stock like we’ve done in the past, figure $25 million, 8% interest which hopefully we can do better. So you figure on the $10 million of royalty you’d have $2 million of interest and some incremental overhead of usually a couple of people which could be about $0.5 million. That’s some color.

I’m sorry?

Hopefully that gives some color.

That’s wonderful. Under that scenario it’s $7.5 million or roughly $0.15, $0.20 a share for each $10 million if I’m doing the math correctly. Wonderful.

One other question I’m just confused on is share count. The shares this quarter were 36.6 million fully diluted; I think you mentioned the share count is 39 to 40 million currently. Could you reconcile that, please?

No. I think what Neil was referring to is next year’s ’06 numbers are based on around 43 million shares with an acquisition. Without an acquisition it would probably be around 40 to 41 referring to this year.

How do you get from 36.5 now to 40.5?

The 36 is a weighted average and the acquisitions that we issued equity for in the quarter.

The Rampage shares and the Joe Boxer shares are weighted average for the year.

I see.

--they’ll be fully weighted.

I see. So at the end of the quarter, the fully diluted share count is around 39 to 40?

Not this quarter but in two quarters. In 12 months they vest over to-- in the average weighted.

And last question. Based on the guidance that you provided for next year, I was a little confused. What exactly do you have in terms of taxes in that number?

Approximately $0.03 non cash tax expense.

Expense. Which is what type of tax rate? I’m just trying to figure out--?

As I said before, you can use around 40%.

In other words-- Is the $0.65 to $0.70 guidance that you give in next year, is that a fully taxed number?

It includes non-cash tax expense of $0.03.

But Jeff, we will not be paying-- We’re paying some taxes at the end of the year but it’s not a fully taxed number.

Okay. I got it. But there is some tax expense in there.

And your next question will be a follow-up from Richard Kniss. Please proceed.

I was curious with Kohl’s aggressive ramping up and promoting of the Candie’s brand, what kind of agreements you may have with them in terms of the contribution of advertising and marketing dollars?

We have an agreement where Kohl’s contributes the advertising and marketing; but what’s been wonderful, they’ve far exceeded their commitment. And they really look at Candie’s as an important part of their general advertising campaign and the commitment that they’ve made to us, it’s almost been tenfold over the year. Or it will be tenfold based on another television campaign, print/internet campaign happening in the spring similar to what happened in the fall.

But it’s not based on a percentage of revenue dollars for sales?

The initial percent is but they’ve been contributing without looking at the percent of sales.

And your next question will also be a follow-up from Kevin Fowley, please proceed.

Just want to clarify, for the 2005 guidance what is the revenue that you are assuming for the full year?

Roughly about $30 million in royalty.

And if I look at your business today, what’s the mix international? Percentage of sales that are international?

I’m sorry? How many are international?

Yes. That license revenue, how much can we say--?

Today it’s minute. It’s probably less than $0.5 million.

And what would you expect next year?

In our plan, as I mentioned, we have very little in it but should be at least five times that and could be a lot more.

Your next question will be from Stanford Clapper with [Rich Press Partner]. Please proceed.

It’s actually Michael [Needleman]. Just two quick questions as far as clarification - what is your actual number that you are going to do in Bongo for this year? You said $8 million for next. What is that going to compare against?

Roughly about the same.

And the second question was, on Joe Boxer your $20 million assumption – not assumption-- Your $20 million royalties that you announced, does that include what you just signed in Mexico as well?

On a minimum basis it does include the Mexican royalties; but again, they will be ramping up this spring and it does not include any overages.

So that initial - if I read the press release - it’s 100 and what--? Forty-Seven (47), 27 stores it’s going down into?

They are hoping to launch 125 stores.

And that 20 million also does not include the possibility of expanding your relationship within the Sears stores?

No. It does not.

And just one other quick question, the Brightstar on the shoes, is there anything else that you are selling in the shoe area, Neil, that that includes or is it just in Wal Mart?

Brightstar has five or six other accounts but the majority of the business is a make-up business for Wal Mart where we get a sales commission. Wal Mart buys direct from the factory and we get a commission.

And your next question will come from Tyler Burk with [Clinton Capital].

The $15 million of royalties that you said from the Candie’s brand next year, that was for the total brand not just the Kohl’s business. Correct?

Correct.

And that, obviously, is above the minimums. Right? That assumes some amount above it?

Correct.

And your guidance for ’05, does that – as it relates to the Candie’s business in Kohl’s – does that assume anything above the minimums for that?

Yes. We have some nice upside in Q4; hopefully it could even be higher but we have put some nice upside in Q4 based on the sales over the first six months.

And then as far as the acquisitions, the SG&A, what kind of assumptions have you made for next year about synergies?

As I mentioned before, each acquisition is unique. If you buy a brand that has a design team or a designer, it could be a higher price and each brand that we’ve looked at comes with different assets and you try to look at those assets and see what you think is best to keep the continuity of the brand; so it’s tough to say what the number. But what we put into our budget in ’06 is roughly $0.5 million to $1 million of added overhead for the $10 million of royalty from a conservative basis.

But if I look at what it sort of looks like you put in there for Joe Boxer and Rampage, it looks like you’ve been pretty conservative with not assuming much in the way of synergies. Is that correct?

Yes. In Joe Boxer, we acquired three very strong people that are a key part of our management team, Bill Sweedler, Andy [Tarshus] and Joe [Hovey]. Rampage we’ve acquired two people, but less expense – less high level; because we licensed it back to the founder to keep all the continuity. So each deal is unique and we look to try to keep the continuity and look for strength in the product development and a lot of the synergies we use at Iconix has a phenomenal marketing and advertising agency and that’s been kind of synonymous with all the acquisitions in leveraging our core competency of marketing.

So would you say that there is much in the way of opportunities on the SG&A line for next year, just based on what you have in the plan right now?

I’d say from an acquisition point of view, I think the acquisitions are all very creative and if we buy more than one or two they’re definitely huge upsides. But today’s overhead is based on today’s business and the SG&A is pretty small. We have roughly less than 30 people and so that’s one of the beauties of our business.

And your next question will come from [Karute], George with Karute Capital. Please proceed.

It’s George Karute. How much did you exceed your minimums in Kohl’s for the third quarter or did you? Have you caught up with the minimums and actually did more than a million for the quarter?

No. We didn’t.

But you think you will in the fourth?

But the minimum-- based on a full year so we have four months to catch up on 12 months of payments but in Q4 we catch up and exceed.

And let me ask you, you know everybody says there’s going to be $28 billion worth of internet business done this year and gasoline prices people aren’t shopping as much; what kind of an internet presence does Kohl’s have and have you all sold a lot of Candie’s merchandise on the internet or is that a place that’s conducive to selling that type of merchandise.

Hi George, this is David Conn. If you go to Kohl’s.com, Candie’s does have a significant presence on their website and, not only have they been focused on promoting the Candie’s product on their website but Kohl’s has actually been investing a fair amount of their marketing dollars in driving people to Kohl’s.com with Candie’s internet advertising. So we think they’re definitely focused on internet sales of Candie’s products and I think there’s some growth there.

And your next question will be a follow-up from Mr. Jeff Seinburg, you may proceed.

If I’m understanding correctly, looking back at some of my prior notes, 2007 is when you really ramp the Kohl’s and the Candie’s to sort of normalize sustainable minimums. Can you talk a little bit, please, about 2007 just so we can understand what a sustainable-- whether it be royalty or profit formula - would look like since that’s the normalized equation in the Kohl’s situation the biggest part of your business?

Yes. When you say Kohl’s is the biggest part of our business one of the beauties of our diversification is it’s planned at less than 25% of our business next year which we-— although we’re excited about it. We think it’s great.

The minimums with Kohl’s, ’05 and ’06 were one contract year; ’07 stands by itself. So the minimums substantially will go up in the 12-month period rather than having to amortize them over 24 months. However, with the strength of ’06, we do see ’07 going up; but maybe not as substantially as when we were projecting ’06 with minimums. Now that we’re projecting ’06 so much far and above the minimums ’07 will continue to grow each year in our contract it grows. But one of the exciting things about Kohl’s is they’re opening up over 100 stores a year. So that’s about 15% growth built in on top of the minimums and the expansion of all the new product categories; so there’s a big upside there that we’re excited about.

Gentlemen, there are no further questions at this time.

I just want to thank everyone for listening today and hopefully those of you that have followed our new evolution and the building of our new business model, hopefully you are as excited as we are. I will be around and I believe so will Bill and David and Warren for most of the day if there’s any individual questions. And once again, thanks for your interest.

Ladies and gentlemen, thank you so much for your participation in today’s conference. This does conclude the presentation and you may now disconnect.