Icon Energy Corp (ICON) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter and full year 2005 Iconix Brand Group Earnings Conference call. My name is Angela and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be conducting a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

Before we begin, the Company has requested I read the following statement. The statements that are not historical facts 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, many of which are beyond the control of our 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 imply forward-looking statements. Listeners are cautioned not to place undue reliance and its on these forward-looking statements which speak only as of the date the statements were made.

Now, the would like to turn the call over to your initial host for today's call, Mr. Warren Clamen, Chief Financial Officer.

Good morning, everybody. Iconix Brand Group today announced financial results for the fourth quarter and full year ending December 31st, 2005. Licensing revenue for the full year increased to approximately $30.2 million compared to $10.6 million in the prior 11-month year. Net income for the full year 2005 increased to approximately $15.9 million versus approximately $200,000 in the prior year. And fully diluted earnings per share increased to $0.46 inclusive of a non-cash tax benefit of $0.14 compared to a $0.01 in the prior year. For the fourth quarter of 2005 licensing revenue increased to $12.4 million compared to $1.8 million in the prior year two-month quarter. Net income for the quarter was approximately $7.5 million compared to a loss of $900,000 in the prior year quarter and fully diluted earnings per share, $0.19 versus a loss of $0.03 in the prior year quarter.

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

Thank you, Warren. Our record 205 results validate the strength of their unique business model and its key attributes of revenue predictability, reduced risk and sustained growth. Iconix focuses on our core competency of marketing and partners with leading retailers and manufacturers. In return, we get a contractually guaranteed revenue stream without any inventory or operating risk and little to no capital expenditures. Therefore, we have substantially higher profit margins than the traditional operating company. These are the key drivers of this business model and by 2005, our first full year as a pure brand management and licensing business, was the most profitable in our history.

In '05, among other things, we successfully launched our heritage brand Candie's at Kohl's department stores. We changed our corporate name to the Iconix Brand Group to reflect their new business model, we acquired two great brands in Joe Boxer and Rampage, and signed eight new licensing deals for our Badgely Mischka brand. We have recently begun to communicate our story to the financial and investment community and I believe is being looked as an innovative business model for the future.

In '06 Kohl's will continue to rollout and expand the Candie's brand, adding swimwear, home accessories, outerwear, girls 4-6x, and an exciting new fragrance launch scheduled for this fall. We have implemented a storewide fixturing program highlighting our products across all departments. Our new national television commercial featuring four young stars including Hilary Duff, Ciara, Michelle Trachtenberg, and Samaire Armstrong, debuts this evening on the Barbara Walters Special. Kohl's continues to exceed our expectations as a licensee and we are excited about the growth ahead as Candie's evolves into a lifestyle mega brand and develops a loyal customer base within one of the largest retailers in the United States.

Our Bongo brand has stabilized and we are beginning to implement our new growth strategy. A new ad campaign featuring the cast of the new hit TV show Laguna Beach has generated a lot of excitement and interest. Our core Jeanswear is once again in all key moderate department stores and our kids apparel license is building Bongo into one of the largest brands in the stores today with close to $50 million in wholesale sales in the kids area. We have launched Bongo in South and Central America where the brands have strong awareness. We anticipate consumer acceptance will be positive and that we will see strong growth over these markets in the years to come.

With respect to our luxury brand, Badgely Mischka, our largest licensing group, J. F., recently shipped the first Bridge Price Collection of evening wear to retailers including, Saks Fifth Avenue, Nieman Marcus, Bloomingdale's and Nordstroms. And to date, sell-throughs have exceeded our expectations. This Bridge strategy is emblematic of our overall direction for the brand which calls for and expansion to a much broader segment of consumers who aspire to own a piece of the luxury and glamour of Badgley Mischka, but cannot afford a couture gown. Our first Badgely Mischka fragrance launches this fall will further enhance the strategy by making the brand more accessible to a new and larger group of consumers. We see the opportunity to add several new licenses in '06 and to continue our planned expansion into new accessory and apparel categories. Our current advertising campaign featuring the Olsen Twins as we received enormous publicity and increased awareness worldwide. We believe this kind of exposure is the key ingredient necessary to raise brand awareness to a substantially higher level and fuel our expansion to a much broader market of consumers.

Our brand Joe Boxer had a strong '05 at Kmart stores. And we are in continued discussions with management on expansion of the brand to Sears stores. Earlier this week, we announced two new licenses in Canada which will further expand our penetration in that key market. We also announced the license, a new licensing partner who will open Joe Boxer stores throughout Northern Europe. These agreements, along with their recently announced license in Mexico, represent the beginning of what we hope will be a significant international expansion of the Joe Boxer brand.

In the first full quarter in which we owned the brand Rampage we have a much stronger than anticipated fourth quarter performance especially our core sportswear licensees. With Federated Department Stores as the largest customer of Rampage we believe that our planned conversion, their planned conversion of May Company to Macy's later this year represents a growth opportunity for the brand, and we see opportunities to add new licenses to fuel addition of growth. In particular a line of premium denim and possibly kids apparel. Our new ad campaign featuring supermodel Petra Nemcova has been well received and generated a substantial publicity and interest for the brand which we will continue working with Petra for our fall ad campaign as well as for some exciting in-store events.

Complementing the organic growth of our five brands, we are focusing on identifying additional acquisitions of strong consumer brands that will further diversify our portfolio of holdings. We are currently evaluating many intriguing opportunities, but we will remain disciplined in ensuring that any acquisition we make is consistent with our criteria for any new brands that are accretive to our earnings and consistent with our diversification strategy. We are confident in our ability to meet or exceed our 2006 EPS guidance, $0.65 to $0.70 per share.

In summary, we are in the early stages of building and pioneering a fundamentally different way of doing business with limitless potential for growth. I am proud of what we have accomplished so far but humbled by the magnitude of the opportunity. Our team will not be satisfied until we realize the full potential of this business model and achieve our mission statement, which is to be the world's premier owner of a diversified portfolio of strong consumer brands.

I would like to thank all of you for your support and interest and I would like to now open it up to a question and answer period.

Joining us today for the question and answer session are Warren Clamen, Chief Financial Officer, David Conn, Executive Vice President, Neil Cole, CEO, and Bill Sweedler, Executive Vice President and President of the Joe Boxer Division. [ OPERATOR INSTRUCTIONS ] Your first question will come from the line of Eric Beder of Brean Murray.

Congratulations on a good quarter. Could you talk a little bit about how the new Canadian licensees when they are going to roll out for Joe Boxer and how much those are going to potentially how that will add to $20 million that Kmart has guaranteed in terms of Joe Boxer?

The licensees are currently ramping up to build their businesses. We don't see material license revenues coming from any of the new categories during this fiscal year. However, we are excited at the potential that the Northern European stores offer to the brand as we expand internationally.

Does Kmart also have a presence in Canada?

Kmart does not have a presence in Canada. Literally, we sell the Bay and Sears and many different specialty stores in Canada. We look at that marketplace as one of our strongest international territories at this moment in time.

When you look at the potential licensees and where you want to focus, what do you think is the best potential for 2006 and beyond in terms of growth and expansion in terms of categories?

We look at it by territory. In Canada, just so you are aware we have wholesale distribution strategy. We don't have a direct retail relationship. We sell better department stores in Canada. But in terms of the opportunities going forward into 2006, we are talking with every territory in the world, in fact, it is not only Joe Boxer, it is leveraging our portfolio brands that we have and it makes it a wonderful platform to go and build a business around the world. We're literally in every continent of the world at this point talking to potential partners.

Thank you.

Your next question will come from the line of Ronald Bookbinder with Sterne, Agee.

Good morning and congratulations. First, following up on Eric's questions on Joe Boxer, where is the product for the retail stores in Europe going to be coming from?

Bill Sweedler. The product is going to be sourced directly by Boxer EHF, as well as leveraging our Canadian manufacturing resources in Canada and the Far East.

Would that mean you could be getting two license fees, but at the wholesale level and with the retail level on that?

We would not be getting two royalty sources. They would be shipping at FOB from their suppliers, so it would actually not hit their -- the shores of Canada.

Switching over to Candie's. How much more do you think Kohl's is going to spend on promoting the brand this year versus last year and how much did they contribute to advertising in '05?

I don't think we are specifically allowed to comment on Kohl's spending, nor do we know exactly to the dollar. However, it was an intense multimedia campaign that we ran for fall with hundreds and hundreds of national TV spots, radio, pretty intense print campaign, and obviously we were very present in their circular and newspapers.

What they did for fall we are continuing for spring. You can see that over the next three to four weeks, a pretty extensive campaign for Candie's at Kohl's. We're pretty excited about. It is far in excess of their contractual obligation. They really believe the Candie's product has been good in generating traffic, which I believe they said earlier this week in their release, bringing consumers into the Kohl's store, so we are pretty excited about the commitment we have gotten and the relationship we have built with Kohl's organization.

And on Rampage, what drove the upside? What surprised you want that the revenues were higher than you expected and when could we see more licenses in there? You mentioned in the prepared remarks a premium denim and kids but there seems to be a lot of opportunities in the Rampage.

It is David Conn. The strength in Rampage in Q4 came mostly from our core sportswear licensees who had a great quarter particularly at Federated. Looking ahead to '06, there are a lot of opportunities. As to when we would announce partnerships whether it's in kids or denim or others, hard to say but we do see a lot of opportunity for the brand in 2006.

Some housekeeping questions. How much cash did you end with on the balance sheet?

Approximately $11 million.

$11 million. And debt?

Debt is a total of $99 million current and long-term.

What tax rate do you expect for '06 and if you could speculate on '07.

We currently have a small non-cash tax expense running through the P&L and included in our guidance for 2006 and I think beginning in 2007 our affected tax rate should be around 37, 38%.

Thank you and congratulations once again.

Your next question comes from the line of Brian Black with Black Sheep Partners. Please proceed.

One of my questions was answered, but the other one following up on the last question, I didn't quite understand what the assumption was for '06 guidance with respect to the tax rate?

The tax rate is the effective tax rate, is very low because we have tax benefits running through in '06 but in the end is going to be non-cash tax expense of $0.03 to $0.05 per share. So it's a very low effective tax rate.

But it is all non-cash?

Correct, all of it.

With respect to the current portfolio of brands and the potential to add some additional ones, do you think your current staff levels are sufficient likely to support those brands or do you think you will need some additional people?

One of the beauties of our business model is it is very scalable. In the acquisitions that we have done over the last 12 to 15 months, each brand is different, but generally we have been adding a few people with each brand and we have been able to leverage our marketing, our sales division and all of the different people we have here. In our budget, our acquisition budget, we look at usually two or three people per brand what we do our projections.

The last question is could you talk about your capital structure with respect to additional acquisitions and how you see funding them in general, stock versus debt?

David Conn again. We financed Joe Boxer and Rampage with roughly half debt and have stock and we can continue to do so if we choose. However, we're always analyzing what the best capital structure is for the company and will remain flexible.

It all has to do with who the partner is and whether they are someone we want to be stockholders, who the sellers are, and if it is strategic and we want them to own stock, it would be more reason to offer stock. Right now, we believe our stock could hopefully be higher in the near future. We are not that interested in giving the stock. It all depends on the strategic nature of the prospective partner in joining the Company.

And do you think earn-outs will be a key feature of the deals you expect to to?

Once again, it would depend on who the strategic partner or person joining the Company. If it is someone with an interest in us staying for with the brand, it would be important to keep him interested and excited. Each acquisition is different. We're in the middle of numerous negotiations in trying to make the best deal for our Company.

Thanks.

Your next question will come from the line of Todd Slater with Lazard.

Good numbers, guys. I see you reaffirmed the earnings guidance to $0.65 to $0.70. I didn't see if you provided any revenue guidance. Number one, what revenue does this assume? If I missed it, I apologize. And then a follow-up.

It assumes roughly $67 million to $68 million worth of revenue.

That assumes what in the way of acquisitions?

That assumes $10 million a revenue coming from a single acquisition which we believe is conservative.

That is good for starters and then it looks like in the quarter you exceeded margin performance we were expecting by a large amount. Costs were much more leveraged than we expected and the operating margins, the pre-tax margins, all of those metrics were much higher and the rates were much higher. What is the margin rate that you are assuming on this on $0.65 to $0.70. To me it looks a little bit low or maybe I am not looking at this right.

Hopefully we can be conservative and not get too far ahead. Basically on the $67 million we are anticipating roughly $22 million SG&A.

The other thing is we also have the option expense for FAS 123 included in '06 which creates more SG&A. I am not sure if you have that.

That is above $22 million?

That is included.

There's roughly $3 million a depreciation in amortization that goes along with 22, in our numbers, projections.

What is the timing, do you think, on any sort of updates relative to the Joe Boxer situation with Kmart. You mentioned that you're looking forward to extending the brand into Sears. Is that is something we might hear about this year or something next year? When do you think you might perhaps [re-jigger] that contract?

We are currently in dialogue with the Sears Holding management team about expanding into the Sears doors. We currently have approximately two years left on the agreement. We're in the process right now. On a separate note, our business has been good. The current Kmart team expanded our brand into the activewear category in Q3 of 2005 and we performed very well in Q4.

Given that you have two years left what do you feel comfortable reworking that contract?

As I said we are in dialogue and I think Neil mentioned it also in his opening comments. We believe we have good partners who are working with them. We are hopeful we will move forward with putting together a viable plan to with Sears and Kmart together.

In the Sears Holding today, it's a $55 billion company, close to 3,000 doors, and I think Joe Boxer would be a great addition to the Sears stores and I think they do also. It is a good opportunity, but if we don't go forward there, there are other great opportunities. Joe Boxer is a really powerful brand and over 90% awareness in the United States and worldwide, the worldwide interest has been amazing. We feel comfortable that the brand will continue to thrive and hopefully it will be with Sears Holding and go from there.

Are you sensing that the Boxer brand is meeting or exceeding Sears internal margin or maintain margin dollar type plans?

I can tell you that in terms of their previous year plans, we exceeded them. As I said, Q4 and for the year we performed well. We are performing well in the stores right now, that we're currently in and we have a very good relationship with the entire team and we think they are doing a nice job repositioning the overall business.

Thanks a lot.

Your next question will come from the line of [Jim Chartair] with [Luness, Presby, and Hart].

Good morning, congratulations. Your previous guidance from next year had a $0.03 non-cash tax expense and the you're talking $0.03 to $0.05. Would that imply the next year you're looking for slightly better results than you have previously on an operating basis?

We feel really good about this year. It seems like, based on the strength of Q4 and our business is trending, there are a lot of great drivers in place. One of the tricky part about the tax benefit is it does get impacted by acquisition, the timing of acquisition. I think that could be a little bit of the spread between the $0.03 to $0.05 and the timing of the acquisition and the utilization of the tax benefits.

Do you have any idea when Federated plans to re-merchandize May stores and when you might see some benefit for your Rampage?

I don't know if they have formally announced it. I have heard that it is in the fall. Around September or the May doors signs go down, Macy's will be the key driver across the business but they are in the process of handling this integration and we are excited about the opportunity that it gives Rampage going forward.

We could see potential upside in the third, and fourth quarter?

Yes.

Thanks a lot.

[ OPERATOR INSTRUCTIONS ] Your next question will come from the line of Jeremy Hellman with Thompson Davis.

Good morning. I want to dig into Rampage a little bit more regarding Charlotte Russe. How optimistic are you that you will be able to get Rampage products on the shelves of Charlotte Russe and be able to generate more revenue from that type of agreement?

We have met with the management team of Charlotte Russe and what I can tell you is where we are in complete alignment with them is we think that more cohesion to the brand is good for both of us and we are continuing to talk to them and that is all but I can tell you at this point.

Thanks.

Your next question will come from the line of Peter Siris with Guerrilla Capital.

I have actually two questions. The first question is sort of a semi-financial question. When somebody signs of license and the license says we will do a minimum of let's say $10 million, whenever it happens to be and we will pay you 6%, and then at the end of the year they to $20 million instead of $10 million, when do you get to book that extra money? Is it on a quarterly basis or does it sum up in the fourth quarter of does some of its end up dragging on to the first quarter? In other words, does better growth impact future earnings?

That is the two part question. The first part is we book the minimum royalty revenue on an ongoing basis until the licensee actually exceeds that $10 million that you had given as an example as a minimum and once you start selling the dollars over that is when we get to record the revenue.

Let me give a for instance on the Kohl's situation. It was a long first year, 2005 / 2006, you take the minimum and amortize it over the amount of months and when you start exceeding the minimum over that month, then you start taking it as income. In the Candie's situation in 2005, we started exceeding the minimum in the fourth quarter so that is why because the benefit of the additional Kohls business in Q4 and the rest of the minimum that we carry forward into 2006 will exceed as we ship over and above the minimum.

But you could see, there must be licensees who report to you after you report your year end so the money should have earned in the fourth quarter ends up coming in the first quarter? Does that happen?

No. We have a great relationship with our licensees, they realize we are a public company and getting the top line sales numbers pretty easy, so we get our numbers usually 10 days after the end of the month or the quarter. Our full-year, we have all of the exact shippings in it.

The other question I wanted to ask is if you keep following your strategy, this is a strategy that requires other than making acquisitions, no capital. And that whatever you earn is basically free cash flow. Is it your intention to continue to use the free cash flow to acquire other brands?

As we start building up cash we can use it for buying brands, we could use it for dividends, buying back stock, those of a wonderful problems or issues that the Board is -- will work together to and figure out the best way to balance our capital structure and be efficient with our capital.

But you still see a lot of potential brands out there that you could grab.

Yes. Our profile and our business has accelerated the last 12 months, we have seen many good opportunities of strong consumer brands the we think we can purchase and with consolidations happening in the retail environment is a great time to find strong consumer brands.

Thanks a lot.

Your next question will come from the line of Eric Beder with Brean Murray.

What is going to be the options expense for 2006?

We haven't disclosed that. We extended it to include the guidance but we haven't specifically said what that number is.

Is there some specific number that will potentially [INAUDIBLE] the numbers on?

We haven't disclosed that. We don't want to.

It is variable. Based on stock prices, certain events, performance based, we put it in our estimates very conservatively but we haven't broken it down for strategic reasons and we would rather not disclose the specifics.

What was the D&A files for the quarter?

I didn't hear you?

Was the depreciation and amortization for Q4?

Less than $500.

500? Thank you.

Your next question will come from the line of Todd Slater with Lazard.

A follow-on Peter's question. The tremendous amount of rationalizations going out there in terms of a department store doors, other types of accommodations going on, is the universe of acquisition opportunity today worse than it was last year, about the same as it was or that would you had hoped for or better? And then when you say that your revenue expectations include one acquisition but you think that is conservative, can you give us a sense of why you feel that is conservative?

Comparing this year to last year is very difficult because the Company has changed dramatically the last 12 months, but our deal flow is five or ten times what it was a year ago because we have become more visible and we are looking at a lot of exciting opportunities. As far as why I think we can hopefully to more than the one acquisition is look at what happened the last 12 months. We basically did three. The way the business works, we usually just purchase a trademark and a lot of royalty contracts and the scalability is not hard to to. We're not dealing with a lot of hard assets, machinery, and people. We believe if the right opportunity comes along, we can execute and execute quickly. We're going to stay disciplined, we're not going to overpay. We will keep the brands that diversify our holdings, we don't want to put brands competing head on head. So we feel very good that we have great opportunities to continue to grow the company both organically and through acquisitions.

[OPERATOR INSTRUCTIONS] Your next question will come from the line of Michael Needleman with Ridgecrest.

Good morning. Can you give the break down and maybe you did, on each brand as far as the license in the fourth quarter?

We did not break down each individual in Q4. I don't believe we are going to do that. We have broken down our projection in 2006 by brand and it is on our website and our investor presentation. But we did not do that for Q4.

Thank you.

At this time I show no further questions within the queue.

Thank you, everybody. We will be available this afternoon for any other questions. David, Warren, Bill, or myself. Thank you for your support and interest and we look forward to talking to you soon. Thank you.

Thank you for your participation in today's conference and this does conclude the presentation. You may now disconnect. Have a wonderful day.