Icon Energy Corp (ICON) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2006 Iconix Brand Group earnings conference call. My name is Kelly, and I'll be the coordinator for today. At this time, all participants are in a listen-only mode, and we will conduct and question-and-answer session towards the end of today's conference.

Joining us today are Neil Cole, Chief Executive Officer; Warren Clamen, Chief Financial Officer; Bill Sweedler, President of Joe Boxer; and David Conn, EVP.

The safe harbor statement under the Private Securities Litigation Reform Act of 1995. These statements are not historical facts contained in this conference call. Our 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 material different from the results.

Performance or achievements expressed or implied by such forward-looking statements. The words belief, 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.

And I would now like to turn the presentation over to your host for today's call, Mr. Warren Clamen, Chief Financial Officer.

Thank you, Kelly. Good morning, and welcome to the Iconix Brand Group first quarter 2006 earnings conference call. As previously announced this morning, in the first quarter of 2006 Iconix reported licensing revenue of approximately $13.3 million, compared to $4.3 million in the prior year quarter.

Net income for the quarter was approximately $7.4 million, inclusive of a non-cash tax benefit of 1.3 million, compared to net income of approximately 800,000 in the prior year quarter. Fully diluted earnings per share were approximately $0.18, inclusive of a $0.03 non-tax cash benefit, compared to a fully diluted EPS of $0.03 in the prior year quarter.

Operating results for the quarter were above the Company's plan. However, included in the Q1 net income plan was an expectation to record a net tax benefit of approximately $2 million relating to the realization of the Company's deferred tax asset. Based on a revised interpretation of the way to recognize this asset, the Company has recognized 1.3 million net benefit in the quarter, the difference equating to approximately $0.02 EPS.

Further, unlike originally planned, we are projecting that the balance in any tax benefits realized would be over the balance of the year as opposed to concentrated in the first half of the year. Therefore, our effective tax rate over the balance of the year is approximately 25% to 27%. The overall full year effective tax rate, including the non-cash tax benefit of 1.3 in Q1 is 19% to 20%.

Looking at other key drivers of the business, pre-tax income for the quarter was 6.1 million compared to 800,000 in the prior year quarter, EBITDA was 8.4 million compared to 1.7 million in the prior year quarter, and free cash flow was 6.6 million compared to 1.3 million in the prior year quarter. SG&A expenses for the quarter, including special charges, increased to 5.4 million versus 3.1 million in the prior year quarter.

Highlights from our balance sheet include cash of 7.8 million plus non-current restricted cash of 5.4 million. Total assets as of March 31st were 220 million and total liabilities were $111 million, including total debt of approximately $97 million.

I would like now to introduce Neil Cole, Chairman and CEO of Iconix Brand Group.

Thank you, Warren. For the first time we have year-over-year comparable results as a brand management company, and they demonstrate how we are beginning to execute our growth strategy, balanced between increasing royalties from our existing brands and adding incremental revenue to accretive acquisitions.

Revenue from the three brands that we have owned since the first quarter of last year has grown substantially, driven largely by the rollout of Candie's at Kohl's Department Store. This combined with new revenue from our recent acquisitions of Joe Boxer and Rampage enabled us to achieve record results for the first quarter.

Our Candie's brand continues to thrive in Kohl's, whose announcement yesterday that they will -- are committed to having 1,200 stores by 2010, demonstrates the significant potential for further growth. At the end of the year, Candie's where we are represented in over 30 different product categories at Kohl's, up from 20 at the end of last year. And the recent launch of Candie's home accessories has exceeded all expectations.

We are also excited about the upcoming launch of outerwear and a new Candie's fragrance for back-to-school. Our present ad campaign featuring Hillary Duff along with celebrity friends, including double-platinum artist Ciara, has been well received, and has been in a heavy rotation on highly rated teen TV shows like American Idol.

Our Bongo brand is playing flat year-over-year. We have recently taken steps to proactively turn over some of the underperforming licensees. And shortly, we will be announcing an exciting new ad campaign for fall of this year. While we are disappointed that Bongo is not growing year-over-year, we believe that Bongo will return to growth in 2007.

Badgley Mischka is small, but showing more and more potential everyday. Since acquiring the brand 18 months ago, we have signed nine new different licensees and are confident that we will add more latter this year. The most compelling opportunity is to continue to expand this luxury brand to more popular price points.

Evidenced by the recent success of our launched platinum collection of evening wear, now retailing incredibly well at over 300 doors including Bloomingdales, Nordstrom's, Saks Fifth Avenue and Neiman Marcus. We are very excited about the launch of the first signature Badgley Mischka fragrance that has scheduled to be on shows this fall as well as new collections of handbag, eyewear, cold weather accessories and footwear all launching in the latter part of '06.

With respect to Joe Boxer we continue to be in active discussions with Sears Holding regarding an opportunity to expand the brand into all Sear stores, I mean new are K-Mart license agreement. At the moment, we have nothing new to announce, however, we remain optimistic that we will have closure on this subject by the latter part of this year and have recently been giving greater visibility into alternative opportunities, should we elect not to move forward with Sears. Our current agreement with Sears Holding guarantees us $19 million per year through the end of 2007.

Our Rampage division continues to exceed our expectation and several of the largest licensees are gaining substantial market share within the core federal department store distribution, most importantly federated department store. The one Rampage licensee that continues to struggle is our retail licensee Charlotte Russe. However, they represent less than 8% of total Rampage royalty, and we believe that the strength of the brand in the department store channel will more than offset the weakness we are seeing at Charlotte Russe.

We have recently closed on our sixth brand Mudd and the integration is going very smoothly. A plan with Mudd is to promote the maximum level of continuity to the core business and focused on helping our larger licensees become even more successful. We have an exciting new ad campaign to be announced in a few weeks and are beginning to evaluate several new domestic and international licensing opportunities to further expand the brand.

As announced earlier this morning, we have entered into an agreement with Cherokee Incorporated to buyout the existing finders' fee for $33 million in cash. The Buyout is contingent upon closing on our acquisition of Mossimo Inc. And as part of our agreement with Cherokee they have to withdraw their offer to purchase Mossimo Inc. Our buyout will increase the profitability of Mossimo for Iconix and paid the way for us to move quickly throughout a July closing and it will be our seventh brand.

Looking ahead to the rest of the year we are confident in achieving our stated full year guidance of $0.75 to $0.80 per share. We are very excited about many different growing opportunities for our existing brands, including international expansion, and we continue to evaluate many additional acquisition opportunities both within and outside the apparel industry.

In a short period of time, we have evolved from owning three brands to a point where once we close on Mossimo, we will own seven powerful national brands that generate over $3.5 billion in annual retail sales. As we continue to grow our licensing revenue and acquire more brands, we move closer to achieving our mission statement to be the world's premier owner of a diversified portfolio of consumer brands.

I'd like to thank all of you for your support and listening. And I will now like to open it up to a question-and-answer with myself Warren, David and Bill.

Kelly, we are ready for Q&A.

[Operator Instructions]

And your first question comes from the line of Todd Slater of Lazard Capital Market.

Thanks very much. Good morning, everybody.

Good morning, Todd.

Great progress on the game plan.

Thank you very much.

Just a question on starting with Candie's 1200 stores by 2010 in the 30 different product categories. Can you give us a, sort of -- a sense of, sort of, how that, you know, ramps up? Is it more backend loaded to 2010, is it more front-end loaded, how do you, sort of, see that progressing?

We see it roughly taking our base, royalty base that we would achieve in this year. And I think we've projected roughly about $15 million and increasing it roughly about a 100 doors a year, which we would generally translate it to about 15%.

Okay.

So that's just on store growth. And hopefully, there will be some comp store growth on top of that. So I think 15% to 20% is a good growth plan for Candie's at Kohl’s.

Okay. Great. Can you give us any kind of a senses just on the Joe Boxer brand, you know, their negotiations aside with here. How is the business performing just on the, sort of, store level basis, do you have any sense of, sort of, you know, how the revenues and margins are performing there?

Hey, Todd. Bill Sweedler.

Hi, Bill.

On a comp store basis, the product is performing very well year-over-year, right now.

Okay. And that comes of to yields of pretty strong Q4?

Yes. It does.

Are they, sort of -- are they performing similar to the Q4 type of trend or they change it all?

The trend has been up over last year almost double-digit.

Okay. Any sense on how the international licensees are progressing on the '07 roll out plans for Boxer?

Well, we are in active dialogue with several countries not only for Boxer, but all other brands.

Care to share?

I am sorry, Todd.

I said do you care to share some more detail on that?

You know, we don't really comment on current negotiations but I can tell you we're working on more than a handful of possible distribution and licensing deals.

Okay. And then, lastly on Rampage, well, thanks for the color on the very, you know, minimal amount of royalty there at Charlotte Russe. But is that, kind of, a dead end there or is there a opting revive something with Charlotte Russe overtime?

Hi, Todd. It's David Conn.

Hi, David.

You know, right now, Charlotte Russe is one of 12 licensees for Rampage, and quite honestly they are the only one that's struggling or not performing. We're seeing tremendous strength at the better department store channel especially with in Federated. And we think that if Charlotte Russe were to move in a different direction, we have provisions in our contract that protect us. And you know, quite honestly we would clear up what has been a pretty disconnected brand experience that we have inherited since buying the brand last year, I think you know that Charlotte Russe doesn't even use the Rampage label on the apparel and stores, its another brand that they have.

Okay. Well, that answers and then lastly just one quick question on the Mudd acquisition. How many people are you planning to pick up there?

So far we hired one and we hired a brand manger and you know one of the benefits of the great continuity with Mudd is that the founder became the licensee. So they took all of the overhead associated, you know with core brand and Dick Gilbert and the people attack that you know, actually their business is very good and they have -- well there has been good continuity with the transition.

Great. It's very encouraging. Thanks a lot. Good luck.

Thank you, Todd.

And your next question comes from the line of Mark Kauffman of [Grady] Partners.

Hi. Good morning. Nice job, I think, it's moving along pretty well for you. My question was basically on the first quarter. If I understand it correctly, basically if you would still use the type of tax benefit that you had originally anticipated, earnings would have been higher, I mean ultimately basically your core operations and profitability was better than what you originally anticipated, is that correct, Neil?

Yes. That's correct.

Okay. Now my other question is, what is the, you know SG&A number look like, the number was higher, did you have a lot of, you know, legal fees etcetera in light of the negotiations that you had occurring during that period?

SG&A was actually in line with what we thought it's not slightly favorable to our old plans. So in SG&A going forward, I think will be fairly in line, it will grow slightly from the Mudd and Moss acquisition over quarter-over-quarter.

Thanks.

Okay.

Your next question comes from the line of Jim Chartier of Moness, Crespi and Hart.

Good morning. And congratulations.

Thank you, Jim.

Just -- you mentioned better than the expected operating results, was that on the revenue side or expense line?

I think a lot of the savings came from the expense side you know, revenue is kind a bit higher but we had some good cost savings and so it was a little bit in both places but bigger in the revenue side, on the SG&A side.

And then the special charges look a little bit higher than they have been, is that all still for the litigation?

Correct. And that will be over this year, it will be going to trial. If it doesn't setle in the summer, summer fall.

So you would expect to no longer see that in third and fourth quarter?

I would be considerably say, by -- I would keep it through the end of the year and you won’t, in '07 you won't see it.

And then for the next three quarters would be similar to first quarter?

Yeah I think that would be fair.

Okay Thanks keep up good work.

Thank you.

The next question comes from the line of Eric Beder of Brean Murray.

Good morning.

Morning Eric.

Nice quarter.

Thank you.

Could you go over the tax and how the tax situations in terms of tax rates for the rest of this year are going to effect?

Sure. Sure, Eric. You know the tax benefit recognition is a very complex calculation of facts and circumstances of the time. So what we originally planned was that the tax benefit was going to be much more front loaded. And now we're recognize -- we're projecting at the effective tax rate for the balance of the year, is going to be between 25% and 27% which is including any tax benefit that will result for the balance of the year.

Is that going to be so you can, you sit here for modeling purposes we can use that rate for each of the next three quarters?

Warren says correct. But I would decide like to clarify in that, you know I would encourage all of us to look at the company from an operating perspective, this is a little you know we've been working hard with the accounts. And this is an ongoing assessment every quarter based on 20 different variables including acquisitions and other assessments. So I would encourage everyone not to pay too hard reliance that how the rest of the tax benefit comes out over the next three quarters and hopefully more on our operating performance.

Great. I mean it's just to beat this facts thing to death one more time, 2007 what should be when after all this is done at some one normalize what is the normalized tax rate for Iconix right now?

That will be 35% to 37% and all the benefits will be behind us, in terms of recognition, it should be very normal.

The payment to Cherokee, I assume there's any finance pretty much by debt?

Yeah.

Is that incremental of 3 million or so and now comes back into your, is this now make it even more accretive and what are the other changes that you can do now as you don't have Cherokee in that position?

You know, this would have been the first brand that we would own on a 100% of and we always thought this was a great opportunity and our goal was to buy a 100% of the brand. It is accretive because that the, 15% of the target royalty is with the nice number somewhere between $3 million and $4 million. And based on our stock and the way the company is trading it would be accretive going forward. So, we think it was a good deal for Iconix shareholders. And we're excited about adding Mossimo to our portfolio.

How, but one how long has Mossimo being increased in terms of when the deal expires now, when that's going to close this, when is the next exploration day for Mossimo?

It's about 3.5 years. January of 2010 year.

Okay and what were the renewal terms after that from the dates?

You know the target every 2 years there's a renewal period, and we're excited because, Mossimo is just doing performing wonderful.

So, you are bringing out Mossimo, and how many of you say that there is Mossimo coming aboard and you think right now?

We haven't evolved the exact account, the exact amount of people but it will be obviously substantially you know we just have to - we'll structure it very efficiently.

Great thank you?

Thanks Eric.

Your next question comes from the line of Jeremy Omen of Thomson Davis.

Hi, good morning every body. There are few questions all over the map for one as usual for Mudd, what was the final number of shares you issued to them?

At 3.3 million.

3.3 million okay. And just keeping on the share idea within Q1 are you breaking out what the options expense was in the quarter at all?

No we haven't done it.

Okay, going back to the prior question on the SG&A you said its going to up slightly, looking at it sequentially quarter-over-quarter with the addition of Mudd you added one brand manager. And I know I think there will be a larger bump on that with Mossimo. Was I right understand to that?

No, Jeremy I would add more cause of work you know we always you know put a little back into advertising.

Right?

Over and above the commitments we got in the licensees. So, you know, usually per annum is that's well over $1 million, there will be over million dollars of Mudd advertising that's actually a little more and so for Mudd there would be an add component.

Okay. It's similarly from Mossimo of course, right?

A little, you know, Mossimo structure a little differently where Target does a lot of it and we're going to do some, but its still we're still going to be working with details of that out.

Okay. And I turned away for quick second, what was the EBITDA number for the quarter?

The EBITDA number for the quarter was I'm sorry I got it, its $8.4 million.

8.4. Okay and depreciation and amortization then?

It was for the quarter it was approximately 500,000.

500K for the quarter.

Yes.

Okay and then looking out the rest of the years we can expect that to go up, you know with the acquisitions, am I correct to assume that?

Yes.

Okay. And then one last thing and then I'll jump out of the queue, just taking the extra 33 now for Mossimo net of the cash, you are looking at about $83 million worth of debt you again have to raise, right?

Correct.

Okay. Good enough, thanks guys?

Thank you.

Your next question comes from Todd Slater of Lazard Capital Market.

Thanks my question was just asked.

Okay.

And your next question comes from Ron Bookbinder of Sterne, Agee.

Hi, good morning and congratulations on fine execution.

Thank you Ron.

On the Mossimo finders' fee, that 33 million, what is the percentage interest that's going to be associated with that debt?

We are in the process of evaluating a few different structures and offers we have and we haven't finalized, you know the specific, source.

Okay.

For interest rates.

Okay and let me just make sure I got this correctly. You said about 3 million to 4 million in incremental revenue and that will be basically no SG&A associated with that just some interest expense on that one?

Yes, correct.

Okay.

It's roughly 15% of our target revenues, it's exactly 15% of target revenues and there will be no expense associated with it.

Okay. One on Mudd, does Mudd have the strongest international distribution of all your brands now?

Mudd has a couple of really good deals and we're surprised that the strength and the opportunities we're starting to see with it in our research. But I would say you know, Joe Boxer now is getting, you know some great interest and we're seeing a lot more for the Candies too so.

And I think when you look across the portfolio and actually Mossimo has six countries. So I think each of the brands have, you know, different deals varying from a few hundred thousand to 1 million or 2 million and but we're all kind of babies and we have just great opportunity to leverage the portfolio and attack the world, and it’s an important part of our initiative and, you know we are heading up for big international initiative that we are going to be unveiling over the next few months.

But with the [fellow] that, he kept the rights to Mudd in China, isn't that correct?

Correct, the one country [Taxet] who opened up stores, kept the rights to them, they have the great Mudd store, which they plan out rolling in 80 stores, which we think is going to be wonderful for us in the rest of Asia. And we have a joint venture with them and we plan on doing multiple countries in executing the strategy that they are doing in China.

But you could also leverage your other brands with Taxet?

Possibility, I mean we are getting to know them and they seem like a great company. And it's great. Obviously, it's good to have people on the ground providing in the international business and forming relations. But you know, China is such a great opportunity, and we want to be very careful how we commit ourselves, because we're seeing a lot of good opportunities coming out of Asia. And it is a very strategic move of our alliances.

Okay. And -- Australia, one of these brands have a strong distribution in Australia.

Yes. Hi, Ron, it's David. Mossimo has a very strong distribution in both Australia and New Zealand.

And will you be able to possibly leverage those relationships?

Possible, as Neil mentioned, it is something that works going on, and we get to know these partners better.

Okay. Great. All right. Thank you.

Thanks.

[Operator Instructions]

Your next question comes from Chris Greenberg of Barron Capital.

Yes. Hi guys. Congratulations on the Mossimo transaction.

Thank you.

Just quickly, and maybe you have mentioned this. I'm sorry if I have missed. Pro forma balance sheet for the purchase of Mudd, Mossimo and now this interest from Cherokee is how much debt and how many shares will be outstanding when we close it all?

Pro forma will be approximately $200 million of debt. And...

Is that net or is that net of the cash or is that a gross number?

No. That would be net of the cash.

Okay.

And the fully diluted share count is estimated to be about 46.1 at the end of the year, for the full year.

Okay. And that includes some options in there or is that's just primary?

No. That includes -- that's fully diluted. That includes the options.

Okay. I got it. Thank you very much.

You're welcome.

Thanks, Chris.

Gentlemen, you have no further questions -- actually, we just have a question that popped in from Jeremy Hellman of Thompson Davis.

We thought we were off...

Sorry, guys. Just one quick thing, just to clarify on that share count, that's the actual share count at the end of the year as opposed to the average share count over the course of the year?

No. That's the weighted average.

Okay. Weighted average. Okay. Great. Thanks.

Okay.

All right. Thanks, everybody. You know, we'll be available. David, Bill, myself and Warren would be around for further questions offline, if anyone would like to call us today. We -- once again, we're pretty excited about what's happening here in. We think we're just at the beginning. We think we have such a great opportunity to do something great. And we think this is definitely at the forefront of wonderful things. And we appreciate your support. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.