Icon Energy Corp (ICON) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group first quarter earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a Q&A session towards the end of today's conference. [Operator instructions] As a reminder, this conference is being recorded for replay purposes.

And now the company would like me to read the following statement. The statements that are made in this conference call that are not historical facts are forward-looking statements that involve a number of known and unknown risks and uncertainties and other factors, all of which are difficult or impossible to predict, and many of which are beyond the control of the company. These factors may cause the annual results, performance or achievements of the company to be materially different from any future results or performances expressed or implied by such forward-looking statements. The words "believe," "anticipate," "expect," "confident" and similar expressions identify forward-looking statements. Readers 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 hosts for today's call, Mr. Warren Clamen, CFO, David Conn, EVP, and Neil Cole, CEO. Please proceed.

Good morning, everybody, and welcome to the Iconix Brand Group first quarter 2007 earnings conference call. In reviewing the company's financial results for the first quarter ended March 31st, 2007, licensing revenue increased to approximately $30.8 million, as compared to approximately $13.3 million in the comparable quarter for 2006.

EBITDA for the quarter increased to approximately $23.3 million, as compared to approximately $8.4 million in the prior year quarter, and free cash flow for the quarter increased to approximately $21.6 million, as compared to approximately $6.1 million in the prior year quarter. EBITDA and free cash flow are both non-GAAP metrics, and reconciliation tables for both can be found on iconixbrand.com and in our earnings release sent out earlier this morning.

Net income and fully diluted earnings per share, as reported on the company's income statement, were approximately $12.7 million, versus $7.4 million, and $0.21, versus $0.18, respectively. However, it is important to note that the company was recognizing non-cash tax benefits through its income statement in the prior year quarter, and therefore, in comparing net income and fully diluted EPS on a more apples-to-apples basis, the company had net income of approximately $12.7 million, versus approximately $3.9 million in tax-affected net income for 2006, and fully diluted EPS of $0.21, versus a tax-affected $0.10 in 2006. A reconciliation for the tax-affected net income and EPS can also be found on iconixbrand.com and in our earnings release sent out earlier this morning.

We are pleased that in a period of rapid growth, where we more than doubled our revenue base in 12 months, our EBITDA margins also increased, to approximately 76% from approximately 63% in the prior year quarter. This margin expansion continues to demonstrate the scalability and leverage of our brand management platform, where the incremental profitability of both acquired and organic growth continues to be very high.

With regard to our capital structure, the syndication process for the term loan that was used to finance the Rocawear acquisition is scheduled to close tomorrow. The syndication of the loan was very well received, and the book was oversubscribed. The loan will be a variable-rate, six-year term loan at LIBOR plus 225 bps, and will be prepayable anytime, penalty free.

We are pleased with the ratings that we received of D1 and D-plus from Moody's and S&P, respectively. With our new term facility loan, the company today has approximately $371 million in total debt, at a weighted average cost of debt of approximately 8%. Our estimated 2007 pro forma debt-to-EBITDA ratio is approximately 2.7 times. This is a ratio we're very comfortable with, and we believe we are now well positioned to make an additional, larger acquisition. We also anticipate being able to continue to reduce our weighted average cost of debt.

I would like now to introduce David Conn, EVP of Iconix Brand Group, and he will give an update on our brands.

Good morning, everyone. We're pleased with the performance of our brands in the first quarter, and I'd like to now briefly walk you through some of the highlights. Our two largest direct-to-retail brands, Candie's and Mossimo, both delivered substantial Q1 year-over-year sales increases at Kohl's and Target, respectively. Candie's grew its sales at Kohl's approximately 30% year-over-year, and Mossimo grew approximately 28% year-over-year.

Our retail direct brand, Joe Boxer, is in the first year of a restructured agreement that reduced the minimum guarantees, but expanded the distribution of Joe Boxer into Sears stores. The launch of Joe Boxer at Sears will begin in August, and by the end of 2007, we are anticipating Joe Boxer to be in approximately 400 doors, or about half of all Sears stores. By the spring of 2008, we're anticipating Joe Boxer to be in every one of the 800-plus Sears stores.

Our fourth retail direct brand is Danskin Now, which is a diffusion brand of Danskin, which we purchased in the first quarter of 2007. Danskin Now is licensed directly to Wal-Mart and carried in over 3,000 of their stores. We are projecting that Danskin Now will generate over $10 million in royalties to Iconix in its first 12 months and believe there are a number of compelling growth opportunities for the Danskin Now brand at Wal-Mart.

Of our wholesale license brands, Bongo royalty revenue in the quarter was slightly higher than a year ago, and we're very pleased with the progress that our new jeans-wear licensing has made in stabilizing and beginning to grow the brand after a challenging year in 2006. In addition, our Bongo [inaudible] licensing is doing very well, and their business is growing nicely.

Badgley Mischka royalty revenue for the quarter increased approximately 60% year-over-year, driven by a number of new license agreements that were signed, as well as the success of the bridge price dress collection.

Our Rampage brand continues to be strong, and royalty revenue for the quarter was in line with our projections, despite the loss of revenue from our former direct-to-retail agreement with Charlotte Russe that was mutually terminated last year as we consolidated the brand at the better department store channel.

Despite a very difficult [inaudible] market, our Mudd brand is performing, being driven in part by the strength of our accessories licensees, especially footwear. We see Mudd coming in this year at the high end of our projection of between $18 and $20 million in 2007 royalty revenue.

This fall will be exciting for our London Fog brand, as we now have seven domestic licensees that will be launching the brand in better department stores, and our retail direct partner in Canada, Hudson Bay, will be launching the brand in approximately 400 doors between their Hudson Bay and Zellers chains. The product selling for London Fog has been very good, and we will be launching a multimedia marketing campaign to support the launch.

We are actively working on completing the licensing strategy for our Ocean Pacific brand. We believe there's a large and compelling opportunity for OP if it's properly positioned, and we're evaluating both direct-to-retail and wholesale licensing strategies. We expect to complete and announce our plans for OP shortly, and it's anticipated that it will launch in the spring of 2008.

In our most recent acquisition, Rocawear, we've retained a very talented team of executives that were running the brand with Jay V. prior to the acquisition. We believe Rocawear can be one of our largest opportunities and grow from the approximately $700 million in annual sales to over $1 billion in annual sales in a few years. We are already in the process of evaluating several interesting licensing opportunities in categories like men's outwear, fragrance, and a license agreement in South and Central America.

With that, I would now like to turn the call over to our Chairman and CEO, Neil Cole.

Thank you, David. I am very pleased with the continued momentum of our growth plan, which is evident in our strong earnings, revenue, EBITDA and free cash flow. Our revenue more than doubles and continues to demonstrate the powerful growth potential of our long-term growth strategy to expand our existing portfolio and also grow through acquisition. The leverage of our model is apparent by the fact of such substantial revenue growth. We succeeded in increasing our EBITDA margins from approximately 63% to approximately 76%, as we were able to leverage our overhead during that growth, which I anticipate continuing.

The other important and distinguishing characteristic of our model, aside from the growth and profitability, is the contractually guaranteed revenue. Today, the company has over 150 licensees worldwide for its 11 brands, and as of today, for 2007, the company has approximately $105 million in contractually guaranteed revenue, which represents over 60% of our projected top-line revenue.

Looking at 2007 and beyond, the company currently has approximately $420 million in aggregate guarantees over the duration of its current license agreements. I am pleased with the performance of the existing portfolio of brands in the first quarter and see them continuing to grow nicely throughout the year. Perhaps the biggest growth opportunity today is licensing our brands around the world, and this is an area that the company is very focused on.

We have developed a handful of unique partnership models tailored to different regions of the world. We have identified who we believe to be the most suitable partners in each of these territories, and we are in discussions with them. While it will take some time to develop, I am confident that we can export our model and brands around the globe and that over the long-term this will be a meaningful source of revenue for the company.

I am excited about the potential of our two most recent acquisitions, Danskin and Rocawear, which I anticipate to generate over $60 million in royalty revenue to the company in its first 12 months. Royalty revenue from Danskin and Rocawear was not material in Q1, since they closed late in the quarter, but will be substantial drivers of growth for the remainder of the year and beyond.

Danskin gives the company a strong women's fitness and active wear brand, and it has a very unique distribution footprint. The core brand is distributed in better department and sporting goods stores, but it also has a direct-to-retail license agreement with Wal-Mart for the diffusion brand called Danskin Now, which is carried in all Wal-Mart stores and we believe has a lot of opportunity for growth.

Rocawear gives the company a strong youth lifestyle brand that today generates over $700 million in annual retail sales and is continuing to grow. We believe that Rocawear could be one of the fastest growing brands in our portfolio and could exceed $1 billion in retail sales within the next three to five years. To ensure continuity, we have set up Rocawear as a relatively autonomous division from Iconix and are working closely with Jay V. and his team to operate it. Iconix will add value to our retail relationships, licensing and business development support, and we anticipate many marketing synergies, including more efficient media buying.

In looking ahead to future acquisitions, our current guidance does not assume any additional acquisitions this year. We intend to remain acquisitive. We have bought six brands in the last 12 months, and in looking at the remainder of the year, I think it is very likely we will add other brands to our portfolio. Our pipeline of prospective deals is strong, and in addition to other U.S.-based fashion brands, we are also looking at various international opportunities, and we continue to be open-minded about acquiring other brands, because of the way our model works, in other industries and are evaluating some of these opportunities as well.

I would like to address some of the recent verdicts the company received in its long-standing litigation with Hubert Guez and its related companies. We are extremely pleased with the outcome of the trial and feel vindicated by the verdict in our favor for over $50 million. The final judgment should be entered sometime in mid May, and we are currently assessing the potential for appeal and collection. Until we have more information regarding the likelihood of appeal and the timing to collect on the judgment, we are going to be prudent and not include any recovery in our guidance for this year.

As far as the special charges related to this trial are concerned, we will continue to have some expenses related to the potential appeal and collection, however, we believe that they will be substantially reduced from what they have been the past several quarters and will end at some point later this year.

In addition to the Guez litigation, the company has reached an agreement in principal to settle its other long-standing litigation with the Redwood Shoe Company. Similar to the Guez litigation, the Redwood lawsuit related to our former operations. In the proposed settlement, the company agreed to pay Redwood $1.9 million, which is already approved for, and therefore, there will be no P&L impact.

I am pleased that these two pieces of litigation within the company have now both been settled and will soon be behind us. In many ways, they were the last vestiges of our days as an operating company, and their completion represents a very positive closure event for this company.

In conclusion, I believe that we have begun what will be another year of dramatic growth and expansion for our business and brands. We are reaffirming our previously stated guidance of $150 to $160 million in royalty revenue and fully diluted earnings per share of between $0.96 and $1.00, excluding any additional acquisitions. In addition, our guidance does not at this time assume any upside for the collection of the judgment of $50 million that was awarded in its lawsuit.

In conclusion, our management team is more excited and encouraged about the future than ever before. We are beginning to see our hard work in marketing and business development bear fruit, and our portfolio continues to grow nicely. However, there is so much more opportunity for all of our brands. I also believe that we are in the sort of a perfect storm of acquisition opportunities today, and what we have accomplished has made us an acquirer of choice in an environment where there are a lot of strong brands for sale, and there is tremendous liquidity in the capital markets.

With that, I would like to now turn it over for questions, and I'd like to thank you all for listening. Michelle, Q&A.

Thank you. [Operator instructions] And we will pause momentarily to compile a list of questions. Your first question comes from the line of Todd Slater of Lazard. Please proceed.

Thank you, and congratulations on the quarter, especially on proving the consistency and sustainability of your model. It's good to see.

Thank you, Todd.

I was wondering if you could just provide a little bit more detail on -- if you could sort of summarize the organic growth at Joe Boxer. You talked about Candie's and Moss, obviously, at very high rates of organic growth, but what would sort of the total business -- what's the total business sort of growing at and what we should be perhaps modeling for the future on the organic growth side?

Hey, Todd, it's David. We think we've said in the past 10% we think is a number we're comfortable with on organic growth, and we think we're on track this year to achieve that.

Okay. Great. And then on the Rocawear and Danskin side, they obviously become more additive starting in the second quarter. I'm just wondering if you could help guide us in terms of revenue and maybe interest expense impact on those two that we should be modeling. I think that it's more of a seasonally strong quarter for Danskin than it is for Rocawear. Just sort of how do we model the -- how would you suggest we model these contributions?

Rocawear is a little heavier for the back-to-school period in Q2 and Q3, but we've said before it's about $60 million between the two brands. I don't think you're going to see -- Danskin is probably a little higher in the spring, which was Q1 and Q2, and Rocawear a little heavier in Q2 and Q3, but I would say it's going to balance out and be $2 million on the $60 million over the full year.

Okay.

And I think the interest you can model out at the term facility is $212.5 million at L plus 225.

Okay, good. That's helpful. And then just there seems to be a lot of concern about Rocawear. I'm just wondering what you feel are some of the major misconceptions out there about the sustainability of the Rocawear brand. Maybe you could address some of those issues.

I personally don't understand it. It's a growing business. We've had time over the last couple of months to spend time with Jay and his team, and also each of the licensees, and they're really solid. I mean, for instance, Kids Headquarters, which is one of the biggest ones, has been doing Rocawear for over seven years and has sustained the level they're at today pretty consistently every year. The women's business is growing; the men's business is growing. Huge opportunity for existing -- we have three or four major proposals for new categories, which we're evaluating, so we're really excited and encouraged about the opportunity of Rocawear, and we do believe that, having someone like Jay running the brand for us, it has a tremendous future.

Okay, great. I've got a couple more things. I'll leave them for perhaps follow-ups, if there are any. Thanks.

Thanks, Todd.

Your next question comes from the line of Jeff Klinefelter of Piper Jaffray. Please proceed.

Yes, thank you. Congratulations, guys, on a great start to the year. Couple questions on your existing brands, maybe a little bit more on Mossimo specifically. Great growth year-over-year in Q1. Can you talk a little bit more about any category extensions, any floor space expansion? What seems to be driving that business outside of just the overall comp and door growth at Target? And then also, the similar type of questioning on Candie's. Is there anything [technical difficulty].

Jeff, are you still there?

Yes, I'm still here. Did you hear that question?

Yes, I heard it. I was fine until it came over. Let me give a little more color. We spent a lot of time out in Minneapolis last week with the Target team, and it's really just so impressive what they've done with Mossimo and how they continue to grow the business pretty much across the board. If you walk into Target today, it's so -- how great they've done, really. They started the Mossimo Supply Company rather than the Mossimo Red Label and really strong, casual jeans business, and the quality of the product and the price value quotient is really incredible. As far as new categories, we're growing. The kids category is an opportunity that we've started to add a couple of racks, accessories, eyewear. We have a new deal with Luxottica, where they're taking over the optical at Target, and pretty much everything -- with Target's just growth as a company, Mossimo gets that beneficial of it being the largest brand in the store. So it's pretty exciting what's happening with Mossimo and Target, and also other opportunities around the world, as Mossimo is working on a big renewal in Japan, which hopefully we'll give a little color to in the next few weeks. As far as Candie's goes, a little similar. I mean, I'm really proud of the great job Kohl's is doing, and Candie's has taken the lead on the junior floor, where they're going to be working on a new fixturing program this fall. The whole dress category, which is exposed to them in the junior area, has been really strong, and Candie's is leading the way. But pretty much throughout the store, Candie's had a great first quarter, and we see it continuing going forward. So I think we have two great partners, which is really an important key to our model, is making sure you have a great partner to help grow the brand, exploit the brand, so we're pretty excited about both.

Okay. Just as a quick follow up, any thoughts on growth rates for those two brands through the balance of the year, their share, what type of rate you expect to see for the next several quarters similar to Q1? And then just also on London Fog, you mentioned several points of potential distribution in the U.S. Can you clarify that a little bit further, and the timing of that distribution?

Right. Both brands, because of new store openings, we have somewhere around 15% for the year in both Candie's and Mossimo. The rate of the -- in Q1, we had the benefit of an early Easter and that extra week, so we don't think we can keep up those rates, but we think it's going to be a pretty strong year, and we've got them both planned somewhere around 15% increases for the rest of the year. And as far as London Fog goes, we've got a great launch plan with Macy's and Dillard's and Nordstroms pretty much across the board, and a really exciting marketing plan, so we think it's going to be a pretty exciting launch when everything hits the stores in August and September.

And how many doors, approximately, for that launch?

It's going to be in all Macy's stores, so I think probably with all department stores, however many more that are left are going to be --

Jeff, it's David. Also, in Canada we have a direct-to-retail license for London Fog with Hudson Bay, and we'll be launching in total 400 doors this fall -- approximately 100 Hudson Bay stores, and then 300 Zellers stores -- with the diffusion brand called the Tower Collection by London Fog.

Okay. Thanks a lot.

Your next question comes from the line of Eric Beder of Brean Murray. Please proceed.

Good morning.

Hey, Eric.

Could you just --? Just a silly housekeeping question; what are the shares outstanding we're looking at for going forward?

Full-year fully diluted should be $63 million.

Okay. Could you talk a little bit about the Joe Boxer line, how you're looking upon that internationally, and kind of when do you think you'll kind of reach the tipping point, where you'll actually be able to get a little bit more than the minimum for the new contract?

As David mentioned earlier, we're going to be launching in the fall at all the Sears stores with a complete rollout in spring '08, of all door Sears, and we believe, as far as the U.S. goes, there will be impact above minimum starting in '08, based on once you get all the Sears stores, and we're actually having a pretty good year with Kmart. The brand is continuing to grow there year-over-year, and it really looks great. If anyone goes into a Kmart Joe Boxer, they've done a really spectacular job in merchandising the brand. So we do see growth, the rebuild happening with the all-door Sears launch. As far as internationally, I believe today we're in about six or seven countries, and we're starting to pick up momentum. We had a really good launch in the UK, and we're using Joe Boxer as an organic program, and that's starting to take hold. So we think it's in the beginning of a nice momentum in Joe Boxer worldwide, and in '08, we'll be back building the business back up to the minimums that we had last year.

Okay. And what's this --? You've talked before about the OP, the sportswear license. What are you kind of thinking in terms of doing that? How do you see that license going out in the future?

Eric, it's David. Right now, we've got some interesting conversations that are far along where we have a retail direct possibility. We've got a traditional wholesale possibility. What I think is also important is, when we bought the brand, it was kind of positioned at the better department store, better specialty store level, and we see it more in the mid-tier, and we're even looking at mid-tier and that opportunities, and we think we're going to get it finalized soon, and we'll announce it shortly.

Great. Congratulations, guys.

Thanks.

And your next question comes from the line of [Jason Parks] of Merrill Lynch. Please proceed.

Hi, this is Jason from Merrill Lynch for Virginia Genereux. I just had a question on the top line. Sales looks like it came in a little bit lighter than we were modeling, given the weighting of the Mossimo deal in Q1. Were there any events in particular where growth was maybe slower than expected or any maybe seasonal offsets for the quarter?

No, I don't think so. Possibly the pushback in the closing of either Danskin or Rocawear. We were hoping possibly to close that a little earlier than they ended up closing Danskin. Rocawear ended up closing the last day of the quarter, so there was no benefit there, and Danskin was in mid March. But, no, I can't think of any revenue that we didn't have on track.

Okay, thank you.

Your next question comes from the line of Jim Chartier of Monness, Crespi & Hardt. Please proceed.

Good morning. Congratulations on a good quarter.

Thanks, Jeff.

Two questions for Warren. On the diluted share count, what's going to cause the increase over the course of the year?

I think the increase is on the earn-outs. That has a dilutive effect, so we have to take that into account.

Okay.

Plus miscellaneous compensation, and non-cash compensation expense has a dilutive effect also.

And then you mentioned the possibility of lowering your weighted average interest expense going forward. Can you expand about some opportunities there?

We're always looking at the capital markets, and currently the capital markets are very strong, so we're just hoping that, based on future acquisitions or being opportunistic, we're definitely confident that we can lower that below 8%, which is our current weighted average cost of debt.

Okay, thank you.

Sure.

[Operator instructions] Your next question comes from the line of Ronald Bookbinder of Sterne, Agee. Please proceed.

Congratulations, also, on a nice, consistent performance.

Thanks, Ron.

First, one the OP, when you talk about doing something maybe retail direct or a wholesale model, but specifically retail direct, that wouldn't hit until the spring of '08. Would that be correct?

Yes, correct, Ron. That's when we anticipate it would launch.

But for this year, you're fully on schedule to hit your OP guidance?

Correct. Our guidance is $10 million in royalties this year, and we're on track to hit that.

Okay, but we could see some significant growth there next year if you did a retail direct with a mass marketer or a mid-tier plan?

Hopefully that would be a possibility, yes.

Okay. You talked about the dress category doing well for Candie's. Do you have a -- how's the dress category doing for Bongo or Mudd given that denim in that sort of teen market is a bit of a challenge these days?

Unfortunately, both Bongo and Mudd do not have dress lines, but fortunately, they both have footwear lines and other accessory categories that are doing well, especially the Mudd footwear business is really outstanding and way above plan, which is helping us offset any softness in the denim market. And Bongo has really been a nice rebuild, because maybe we had a difficult year last year. We're kind of being looked at as a solution, and we're having a very good spring on our shorts and some other new product categories at Bongo. Where we have benefited from dresses is also Rampage. Rampage has had a wonderful quarter last quarter at Federated and other department stores, and that's benefited from the whole dressy dressing that young people are wearing.

Do you think it's too late to get a dress category going for your other two sort of teen lines?

No. It's been in discussion, and I'm sure we'll have it in place for '08.

Okay. And on the last call, you talked a lot about international and that you were hoping to have something going in international that you could leverage your existing brands sort of something in the back half of the year. Any new color on that?

Hi, Ron. We're in discussions right now with a lot of exciting large players around the world. We're not necessarily talking to them about a single license agreement. We're more focused on longer-term, strategic alliances, and we're hopeful that we're going to be able to announce them soon.

The other good opportunity, Ron, is we're looking at some very interesting international brands for purchase, and if those come to fruition, we think that would give us a platform in both Europe, Asia and other parts of the world. So that's been a focus of the acquisition team, is looking at some brands outside the U.S.

Okay, thank you.

Thank you.

And, sirs, you have no further questions at this time. I'll turn it back to management for closing remarks.

Okay. Well, once again, thank you, everybody, for listening and your interest, and we at Iconix are pretty committed to continuing the momentum we have and executive what we think is a business model for the 21st century, and we will be able to talk to you all individually. And once again, thank you very much. Talk to you later.

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