Icon Energy Corp (ICON) 2008 Q4 法說會逐字稿

Good morning ladies and gentleman and welcome to the Iconix Brand Group fourth quarter full year earnings 2008 conference call. My name is Chanel, and I will be your coordinator for today. At this time all participants are in listen only mode. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

The safe harbor statement under the Private Securities Litigation Reform Act of 1995. 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 and many of which are beyond the control of the Company. This may cause the actual results, performance, or achievements of the Company to be materially different from any 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.

Your presenters for today's conference call is Neil Cole, Chief Executive Officer, and Warren Clamen, Chief Financial Officer. I would now like to turn the presentation over to your host for today's call, Mr. Warren Clamen, Chief Financial Officer.

Thank you. Good morning, everyone, and welcome to the Iconix Brand Group fourth quarter and full year 2008 earnings conference call.

Beginning with our results, for our full year 2008, revenue increased 35% to approximately $216.8 million as compared to $160 million in the prior year. EBITDA increased 17% to approximately $149.6 million as compared to approximately $127.6 million, and EBITDA margins were approximately 69% for the year. Free cash flow increased 22% to $122.1 million as compared to approximately $99.9 million in the prior year. Net income increased 10% to approximately $70.2 million compared to approximately $63.8 million in the prior year. Diluted GAAP earnings per share was $1.15 as compared to $1.04 in the prior year and includes $0.10 and $0.02 of noncash related compensation respectively. Free cash flow per diluted share was $1.99 in the year.

Reviewing our results for the fourth quarter ended December 31st, 2008, revenue increased 14% to approximately $54.3 million in this quarter compared to approximately $47.4 million in the prior year quarter. EBITDA decreased 10% to approximately $37.8 million as compared to approximately $42.4 million. However, our fourth quarter 2008 EBITDA results included a one-time pretax gain with an adjustment of approximately $7.1 million associated with the Company's unzipped litigation. Therefore, excluding this gain, EBITDA for the fourth quarter 2008 actually increased $2.7 million or 8%. EBITDA margins were approximately 70% for the quarter. And free cash flow increased 18% to $31 million in the quarter as compared to $26.3 million in the prior year quarter.

Net income decreased 11% to approximately $17.1 million compared to approximately $19.2 million in the prior year quarter. However, excluding the gain in 2007's net income, fourth quarter 2008 net income actually increased quarter over quarter by approximately 4%. Diluted GAAP earnings per share for the fourth quarter was $0.28 as compared to $0.31 in the prior year quarter. However, again, the fourth quarter 2007 results included that gain related to the unzipped litigation of $0.04 in EPS. Therefore, excluding the gain, diluted earnings per share for the fourth quarter actually increased $0.01 to $0.28 versus $0.27 in the 2007 fourth quarter.

The fourth quarter 2007 and -- I'm sorry -- the fourth quarter 2008 and 2007 included $0.03 and $0.005 of noncash compensation expense respectively. Free cash flow per diluted share for the fourth quarter '08 was $0.51. EBITDA free cash flow and results excluding the unzipped litigation are all non-GAAP metrics and reconciliation tables for each can be found in the press release sent earlier this morning or on our website, www.iconixbrand.com.

Free cash flow is an important metric to look at in determining our financial performance as our business model generates a significant amount of cash that is incremental to our reported net income. In 2008, the noncash items totaled $52 million. The majority of this amount is the reoccurring annual cash benefit related to our noncash taxes, our noncash compensation, and depreciation.

The Company ended the year with approximately $67 million of cash on hand and as of today, has cash on hand of approximately $79 million. We understand the importance of cash in the current environment and will continue to evaluate our options regarding our use of cash and make decisions based on what we believe is in the best interest of the Company and our shareholders. During the fourth quarter, we repurchased 265,404 shares at a weighted average stock price of $6.85, totaling approximately $1.8 million. We will continue to consider stock repurchases as a potential use of our cash and will balance this initiative with the need to preserve cash to be opportunistic with acquisitions and for other corporate purposes.

Total debt at the end of the year was $668 million, and the earliest maturity of any of our debt is approximately three years from now in 2012. Our pro forma net debt to EBITDA is below four times, and we are comfortable with these levels given the controlled risk profile of our model and our strong free cash flows. Unlike many companies in the retail and consumer product industry, we have downside protection from our minimum guaranteed revenue and our tiered royalty structures.

As we have stated before, as of January 1st, 2009, we had over $500 million in aggregate guaranteed minimums from our existing contracts excluding any renewals. In addition, some of our large direct to retail contracts have a royalty rate that steps down as the retailer hits certain revenue thresholds, which insulates us in a weakened economy as the lost sales are typically valued at the lower royalty rate. In addition, the tiered royalty structure incentivizes the retailer to grow the business because at the higher sales levels they pay a lower rate.

The Company's weighted average interest rate on all its debt declined in 2008 to approximately 4.7% from 5.9% in 2007, and we have locked in our rate of approximately 3.7% for the first quarter of 2009. The Company has only one financial covenant in its senior term facility. This covenant is a net debt to EBITDA calculation and the Company is currently below the level required to be compliant for 2009. Giving us additional comfort is that the Wal-Mart brands, our largest growth brands, are currently in the term facility and will positively impact that ratio in 2009.

I will now turn the call over to the Iconix Chairman and CEO, Neil Cole.

Thank you, Warren. Good morning, everyone. As 2008 unfolded, it became more and more evident that we were heading into one of the most challenging economic times of our generation. Although macro economic factors tested our ability to grow, both organically and through acquisitions, our business remained strong, and 2008 was a very successful year for Iconix.

In 2008 we delivered 35% revenue growth, 10% earnings growth, and generated approximately $122 million of free cash flow which translates to $1.99 per share. We executed new direct to retail partnerships for Danskin Now and Starter with Wal-Mart, Mudd with Kohl's, Cannon with Sears , and we renewed Mossimo at Target. We initiated two international joint ventures with strong partners to expand to China and Latin America, and in a difficult acquisition environment, we acquired the Waverly brand at attractive economics with cash from our balance sheet.

These economic times have enabled us to demonstrate many of the advantages inherent to our licensing model that differentiates us from the traditional operating model. We believe we have the most relevant model in the market today, making it possible for leading retailers to offer national brands at affordable prices supported by innovative marketing campaigns. I would now like to give you a quick update of each of our brands.

Our direct to retail brands which are brands that we have licensed directly to retailers are becoming a much larger percent of our royalty revenue stream. In 2008, they accounted for approximately 25% of our revenue. We expect this to increase to well over 50% in 2009. Today we have 13 direct to retail partnerships, 11 in the United States and two international. These partnerships align with us top retailers that have strong credit, that have capital to contribute to marketing and in-house fixtures and provide our brands with some of the best placements within the stores and in their newspaper circulars. The advantage to the retailer is that they receive the opportunity to offer their customers exclusive national brands at private label economics.

We anticipate that the significant growth in this segment will be primarily driven by our three brands at Wal-Mart -- OP, Starter, and Danskin Now, which are projected this year to more than double retail sales. The OP launch is on track. Product will be rolling out to all doors this spring, and OP will be taking the over the vast majority of Wal-Mart's swim business this year. OP products is also being sold in Wal-Mart Canada and will be launching in Wal-Mart Mexico next week. The expanded relaunch of Danskin Now is off to a strong start with Danskin Now taking over the hot spot in Wal-Mart stores this past January. The new Starter product has also begun to arrive in stores. Our latest campaign featuring Tony Romo, and we expect to keep the excitement going with additional high profile athletes to promote the Starter brand.

The Mossimo business was down versus the prior year. However, we believe Target's renewal of the contract for the fourth time through January 31st, 2012, with no charges to any -- no changes to any terms speaks to the importance of the Mossimo brand to the Target consumer.

At Kohl's our Candie's business was impacted by the general environment and lean inventory management. However, Kohl's has remained committed to the brand and has invested alongside Iconix for in-store fixturing programs and innovative marketing campaigns. Also, later this week we will be announcing a mega star as the new Candie's spokesperson which should create quite a buzz for the brand.

In December we signed our second direct to retail agreement with Kohl's for our Mudd brand. Although Mudd struggled in 2008 as many key retailers focused on their exclusive brands, this new partnership with Kohl's will stabilize the brand and enable growth for 2010 and beyond. 2009 will be a transition year for Mudd and the new exclusive Kohl's product launching in July will be there for minimal retail sales associated with Mudd brand in the first half.

Joe Boxer was one of the best performing direct to retail brands in 2008 with double-digit sales growth as K-Mart introduced new categories and expanded into Sears. The Sears rollout continues to be slower than expected, but we believe in the new merchant team at Sears and their ability to move forward with the brand.

Looking at our traditional wholesale brands, Rocawear sales were relatively flat in 2008 even as the urban market consolidated and several independent retailers shut down. Jay-Z's commitment to the brand and participation in the marketing campaign has given a boost to the brand, and today Rocawear is one of the top brands in America.

Our Rampage business was down this year but we think that our new core licensee and new distribution channels and the new campaign featuring Brazilian supermodel Gisele will reenergize the brand. London Fog has been a great growth story for us as we continue to transition the brand to a lifestyle brand adding new categories including luggage, handbags and footwear. We are still looking to expand into additional categories including sportswear.

Badgley Mischka had a tough year with the luxury market suffering more than most. We have transitioned the core dress category to a new company and are excited that Mark Badgley and James Mischka are among the new owners. Bongo is performing as expected, but we realize it is in a generally challenged retail position and we are exploring a number of options for the brand.

As for our home brand this was our first full year in the home business, and we are pleased at our many accomplishments, including our ability to achieve our revenue targets. We introduced Royal Velvet as an exclusive brand in Bed, Bath & Beyond and supported the launch with an exciting and innovative campaign featuring Brooke Shields and her family. We signed a direct to retail deal for the Cannon brand with Sears Holdings, positioning the brand to take over a significant portion of the Sears K-Mart home business as the Martha Stewart brand exits the store by the end of 2009.

We are repositioning Fieldcrest brand at Target and are working on a new distribution strategy to expand the Charisma brand. As for Waverly, we are working to reinvigorate the brand and will be launching a new campaign in the next of couple months. We have also been able to leverage our home platform this year and are launching new home products at some of our other brands including Mossimo at Target and OP at Wal-Mart.

As we look into the future, we are excited about our growth prospects, both domestically and internationally. Our global expansion plans are progressing and over the past year, we entered two international joint venture agreements, one in China and one in Latin America. We believe by having locally based partners in these regions we will be more successful in monetizing our brands.

ur joint venture in Latin America is with the Falic group which has extensive expertise and relationships throughout Latin America and is also the owner of duty-free America, the largest duty-free retail operator in the Americas. We believe that partnering with the Falic group we will accelerate the growth of our brands throughout the territory and maximize the revenue from our existing licenses in the region. Unlike our China joint venture this business will be run as a traditional licensing model.

We have also begun to make progress in Iconix China and in December signed our first deal for Rampage with the Mecox Lane group, a multi-channel retailer in China. Mecox Lane has already begun rolling out Rampage stores and expects to have over 50 open by the end of '09. We continue to work on finding partners for our other brands in China and have an imminent deal that is in the contract stage for another brand.

Moving on to acquisitions, while 2008 was a difficult year for acquisitions as the credit markets shut down and sellers were still valuing their businesses at the prior year level, we believe in 2009 opportunities will present themselves in this industry as the industry consolidates and sellers began to appreciate the new reality. We are currently looking at a couple of exciting medium to large size deals that we believe could be financed through both traditional and alternative structures. However, we remain extremely diligent and will only execute a transaction that we believe is in the long-term interest of our Company and our shareholders. Now I would like to take you through our '09 outlook.

We are reaffirming our full-year '09 EPS guidance of diluted EPS between $1.20 and $1.30, excluding the change in convertible debt accounting between $1.06 and $1.16, including the noncash interest related to the new debt accounting rules. We're now projecting revenue to be in the range of 210 to 220 -- $210 million to $220 million. This guidance relates to the existing portfolio of brands only and assumes no acquisitions. We expect to continue to generate strong cash flow and are forecasting free cash flow to be approximately $120 million this year, which translates to a free cash flow per share of approximately $1.95.

While we have several exciting growth initiatives for 2009, including the large rollout of our OP, Danskin Now, and Starter brands at Wal-Mart, we have updated our revenue projection to reflect current economic and sales trends and the negative short-term impact that the Mudd transition will have on 2009, as it will be taken out of the market for six months before relaunching at Kohl's in the second half of the year. That being said, we remain committed to delivering earnings growth to our shareholders and are managing the business accordingly.

Our business is highly scalable, and we have been taking a very close look at all of our expenses and are adjusting our overhead structure based on the current economic conditions and our top line projections. At the same time, we will not lose sight of our long-term goals and will remain focused on keeping our brands fresh and relevant through innovative and exciting marketing and advertising.

In closing, while we cannot predict what will happen in this economy, we are confident that we have the right business model to deliver a continued earnings growth. We believe that we are aligned with the retailers best position to thrive in this current market. We have strong cash flow supported by predictable revenues with minimum guarantees that do not have any material contracts up for renewal until the end of 2010. We are pleased to have delivered such strong results to our shareholders for 2008, and look forward to continued success in 2009 and beyond.

With that I would like to thank you all for listening this morning and turn it over to a question and answer.

(Operator Instructions) And your first question comes from the line of Todd Slater with Lazard Capital Markets. Please proceed.

Thank you very much. Hi, guys.

Good morning, Todd.

So currently you are trading at six times GAAP EPS, four times cash EPS, about the lowest valuation in the group even though you have one of the best models in the group. So I guess the street is saying that if Mudd is vulnerable, perhaps all the guaranteed minimum income is in jeopardy. I think this is an erroneous conclusion, but I was just wondering if you could just address these concerns.

It's tough to address the street, and the stock price, hopefully it will take care of itself in the long run. But I think we've addressed it over the last three years, Todd.

The Company has gone from $60 million royalty up to $217 million worth of royalty, and we have partnerships with the best, we think, retailers in America, or the world that are going to do well in this environment, and we have three deals with Wal-Mart, we have three deals with Target, we have two deals with Kohl's. Some of the best retailers, the best credits, and our business continues to grow and prosper.

And obviously you get frustrated when you look at the stock -- but what's going on in the world today -- but we just have to stay focused and we just have to continue to execute. Yes, some of the brands where we thought they were going to bring in $20 million might bring in $18 million or $19 million in this economy, and sales have been off because retailers are managing inventories tightly, but we just to have stay focused, and we will come out incredibly strong on the other end, as we continue to perform.

So help us understand Mudd. Mudd is kind of going from a wholesale type of structure to a DTR, direct to retail, short-term negative implication during that transition. Does Mudd get back to or grow above the revenue levels with Kohl's that it had as a wholesale business?

Yes, definitely. It would get there probably in '11. '010 it it will probably get back to where it was. We think in '11 and '12 it will prosper.

Kohl's is an amazing retailer. We've had great success with them with Candie's. They are turning a large percent of their business over to us. And have wonderful -- and have signed nice guarantees and we're pretty excited about what they will do with Mudd in the years to come.

So lastly, if you are looking for flat revenue -- roughly flat revenue expectations this year -- if you take out the Wal-Mart gain, then I guess you are expecting maybe -- looks like $25 million, $30 million decline everywhere else. Just wondering if could you walk us through where these declines are coming from and make us sort of comfortable with the rest of the non-Wal-Mart businesses.

It's a little bit across the board. One of the places where we're definitely losing business is Rocawear. Rocawear today is performing at double-digit increases at Macy's and Dillard's and other places.

However, we're losing [Independence]. We've lost [Demo]. We're losing Up Against the Wall and we're losing a lot of the independent business which is probably going to take that business down about 10% going forward. Pretty much across the board, Todd, we're thinking each business is going to be challenged with what's happening with the consumer. Especially in the first half of the years we're projecting somewhere 5% to 10% down on each brand. Hopefully we're going to get some surprises.

There's a bright spot with Cannon as it is performing really well with K-Mart, and that could be a growth business, but we're playing it conservatively. I felt that if we didn't and didn't adjust the overhead accordingly, then we wouldn't show earnings growth, and we're committed, as we have the last four or five years to try to continue to grow earnings, and not be erroneously -- wait for the business to come back. We're just going to look at current trends and go forward and adjust the business accordingly.

Can I ask one last quick question? If the revenues -- looking at that model, how is it you are still comfortable with the earnings -- 120, 130? What are the areas of offset?

We basically looked at every part of the business and have adjusted accordingly. We've taken down expenses roughly about $16 million. We were planning to increase advertising substantially over last year, and we've decided to keep it flat. We think with the help we're getting from our retail partners, it will be sufficient spending somewhere around $21 million in advertising, supplemented, as I said, by what we get from Wal-Mart and Kohl's and our partners. Headcount, we've taken down -- we reduced somewhere around $5 million, $6 million in salary and stock incentives.

Also tightened up every aspect of the business, whether it be rent and some of the others. We were going to build a big new showroom -- we stopped and we're not building. We're just being very careful. We've also lowered our interest expense about $4 million with what's -- that's one of the good things happening in the world today as far as where LIBOR is. So a combination across the board we think we've adjusted the overhead, so that we can continue to grow earnings with a decrease in top line. Or top line projection, not a decrease for the year.

That's great to hear. Good luck with everything.

Thank you, Todd.

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

Good morning, guys. Congratulations.

Thank you, Eric.

Could you talk a little bit about the Wal-Mart expansion internationally? You said Mexico and Canada with OP. Where do you think that can go, and do you think the other brands also can expand internationally at Wal-Mart?

We're pretty excited about that opportunity. It will take a couple years to develop, but we went down to Bentonville a few weeks ago and met with the international team, and we really believe we can go around the world.

The first -- we're working hard in Canada and Mexico, but we believe that pretty much everywhere Wal-Mart is -- in South America, even India, Russia, China -- the Wal-Mart international business is a big growth play for them, and almost equals the sales of Wal-Mart America. So we've put it as a big growth initiative for us over the next five years, especially as Wal-Mart USA is performing. Although the international divisions run independently, it does give more respect to look at their apparel offerings. We think what [John and Dottie] are -- the team that they're leveraging in New York -- they are going to hopefully bring the international people in to look at all the ideas that they are developing.

So we do think it's an opportunity. Won't happen quick. It will be incremental over the next few years.

Okay. I'm not sure you gave this number out already, but you sometimes talk about how -- what percentage of the guaranteed revenue is based into your numbers right now in terms of 2009? How much of the 210 or 220 is guaranteed?

Hey, Eric, it's Warren. About 70% is guaranteed of the number.

Okay. Well, again, congratulations, guys. Looks good for '09.

Thanks, Eric.

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

Good morning.

Hi Jim.

Can you just talk about the early reads from Wal-Mart, how that business is performing?

Have to be somewhat careful because Wal-Mart is a little proprietary but we had -- in January, during wellness month, Danskin Now was the hot spot, and we really got off to an amazing start with Danskin Now, and it really looked amazing and the sales were great. Starter and OP are first really starting to roll out now. The inventory is starting to come in now and we're expecting big business for the next 10 months but those businesses are growing and developing.

In terms of the seasonality of the business this year are you projecting any major differences between first half, second half of the year for revenues?

Yes, we are. We definitely believe the second half will be a lot stronger. As the Wal-Mart business builds, especially with Starter, and OP, the first quarter will definitely push back, and along the combination of what's happening with Mudd -- that's a brand that's going to be all second half loaded with the Kohl's launch. So between those and how retailers are playing inventories, we definitely see the first half a little weaker on the revenue side compared to Q3 and Q4.

Okay. And then for Warren, what else is included in net other expenses other than interest? It looked a little bit higher than I was looking at. Were there any one-time items in there?

The equity pickup on the China joint ventures, which were small, less than $1 million dollars, that's really the only thing. It's just interest income, interest experience and the equity pickup of the joint ventures.

So was that an expense -- the equity pickup an expense or benefit?

It was an expense -- a small expense. I think it was about $500,000.

Okay.

Okay?

Great.

Thanks, Jim. Are we -- any more questions?

Your next question comes from the line of Sean Naughton with Piper Jaffray. Please proceed.

Good morning.

Good morning Sean.

Quick question for you on -- when you were talking about SG&A before, is it possible for you to have SG&A in dollar terms flat with last year? Is that what you guys are aiming for?

No, actually, we're aiming to reduce it compared to last year.

Did you say down $16 million?

Overall expenses will be down $16 million. We're projecting 70% EBITDA margins, and Neil had said -- part of the $16 million was a pickup in interest, also which is below the EBITDA. So we are projecting that we're going to maintain our 70% EBITDA margins, and we'll claw back through SG&A but also through a pickup of interest since the rates are lower.

Okay.

Okay?

Okay. And then on the retail side, you guys have a good view into the consumer, obviously. Have you noticed, within some of your brands at retail, have the price points been changing there, or have they been relatively consistent on your brands?

Yes, I think the price points generally are coming down a little bit, and people are getting a little more competitive in the market, and obviously retailers are being more promotional, so we are seeing -- sometimes we're seeing the same amount of units going out the door but still being down a couple of points. So I do think there will be pricing pressure on a lot of our brands -- pretty much on all brands over the next few months.

Okay. Then just a couple questions on the balance sheet side of things. Given kind of the new run rate we're experiencing here, kind of with the consumer spending globally on discretionary apparel and home items, and you've had a lot of acquisitions over the last few years. Is there anything in terms of your intangibles that -- have you tested those recently, and are there any write-downs that may potentially be coming?

To answer your question we have tested them recently and there are no write-downs coming.

So that's the annual test, so you've done that, so we should be okay for 2009, or are you testing them more frequently?

No, that's the annual test and we should be okay unless -- we test them on an annual basis.

One of the benefits of our model is we have guaranteed royalties for pretty much all of our brands, so it gives good comfort that they are all performing.

Okay. Last question. On the term loan facility, can you remind us or give us a number on how much of the free cash flow from 2008 is actually -- needs to go to that particular facility?

50% of the free cash flow generated by the term facility brands is required to be paid down once a year, and the payment will be probably in March. It's going to be around $38 million, approximately.

Okay. And was that taken out of the $67 million in the cash number that you gave earlier already?

No. That's still in there. It is going to be taken out in Q3 or -- in Q1 or Q2, when it's paid.

It will also have built up. Today it's $78 million, and it goes up substantially every quarter because we're generating at the rate of $120 million per year.

Great. Okay, thank you.

And we're currently showing no more audio questions in queue at this time.

Okay, well thank you everyone for listening. Management will be around this afternoon to answer any individual questions. Thank you. Bye-bye.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.