Icon Energy Corp (ICON) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Q2 2009 Iconix Brand Group earnings conference call. I will be your operator for today. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). 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 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. This may cause the actual results, performance, or achievements of the Company to be materially different from the results, performance, or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident and similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made.

I would like to turn the call over to Neil Cole, Chairman and Chief Executive Officer, Warren Clamen, Chief Financial Officer and Yehuda Schmidman, Executive Vice President of Operations. I will now introduce Warren Clamen. Please proceed.

Good morning everyone. Welcome to the Iconix Brand Group second quarter 2009 earnings conference call.

Reviewing our results for the second quarter ended June 30th, 2009, revenue was approximately $56.4 million, a 9% increase compared to $51.7 million in the prior year quarter. EBITDA in the second quarter was approximately $41.8 million, a 19% increase as compared to approximately $35.2 million, in the prior year quarter. Our EBITDA margins improved over 600 basis points to 74%, demonstrated the continued scalability of our business model. Our non-GAAP basis, which excludes non-cash interest related to the adoption of the new accounting treatment for the convertible debt, net income increased 29%, to approximately $21.3 million compared to approximately $16.5 million, in the prior year quarter. Diluted non-GAAP earnings per share for the second quarter was $0.33, $0.06 higher than the prior year quarter of $0.27, and $0.03 above the consensus of $0.30.

Our GAAP net income, which includes the adoption of the new convertible debt accounting treatment for all periods reported, increased 32%, to $19.3 million, compared to $14.6 million, in the prior year quarter, and GAAP diluted earnings per share was $0.30, $0.06 higher than the prior year quarter of $0.24. Free cash flow for the quarter was $35.1 million, a 34% increase as compared to approximately $26.3 million in the prior year quarter. Free cash flow per diluted share for the second quarter 2009, was $0.54. The four largest components of the $15.8 million cash add back in the quarter were non-cash taxes, non-cash interest expense, non-cash compensation and depreciation and amortization.

Our strong results in the second quarter offset our sales decline in the first quarter and thus for the six-months ended June 30th, 2009, revenue was flat at approximately $107 million. EBITDA for the six month period increased by 6%, to approximately $78.2 million, as compared to approximately $73.9 million in the prior year period and free cash flow increased 10% to approximately $64.9 million, as compared to approximately $59 million in the prior year period. Free cash flow per diluted share for the six month period was $1.03.

Non-GAAP net income as previously defined for the six month period increased 12%, to approximately $38.9 million as compared to approximately $34.7 million in the prior year period, and non-GAAP diluted earnings per share increased to $0.62, versus $0.57 in the prior year period. For the six month period GAAP results, please see our press release from this morning. EBITDA, free cash flow, non-GAAP net income, and non-GAAP EPS are all non-GAAP metrics and reconciliation tables for each can be found in that press release sent earlier this morning and on our website iconixbrand.com.

This quarter, we raised $153 million through our equity offering, which brought our cash balance at the end of the quarter to approximately $200 million. We felt this was a good opportunity to reload our balance sheet and position ourselves to be opportunistic on executing acquisitions. The current face value of the debt related to debt facilities at the end of the quarter was approximately $625.5 million, and the earliest of any of our debt maturities is not until 2012. The Company's weighted average cash interest rate, on all of our debt in the second quarter was 3.7%, and is expected to be about 3.3% in the third quarter. Our trailing 12 month net debt to EBITDA is below three times and we are comfortable at these levels given our controlled risk profile of the model and our strong free cash flows. I will now turn the call over to Iconix Chairman and CEO, Neil Cole.

Thank you, Warren. Good morning everyone.

I'm pleased with our performance this quarter and excited to announce that we achieved licensing revenue, record EBITDA and record net income. Our strong results in this quarter respect a culmination of many initiatives we have been working on including successfully investing in partnerships with leading retailers, streamlining our internal operations to further leverage our infrastructure, continuing to execute innovative marketing campaigns, maintaining a strong balance sheet with a low cost of capital and being opportunistic in our acquisition and our organic growth efforts.

We are particularly energized about our direct to retail relationships which were the primary driver of our growth this quarter. And these should continue to provide growth in the future as we expand in to new categories and benefit as our partners open up new doors. We are also very encouraged by the initial reaction to the new Mudd launch at Kohl's and the Charisma launch at Costco. In the second quarter, our direct to retail brands accounted for 55% of total revenue up from 27% last year, and just 46% just last quarter. What attracts us to the DTR model is the premium support we receive from our partners with respect to placement within the store, placement on their circular and newspaper ads and general marketing as well as a strong credit profile of our partners.

Starting with our Wal-Mart brands, we are thrilled with the performance of all three brands, OP, Starter, and Danskin Now. OP expanded into all Wal-Mart stores this quarter and in May received the premier real estate in the apparel section known as the hot spot. Given the success of the first OP hot spot, it received the premier hot spot again this July with a full back to school assortment. Starter continues to grow each week as we roll out additional categories such as socks and footwear. It's also receiving great publicity with Tony Romo as its spokesperson. We are excited about the new Tony Romo advertising campaign set to run this fall. As well as a Tony Romo product line called [TR9] that will arrive in select Wal-Mart stores this October.

We are also introducing a co-branded line for the Danskin Now spokesperson Gabby Reece. Danskin Now had continued to do well, maintaining high sell throughs since it relaunched in the hot spot this past January. Looking ahead, we anticipate strong organic growth from all three Wal-Mart brands through new categories and international expansion which we will speak about later on in this call.

Another one of our brands that has seen a bright spot is Candie's. We believe that the success we are having with Candie's speaks to the strength of our DTR business model. The Candie's Britney Spears campaign was featured on the cover of Kohl's Easter circular and Candie's was back on the cover this July with a new back to school Britney ad campaign. The ads are also featured in a major television campaign that is presently on the air that will run through back to school.

We are also excited about our newest direct to retail agreement with Kohl's for our Mudd brand, which arrived in stores just a few weeks ago and has had a very strong initial response. To support the launch Mudd product was featured on the cover of Kohl's circular and has been given great placement within the store. We think this is a great opportunity for the Mudd brand and should provide growth for the second half and certainly well into next year.

Our Target brands were off but in line with Target's overall sales trends. Joe Boxer sales are up at K-Mart as new categories such as footwear have been introduced.

Sales of our wholesale apparel brands have been mixed. Rocawear continues to gain share in the urban market with continued growth at Macy's. However sales have been challenged by the closing of several specialty retail chains. Sales of our better department store brands such as Rampage and London Fog were both up over the prior year's quarter. As previously stated on prior calls, two of our brands that have been under performing are Bongo and Badgley Mischka. But these brands are among our smallest of royalty basis. Ed Hardy royalties are up over 50% from last year on this quarter, as the brand expands into new categories and grows its department store base.

Moving on to our home brands we are most excited about the progress we are making with our Cannon brand at both Sears and K-Mart as it takes more and more shelf space from the exiting Martha Stewart business. K-Mart Sears has shown a great commitment to the Cannon brand which has been featured in their television spots and circular. Cannon kids and teen product has arrived in stores for back to school and we're working on some new possible brand extensions with Cannon. We are also excited about a new DTR we signed this quarter with Costco for our Charisma brand. Since the Charisma launch Costco has already seen a spike in its power sales, which we believe is attributable to the power of the Charisma brand. Based on these strong initial sales results, we believe there will be opportunities to expand this program later this year and into next.

Royal Velvet has been on plan and we are working to expand into new categories with Bed, Bath and Beyond. Waverly has been soft at Target but has a strong paint DTR at Lowes and is performing well through its other distributions. On the international front this quarter, we signed our third deal in China for our Rocawear brand. Between Rampage, London Fog and Rocawear, we expect our brands to have well over 500 stores in China within the next three years. To reiterate our China strategy we are targeting the masses, and rather than opening up a handful of stores in a few major cities, our partners anticipate opening up hundreds of stores in the densely populated nonmajor cities all over greater China. While longer term in scope, we believe this is a large opportunity for us and expect to see significant upside through monetization events over the next few years.

We are also making great progress in our Latin America joint venture. We have an office open in Panama and hired a key executive to run the business and work on signing new licenses in the area. We are also working hard through the JV to maximize Wal-Mart Mexico, Brazil, Argentina and Central America. In terms of Wal-Mart International the OP assortment is now available across Canada and Mexico and will be going into Argentina this fall.

Acquisitions continue to be a major focus for us. This quarter as Warren mentioned, we raised $153 million through an equity offing, and now have well over $200 million of cash on hand which should allow us to move quickly given the right acquisition. We are sitting -- seeing many new opportunities for great brands, and believe that our pipeline consists of actionable opportunities in the near term. That being said, we will remain disciplined and we are looking to stay within our target metrics.

Now I would like to take you through our 2009 outlook. Based on the strong performance of our brands this quarter we are raising our full year 2009 revenue guidance from a range of $218 million to $225 million to a range of $223 million to $230 million. Although top line guidance is being raised, and we are seeing improved EBITDA margins, we are maintaining our full year non-GAAP EPS guidance of $1.30 to $1.35 and GAAP EPS guidance of $1.16 to $1.21, due to the impact of the equity offering this quarter, in which we raised $153 million. We expect continue to generate strong free cash flow, and our forecasting to free cash flow to be approximately $130 million this year. This guidance relates to the existing portfolio of brands only and assumes no acquisitions.

In closing, I believe that this quarter more than any other in our recent history demonstrates the strength and relevance of our business model. In what continues to be a challenging retail environment, we are executing a sustainable strategy that is delivering both top and bottom line organic growth. Our brands now generate retail sales in excess of $8 billion, and Iconix is recognized as the second largest licensing Company in the world by Global License Magazines. With our domestic business performing well, our international strategy beginning to take shape, and a balance sheet with well over $200 million of cash on hand to execute against our acquisition strategy, our Company has never been in a better position.

With that, I would like to thank you all for listening this morning and I would like the turn it over to the operator for question-and-answers.

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

Thank you and good morning everyone. Very impressive quarter, EBITDA margins up 450 basis points, I think that illustrates the strong [levigability] of the model. Do you think you can sustain these types of margin especially during your cost disciplines and if you look back at the equity dilution it seems like you are raising your operating earnings or EBITDA guidance by about $0.06. If I'm correct calculating the deal dilution of about $0.06 in the back half, maybe if you could tell us what your EBITDA expectation is for the year on your $130 million free cash flow number, that looks like it's nicely higher as well.

I think we do expect EBITDA margins to remain where we are. I think for the full year, we are counting on mid-70s around 75%. They should improve slightly in the back half of the year as revenue continues to rise.

Okay.

We are pretty satisfied with where SG&A is now in this quarter. It's pretty much going to be flat for the balance of the year.

So your $130 million in free cash flow gets you to about a 75% EBITDA margin.

Correct.

And is the dilution calculation correct -- about a penny or so a month or $0.06 in the back half?

It's probably a little bit more, probably about a $0.015 a month, Todd.

Okay. And just real quick the what impact if any of the Gabby Reece and TR9, those co-branded lines. Is that included in your guidance?

It's minimal. TR9 is going to be in about 400 stores focused in Dallas and Oklahoma where all of the Cowboy fans are. And, Gabby's also in 300 stores. So, minimal impact on a large Wal-Mart business.

Excellent, great going, thanks, guys.

Thanks, Todd.

Your next question comes from the line of Bob Drbul with Barclays Capital. Please proceed with your question.

Hi good morning.

Good morning Bob.

Two questions I have. First can you talk a little bit about the competitive environment out there for the deals you are looking at and any changes you are seeing?

And, the second question that I have is -- are there any notable issues that you are seeing with your non-DTR licensing partners due to the financing environment that's outside?

Yes. As far as competitive it's very tough to tell who is on the other side of deals unless it's a public auction which we did experience when we were looking at Eddie Bauer. We think we are in a pretty advantageous position, based on the fact of our cash and how quickly we can move and the type of deals we are looking at. We are pretty excited about the acquisition opportunities that are out there and feel confident that we can get some deals done before the end of the year.

As far as what is happening on the street with CIT and TitanCredit, it's a small impact for us, we have about 100 licensees that are very small which definitely will be facing some pressure in finding if there was CIT, probably a lower borrowing level, it hasn't affected us yet. We are looking at it. But basically 60% of our revenues comes from DTR's, another 20% comes from really strong licensees like a [Leon Fung] and a couple of other big ones.

I would say the exposure is about 20%, and it's over 100 licensees, so we are not that concerned of it having a material impact on us with what is happening in the market.

Thank you very much.

Thanks, Bob.

Your next question come from the line Omar Saad with Credit Suisse. Please proceed with your question.

Hi, This is [Spencer Hill] in for Omar Saad. Good morning everyone. Hoping you could talk about the China opportunity, near term how the London Fog played into the fall launch is looking, and the Rampage potential retail roll out and then finally we should think about the cadence of Rocawear growing in that market?

Sure. Hi Omar, Yehuda here. In terms of the near term opportunity in China, we've signed three deals to date in the short order. We've only been operating shy of a year out there with our partner Silas Chou and Novel. We expect between our three deals with London Fog, Rampage and Rocawear to have over 500 stores over the next three years. We do plan on monetizing all 17 brands so that there will be some sort of an event planned within a three or five-year period for each. In terms of back to the near term, we have a fourth deal in works in the pipeline and we expect several others to take place with our partner over there.

Thank you. Can you discuss the existing brand awareness, both of these three brands and the other key brands in China and as well, the advertising strategies you and your partners are deploying there to grow that brand awareness.

Probably very little. Because we are going into mainland China, into over 80 cities not necessarily into the big cities that would be aware of our brands. But they are aware -- the way they are being marketed seeing how Rampage is being done because it's more developed about a year ahead and watching how London Fog and continuing to working on the Rocawear concept is they're American. And that's a good concept because they are looking for American brands.

Then when we bring over the marketing that we have and with Rampage we had Gisele and now Bar Refaeli. So, it's bringing new exciting American brands into mainland China where the people probably don't have recognition but we are going to build it and we are working on innovative marketing -- both print, television, and we have got a great team over there, headed by the Chou family, so we are pretty excited about the opportunity that's going to happen throughout China.

Thanks very much.

Your next question comes from the line of Robert Ohmes with Banc of America - Merrill Lynch. Please proceed with your question.

Hi guys, this is [Holly Nasay] in for Robbie. Would you be able to elaborate on the Mudd launch at Kohl's in terms of marketing plans and initial rollout in terms of door count categories, whether it's apparel or non-apparel or both. Just a little more color on how the brand will be positioned versus Candie's and other competing brands/private label within the junior space.

Mudd is presently set up and it looks amazing, encourage all of you to get into a Kohl's. And it's being positioned as the casual brand at Kohl's. Where Candie's is more club and more dress, Mudd is more everyday jeans and t-shirts. It's really anchoring the department where you see Kohl's -- Candie's on one point and you see Mudd on the other, we are excited about the opportunity. Is it in all doors. We are starting to expand throughout the store into all categories. Presently started in all apparel, footwear and handbags and pretty much going across all 30 categories similar to Candie's.

Okay, thanks.

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

Yes, thanks. Neil, could you share a little bit more on your view on Target. Giving you a view across all of retail at this point or a very good cross section. Why do you think it is or share your thoughts on pricing within Mossimo, also within the home products, what do you think it would take to get the trends improving over there particularly as it relates to product successes in other retail channels right now?

I think Target's a great company. They will flourish and survive and be back on top in the near future. My personal view is they are a victim of their own success. They had this amazing marketing over the last five or ten years where people thought it was a designer feeling and more upscale. When we went into this recession, I think the great marketing hurt them and it was a backlash on it. They are starting to get back some momentum with going after more price and value. So I think they will get back on track over the near future and total faith in them as a great retailer.

Do you see any strategic changes needed in terms of pricing -- are you I able to provide insights in terms of what you're seeing out on the marketplace to get those prices reset?

Where I think the consumers may be missing it or maybe Wal-Mart is beating Target on the fact that they do have great prices and they are very competitive and the product is priced well. I think there is a perception that it's not as good as it is. They have great values at Target and will probably get that message across soon.

One other one -- on Ed Hardy -- what's your strategy in terms of distribution for that brand as you work with that partnership -- in terms of managing and controlling off price distribution, or exposure to the brand versus traditional, give us more of a sense now that you have a quarter under your belt with it.

Ed Hardy is the only brand in our portfolio where we are a partner, and it's the only brand we are not controlling both marketing and distribution. Christian Audigier is doing so. In speaking to Christian over the last month or two and trying to understand the strategy, because it is broadly distributed in a lot of different product categories, they really pulled back the distribution on the apparel and the main product categories, and you will find little now in off price.

Last year there wasn't a lot of off price, they've cleaned it up and its now in better department stores. They are trying to pull back on the distribution because it became so popular everywhere and the goods were turning up in places they didn't want. As far as some of the licensees we have work to do because it is popping up in places that it shouldn't be but a work in progress and Iconix is trying to understand and work with Christian.

Just one last thing Neil -- in terms of your second half outlook and more specifically Q4 -- what is that guidance predicated on? Is it predicated on the conservative guidance your retailers are providing you in terms of their comp outlook or how would you characterize the Q4 outlook at retail and how it translates into your guide?

I think it's similar to what is happening today. We see the consumer -- it's still staying pretty cautious and we are not expecting the world to get back to the normal that we remembered over the last ten years. We think it's going to be a slow recovery. That's how we are looking at the world and thinking it's going to inch back to where it once was over the next couple of years.

Okay. Thank you.

Thanks Jeff.

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

Good morning. Could you talk a little bit about international expansion of Wal-Mart. I know you've done Canada and Mexico and you are going to Argentina. How do you look at that process as you go in to Europe or other areas? Can you talk about how far penetrated you are and what your expectation of penetration for the Cannon roll out at Sears and K-Mart?

Hi Eric. It's Yehuda. I will take the first on Wal-Mart International.

We continue to be very excited about all three brands, OP, Starter and Danskin Now in Wal-Mart and as we look at that success in the states, we continue to try to export that throughout the system in Wal-Mart International. I believe today Wal-Mart is operating in 15 countries outside the US as a stand alone business. It continues to be high performing business, a growth vehicle for their company, so as you mentioned we are trying to go throughout the system and we've got OP in Wal-Mart Canada, we've got OP in Wal-Mart Mexico, Wal-Mart Argentina launching the back half of this year. You mentioned Europe, we are talking to Wal-Mart throughout the globe which includes Japan and China. So, there is a full outlook of Wal-Mart International. And, I think that is an important growth vehicle as you look at the Wal-Mart business in general.

As far as Cannon goes, every day we are making progress. We are up to two or three aisles in a lot of the K-Mart stores and Sears stores. I think it will only get bigger as the year gets over. One of their major licenses is up at the end of this year and as we see that exit, Cannon is getting more and more shelf space.

Congratulations on a good quarter.

Thank you Eric.

Your next question comes from Mimi Bartow with Telsey Advisory Group. Please proceed with your question.

Good morning, thank you. First given updated revenue guidance I am just trying to get a sense of the larger brands, Rocawear at the end of 2008 when you reported your fourth quarter you saw it down 10%, looked a little bit better after the first quarter. How should we be thinking about that brand?

I think it's about the same. Rocawear is doing amazing where it's getting distribution. The big problem there -- there has been a lot of companies like Demo and Against All Odds and there has been a really contraction in the specialty stores in the urban market which hurt the distribution, but, where it is, it's the best selling brand and so we are excited about the prospect -- the fragrance is doing well. Its held it place but it is down as we discussed because of the specialty retail area.

Got it. Then was wondering about the deal sizes you are seeing today. Is it more in the smaller side or given Eddie Bauer and those types of sizes. What are you looking at or seeing out there?

We have about five deals that we have at the top of the pipeline that we are working on and negotiating. A couple of them are around $50 million to $60 million in royalty and then there's -- the other three are probably between $20 million and $35 million in royalty. We're trying to stay away from anything under $20 million because it really doesn't move the needle. But, you know, so it's€™s across anywhere from $20 million to $60 million depending on the size of these iconic brands.

Lastly, I know you -- obviously a lot of opportunity in the international side, particularly in China, how have you thought about Europe given DTR potential there and long-term growth in that part of the world?

Europe is always been tough for us because I don't think Europe operates as continent -- the Italians and Spanish and Germans seem to have different markets. We have a lot of one off deals throughout the continent where we make a few million dollars but there is not a great global presence.

The two big players over there are Tesco and Carrefour. We are talking to and engaged and as Yehuda mentioned before we have ASDA visiting us tomorrow and there are€™s big opportunities there. So we continue to work with Tesco and Carrefour and look for the right opportunity to do a deal, but Europe as a whole, we see very different than the opportunity that we have in other parts of the world.

Okay, great, thank you.

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

How many Costco doors are you guys in now with Charisma?

It's in all doors.

And, then Cannon is in all Sears and K-Mart doors?

Yes.

And then sounds like you guys have a lot of potential acquisitions that you're looking at. Can you talk about the debt financing environment and what kind of interest rates you're seeing if you go beyond the cash you have on the balance sheet?

It obviously the debt financing in the credit markets have definitely eased up, it all depends on what the acquisition is what the credit profile is. We are seeing rates ranging from 9% to 11%. Again -- I can't put a stake in the ground -- that changes weekly and it also changes in terms of what the acquisition target is.

Okay. Last year you talked about India as an opportunity, sounds like you've cooled on that. Can you tell us where you are in regards to India?

India is going very slow. We are a little disillusioned - we were working with a couple of partners -- potential partners and didn't seem to get the volume that we thought was important and so we are going to keep watching and hopefully they will start actually building these malls they keep talking about.

Great, thank you.

Your next question comes from Michael [Weisberg] with Crestwood Capital. Please proceed with your question.

Good morning. What's the fully diluted share count we should use going into the third quarter?

It's probably about 73 million -- 73 million, 74 million -- and for the full year weighted average should be about 68 million.

Got it. When you were talking about SG&A flat second half, were you talking about in dollars from the second quarter run rate?

Yes. I was, Michael.

Flattened dollars, great. And what were you -- you mentioned the possible expansion of the Costco relationship, does that mean you can see another DTR deal there in the near term?

I don't think I -- I just mentioned Charisma is doing well and I think we'll be able to expand some product categories there. The club business is very interesting to us. Both Costco and Sam and maybe BJ's all are interesting great targets for us to look at possibly doing business with. We have no nothing on the near horizon.

One other quickie, the Wal-Mart expansion in Argentina, is that going to be part of the joint venture?

Yes.

Will be. So everything in South America is part of the joint venture, everything away from South and Central America you are doing is a direct business for you, is that right?

That's correct. Except China is also a joint venture.

Thanks a lot.

(Operator Instructions). Your next question comes from Todd Slater with Lazard Capital. Please proceed with your question.

Thanks very much, just a follow up on how you can monetize your brands where there is still a lot of white space in Europe or Asia and you answered the Tesco, Carrefour question but do you think you will penetrate with any of your brands for delivery next year in some of the big markets you are not in like in Europe? What about the rest of Asia, which seems very underpenetrated too? Would any of the deals and type of deals in Europe or Asia look like a traditional licensing type of frame work or might they also be a joint venture type of relationship?

Right now they would probably look as a traditional licensing. We are having some conversations in Japan and other places about a possible joint venture, but I don't think it's going to go that way. I see the rest of Asia and the rest of Europe as good businesses for us that could definitely add in millions. But not move the needle being the 10 millions or 20 millions as we have opportunities in the states and possibly in our China JV. We see continuing to do deals in those territories but not mega deals or huge deals except possibly if we do something with the Tesco or Carrefour.

Okay. Thanks.

Thanks Todd. Any other questions? There are no further questions at this time. Once again, thank you everybody. We are really pleased with our performance this quarter as I mentioned are excited about the growth prospects for the balance of the year. Thank you for joining us today and for all your interest in Iconix. As always Warren and I will be available for further questions throughout the day. Thank you.

Thank you for your for your participation in today's conference call. This concludes the presentation. You may now disconnect.