Icon Energy Corp (ICON) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Iconix Brand Group's third quarter 2009 earnings conference call. On today's call we have Neil Cole, Chief Executive Officer. Warren Clamen, EVP and Chief Financial Officer, and Yehuda Schmidman, EVP Operations.

During the presentation, all participants will be in a listen only mode. After the speakers' remarks, you will be invited to participate in a question and answer session. As a reminder, ladies and gentlemen, this call is being recorded. Before we begin, the Company has asked me to read the Safe Harbor statement under the Private Litigation Reforms 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 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 achievement 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 undo reliance on these forward-looking statements which speak only as of the date the statement was made.

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

Good morning everyone and welcome to the Iconix Brand Group third quarter 2009 earnings conference call. On today's call we will review our quarterly and year to date performance, the guidance we have initiated today for 2010 as well as our announcement this morning of our agreement to purchase a 51% controlling stake in the Echo portfolio of grants. Reviewing results for third quarter ended September 30th, 2009, revenue was approximately $59.4 million, an 8% increase as compared to approximately $55.1 million in the prior year quarter. Third quarter 2009 revenue included a gain of $3.7 million relating to a transaction involving the Joe Boxer trademark in Canada or equivalent to $0.03 of diluted EPS. Excluding this gain our third quarter 2009 revenue was $55.7 million or 6% higher than the third quarter 2008 revenue of $52.5 million, which excludes the $2.6 million Iconix China gain in the prior year quarter. EBITDA for the third quarter was approximately $43.0 million, a 14% increase as compared to $37.9 million in the prior year quarter. Our EBITDA margins were 72.5%, or 380 basis points improvement over last year's period, which demonstrates continued scalability of our business model.

Our third quarter results include an increase in reserve for bad debts of approximately $3 million related to our Rocawear women's license. Excluding this one time charge, our EBITDA margins would have been 77.4%. Other than this one incident where the licensee's financial position deteriorated rapidly, we believe we have been successful in ensuring and monitoring the credit worthiness of our licensees. That being said, we have increased our attention and our resources on monitoring, as best we can, the credit profiles of our licensees. Although we cannot make assurances, we believe that as of today, we have no material collection or credit related exposure with any other licensees.

On a non-GAAP basis, which excludes noncash interest related to the adoption of the new accounting treatment for convertible debt, net income increased 23% to approximately $22.6 million as compared to $18.3 million in the prior year quarter. Diluted non-GAAP earnings per share for the third quarter was $0.31 compared to $0.30 in the prior year quarter. Our GAAP net income, which includes the adoption of the new convertible debt accounting treatment for all periods reported, increased 25% to $20.5 million compared to $16.4 million in the prior year quarter and GAAP diluted earnings per share was $0.28 compared to $0.27 in the prior year quarter. Free cash flow for the quarter was $35.4 million, a 15% increase as compared to approximately $30.9 million in the prior year quarter. Free cash flow per diluted share for the quarter was $0.48.

For nine months ended September 30, 2009, revenue was approximately $166.3 million, a 2% increase compared to approximately $162.5 million in the prior year period. EBITDA for nine months increased 8% to approximately $121.2 million as compared to approximately $111.8 million in the prior year period and free cash flow increased 12% to approximately $101.6 million as compared to approximately $90.7 million in the prior year period. Free cash flow per diluted share for the nine months was $1.53. Non-GAAP net income as previously defined for the nine month period increased 16% to approximately $61.5 million as compared to $50.3 million in the prior year and non-GAAP diluted earnings per share increased to $0.93 versus $0.87 in the prior year period. Our GAAP net income increased 16% to $55.4 million compared to $47.6 million in the comparable prior year period and GAAP diluted earnings per share was $0.83 versus $0.78 in the prior year period. 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 the press release sent this morning or on our website, www.iconixbrand.com. Our cash balance was approximately $233 million and is over $248 million as of today.

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

Thank you, Warren and good morning, everybody. Looking back on our performance for the third quarter, although we did not achieve the guidance we reported on our second earnings conference call, we did deliver record revenues, record EBITDA and net income for Iconix. We are continuing to make progress with our acquisition strategy and today announced that we have signed a definitive agreement to acquire a 51% interest in the ECHO brands.

Starting with the performance of our existing portfolio brands, here are the few of the highlights. We are excited about the progress we're making with many of our initiatives, particularly the success we are having with direct to retail brands. For those of you new to Iconix, our direct to retail brands are licensed directly to leading retailers who in turn produce and sell products under our brands. The benefit of the DTR model is that the retailer gets exclusivity to a nationally recognized brand at private label economics and in return provides our brands with premium support in terms of store placement and marketing. In the third quarter, our direct retail brands accounted for 50% of the total revenue, up from 20% last year. Our Wal-Mart brands "Starter" and "Danskin Now" have been performing well and we are excited about the growth opportunities in the fourth quarter and into next year, as it will be the first full year of the launch.

Following an outstanding spring, summer season for OP, the breadth of the product assortment has been reduced for fall as the business was planned more seasonally this year than we expected. However, we are still excited about OP's potential at Wal-Mart, both in the US and around the world. OP launched in Wal-Mart Argentina three weeks ago and OP has sold in four Wal-Mart regions, United States, Canada, Mexico, and Argentina. We are seeing positive sales trends for most of our other DTRs as well. We are pleased with the results of the launch of MUDD at Kohl's department store, which as been one of the most successful launches in Kohl's history. Mossimo has been comping down for the first half of the year, but has turned positive recently. Also Candie's has been trending up, especially the last couple of months.

Performances for our traditional wholesale licensing business have been mixed. In the third quarter, we transitioned the Rocawear women's license and aside from the one time charge that Warren mentioned earlier, we expect the transition to be smooth with the women's business back on track in the fourth quarter. The new licensee has already started shipping to Macy's and all other key accounts. The issue with the former licensee were operational and financial and not reflective of the strength of our brand in the -- or the other 26 Rocawear licensees. The Rocawear brand continues to benefit from the exposure it receives from the founder and spokesperson, Jay-Z, who today has one of the top albums in the world.

Some weaker spots in our brand portfolio were Rampage, Bongo, and Badgley Mischka, we continue to explore revenue opportunities from each of these brands. For example, we recently signed a new DTR with HSN for a diffusion brand of Badgley Mischka, called American Glamour, which will debut on November 17th during a special two-hour prime time show featuring Mark Badgley and James Mischka.

Moving on to our home brands, the rollout of the Canon brand at Kmart and Sears is on plan and we are seeing sales level increase week after week as Canon takes over more space and more categories. For Waverly, we recently renewed the DTR with Lowe's for Waverly paint products. We also signed a few new Waverly licenses, including a deal in Canada for Waverly product to be sold at [inaudible]. As well as US licensees for kitchen linens and paper goods.

We are pleased with the progress of our three joint ventures, Ed Hardy, Iconix Latin America and Iconix China. The Ed Hardy licensing business continuing to grow quarter over quarter as Ed Hardy rolls out into new categories and expands its presence around the world. In Latin America, we signed three new licensing deals in the third quarter, including a direct to retail deal with suburbia in Mexico. We continue to believe that our JV in China will provide substantial long term returns to Iconix and our September visit to China further validated this view and optimism. We were impressed with our partner's network in China, quality of our current partners, and the booming retail environment. In its first year, our JV has signed three partnerships, covering Rampage, London Fog and Rocawear. And a fourth deal for Badgley Mischka is in contract. In the aggregate, the four Chinese operating partners plan to open over 750 stores within the next three years.

On the acquisition front, we are excited about our agreement to acquire a controlling interest in the Echo portfolio of brands, which include Echo Unlimited, Mark Echo, the Rhino logo, and Zoo York. We believe this is an attractive acquisition for many reasons. To begin with, we are adding a collection of powerful lifestyle brands to our portfolio that in an aggregate represent over $1 billion in annual sales. We see these brands as leading modern lifestyle brands for today's youth culture. We also believe that some of the brands in this multi-brand portfolio could lend itself easily to our direct to retail model. Secondly, Echo already has a strong licensing program in place with the largest revenue streams coming from licensees with good credit including Sketchers and Kids Headquarters, which will soon be acquired by [Lee & Fund]. Simultaneously with the signing of this acquisition, we will enter into a license agreement with an affiliate of the sellers for the core business, which after this transaction will have a strong balance sheet and we believe will be well positioned for future growth and success. The Echo business has a well established European platform, which we will look to leverage our existing portfolio of brands.

Lastly and just as important, this is a strong and very accretive business deal for our Company and for our shareholders. Based on our share of the projected royalties, we were able to acquire our 51% interest for slightly over four times revenue. We were also able to take advantage of low cost financing from William Fung, without having to make a significant cash investment. We expect the Echo brands to generate gross royalty revenue of approximately $45 million to $47 million, of which Mark Echo, the individual, receives $3 million per year. Therefore, the net royalty revenue to the joint venture will be an estimated $42 million to $44 million. Based on a predefined revenue and profit sharing calculation in the agreement, the Iconix share of the gross royalties will be approximately $26 million per year. To finance this acquisition, Iconix contributed $63.5 million of cash and a stand alone joint venture obtained $90 million of financing at an interest rate of 7.5%. Therefore, our effective purchase price of this acquisition is approximately $109 million. The Echo intellectual property will be acquired through a joint venture which Iconix will own 51%. Given that we will have controlling interest in the newly formed entity, for accounting purposes, we will be consolidating results of the JV into our financials. The minority interest that we do not own will be deducted after our operating income and only the earnings attributed to Iconix will be included in our EBITDA. We do not expect this acquisition to be material to earnings this year in '09 as any accretion relating to this acquired business, which is expected to close in the fourth quarter, will be offset by the deal costs which are now expensed add incurred and not capitalized to purchase price. However, we do expect the acquisition to be accretive to our Company's 2010 earnings per share.

Before I take you through our '09 and '10 outlook, it's important to discuss the downward guidance revision on September 30th, 2009. Looking back at the quarter, we increased our revenue on August 4th, 2009, based on our strong second quarter results and the sales trends that we were seeing. At the time, we felt extremely good about the business and the expectations. However, in the third quarter, we faced some unforeseen challenges that hindered us from meeting those expectations. The first being that we had our first real credit issue with a large licensee as Warren discussed earlier. In addition to that, related to seasonality, we over projected the sales volume of one of our newer DTR partnerships, based on the strong trends we were experiencing during the spring, summer season. To ensure we have better insight into where sales are heading, particularly for new DTR relationships, we are increasing our effort to obtain greater visibility throughout the supply chain. Also, as we begin to build a history for each of the new DTRs, we will be better positioned to project is seasonality of each of the brands.

Despite our recently revised guidance, our portfolio of brands is still performing extremely well. Over the past four years as a pure brand management and licensing company, we have a strong track record of delivering against our guidance and believe we will continue to deliver value and growth to our shareholders. We are reiterating our recently revised 2009 revenue guidance of $215 million to $220 million and our 2009 non-GAAP EPS guidance of between $1.17 to $1.22. We are initiating 2010 revenue guidance of between $260 million to $270 million of which 67% of that is guaranteed by contract. This includes approximately $42 million to $44 million in the net royalty revenue from Echo. With these 2010 projections and growth from our existing brands is conservatively projected to be in the low single digits, we are projecting 2010 diluted non-GAAP EPS of between $1.25 and $1.30. This represents a four year compounded annual EPS growth rate of approximately 15%. We expect continue to generate strong free cash flow and are forecasting free cash flow to be approximately $123 million to $126 million in 2009 and $140 million to $145 million in 2010, representing an increase of approximately 14%. Our 2010 guidance assumes the Echo acquisition closes sometime in the fourth quarter of 2009 and it assumes no additional acquisitions.

In closing, I believe the year on year results we have delivered this quarter further demonstrate the strength of our business model. We are very proud of what we have achieved this year and feel our organic business has much more potential, both domestically and internationally. Inclusive of the Echo acquisition, we have a portfolio of 21 powerful lifestyle brands to expand throughout the world. As we continue to acquire new brands, we can further leverage our various international platforms, including China and Latin America. As I look ahead to 2010, I remain as positive as I have ever been. I am confident that we have great partners and a strong foundation of which to continue to grow. We are seeing good signs in our early fourth quarter results that the consumer is slowly coming back. After the Echo acquisition, we should have a strong balance sheet available for additional acquisitions which should make these very accretive. With that said, I feel our Company is as well positioned as ever to deliver great results to our shareholders. I'd like to thank you all for listening this morning and your continued support. We will now turn it over to a question and answer.

(Operator Instructions). The first question comes from the line of Bob Drbul of Barclays Capital. Please proceed, sir.

A couple questions. First, on the Echo acquisition, can you talk a little bit about the category itself, the trends in the category and I'd say year to date sales for the Echo business as well as the Rocawear business and what's the shakeout underway that you can talk a little bit more to get us comfortable with it?

Thanks, Bob. When you say the category, I see it as youth wear. And one of the wonderful things about Echo is it has a pretty diverse business from apparel, a really strong footwear business, a youth business in Europe and strong retail business. As far as trends, the last six months, the business is comping up in the high single digits and they've really turned the business around and doing really well. The footwear busy is really strong. Echo is different than Rocawear in that Echo is suburban, where Rocawear is more of an urban customer, a little more Hispanic base. And I see both brands, including Ed Hardy as Iconix brands to have future. These brands have been around close to 15 to 20 years, at least, Echo has. And tremendous acceptance in the youth market. Echo is a over $1 billion in sales. And really just a powerful brand across America and really the world with a strong penetration close to a $70 million wholesale business in Europe.

And second question is on the OP business, can you elaborate a little more on the seasonal issues that you've seen this year versus last year and how that's played out?

This is Yehuda here. In terms of the OP business, the assortment has not been as large for fall and holiday as we originally had hoped. In the spring summer business, the business was absolutely incredible. If you look over the landscape of America in the swim wear industry, we're probably one of the top in the America swimwear brand if not the largest brand. Wal-Mart introduced the mother brands in the same space and that pushes back on us a little bit. We see the brand as a lifestyle California inspired brand, similar to an Aeropostale. And that's the focus of ours and pushing Wal-Mart to work towards that goal in the future.

Thank you.

Thanks, Bob.

Any other questions? Operator, are you there?

Your next question comes from line of Omar Saad with Credit Suisse.

This is Spencer Hill in for Omar Saad with Credit Suisse. I wanted to hear your thoughts on the environment potentially improving and executing more deals. We were pleased to see the level of spend in the quarter. How is the philosophy of SG&A spend evolving as your ramp up sales coming out of this?

Right. We see the consumer slowly coming back. Most of our deals, our DTRs are comping up over the last couple of weeks and into the fourth quarter. So we're pretty encouraged about what's happening from the consumer level. Generally, we've tried to contain our SG&A. It looks a little higher because of the bad debt reserve that we've been experiencing. But continue to see some strength in retail sales on a weekly basis. The brands that weren't comping up in the first six months like Mossimo and Candie's are all really starting to do well over the last couple of weeks.

And Spencer, next year we're projecting similar type EBITDA margins in the low 70s, inclusive of the Echo acquisition and the minority interest portion that comes out. Spending will be commensurate with the increased revenue.

Wonderful. Thanks very much.

Thank you.

(Operator Instructions). We have a question from the line of Todd Slater Lazard Capital. Please proceed.

Hi, it's Diane [McHess] for Todd. Can you talk about your appetite for further acquisitions? In the past you have said you are looking at several deal on the table. Are those on the table and what kinds of categories are your looking at?

Well, today we have close to $250 million of cash. When Echo closes, we'll have around $180 million. We're generating as we said today our plans for the next 12 months, to generate $145 million of free cash flow. And we have another close $40 million available under our accordion. We have $200 million to $300 million available. We're in the middle of several negotiations, trying to buy great iconic brands at good price points that match our purchase philosophy. So we're pretty confident. Today we have 21 brands. We're acquired 15 or 16 over the past three or four years. And we plan to continue to be inquisitive and buying strong monetized iconic brands.

That sounds great. Can you also comment about your guidance in terms of it seems to be conservative given that recently you have seen some turn in some of the businesses including Candie's and Mossimo? Can you just clarify that your guidance may not be including those turns, it may be including a base case as of the end of September.

Well, we're -- we have a low single digit increase on our organic business. So after what we've just been through and live and learn, we're being very conservative in our guidance and our hope is to as we have for the last four or five years, hopefully beat it and be conservative in our projection.

Okay, great. Thank you very much.

Your next question comes from the line of Sean Norton with Piper Jaffray.

On the licensing front, are there any brands coming up for renewal over the next 12 to 18 months? Any negotiations currently going on there?

We have no renewals in '10. The next renewals are in '11. Those are Candie's, Joe Boxer, and Danskin Now. Those are all big businesses growing and doing well. So we're confident that each of them will renew. If not, we have other opportunities to move those brands.

And secondly, on the $3.7 million on the Joe Boxer sale. Can you elaborate? Were there any sales that you are currently experiencing in that region or is this a green field?

This was a brand -- the present owner, was a company called [Call Field] that had owned the brand for 15 years. And they came to us with an opportunity. For us, it was somewhat of a declining asset because the Canadian business was going down. And they really wanted to take control of it because we were doing Kmart in the US. Gave us a great offer at a 7 times multiple of what it was giving us royalty at, so we took the deal. It's not something we're going to do for a living. If we can buy brands at four or five times and tell them at seven or eight times. Its something that we should look at and not get too married to our portfolio. We have to look at it as a business and we'll continue to do so.

Great, thanks.

Thank you.

At this time, there are no further questions. I would now like to turn the call back to Neil Cole, Chief Executive Officer for closing remarks.

Thank you for joining us on the call. As always, the management team will be available for questions today if you'd like to call us directly. Thank you and we'll talk to you soon.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.