Icon Energy Corp (ICON) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group full-year and fourth quarter 2009 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

With us on the call, we have Mr. Neil Cole, Chief Executive Officer; Yehuda Shmidman, EVP; and Warren Clamen, Chief Financial Officer.

Before we begin, the Company has asked me to read the following 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 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 now like to turn the presentation over to your host for today's call, Mr. Warren Clamen, Chief Financial Officer. Please proceed, sir.

Good morning, everyone. Welcome to the the Iconix Brand Group full-year and fourth quarter earnings conference call. On today's call, we will review our full-year and fourth quarter financial results, we'll talk about our recent brand initiatives, both domestic and international, and discuss our outlook for 2010.

For the full year ending December 31, 2009, revenue increased 7% to $232.1 million. EBITDA increased 9% to approximately $163.1 million, non-GAAP net income as previously defined for the full-year increased 19% to approximately $83.3 million, and non-GAAP diluted earnings per share increased to $1.22 from $1.15 in the prior year. We generated $134.8 million of free cash flow, a 10% increase over the prior year. Free cash flow per diluted share for the year $1.97.

Reviewing our results for the fourth quarter ended December 31, 2009, revenue increased 21% to $65.8 million. The increase was driven by the continued roll-out of our Wal-Mart brands, overall -- the overall strength of our direct-to-retail brands and our Ecko acquisition. EBITDA for the fourth quarter increased 11% to approximately $41.9 million. Non-GAAP net income, which excludes non-cash interest related to our convertible debt, increased 28% to approximately $21.9 million, and diluted non-GAAP earnings per share was $0.30 for this quarter compared to $0.28 for the prior year quarter. Free cash flow for the quarter increased 6% to 33.2 million. Flee cash flow per diluted share was $0.45 for the fourth quarter.

As Neil will talk about later, we closed our European joint venture in the fourth quarter, which resulted in the gain we recorded of approximately $7 million. Our EBITDA margins for the quarter and full-year were 64% and 70% respectively. The lower margins in the fourth quarter primarily reflect certain expenses and non-controlling interests associated with the Ecko acquisition, as well as the slightly higher corporate expenses related to bonuses. With the new accounting rules, certain deal costs are now entirely expensed in the quarter, which -- in which they occurred, and cannot be capitalized as part of the purchase price. For 2010, we expect our margins to be in the low 70s, which excludes any costs that would be related to additional acquisitions.

Now, we would like to briefly talk about the various joint ventures and investments, and how they are reflected in our income statement. In the fourth quarter and full-year of 2009, we recorded an equity gain of $860,000 and $3.4 million, respectively. These equity gains include our share of the income from our three international ventures, of which of we own 50%, and our investment in Ed Hardy. We also now have a separate line-item below net income, which represents the non-controlling interest of our investments in Ecko and Scion, whose results are consolidated into our net income. In the fourth quarter of 2009, net income attributable to those two non-controlling interests was $1.1 million and $594,000 for the full-year 2009. EBITDA, free cash flow, and non-GAAP net income and non-GAAP EPS all non-GAAP metrics, and reconciliation tables for each can be found in the press release sent out earlier this morning, and on our website, Iconixbrand.com.

Our cash balance at the end of the year was more than $200 million, and is approximately $230 million today. We expect to make a payment for our term loan of approximately $47 million at the end of this quarter. Our pro forma net debt to EBITDA ratio is less than three times, and our weighed average cost of debt for the full-year 2009 was 3.6%.

I will now turn the call over to Yehuda Shmidman, our EVP of Operations.

Thank you, Warren, and good morning, everyone.

As we look back at 2009, our organic growth was approximately 7%, excluding the Ecko and Waverly acquisitions, non-recurring gains and the impact of the transition of the MUDD brand to a direct-to-retail license with Kohl's. As Warren referenced earlier, the key drivers were our three direct-to-retail deals at Wal-Mart, and the overall performance of our direct-to-retail, or DTR, brands in general. Total revenue from DTRs represented approximately 48% of our revenue in 2009, up from 25% in the prior year. In total, we have 18 direct-to-retail partnerships worldwide, including our newest edition of Bongo, with Sears Holdings Corporation. This new agreement marks our third direct-to-retail partnership with Sears Holdings, and we're excited to be working with their new merchandising team on all three of our Sears Holdings brands -- Bongo, Joe Boxer and Cannon.

Looking at our broader direct-to-retail businesses, we also remain excited about the continued growth of our three brands at Wal-Mart -- OP, Starter and Danskin Now. Year-over-year, each of our Wal-Mart brands experienced substantial growth, as Wal-Mart added new categories, expanded door counts and increased rack space. As we head into 2010, the Wal-Mart brands are continuing on the same growth path, with strong momentum. Danskin Now and Starter are jointly featured in a new hotspot that launched last week in collaboration with NBCs "The Biggest Loser" television series. As part of the collaboration, Danskin Now and Starter products will be integrated into the hit show. And with OP, we are gearing up for our new marketing campaign to support the spring/summer season, which is already showing early signs of success in-store.

Our Kohl's partnerships also performed well. Candie's had a strong year in 2009, as we launched our new Britney Spears marketing campaign. Since partnering with Britney, Candie's has received priceless exposure, both in-store and especially in media around the world. Based on that success, we signed her again for 2010 in partnership with Kohl's. We are excited about the MUDD launch, which first debuted in stores for the 2009 back-to-school season, and is continuing to expand rapidly throughout Kohl's.

And lastly, in looking at Target, Mossimo finished the year with strong sales numbers following softer sales in the first half of the year. Target remains committed to the brand, and in 2009 Target renewed the Mossimo license through January 2013. 2010 marks the 10th year of Mossimo at Target.

Sales of our non-DTR brands were mixed. Although the market was challenged this past year by the loss of certain specialty retailers, Rocawear remains the leading brand in its space; and Jay-Z's popularity, which is at an all-time high, continues to have a positive impact on the brand. The Badgley Mischka business, on the other hand, has been weakened by the overall decline in the luxury market, but we are continuing to explore new ways to expand the brand, as we started to do last quarter with the successful launch of an exclusive collection, American Glamour by Badgley Mischka with Home Shopping Network.

Moving on to our home brands. We are very excited about the growth of our three DTR partnerships, covering Cannon at Sears Holdings, Charisma at Costco, and Fieldcrest at Target. Cannon continues to gain shelf space, as sales are up significantly year-to-date. The Charisma brand at Costco, which launched this past year, has been extremely well-received, and last quarter we launched a new sheet collection, our fifth major category. Fieldcrest sales have also been strong over the fast few months, as consumers embrace its new positioning as a luxury brand within Target.

With that, I will turn the call over to our Chairman and Chief Executive Officer, Neil Cole.

Thank you, Yehuda and Warren. Good morning, everyone.

Since converting to a licensing model about five years ago, we have consistently delivered strong growth. We are pleased to report that in 2009, it was another record year for our Company, in which we delivered record revenue, record EBITDA, earnings and free cash flow.

Looking back at the year we had many accomplishments, including the launch of five new direct-to-retail programs, including Starter and Danskin Now at Wal-Mart, MUDD at Kohl's, Charisma at Costco, and American Glamour by Badgley Mischka at Home Shopping Network. Through these exciting new partnership, as well as organic growth from some other direct retail brands, we have increased our market share, and today portfolio brands represents $10 billion in annual retail sales. We also renewed four direct-to-retail agreements, including Mossimo at Target, and Candie's at Kohl's, at similar terms, which we believe speaks to the importance of our brands to our retail partnerships.

We continue to focus on building a strong foundation for international growth, and in December we extended our platform to Europe by partnering with The Licensing Company, which marks our third international partnership. TLC is a licensing agent with over 2,000 licensing contacts, offices in London, Munich and Paris, and relationships with a wide variety of European retailers and wholesalers. Similar to our partnerships in China and Latin America, we hope to leverage TLC's local relationships and expertise to further develop our brands. The business model of Iconix Europe will be similar to the Iconix strategy of signing traditional and direct-to-retail licensing agreements for the total Iconix portfolio of brands.

In 2009, we also announced two additional partnerships for our joint venture in China for our London Fog and Rocawear brands, and are currently working on closing a Badgley Mischka deal. Between the three deals we have signed in greater China, we expect our partnerships to open approximately 600 stores over the next three years. In Latin America, we signed a few new licenses, including a direct-to-retail with Suburbia, a division of Wal-Mart, for the Mossimo brand. We also launched OP in Wal-Mart Argentina, its fourth region with Wal-Mart.

Although the landscape has been challenging, we were successful in acquiring a 51% controlling interest in the Ecko portfolio of brands, and made a 50% investment in Ed Hardy, both at very attractive financial terms. These are two of the leading youth brands in today's market, and we believe that they can continue to grow them -- we can continue to grow them through category expansion and territory expansion. In acquiring the Ecko portfolio of brands, we have been active in signing five new licensees for Ecko, and have repositioned Zoo York in the mid-tier segment through a new long-term license agreement that we signed with [Lee and Tony]. As for the Ed Hardy investment, this Holiday season Ed Hardy was the number one-selling fragrance at Macy's.

As we look ahead to 2010, we're excited about the opportunities before us. We're still in the first full year of our roll-out at Wal-Mart, and therefore anticipate strong growth in the first half of the year, as our brands are now in more categories and doors than they were a year ago. Performance of our DTR brands for the first six weeks of this year have been strong, and we feel good about the growth of the overall portfolio. For most of our brands, we are seeing better sell-throughs and higher inventory plans going into the rest of the year. With approximately $230 million of cash on hand, we are well-positioned to be opportunistic with acquisitions. We are currently working on several different opportunities, and are at various stages of diligence. But we plan to stay disciplined, and will only execute on acquisitions that we believe are in the best interest of the Company and our shareholders, both short-term and long-term. We have a strong acquisition track record, which is highlighted in detail in our new investor presentation, which can be viewed on our website, Iconixbrand.com, and we believe we can continue to leverage our platform through new acquisitions. However, even without acquisitions, we feel good about our organic growth prospects, and have not included any acquisition assumptions in our forward-looking guidance.

We are reaffirming our full-year 2010 revenue guidance of between $260 to $270 million, of which 67% is comprised of guaranteed minimum royalties. Excluding non-comparative acquisition revenue, this implies organic growth of the present portfolio of approximately 5%. We expect non-GAAP net income, which excludes noncash interest, to increase approximately 15% to a range of $93 million to $97 million. We are reaffirming our full-year 2010 diluted non-GAAP EPS guidance of between $1.25 and $1.30. Further, we expect to continue to generate strong cash flow, and are forecasting free cash flow to be approximately $140 million to $145 million in 2010.

In closing, we believe our ability to continue to deliver organic growth in one of the most difficult economic environments in recent history speaks to the strength of our business model. In 2009, we successfully launched five new direct-to-retail deals, renewed four direct-to-retail contracts, and signed our third international partnership. We are proud of these achievements, and believe with our strong portfolio of brands, our best-in-class retail partners and our growing international platform, we are well-positioned to continue to deliver strong results.

The past five years have been very exciting for our Company, as we have built our licensing and brand management platform. From 2005 to 2009, we have steadily grown revenues from $30 million to $232 million, and non-GAAP net income from $16 million to $83 million. We're energized about where our Company is today, and in 2010 are focused on continuing to deliver organic growth, and we remain active but diligent in our search for iconic brands that are well-monetized.

I would like to thank you all for listening this morning, and your continued support. We'd like to open up the call for all questions and answers. Operator?

(Operator Instructions)

Our first question comes from the line of Todd Slater from Lazard Capital.

Thanks very much, good morning, everyone.

Good morning, Todd.

I guess I'm curious on the conviction you have on the organic growth part of the story, now that the year is underway a little bit. You said in your investor presentation, 5% to 7% organic growth, and then you said 5% to 7% again on the call. I'm just wondering if that has changed at all, and how you're feeling about that, and if that includes some revenue out of the European venture that you just signed?

Actually, we're feeling really good about business. It's been a really good -- since the beginning of the year, I think 15 out of our 17 DTR deals are a lot higher than last year. Analyzing inventories are all planned higher, and we're watching them build into the Spring season. It really feels like the consumer is coming back; and a lot of our businesses, like some of the Wal-Mart businesses, were not fully rolled-out at this time of the year. So the combination of all, I think 5% is really a conservative number, but it's a number that we wanted to put down just to show it, and hopefully we'll do a lot better.

Okay, so you're not backing off the 5% to 7% necessarily?

No, I am feeling really good about the 5%, and hopefully we're going to be doing a lot more -- a lot higher.

Okay. All right, well I would think with the Bongo and the MUDD, and all the other, you know, Wal-Mart, there are some real -- you've got some nice cushion in that number.

We agree.

I would want -- just curious if you could confirm the reports about the Madonna thing, and if not specifically Madonna, how would a deal of that nature with a celebrity like that be structured, because it doesn't sound like it's necessarily the traditional structure of acquisition structures that you have had in the past?

We can't, obviously, comment on something that is not completed, but we wouldn't do a deal like the deal that was rumored unless we owned equity and, you know, we're not a broker who is going to broker a deal. So we would usually own at least 50% of the equity in the deal. And the other thing, obviously, as you know us, Todd, we wouldn't do a deal that is not monetized, and that we have a great licensee on board. So as we're continuing to look at our organic DTRs and brands that we're bringing on to Iconix, we would just look for a great brand that is monetized with an iconic figure or an iconic brand, and with a great licensee, so we continue to work hard on completing a few different deals that we're working on.

Okay, great. Thanks, and best of luck.

Thanks, Todd.

Our next question comes from the line of Bob Drbul, Barclays Capital.

Hi, guys, this is John [O'Connor] in for Bob. I just had a question around Iconix Europe. Do you have a sense for how big you think that could be, and any idea of the timing behind any deals that you might announce there?

Sure, it's Yehuda here. We're just very excited about the European partnership in general. In terms of timing and possible revenue, we think it's just the beginning of an exciting, hopefully build-up business. We're going to be looking for DTR partnerships, non-DTR businesses, traditional licensees. Hopefully we'll be looking at some deals this year. We do have a great group on the other side of the pond, as they say. They have over 50 people based in Munich, in Paris and London. Within their stable, they have many different DTRs. So between their relationships and our brands, we're hoping that there will be some action and activity this year.

Okay. Do you have any sense for, you know, any kind of revenue target you might look at for that region?

Not at this time.

Okay. Thanks, guys.

Our next question comes from the line of Eric Beder with from Brean Murray, Carret & Co.

Hi, this is [Sharon Spring], I'm calling for Eric Beder with Brean Murray, Carret & Co. First, you can provide an update on your Ecko or Ed Hardy line? You mentioned some category and territory expansion for Ecko and Ed Hardy. If you can give a little bit more color around that, and then I have a second follow-up.

Okay. That is a big long question of three parts, and a follow-up. Okay, we'll take them one at a time. Ecko, as you all know, is a new acquisition for us. We just bought it about three or four months ago, and we're really excited about it because, you know, it is a portfolio of brands between Ecko, Mark Ecko, the Rhino and then also Zoo York. Something that we're really pretty proud of, we repositioned Zoo York and did a pretty big deal with Li & Fung to bring the brand into Penney's and Kohl's. And we've also signed five new deals, a total of about $28 million worth of new deals since we bought a majority of the Company. Amazing brands, a great heritage, has been around 15 years and, you know, over an 80% recognition, and the total portfolio does close to $1 billion. So we're pretty excited about our Ecko acquisition, and feel very strong about it three or four months later.

Ed hardy is something we invested in, and we're not an active operator. It's run on the West Coast by Christian Audigier. But we invested a combination of $17 million. We have already gotten back over $4 million, and the business is pretty strong, you know, to our surprise quite honestly, because the t-shirt business and hat business has shrunk dramatically in the States; but the licensed products, the number one fragrance for Holiday, you know, across the country, and a lot of the licensed products are really expanding around the world. So the brand is picking up market share, despite the fact that the t-shirts and hats are a little overplayed, especially on the Jersey Shore. So Ed Hardy is -- you know, we feel very confident about getting back our investment and growing that business.

Last but not least is Rocawear, and Rocawear is the number one-selling street urban brand at Macy's and independent stores. And Jay, obviously his celebrity has gotten pretty big. Anyone who opens up the Super Bowl and the seventh game of the World Series, and so, is number one, you know, hot album, number one album, the first person to do it more than Elvis Presley, as far as I think 21 albums. But besides that, the product is pretty strong, and the business is holding up. Successfully transitioned the woman's licensee, where we thought we would lose market share because we did have an issue last third quarter with our women's licensee, but we have a great company who has picked it up and done a really good job.

So Rocawear is holding its own. Definitely a tough segment in that business, because all the urban brands are kind of looking like the preppy brands; there's kind of a melding, something that happened about 10 or 15 years ago in fashion, but we're pretty encouraged about the group of what we call youth brands that we do own. I believe -- is there a follow-up question there?

Yes, thank you. Then, just looking back at your performance through 2009 going into 2010, how do you think the recession has played to your strengths? And then what weaknesses have you identified in your business model, given the current consumer environment? Thanks.

I don't know if the recession has played to our strengths, but I think that the retailers have realized the power of our business model, and we have been able to do a lot of deals where the retailer now can own a great brand directly. Source directly, get better economics, cut out the middle-man; and in this recession, it passes on great products -- great price points and great products to the consumer, because value and price are so important. So because of that, we were able to do five major deals last year, and really puts in a great position for the next five years. Today, our portfolio has over $600 million of guarantees on the first term of our agreements, besides the fact that we continue to get strong renewals.

So I don't want -- I think we're pretty proud to have grown our organic business 7% in a recession, which is why I believe that as the consumer comes back, as we're starting to see slowly, we'll be able to do better, and we'll be able to continue to pick up momentum. We do realize it's a zero-sum game, so we're going to have to take it elsewhere, and as we continue to become partners with the end-user who controls market share, I believe we'll continue to gain share. Did that answer the question?

Yes, thank you.

Thank you.

Our next question comes from the line of Mimi Bartow from Telsey Advisory Group.

Hey, good morning, guys. First, would love to start off on the expense side. Warren sort of talked about some of the buckets. I was wondering if we could get a little bit more granular, and maybe put some numbers around actually what the deal costs were associated with the Ecko deal that you had that ran through the P&L in the quarter, and then maybe just a little bit on marketing as well?

Yes, sure, Mimi. I think the best way to do it is if you look at Q4 2008 versus Q4 2009 and the growth, we have said the drivers there are we invested more in our brands through advertising to the tune of about $3.5 million. The Ecko expenses, deal costs, et cetera, anything related to Ecko that's not in last year's number is probably around $1.5 million, and then miscellaneous other stuff comes to the $7 million increase quarter-over-quarter. So that kind of gives you the max buckets.

Okay, and so the miscellaneous is bonus majority, or what else is in there?

Yes, correct. It's just a whole bunch of other stuff to the tune of about $1.5 million.

Okay. And then, just in terms of marketing for 2010, how should we be thinking about that?

We're going to -- in terms of we're going to continue to invest in our brands, advertising is going to be slightly up, but SG&A as a whole is going to be pretty flat year-over-year. We have gotten some savings in terms of we've controlled costs, et cetera. So if you look at kind of the whole SG&A nut for 2009, it's about $79 million, $80 million, including depreciation and amortization; it's probably going to be around the same, a little bit more in advertising, a little bit less in sort of overhead.

Okay, great. And then the CapEx number came in a little bit higher than we were thinking for the fourth quarter; what was behind that?

We invested again, it was mainly -- we actually moved our offices, we actually moved one floor down so there was a little bit more investment in leasehold improvements that is going to be amortized over 15 years.

Got you. Then in terms of the timing on the Bongo deal, how should we be thinking about that just from a modeling perspective?

It's going to launch towards Fall, around September, and luckily we've been able -- we're not trumpeting the deal in the paper, we did it hopefully quietly on our conference call, because we want all the Spring goods to flow normally as they are shipping. So we're hoping not to have a lapse like we did last year with MUDD until we got MUDD up going full speed. So hoping for a smooth transition, and to be in business for Fall in all Kmarts and all Sears.

Great, and so the current guidance, does that assume a smooth transition as you just noted?

Yes, but it's really -- you know, Bongo's not a big number for us.

Right.

As a Company. Business has shrunk over the last couple of years, so it does -- the current guidance anticipates what is happening.

Okay. And then just lastly, a little bit more -- broader question. How are you seeing -- and I know obviously talking about Bongo and the recent deal, but what is the general propensity or willingness of retailers to take on exclusive brands today?

It's obviously strong, and just the fact we were able to do five of them, and are in discussions to do more. I think all the retailers, not just in apparel but we're seeing it in other industries, all want to have something that drives traffic to their doors, and something where they can get an exclusive, something where they can get better margins and not have to worry about someone down the street cutting price points. So it's a growing trend that's been happening over the last five years, and luckily Iconix has been at the forefront of it, and we believe it's a trend that's going to continue to happen because it makes so much sense, especially in this economy.

Okay, great. Thank you.

Thank you.

We have a follow-up question from the line of Todd Slater from Lazard Capital. Please proceed.

Thank you very much. You guys have a very great opportunity with your Iconix China joint venture that I think the investor community is kind of ignoring at this point. But I was wondering if you could talk a little bit about the timing. Any type of monetization in China now that Rampage is going on, is I guess it's second year or, you know -- and might we expect any other brands to roll-out there in addition to Rampage, London Fog and Rocawear that are currently in that JV? Thanks.

Yes, we're hoping -- our plan is to monetize within the third to fourth year, and the company that does have Rampage is already talking about an IPO, which could be some nice revenue to Iconix, which is not in our guidance because if it does happen it would be in the fourth quarter or the first quarter of next year.

But we're also in negotiations with three new companies. Our goal is to sign three new deals a year at least, and we're being aggressive, and I believe by the end of the year we'll have six or seven of these arrangements in place, and it's going to be wonderful when the monetizations start hitting; every year, we're hoping to bring large amounts of revenue as these companies go public or have a monetization event.

Great. Thanks so much.

Thanks, Todd.

(Operator Instructions)

Okay --

We have no questions in the queue.

Thanks, everybody, for joining us today, and for your interest in Iconix. As always, our team will be available for further questions throughout the day. Thanks, and have a good day.

Ladies and gentlemen, we thank you for your participation in today's conference. That concludes our presentation, and you may now disconnect. Have a great day.