Icon Energy Corp (ICON) 2010 Q4 法說會逐字稿

Please standby for a realtime translation. Welcome to the Iconix Brand Group fourth quarter and full year earnings conference call. With us today are speakers, Neil Cole, Chief Executive Officer; Yehuda Shmidman, Chief Operating Officer; and Warren Clamen, Chief Financial Officer. (Operator Instructions) At this time, I will read 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 more 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 with 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 conference over to your host for today, Mr. Warren Clamen, Chief Financial Officer. Please proceed.

Good morning everyone and welcome to the Iconix Brand Group fourth quarter and full year 2010 earnings conference call. On today's call we will review our full year and fourth quarter financial results, provide an update of our recent brand initiative and discuss our outlook for 2011. 2010 was on the another record year for our Company. Revenue for the full year ended December 31, 2010, increased 43%, to $332.6 million. This was driven by the strength across the overall portfolio, particularly our DTR brands, which on average achieved double digit retail sales gains. Also our acquisitions of Peanuts and a full year of the Ecko portfolio brands.

Non-GAAP net income, which excludes non-cash interests related to the convertible debt for the full year, increased 29% to approximately $107.8 million and non-GAAP diluted earnings per share increased to $1.44 from $1.22 in the prior year. EBITDA increased 29% to approximately $209.6 million, and our EBITDA margin for 2010 was approximately 63%. This was slightly higher than expected, due to a one time litigation gain which we will discuss a little later in the call. Excluding litigation gain, our EBITDA margin was approximately 58%. In 2010, we generated approximately $167 million in free cash flow, or $2.23 per diluted share.

Reviewing our results for the fourth quart and ending December 31, 2010, revenue came in slightly higher than expected, up 34% to $88 million. This upside was spread across the majority of our portfolio. Non-GAAP net income, as previously defined, increased 12%, to approximately $24.5 million. Diluted non-GAAP earnings per share was $0.33, compared to $0.30 in the prior year quarter. EBITDA in the fourth quarter increased 40%, to approximately $58.7 million.

Our fourth quarter and full year results included a few nonrecurring items that I would like to highlight. In the fourth quarter we recognized pre-tax income, net of expenses, of $16 million relating to the favorable judgment that we received in December, 2010, in the Unzipped litigation. However, we also recognized some nonrecurring expenses in the fourth quarter that offset this gain. We took a write-down of $13 million related to our auction rate securities that we purchased through Merrill Lynch in 2006. While the Company has commenced a lawsuit against Merrill Lynch seeking full recovery of the $13 million, the recent bankruptcy filing of the issuer of the security has triggered the write-down. In the fourth quarter we also incurred nonrecurring expenses of approximately $3 million, related to the Peanuts business, as we continue to integrate it into the Iconix platform. This includes a charge of approximately $2 million related to the consolidation of the Peanuts into the same facility as Iconix, and approximately $1 million relating to severance costs. We believe these efficiencies will result in increased EBITDA margins to the low 60% for 2011, up from approximately 58% in 2010. These one timers offset each other and are neutral to the net income and EPS.

I would like it highlight our equity earnings on joint venture line as it's become a larger component of our income as well as our focus. This equity line includes our percentage of earnings for all three of our international joint ventures, Latin America, Europe, and China, as well as our profit -- our share of the profits in MG Icon, our partnership with Madonna and our Ed Hardy investment. In 2010 our equity earnings on joint ventures increased 60% to approximately $5.5 million, compared to $3.4 million in 2009. In 2011 we expect our portion of the profits associated with these joint ventures to be approximately $8 million to $9 million. 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 earlier this morning and on our website iconixbrand.com.

Our cash balance at the end of the year was approximately $122 million and is approximately $170 million today. Our pro forma net to EBITDA ratio is less than 2.5 times. Our term facility and our convertible debt, which total approximately $460 million and have an average weighted cost of 2.1%, are coming due in 2012. By the second quarter of 2011, we expect to have enough cash on hand to pay off the term facility, which is currently over $170 million. Once paid off, we will have 14 unencumbered brands that we expect to generate over $150 million of EBITDA, giving us the ability to refinance any shortfall in the convert pay down. With that, I will turn the call over to Yehuda Shmidman, our Chief Operating Officer, who will provide you with an update of our business initiative.

Thank you, Warren. In 2010 we continued to focus on our organic growth strategy, which is based on three core pillars. The first is to motivate, support, and partner with our licensees to increase sales from existing license partnerships. Second, we pursue new licenses for new product categories. And third, we seek out opportunities to expand our brands into new international markets. With this strategy in place, last years organic growth rate climbed to 9% as we saw retail sales from all of our direct-to-retail, or DTR brands, increase across the board. In particular, sales from our brands at Wal-Mart, Kohl's, Sears K-Mart, Target and Costco, led the year with significant gains. In fact, in the fourth quarter, both Starter and Joe Boxer achieved new records for sales in a single week. And in 2010, Mossimo at Target reached its highest retail sales level since its peak in 2007.

Within our traditional license portfolio we also saw a general strength in 2010 with notable gains coming from Rampage, London Fog and Badgley Mischka. Rocawear and Ecko were off slightly in their mens whole sale businesses but this was mostly offset by strength in Rocawear kids as well as sales gains from Zoo York. In addition to the strong end-year performance from our portfolio, we renewed several major DTR partnerships in the past year, including Danskin Now with Wal-Mart, Joe Boxer with Sears Holdings, Waverly with Lowes, Mossimo with Falabella in Chile, and most recently, Charisma with Costco. We also signed several new licenses in 2010, including Material Girl at Macy's and The Bay in Canada, Bongo at Sears K-Mart, and Zoo York with Li & Fung. The Peanuts business, which we acquired roughly eight months ago, is exceeding our expectations and we see multiple new opportunities for continued organic growth in the future. By way of example, our new animated special titled, Happiness is a Warm Blanket, is scheduled to debut this March through our partnership with Warner Bros. We are also working on several other new initiatives that we believe will modernize and expand the reach of the Peanuts brands.

On the international front, we are please with our progress in 2010 and encouraged by our future prospects ad. Last year we signed two new partnerships in China for our Candies and Badgley Mischka brands and between our five brands that are already launched in China, our partners have over 150 stores open today with plans for over 450 stores in the next 12 months. Our Land America business is continuing grow through new DTRs, and we are beginning to see traction in Europe.

This quarter we also signed our first license in India, a DTR with a company called Arvind, for Mossimo. India is an exciting new area of growth for our Company as we continue our efforts to expand our portfolio brands around the world. And with that, I will now turn the call over to Neil Cole, our Chairman and Chief Executive Officer.

Thank you, Yehuda and Warren. And good morning, everybody. We are pleased to report another record year for our Company, driven by strength across the portfolio as well as our acquisition of the Peanuts brands. With 2010 top-line growth of over 40%, income growth of nearly 30% and $165 million of free cash flow, we continue to deliver strong results. 2010 was a transformative year for our Company that we believe positions us well for future growth. We acquired the Iconix Peanuts brand, which extended our platform into new categories, including character licensing and entertainment. We expanded our licensing base to over 1000 licensees, with great new partners such as Hallmark, MetLife, ABC, Warner Bros, Cedar Fair, H&M, and Benetton and have broadened our international footprint to over 40 countries with approximately two-thirds of the Peanuts revenue generated outside of the United States.

We also formed a new partnership with Madonna, leveraging her persona and fame for apparel, accessories and beauty products worldwide. The first brand we launched together, Material Girl, received a tremendous response and has garnered attention from around the world. We believe this venture has legs beyond Material Girl and are already positioning a second brand right behind the first. We also continue to make progress in China, as Yehuda discussed earlier, and see it as a key part of our long-term growth strategy.

As we begin 2011, we believe we are well positioned for another successful year. We expect the strengths of our DTR businesses to continue as the retailers have made it clear that proprietary and exclusive brands are a focus. Our traditional licensing brands are well positioned as an integral part of American fashion. And we see international as a large opportunity as we expand our brands throughout the world in our three joint ventures in China, Europe and Latin America, and new partnerships such as the new license in India. As we execute on our international strategy, we believe over the next three to five years, international can grow to over one-third of our business from approximately 17% today.

Acquisitions also remain a key focus for our Company. And with our cash on hand of over $170 million, coupled with our strong free cash flow generation and credit availability, we have significant buying power for the right Iconix brands. However, as always, we plan to remain disciplined and will only execute an acquisition that we believe is the best long-term interest of our Company.

In looking at our full year 2011 financial outlook, we are reiterating our revenue guidance of $340 million to $350 million, our diluted non-GAAP EPS guidance of $1.53 to $1.58 and our free cash flow guidance of $160 million to $165 million. This guidance relates the existing portfolio of brands only and does not include any acquisitions. Our 2011 guidance reflects a low to mid single-digit organic growth rate for the existing portfolio. This includes both our top line revenue estimate, plus the royalty revenue associated with our nonconsolidated joint ventures, which we expect to grow significantly in 2011.

In closing, we believe our strong performance in 2010 is yet another confirmation that we can continue to grow our business, both organically and through acquisitions. We have proven that our brands have staying power and can continue to grow as we build lifestyle brands, optimize distribution channels and expand globally. Today, as owners of 27 Iconix brands that to represent approximately $12 billion in annual retail sales, we have made tremendous progress. We believe, through our strong brand management and marketing platform as well as our network of best in class, retail, and wholesale partners, we will continue to build on our success. With that, I would like to thank all of our employees for all their hard work in delivering another strong year and our shareholders for their continued support. We would now like to turn it over to the operator for some questions and answers.

(Operator Instructions) Your first question comes from the line of Todd Slater. Please proceed.

Thank you and good morning.

Good morning, Todd.

I have three questions. So I'll just, throw them out there. First of all, first could you talk about how inflation and sourcing costs will affect your licensees and how you think it will translate to European? Obviously this has been the number one topic of conversation around the world. I know you don't have a cost of goods line. Maybe you could talk a little bit about the opportunities and challenges there for you. Secondly, if you could just talk a little bit about your outlook with Wal-Mart, given the management changes there and the challenges that they've talked about in the apparel space? And then lastly, on the international side, you mentioned your goal of a third of revenues by when? I guess is my first question. And could you give us a better sense of how that might breakdown between brands and geographies? Thank you.

Okay. That's a lot of questions for someone off the red-eye from Las Vegas. Starting with what's happening in the world, the way we look at it, most of our licensees are projecting pretty good growth in 2011 with our brand. So we feel very good about it. We really don't know the intricacies. We think a worst case scenario as we read all the analysis and listen to CEOs that operate sourcing companies and goods, there's going to be less units in higher prices. And that's how we are going to hit our numbers. But the best case scenario would be if the consumer accepts these higher prices, and I think there could be upside to our projections and our growth based on what happens throughout the year. As you know, we are not directly exposed because we don't source goods or our own inventory. But so we are looking at it. We are listening. But fortunately, we are not on the front lines and our customers are all projecting good growth.

As far as Wal-Mart goes, we are coming off a record year and pretty much on all three brands. And our brands have really been accepted into the new basic strategy. And we've had pretty exciting growth, both all in Starter, Danskin Now and OP. So, pretty enthusiastic about going forward and where the business is today. We think there's opportunities for growth, both within the USA in new categories and added store openings. And most importantly, which I'm going to turn it over to Yehuda talk about international, really feel good about the opportunities at Wal-Mart international because we're starting to -- they're really embracing our brands in many different countries and we have an effort to do that. So, generally we're very fortunate to be part of the new strategy where Wal-Mart's looking more basic product with strong brand names, which luckily we have. So, I'm pretty encouraged with what's happening there. Yehuda, do you want to talk some more about the international and Todd's questions?

Sure. In terms of international in general, with Wal-Mart as a segway -- with Wal-Mart in 15 countries, we're absolutely looking to continue the expansion of our three Wal-Mart brands throughout. I think, as you know, OP being one of the first ones to start to go through that platform. We've got OP in Wal-Mart, Canada, and Wal-Mart ,Mexico, as well as through Latin America and various areas, including Argentina. And then on a whole, we're looking at a growth rate of -- from international as Neil mentioned earlier, we're roughly 17%, 18% today, hoping that it can be a third of our business one day. And Peanuts was a big driver in that in opening up a lot of doors. Where two-thirds of the Peanuts business came into us, already being outside of America, and hopefully through those licensee and other new relationships that we're pursuing. And of course the JVs throughout China, we're seeing continued growth there and up ahead.

But, Todd, I just want to add that obviously we are excited about what's happening in China. I think that's -- will help us over the next couple of years. 150 stores today over 450 by the end of the year. We've got five brands and we really think that we have a great strategy there. So I think that's going to -- along with a lot of the deals which we're doing in South America and Latin America and our new situation in Europe, we do see our whole -- international to us is a huge opportunity. And for big growth platform, especially in countries like China, Brazil and India -- a lot of the growth countries that are happening.

Great. Thank you, guys.

Thank you.

And your next question comes from the line of Bob Drbul. Please proceed.

Hi and good morning.

Good morning.

Just a follow-up on Todd's question. On the plans in terms of your revenue growth, can you talk a little bit about -- I guess maybe who (inaudible) from Neil, but on opening price points and the units versus opening price points with price increases, like, how you actually think that's going to play out at various retailers? Your large retailers?

Bob, similar to what I tried to say before, and maybe not too articulately. We don't really get that deep into the weeds. We just know that in speaking to our retail partners and wholesalers that they're all projecting increases and luckily we don't have to dive down and negotiate the pricing and the units and we just get to focus on the market and go doing some great, innovative ideas to help drive products. So I'm really not -- I can't comment on the weeds. And I think probably every store has a different strategy, whether they are going to hold prices and work on tighter margins or raise prices. But luckily, those were our old days and haven't done that in a while as far as understanding the specifics of how it is all going to work.

Alright. Fair enough. On the DTR renewals, have all of those been done on the same terms? Or have there been any noticeable term changes with any of the renewals that you talked about this morning?

No. We've basically been able to renew all the key deals on similar terms. There have been, you could argue, tweaks on trying to drive larger volume. But the economics have all pretty much stayed the same and we've been pretty lucky and hopefully we see that going forward.

Okay. Neil, when you look at the acquisition opportunities, are there still sizable, attractive opportunities that you see in the marketplace? Have things gotten tougher for you competitively with whether private equity or other companies trying to utilize the model that you are pursuing?

We honestly haven't seen anyone utilizing the model. There are, obviously, some bigger deals that have been done with private equity. Usually looking at the EBITDA of the Company and the apparel company. But we haven't seen any large scale IP acquisitions like similar to what we do. But quite honestly, we were pretty -- in '06 and '07 and '08, we were definitely did a lot better and acquired a lot more brands. But we did buy some great properties in '09 and '10 too. Not as many. And we're working harder and we're negotiating with a lot of properties, but you know, it's definitely, like we could argue challenging, but we are pretty confident we will get there. And the key is just to be opportunistic. Pretty much Peanuts came out of -- was put up for sale in, I think, in March and we ended up buying it 60 days later. And the same thing with a lot of our brands. But we've been working with a lot of great IP for a couple of years, trying to find the right price and just trying to be execute. But most importantly because of how strong the business is, our organic business around the world, there's no reason to reach and lose the discipline that we have had over the last many years. So we are going to continue to do the best we can and we are pretty confident we'll be able to find great Iconix brands to add to the portfolio.

Great. And then the last question is -- more on the organic side of it. What's the most exciting growth opportunity you see for the Peanut business right now? And, I guess, in terms of Rocawear as a brand, are there any brand extension opportunities that you are most excited about? Some of the things that you already own in terms of that organic story for both of those brands might be helpful.

Sure. I'll start off with Peanuts and then turn it to Neil for Rocawear. In terms of Peanuts, the most immediate would be on the fashion side. Quarter our sweet spot of where we know and definitely a lot of upside, especially throughout North America where that's been underpenetrated in the past. And just general -- other opportunities as well, especially as we take Peanuts into modern technologies and modern platforms in the 21st century.

Yes. And on the Rocawear side, we are working with Jay on a pretty exciting, possibly athletic concept, which we hope to maybe get done in the next couple of months. Which I think it is going to be tremendous growth for Rocawear in that platform. We have two or three exciting things. Jay has got some great ideas and so we are hoping to work on new -- could be sub-brands within Rocawear or else just continue. Rocawear is in a very tough sector. Definitely has been. Rocawear continues to dominate and be the best brand. Our mens business was flat, our kids business was way up. So, we have managed to pretty much hang on to our business in a tough world there and we have confidence in our structure there.

Great. Thank you very much. Good luck.

Thanks, Bob.

And your next question comes from the line of Omar Saad. Please proceed.

Yes, good morning. Actually, this is Sam Lee on behalf of Omar Saad. Good job on the quarter.

Thank you.

I guess our question is -- I know you don't give specific SG&A guidance. But we noticed the last two quarters your SG&A dollar spent has ramped up significantly due to the acquisitions you made. So can we sort of expect $40 million to $50 million to be the run rate going forward on a quarterly basis or should we expect this to sort of moderate this year?

We had -- hi, Sam, it's Warren Clamen. The ramp up in Q3 and Q4 was related to Peanuts. But there's also a lot of sort of one timers and his nonrecurring. We have said our EBITDA margins for 2011 are in the low 60%. So that is what you could expect. In terms of -- you have the revenue. So that is about the SG&A.

Okay great. Thank you.

You're welcome.

And your next question comes from the line of Eric Beder. Please proceed.

Good morning. Congratulations on a good quarter.

Thanks, Eric.

In your guidance, you've -- when the guidance you've given for next year, are you -- if you signed, let's say, another Madonna deal, is that in the guidance? Or are you assuming no major new expansion in your guidance right now?

We are assuming no new deals and totally organic. So hopefully we're going to be busy and I have some upside if we can execute on some acquisitions or new opportunities. So it only has the present business we have today.

Right. So if you sign another joint venture or another expansion that would not be in the numbers?

It is not. But quite honestly, a lot of those -- if it is a start up like Madonna, they do take a year or two to bear fruit. You know, the ones that become big opportunity are the ones that -- like an acquisition like a Peanuts or an Ecko. That bears fruit right away when it's a big company. When you're starting something new, it would take usually at least 12 months to become substantial.

Right. Warren, in your comments you imply that you are going to use the -- potentially use the free cash flow to pay down the line of credit as opposed to something else. Is that the goal for this year? To pay off the line of credit and clear it out this year?

I don't think we've been specifically saying that's the goal. But what we've said was is that we do have $170 million of cash today. We're going to generate -- excuse me -- over $160 million next year. And we do feel comfortable. We have the debt that comes due in 2012. We feel comfortable that we have the ability to pay it off and to restructure the remaining shortfall, if there is, when it comes due in 2012. So we do have --

However, Eric, if we saw a good opportunity in the next six months, we obviously might use our cash because it is really cheap money and then refinance the acquisition. So, we have a very flexible structure at the moment and we are trying to stay flexible but also conservatively keep the cash around and maintain it so we can pay the debt when it is due.

Okay. Just to remind us, what is the conversion price on the convertible?

It's $27.56.

Okay. If we can get there you can do it that way too.

Right. And then it's partially hedged up. We did take a hedge up to $42.40.

Okay. Finally in China -- are we doing the potential this year to see some monetizing event for your joint ventures? Are we getting to the point where they have to kind of do something to show the value for the business?

I don't -- we're expecting a couple of IPOs. However, our businesses are still developing. And I don't think we are going to exercise our puts, even though these companies are going to do their IPOs. Because if -- waiting until the stores, they have 200 to 300 stores, will give us a maximum opportunity rather than exercising it in their infancy. A good example is London Fog is a great company. Today we have 100 stores. Could be an IPO in the next few months. But we started to value and to take a smaller amount of money when we know they are opening up another 200 stores in the next two to three years. So we're going to probably wait and exercise our put when our brands are somewhat rolled out.

Got it. Okay. Great quarter. Thanks.

Thanks, Eric.

And your next question comes from the line of Jim Chartier. Please proceed.

Good morning. My first question for Warren, I guess. Looks like you exceeded your revenue guidance for the year by a little more than $4.5 million and earnings kind of came in line with the high-end. So, I was wondering if there is anything else in SG&A that offset some of that upside?

Well, we had the restructuring, the one time $3 million related to Peanuts. And we do have probably around $3 million in performance bonuses in Q4. So, those two are the $6 million that we're slightly above.

Okay. But last quarter you told us that you were going to have the Peanuts integration cost and I think that was in your guidance. Right?

Partially. It came in a little bit higher.

Okay. And then, any reason you didn't take up your revenue guidance for next year? Based on the upside you saw this year?

Yes. We'd like to hopefully continue to be conservative and hopefully continue to do what we've been doing the last three or four quarters and just not try to over promise. And so we're trying to be somewhat cautious as we look at the future.

Okay. And then just on Peanuts. Where are you in the integration process? Should we expect more integration charges next year? And then, I think your original accretion guidance for Peanuts was about $0.12 to $0.15, do you think there's upside to that number?

Yes. Just the first part of your question. We're doing pretty well on the integration. We've reduced SG&A by roughly $5 million going into 2011. To answer your second point, don't see any special hits going to happen. Not anticipating that in 2011. In terms of upside potential, the answer is, yes. We do believe there is revenue upside potential. If we can secure some fashion upside opportunities that we are working on and, as well, find opportunities on the digital side or otherwise. We just -- we've had a great year, even in the first eight months we have owned the business coming off the 60th anniversary and we definitely see potential.

Was the $5 million of SG&A savings in your original expectation for Peanuts when you first bought the business?

Yes. We knew we were going to take expenses out and that $5 million is in our 2011 number. We knew that.

Okay. Thank you.

Thanks Jim.

(Operator Instructions) And your next question comes from the line of Todd Slater. Please proceed.

Thank you. Can you hear me?

Yes we can.

Okay. So I guess just a follow-up on the last question about the guidance. Because, I mean you obviously -- you exceeded the fourth quarter earnings expectations a bit. Inflation should act as a tail wind on the revenue line. The Peanuts consolidation should benefit the expenses, as you mention. And other than being conservative, is there anything else that has changed that perhaps gives you reason to be a little more conservative?

You know, there's a -- no. We have a lot of our -- to be quite honest -- we have a lot of our big businesses that even if they grow, being in a tier royalty, there is not that much. Where if a business goes from $1 billion to $1.1 billion, there wouldn't be a huge upside as if it went from $500 million to $1 billion. Like, you could argue is half (inaudible) a couple years. So, we're projecting a mid single digit conservative organic. And the rest is, you know -- look at this tricky world. Where we've been pretty energized what happened in 2010. The consumer came back. Which maybe a little quicker than we all thought. And we just want to make sure that the consumer continues to consume and be as good as it's been in 2010. And be a little conservative.

Okay. And on the wholesale licensee side, there's no increased concern given the inflationary environment? Perhaps maybe it will be some reorganization or some changes in a few of those relationships?

No. I mean, London Fog's good, Rampage is good. Any other Street business has been a little tough with Ecko and Rocawear but it is pretty much what we projected. And home is okay. So, no, it's actually -- everything is okay. And we keep knocking on wood and feeling good about the strength of our brands. And hope, as I said, the consumer continues to consume.

Great. Thank you. Have a great first quarter.

Thanks, Todd.

At this time there are no further questions in queue.

Okay. Just wanted, once again, to thank everyone for joining us today. And thank all the wonderful employees at Iconix for their hard work and what we've been able to achieve over the last six years. And pretty confident our portfolio continues to gain market share. And really believe we are positioned for worldwide growth. Pretty excited about what's happening at Iconix. For those of you, obviously, that would like to talk to us individually, we make ourselves available all day for anyone who would like to talk to us. And look forward to speaking to you all at the end of the first quarter. Thank you.

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