Icon Energy Corp (ICON) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2011 Iconix Brand Group, Inc. earnings conference call. My name is Stephanie and I'll be your operator for today. At this time all participants are in a listen only mode. W e will conduct an question-and-answer session toward the end of today's call.(Operator Instructions)Joining us today are Mr. Neil Cole, Chief Executive Officer, Mr. Yehuda Shmidman, Chief Operating Officer, and Mr. Warren Clamen, Chief Financial Officer.

I will now 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 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 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 first quarter 2011 earnings conference call. On today's call, we will review our first quarter financial results provide an update on our portfolio of brands, discuss our acquisition of the increased ownership of the Ed Hardy brand, and walk you through our revised 2011 outlook. Reviewing our results for the first quarter ended March 31, 2011, we continue to deliver strong results. Revenue came in better than expected and was up 29% to $92.4 million compared to the first quarter of 2010. The current quarter revenue increase was driven by royalties from Peanuts, which we acquired in June 2010, as well as the continued strength of our overall portfolio, particularly our direct to retail brands.

Non-GAAP net income, which excludes non-cash interests related to the convertible debt, increased 25% to approximately $33.7 million, as compared to $27 million in the prior year quarter. Diluted non-GAAP EPS was $0.45, compared to $0.36 in the prior year quarter. EBITDA for the first quarter increased 19% to $58.8 million as compared to approximately $49.4 million in the prior year quarter. Our EBITDA margins for the quarter was approximately 64%. The margin improvement compared to Q4 2010 primarily relates to the expense reductions we made last year to the Peanuts business and the timing of year-end bonuses. In addition, marketing expense for our consolidated business was down slightly from expectations. However, we did increase spending on the marketing initiatives in our 50-50 joint ventures, which led to the lower than expected earnings in our equity earnings on joint censure line in our P & L.

In the first quarter we generated a $45.9 million of free cash flow, or $0.61 per diluted EPS. EBITDA free cash flow non-GAAP net income and non-GAAP diluted EPS are 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. This morning we also announced where we have increased our ownership in our Ed Hardy over joint venture to 85% and acquired the worldwide licensing rights for the Ed Hardy brand from Nervous Tattoo for $55 million, plus a $7 million earn-out. Also as part of the transaction, Nervous Tattoo, who will continue to be a licensee for the Ed Hardy T-shirts, hats, and hoodies, will prepay $7 million in royalties under their license. Our original investment in Ed Hardy back in May 2009, was made through a 50-50 joint venture with Don Ed Hardy, the person, through which we earned only a fraction of the total royalties generated by this brand. With a majority stake, we will now fully consolidate the Ed Hardy financials and results, and Don Ed Hardy' s 15% will be reflected in a minority interest. Going forward, since Ed Hardy will be fully consolidate, it will no longer be included in our equity earnings on joint venture line in our P & L.

In terms of our balance sheet, we continue to be very focused on the upcoming maturity of our debt and will look to refinance [what we feel] rates and timing our best for Iconix and our shareholders. After making a $60 million payment on our term facility in March of this year, we ended the quarter with $100 million in cash. With that I will now turn the call over to Yehuda Shmidman, our Chief Operating Officer, who will provide you with an update on our business initiatives.

Thank you, Warren, and good morning, everyone. As we look across our brands, we feel good about our portfolio and our ability to drive continued organic growth. We had a strong quarter with the majority of our brand achieving positive growth as we remain focused on our three-pronged growth strategy of building our brands with our current partners, signing new category licenses, and expanding internationally. Our direct to retail brands in particular continue to perform well, as they gain more market share within their respective retailers.

To highlight some of the DTRs standouts in the, Candie's at Kohl and Joe Boxer at Kmart Sears, two of our longest standing DTRs achieved double digit retail sales gains. Our Wal-Mart brands had another strong quarter driven by Danskin's fitness theme in January, Starter's strong basics program, and OP's largest swim season ever. Mossimo continues to grow within Target's apparel business, and we recently renewed that agreement, extending the terms through January 2014, and expanding the license into Canada. We also recently renewed the Charisma DTR license with Costco for another three years.

Within our traditional license portfolio, we had mixed results. On the positive side, Rampage and London Fog continue to perform well. We have also boosted our Badgley Mischka sales through our DTR license with the Home Shopping Network and through our new Mark & James collection, that targets a younger, more contemporary customer. We continued to see some weakness in the urban space affecting both Rocawear and Ecko. However, declines in the Ecko and Rocawear businesses are being somewhat offset by strong Rocawear kids business and growth from Zoo York.

We remain excited about the Peanuts business and the initiatives we're working on to both modernize and expand the brand. This quarter, we launched our new animated special with Warner Bros. titled "Happiness is a warm blanket, Charlie Brown", on DVD and Blu-Ray. The story was also released in graphic novel form from Kaboom, and as a children's story book from Running Press. In addition, we signed our first new global fashion DTR for Peanuts with Uniqlo, which is set to launch for holiday 2011, and will complement our existing global fashion DTR partnerships for Peanuts, with retailers that currently include Benetton and H&M.

I would also like to highlight two other deals we entered into in the quarter. First, we partnered with Sandra Lee, the Food Network TV star, to license her brand to Sears Holdings for home products. The "Sandra by Sandra Lee" collection will launch in Spring 2012, and will extend our business into new home categories, including cookware, bakeware, and small electrics. Second, , through our Latin America joint venture, we signed a new DTR license with Sears Mexico for Joe Boxer. All in all, between the growth opportunities through our existing partners and opportunities to expand with new partners, we are well-positioned for continued organic growth. And with that, I will now turn the call over to Neil Cole, our Chairman and Chief Executive

Thank you, Yehuda and Warren, good morning, everybody. I'm pleased to report that 2011 is off to a great start. The strength we saw in the fourth quarter continued into the first quarter, and we achieved better-than-expected sales and earnings. Our success continues to be driven by two key factors. One, the strength of our brand, as we continue to work very closely with our Retail and Wholesale partners to identify new and exciting opportunities, and making sure that our brands stay fresh and relevant to the consumer today; and secondly, the strength of our specialized business model. With our asset light business model, strong contractual guarantees, and the unique direct to retail model, we have proven that extremely profitable and predictable nature of our business model and cash flows. In addition, as inflation concerns arise, our company has found itself in a secure spot, with no direct inventory exposure and a possibility for upside, depending on the price elasticity of the consumer.

So far, based on our better-than-expected first quarter's results, -- first quarter result, the consumer appears to be spending, and as a result, we increased our full-year guidance, which I will take you through a little later on in the call. However, even as we see a very strong first quarter, we will remain cautious in our guidance about the back half of the year. Moving on to the Ed Hardy acquisition. We believe this is a good deal for our company, as it allows us to take control of the brand and make improvements to the marketing and licensing program. Neither of which we had any control over previously.

Ed Hardy is a brand with worldwide recognition and a strong and growing International business. Today, it is sold in over 43 countries, over 30 product categories, and is nearly 80 Retail stores worldwide. We believe through our marketing and licensing expertise, we'll be able to improve and grow the business. We also hope to leverage its broad licensing platform to extend some of our existing brands into new categories. On a pro forma based consolidated basis, we estimate the brand will generate approximately $15 million to $16 million of total royalty revenue. We expect to continue to be inquisitive and further leverage our platform through new acquisitions later this year. There are many strong iconic brands out there that would fit perfectly into our business model. We are actively looking at a number of opportunities that would be accretive to earnings , however as always, we plan to remain disciplined and will only execute on acquisitions that we believe are in the best long-term interest of our shareholders.

Further, as we are very focused on expanding our portfolio brands around the world through our three joint ventures, also our Peanuts platform and new initiatives that we are working on. We are particularly excited about the opportunity in China, where we believe our brands will have roughly 450 stores through five different equity partners by year end. We're also hopeful that we can begin to monetize one of our interests later this year. We are increasing our revenue guidance by $15 million to arrange a $355 million to $365 million in 2011 from the previous guidance of $340 million to $350 million. And we are increasing our non-GAAP diluted EPS guidance by $0.10 to a range of a dollar $1.63 to $1.68 from the previous guidance of $1.53 to $1.58.

In closing, as we report another strong quarter for our company, we continue to prove the sustainability and growth potential of our business model. Over the past five years, we have grown our revenue at a compounded annual growth of over 60%, and our net income at a compounded annual growth of nearly 50%. With the initiatives we are working on here in the US, combined with our plan for international expansion and new acquisitions, we believe we are well-positioned for continued growth. I'd like to thank all of you for listening this morning and your continued support. I will now turn it over for question and answer.

Thank you. (Operator Instructions) Your first question comes from the line of Robbie Ohmes, please proceed.

Okay good morning Neil, good morning guys.

Good morning, Robbie.

Actually, two quick questions. First was just an update on, you know, the performance of Material Girl and with that JV, what sort of reminder of what further opportunities and the timing of things going on there as you look into this year and next year. And then the second question was, you know, if you has had any sort of thought on, you know, whether there can be some things going on in the Urban brands that can get them to turn around later this year or as you head into next year? Thanks.

Okay. Actually, Material Girl's doing really well. Macy's expanding into multiple product categories. Actually, right now we're launching swimwear. We're also expanding the jewelry side of the business, and in the Fall we'll be doing outerwear. So a lot of new categories expansion. Expansion of doors, so Macy's is really excited and so are we. Also, we're launching - we launched in Canada , and we're pretty excited the bay had really great results, and that's also working really well. And we're working with Madonna on a couple new ideas, hopefully, one of them will be solidified in the next couple of months which we can tell you about. So the Madonna JV is going really well, and kind of on track.

On the Urban side of the business, the Ecko business has been a little difficult, but what's made up for it is the Zoo York business, which we took down when we bought it, it was in better department short stores, and today it's in the middle tier where actually it's doing really well in both Penny's and Kohl's. So we're excited about the growth of Zoo York in various categories, but especially in the apparel side. And Rocawear, we're working on a new initiative that we're hopefully also going to be able to announce soon, and in their we have a pretty strong kids business. So definitely, the weakest side of our portfolio, but we see -- we think - we know we have two great brand, and I believe they're the top two right now, and we can definitely see longevity with them and getting them back on

Great. Thank s a lot.

Thanks Robbie.

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

Hi, this is John Conowitz, in for Bob today. I had a question, a couple of quarters ago, you -- during the talks Micox Lenea IPO, you talked about a potential valuation of something like $10 million to $15 million -- at the time. Do you guys have any updated estimates there?

No. We're waiting --, you know,, we're supposed roll up a lot of Rampage stores over the next couple of years so we have another three to four years to do our put, and we don't see that probably happening -- it will not probably be our first monetization. There is a couple of others in China that are proceeding rapidly.

Okay. Do you have any ballpark estimates on what those -- what kind of numbers you can realize on any of those monetization?

No. I really can't -- there's going to be IPOs done on Hang Seng -- until the deals are completed and they're announced, I believe publicly I can't -

Okay.

Tell you what amount of dollars that will come to us.

Understood. And then my other question was, can you talk a little bit about Starter and how that's performing at Wal-Mart and whether or not you think there's still some shelf space or category growth there?

Yes. Starter's been wonderful and just continues to grow. Having another strong year during Wal-Mart, as they've gone back a more into some of the basic business, Starter has picked up a lot of the key programs in both underwear and socks and T-shirts, so, you know, another growth year and it's spread really well across the store and about 25% is footwear, 25% is accessories, 25% apparel and boys. So it's definitely one of our solid, biggest brands, and we are excited about how Wal-Mart is handling it.

Great. Thanks a lot.

Thank you.

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

Good morning.

Good morning, Jim.

On Ed Hardy, can you just give us an idea of what the contribution that you are getting from Ed Hardy previously was? I think at one point you said it was like $4 million, maybe in 2009?

Right. Yes . That was kind of the Hardy way. We owned 50% , it was a fraction. Of the $16 million that we are projecting on a pro forma basis, about $12 million is incremental -- I'm sorry, $14 million is incremental to us at an

We ran [right at] to bring in about $3 million this year, maybe $3.5 million. And then with the $16 million, is the difference.

Great. So do the difference is between $16 million and $3 million?

Just about, yes.

And then what, the increased to the guidance this year is great to see. What - how much of that is coming from Ed Hardy, and how much is coming from upside in first quarter or the core business?

It's about half and half. You know, remember we're going to have Ed Hardy for only about eight months, and we're probably going to spend a little in the beginning to help market it, get it back on some interesting marketing, and the rest is based on our core business.

Are there any deal costs associated with it in this quarter or next quarter that we should expect?

Yes, but that's already factored into the numbers, the increase guidance, Jim.

Okay. Is it coming in second quarter or did come in first quarter?

No. It'll be second quarter when the deal closed.

Okay. And then the marketing spend for the JV that you guys increased, which brands in particular or what areas was that?

It was -- a lot of it -- of there were to JVs that were affected. One is China. We participated in a trade show where we did a really amazing job and got a lot of new customers in Beijing last month. And then we also have been spending a little heavy - up front heavy on Material Girl. So those two JVs have a little higher costs. And will hopefully level off in the back half.

Great. And it sounds like to date, you guys are benefiting from some of the recent Wal-Mart changes? You mentioned that Starter had picked up some programs with return to basics? Is that --

Yes. I think we've come a really great and we've got great support there for all three brands. And because we let them direct source and there's no middleman, I think we're the perfect model for what they are trying to do today , and all three brands are really doing well and

Okay. And then finally, the fashion deal with Uniqlo for Peanuts, is that more of a 2012 impact on your P & L, or should we see some benefit this year?

Hey Jim, it's Yehuda. I think that's the right way to look at it , 2012, although we do think it'll launch this holiday, so that'll be great to get that something going this year. But yes, so far as an impact, we would look at it in

And then are you looking for fashion businesses with Peanuts in other geographies, the US, Europe, I mean, where else are you looking to do this?

The answer is yes, absolutely , all over. We see Uniqlo as just kind of a first step and it's consistent with some of the other DTRs that we acquired, the Benetton deal, the H&M deal. But this is the first of hopefully other deals all around the world, not just in the US, not just in Europe, but throughout the

But we do see a lot of opportunity in the US, and -- to do a couple of exciting DTRs, so we're working on it.

Great. And then have you seen any change from a -- I don't know how the consumer perceives the Peanuts brand, since you started doing some different things, on the media front, and the video games?

I'd say it's too early. Most of our initiatives are hopefully going to start happening in the second half of this year, and so I can't say -- although the Peanuts business has been strong, such an ever green property, it has, you know, exceeded our expectations so far. Unfortunately, I don't think we can take any of the credit.

Great. Thanks for taking my call.

Your next question comes from the line of the [Diana Coz]. Please proceed.

Hi. Congratulation s on a great quarter.

Thank you.

Wanted to know if your increased guidance still incorporates an organic growth rate in the low to mid single digits?

Yes, it does.

Okay great. And I know you expanded a little bit on Wal-Mart. I wanted to know specifically at OP at Wal-Mart given they had originally shrunk their junior pad overall and now bring it back to its former size. If you could talk about opportunities with OP and then also with footwear within Wal-Mart, , they're also bringing that back to its former size, if you talk about opportunities within your brands

Yes. This is Yehuda. In terms of OP, it's actually doing really well. Best swim season ever, and you can see it on the floor. It just looks terrific. And so, you know, I think we were describing in terms of the junior side really our business and similar to what Neil had mentioned about Starter, it's going with the flow in terms of where their categories have gone, so OP in swim, on the apparel side that you see over there on the floor has been performing quite well.

Diana, what was the back of the of the question?

> Oh - with footwear at Wal-mart, if your brand is seeing any opportunities there, because they're also going to be an increasing their footwear.

Yes. No, actually we see a lot of opportunity there and our Starter and Danskin business has been wonderful there and we definitely see an opportunity to grow the OP footwear side of that business.

Okay. Great. And then wondering if any of your partners have given you any commentary how the consumers are reacting to some initial price increases at all.

I'd say it's a little early. March was a little tougher for some of them and they weren't whether it was the increased prices or the later Easter or the weather. So there was a combination of three things and -- but the last couple of weeks have been pretty encouraging, and so, you know, everyone is pretty -- feeling pretty good about it, the consumer will pay the prices, and I think they planned accordingly, possibly less units. But generally, you know, everyone seems to be cautiously optimistic that the consumer will accept the prices. Obviously, probably purchase less units at higher prices, to show small - -probably single digit increases.

Great. Thank you very much.

Thanks Diana.

The last question comes the line of Ronald Bookbinder. Please proceed.

Hi. Yes . Good morning and congratulations for a great start to

Thanks, Ron.

It looks like you received another $10 million from the Unzipped litigation?

Correct. But we had planned $26 million, and we ended up getting I think $27.7 million.

Okay. And so we shouldn't expect anymore?

No. We're in full settlement, and luckily, that is behind us. We don't have any -- anything like that. No legal fees like that on the horizon.

All right. And you talked before about the balance of the term loan. Given the acquisition, do you still have plans to pay that off in Q2?

We did pay the $60 million of it in Q1. The balance is about $110 million today, and it's due January 1, 2012, and we will generate sufficient cash to have the ability to pay that off, just with our own cash.

Yes. We definitely plan to pay it off.

Okay. And you talked about the organic growth in your guidance hasn't changed, but then you talk -- I think before, you were talking about that you expected a full offset of units for price increases. Now you're saying maybe a single digit bump from inflation ? Could there -- are you saying there could be

Yes. I think from the beginning of the year, we plan most of our retail businesses to be up of between 5% and 10%, and it's happened. And we hopefully it continues. And the retailers, because they are raising prices considerably, are buying less units, but the net-net is a single digit planned increase for both them and us.

And on the acquisition, if this -- Nervous Tattoo, this is the Christian Audigier master license?

Correct.

And it seemed like he kind of over distributed the brand. Are you going to change sort of the direction or give it a direction once you take control of marketing and licensing?

Yes. Yes . And yes. Christian did a pretty wonderful job, but , and sales skyrocketed worldwide and they've definitely been going the wrong way for the last couple of years, but we believe that somewhat stabilized, and we are hoping with some interesting new marketing and being a little more careful on categories and not -- that we can build the brand back up and put in a good direction. But it does have incredible awareness around the world, and we do think we can take advantage of it and hopefully get royalties going back in the

Okay. And you talked in the past about how Rocawear athletics line. Are you still looking at something like that?

Yes. We're still working on a something - a sub-brand within Rocawear which could happen - hopefully will happen in the back half of the year.

Okay. And then just lastly, the tax rate, what sort of tax rate should we be looking at for the full year?

You know, excluding the non-Iconix, it's about 35.5%, it's the same tax rate that we've had, 35.5%.

Okay. Thank you.

With no further questions in queue, I would now like to turn the call over to Mr. Warren Clamen, for any closing remarks. Please proceed.

Actually, this is Neil. We are around for a little while, but actually we are doing an Investor conference at Barclays this afternoon, so differently, management will not be as available, but probably back after 4 o'clock if anyone wants to talk to us or arrange a conference call. But I wanted to thank everyone for joining us today, and your continued interest in Iconix. And we will talk to you in a few months. Thanks, everybody.

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