Icon Energy Corp (ICON) 2011 Q2 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the second quarter 2011 Iconix Brand Group earnings conference call. My name is Audrey and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. (Operator Instructions).

Before we begin today's conference, I've been asked to read the following Safe Harbor statement. 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 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 statements were made.

On today's call we have Mr. Neil Cole, Chief Executive Officer; Yehuda Shmidman, Chief Operating Officer; and Mr. Warren Clamen, Chief Financial Officer. It is now with pleasure to turn the call over to Mr. Warren Clamen, Chief Financial Officer. Sir, you may begin.

Thank you, and good morning everyone, and welcome to the Iconix Brand Group second-quarter 2011 earnings conference call. On today's call, we will review our financial performance and outlook for the full year as well as discuss our recent financing and the acquisition of Zoo York.

Starting with our results for the second quarter ended June 30, 2011, total revenue increased 17% to approximately $89.3 million. The drivers were the strength of our existing portfolio, royalties from PEANUTS which we acquired in June 2010 and a partial quarter of Ed Hardy royalties which we began consolidating on April 27, 2011 to reflect our increased ownership in the brand.

Our EBITDA increased 18% to $58.1 million and our EBITDA margin for the quarter was 65%. Free cash flow for the quarter was also up 18% compared to the prior-year quarter to approximately $43.4 million and free cash flow per diluted share was about $0.58.

Our non-GAAP net income for the second quarter increased 21% to $32.3 million and our diluted non-GAAP earnings per share was $0.43 compared to $0.36 in the prior-year quarter. Our GAAP net income for the second quarter was up 69% to $41.5 million and our GAAP diluted EPS was $0.55 compared to $0.33 in the prior-year quarter. Our GAAP numbers include a non-cash gain of approximately $21.5 million relating to our acquisition of the global master license of the Ed Hardy brand in this second quarter in which we've transitioned from a non-controlling interest to a controlling interest. This gain, which is driven by a remeasurement of our initial investment in the brand, is included in interest and other income on our income statement.

In the second quarter, we also closed on the issuance of a $300 million new convertible note due in 2016 with a coupon of 2.5% which effectively extends our debt maturities now out another five years. As anticipated, a portion of the proceeds were used to pay off the remaining balance of the term loan facility and in total we paid down over $170 million for this term loan in the first half of the 2011. As part of this early and total repayment of the term loan, we recorded a $2.7 million write-off relating to the unamortized financing fees and original issue discount, or OID. This charge is recorded also in interest and other income in our income statement. The balance of the proceeds along with cash generated over the next 12 months will be used to pay off our convertible notes due in June 2012.

Reviewing our results for the six months ended June 30, 2011 we achieved strong top- and bottom-line growth. Our revenue increased 23% to approximately $181.6 million and our EBITDA increased 18% to $116.9 million. Our non-GAAP net income as previously defined increased 23% to approximately $66.1 million and our diluted non-GAAP earnings per share was $0.88 compared to $0.72 in the prior year. Our GAAP net income increased 48% to $73 million and our GAAP diluted EPS was a $0.97 compared to $0.66 in the prior year.

Free cash flow attributable to Iconix for the six-month period ended June 30, 2011 was $89.4 million and free cash flow per diluted share for the six months was $1.19. We believe free cash flow is an important metric to look at for our Company because there is a large non-cash component to our expense and tax structure. 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 earlier this morning and on our website -- iconixbrand.com.

We ended the quarter with $235 million of cash. As it relates to our new 2.5 million -- 2.5% convertible note, we recorded an additional $1 million in non-cash interest expense in the second quarter and will record approximately $6 million of additional non-cash interest expense for the full year 2011. This non-cash expense is excluded from our non-GAAP net income and our non-GAAP diluted EPS.

I will now turn the call over to Yehuda Shmidman, our Chief Operating Officer, who will provide you with an update on our brands.

Thank you, Warren, and good morning everyone. As we look across our portfolio of brands we are pleased with its performance and see many opportunities to continue to grow both domestically and internationally. In the second quarter, some of our best performing brands were our more recently launched DTRs, including Mudd at Kohl's and Bongo at Kmart and Sears, which have both quickly become the top-selling junior brands as at their respective retailers.

These are prime examples of the success we are seeing with our DTR model, which is truly a win-win formula for both us and our retail partners. Our recently launched DTRs are not the only brands experiencing growth. We also continue to see strength in our more established DTRs, including Candie's, Joe Boxer, Mossimo, and Fieldcrest which all posted positive retail sales gains in the quarter demonstrating the sustainability of our brands. Our three Wal-Mart brands have developed into sizable businesses and similar to our Mossimo brand at Target, they have begun to deliver consistent results. The standout within Wal-Mart this quarter was our Danskin Now brand, which is one of the top-selling women's brand in Wal-Mart's apparel business. In addition we've recently renewed the OP license with Wal-Mart.

Material Girl also had a strong quarter. Macy's remains committed to the brand and this fall will be expanding into a variety of new product categories, including beauty, intimates and sleepwear. In our traditional licensing model, our higher-end and better fashion brands, including Badgley Mischka and London Fog, also performed well. However, our urban brands, including Rocawear and Ecko, remain challenged.

PEANUTS had a successful quarter. Most notably, we renewed our global fashion DTR license with Benetton, and MetLife, our financial service services partner, expanded in Japan with a major ad campaign featuring the PEANUTS characters. We also launched a new website at peanuts.com with more content and features rolling out through Q3, Q4, and beyond. The brand also expanded its presence in the social media arena, and looking ahead as we continue to execute on our goal of making PEANUTS relevant to younger generations we expect to be announcing new, exciting partnerships in the digital space.

In addition to driving continued growth for our brands in the US, we have been focused on building businesses for our brands around the world. In the second quarter, we further expanded our global presence with several new international licenses, including a new multi-year direct-to-retail deal with Falabella, a leading department store in South America, for our Ecko brand. This marks our second direct-to-retail deal with Falabella. We also renewed our direct-to-retail license with Hudson Bay in Canada for London Fog through 2018 and expanded the license to include men's sportswear, which will be launching in all Hudson Bay doors this spring 2012.

Overall, we feel good about our existing business and are on track to deliver low- to mid-single-digit organic growth for the portfolio this year. 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 everyone.

I'm pleased to report that our Company achieved record results for the second quarter, both on the top line and bottom line. Our brands continue to gain momentum, both domestically and around the world. As brand managers that operate under a licensing model, we have found ourselves in the unique position with a royalty structure that minimizes the impact from inflationary pressures, particularly as it relates to our direct-to-retail licenses that are purely based on retail sales.

On the international front, we are making good progress. We remain particularly excited about China and believe our first monetization event could happen later this year. China Outfitters, our partner for London Fog, is looking to go public on the Hong Kong Stock Exchange. When this occurs, we'll be monetizing our equity stake into half cash and half publicly-traded shares in China Outfitters. Our current guidance does not include any upside to this monetization.

We see international as a large opportunity for our company and are also targeting other geographies such as India, the Middle East, Southeast Asia, and Russia where we believe there could be significant opportunity to expand our brands.

We also remain focused on acquisitions and with our current capital structure, we are well-positioned to execute with significant borrowing capacity. Since we have repaid the entire balance of our term loan facility, a majority of our portfolio is now unencumbered, enabling us to finance new acquisitions. We are currently looking at a number of opportunities, but as always, we will take a disciplined approach.

This morning we announced a small deal in which we increased our ownership in the Zoo York brand to 100% for $18 million in cash. In late 2009, we acquired 51% of the Zoo York through our acquisition of Ecko brands. Since then, we have signed Li & Fung as the core licensee and substantially expanded the distribution beyond the core specialty stores and into large-scale department stores, including JCPenney and Kohl's. The overall brand has exceeded our original expectations and we believe there is further growth potential in department stores, both domestically and around the world. We estimate the brand will do -- will generate approximately $150 million in retail sales and generate approximately $8 million in royalty in 2012.

However, as a reminder, since we previously owned a controlling interest in Zoo York, its financials were consolidated, and therefore 100% of Zoo York's revenue was already reflected in our top line. The future gain will come from a reduction in the minority interest down below. The Zoo York acquisition is the second transaction this year where our Company has purchased the remaining interest in a brand which we do not fully own.

In looking at our full-year guidance, we are maintaining our 2011 revenue guidance of $355 million to $360 million and our 2011 non-GAAP diluted guidance of $1.63 to $1.68 a share. We are increasing our full-year GAAP diluted EPS by $0.11 to a range of $1.61 to $1.68 to account for the Ed Hardy non-cash gain in the second quarter, the write-off of unamortized financing fees and non-cash interest associated with a $300 million convertible security which are net positive to earnings.

In closing, as we look at the first half of the year, our existing business is strong. We increased our ownership in two of our brands and we strengthened our balance sheet. As we grow growth in the US and around the world, we continue to demonstrate the power of the business model. We believe we can continue to leverage our platform through new acquisitions and are still actively looking to add iconic brands to our portfolio. Over the past six years, we have built a unique brand management platform and our business continues to gain momentum as we focus on our mission statement to be the world's premier owner of a diversified portfolio of consumer brands.

I'd like to thank you all for listening this morning and continued support, and I'd like to now turn it over to question and answer. Operator?

(Operator Instructions). Bob Drbul.

I guess the first question I have is, on the PEANUTS business, Neil, can you talk a little bit about the opportunities there, just in terms of distribution growth or category opportunities, what you're most excited about and some of the opportunities over the next rest of this year, but also more importantly into next year?

That was PEANUTS opportunities, right?

Yes.

Yes, I mean PEANUTS, we are still very excited about PEANUTS overall, both -- especially in two ways. One is the digital space which we were just talking about and we see a lot of announcements coming soon about additional partnerships we are working on. Hopefully that comes toward the end of this part of the year or maybe even sooner. And then, on the fashion space, we are still very excited. We mentioned how we have just recently renewed our Benetton DTR, but we still have great partnerships with H&M, recently signing Uniqlo as well. So, increasing that business is still a key priority on a global basis and we still remain very excited about PEANUTS' upside in the future.

Okay. And then I guess with the Zoo York move, can you remind us in terms of the positioning of Zoo York versus Rocawear and just the developments that are going on sort of within competition within those various brands?

Zoo York, Bob, is a little different than Rocawear in that Zoo York is really a skate brand and our biggest customers are in the past were people like Pac Sun and Zumiez. And what we've done over the last 12 months, we've expanded across America into JCPenney and Kohl's and substantially increased the market share. So, it's more of a skate brand that competes with brands like Van's and a very different than where Rocawear is placed.

How about the competition around Rocawear, then, Neil?

Rocawear, the whole area has been a little challenging but we have a lot of bright spots and the business is still holding up pretty strong as the leader in its space. And, the kids business has been great, the accessories business has been strong and working on a new concept with Jay and we're pretty excited about the opportunities going forward.

Okay and just the last question that I have is, on Material Girl, can you just talk about a little bit about sort of what you've learned so far and where you see additional brand opportunities or introductions like that?

Material Girl has been a good learning process working with Madonna and we've had great support from Macy's and this fall we are really expanding it into a lot of new categories. And so, we're pretty excited and Macy's is taking a more active role in development, which is really a good sign which has happened in most of our good DTRs when they get more involved in house. So we see a big future and a lot of big gains for Material Girl over the next few months.

Thanks very much.

We're also taking it around the world where, Canada, Hudson Bay has really had a very strong launch and we're hoping to announce a few other deals in the next couple of months in both South America and Europe.

Okay, thank you.

Eric Beder.

Congrats on the nice quarter. Could you talk a little bit about China? How many joint ventures do you have right now and are you actively looking to add more to the mix in terms of new joint ventures in China?

Yes, we have roughly -- we have exactly five joint ventures signed today and we do hope to announce a couple more, maybe two or three more in the back half that we are in the works doing. And our joint venture partners I believe have almost 200-250 stores opened and plan to have over 400 stores by the end of the year.

Could you also, just in terms of account, the income statement, what was the reason that the equity earnings and joint ventures went up so much year-to-year and, what should we expect with that line going forward?

You know, we had pretty good growth, both in Material Girl, which is down below Latin America, down below -- we also had Ed Hardy in that line for part of the quarter. So, probably should go beat down a little bit in the back half of the year, although we had a strong quarter this quarter which really did help our organic business when you look at it and which we are on plan to hit our organic number this year.

I'll just reiterate, because Ed Hardy is actually now up top where it used to be in that line, it definitely will be smaller.

Right. And just, the Zoo York number, what should we think about that, A, in terms of potential to add to earnings beyond this year in terms of your consolidating -- I know it's not going to affect revenues, but it should I would assume affect earnings, and what about that?

We see it probably bringing in around $0.03 on a pro forma basis.

Okay.

For 2012, right.

Okay guys, thank you, great quarter.

Robbie Ohmes.

I had a couple of quick questions on -- the first question just on the monetization of your joint ventures in China, can you elaborate more on what your plans would be to do with the cash? Would it be to fund further acquisitions or debt paydown, etc., how we should think about that from the stockholder perspective? And then the other question was just on -- and I apologize if you covered this at the beginning but, you mentioned your organic rate of growth is on plan. Can you sort of give us a flavor of how the fallout look appears for your licensed partners and sort of how you think they have planned the price increase aspect of their business versus inventory units, etc., and how they sort of think this is all going to blend out and how it could blend out for you guys? Thanks.

The China business we look at similar to the rest of our free cash flow, which is planned at about $170 million which we're just going to use it to grow as we continue to buy more iconic brands. So, not different than any other of our free cash flow, we look at China's ability for fuel to continue to grow the business.

And the second half, we are seeing the last few weeks have been pretty good and where a lot of the fall goods are coming in. It appears the consumer is accepting price increase. I think the retailers have planned the back half to be up maybe mid-single digits; it's probably less units at higher prices, and so far so good. We're seeing some good acceptance and could sell throughs.

Great, thanks very much.

Jim Chartier.

In terms of revenue for this quarter, growth rate slowed relative to first-quarter. Was there any major change in the business versus first quarter or did some of us just model seasonality a little bit off?

Actually, the business is really good and I don't see any growing -- any slowing of the numbers. We're projecting, we're on target to do about $360 million, $365 million this year and so, we're pretty much on plan.

Great, and then for Warren, I noticed in the free cash flow reconciliation, there is a footnote where you change the quarterly flow with some adjustments last year. Just wanted to ask what precipitated that change, if there's any change on a full-year basis and anything different going forward for us?

No, no change on a full-year basis. We just normalized because we had -- the 2010 had been finalized so we just normalized Q2 and Q3, but on a full-year basis there's been no change.

Okay. And as far as kind of talks about changing the tax code and getting rid of some tax breaks, any worries that the tax yield from your amortizing of your brands, acquired brands, is at risk here?

So far I have not read anything to that specific, that they are going to disallow, if you have indefinite life on a book basis, you have to -- so far, I haven't read anything. That's not to say that it may not change but, so far they haven't mentioned that.

Okay, thank you.

Jim, also let me just circle back and mention a couple of things. From the first quarter to the second quarter, PEANUTS was a few million dollars higher in the first quarter. So, that's a little different.

And the other thing is, as you guys know, we have a tiered structure so, a lot of the businesses stepped down a point from the first quarter. So, second quarter is good. We're also expecting third quarter to continue to rise above second quarter with the shift of Ed Hardy and also the reset of the OP deal which is a July 1 deal.

Okay, so from the tiered structure, maybe you guys were -- some of that higher tier was in second quarter last year and that kind of shifted down to into a lower tier rate at Wal-Marts and the other businesses this year?

Correct.

Okay that helps, thank you.

Steve [Merotta].

Could you please comment on growth ex-acquisitions for the second quarter?

When you say growth acquisitions, you mean --?

Excluding acquisitions, organic growth for the second quarter, percentage gain.

We really don't -- Steve, we don't break it down by quarter, but, including the JV line I believe we've told everyone that we are in the mid-single digit this year and we are on track, and the second quarter is pretty similar.

Okay. How can we think about SG&A costs for the balance of the year?

We've said that the EBITDA margins are going to be in the low 60s for the year, and we are still forecasting that. So, if you just -- it should be fairly flat. Q4 is usually slightly higher because of the year-end bonus accruals, but it's going to be in the low 60s for the full year. Steve.

Andy you just mentioned that OP obviously renewed now July 1. Will that run from July to June basically every year? There's no January 1 reset there?

Correct.

And do you -- forgive this question because I'm a little new to this story -- do you offer specific DTR dollars or quarter?

We don't.

And my last question is, from a current deal flow perspective, have you seen any material changes in the last two to three months, either an acceleration or deceleration in deals that have been offered to you?

We've been really busy. There is a lot of opportunity out there and maybe since it went across the wire that we raised $300 million, that caused a lot of interest. But we just are making sure that we don't make mistakes, want to stay disciplined and make sure every acquisition is a great acquisition.

Terrific, thank you.

Diana Katz.

It does seem like today was a gross overreaction to what should've been modeled as a tiered royalty structure. But looking forward this year, given it is a tiered royalty structure, is there any opportunities for better results if -- at your retail partners if AURs come in higher than units because your guidance assume the neutral equation?

Yes, we think there's a lot of opportunity, and most of our brands have been performing well and seeing good growth. I believe, just to give a little visibility, out of our 27 different revenue flows I believe about 19 showed significant growth in the first six months and we see it continuing into the back half.

Again, can you comment a little bit just have your retail partners commented at all if they are seeing you know the inflation benefits on the top line, if they are seeing units come in down but lower than the AUR increase?

Yes, I think that's what's happening. I think they are showing growth and I don't want to comment on anyone else's business, but we are seeing some good rev growth and my guess is, it looks like it's higher prices on smaller units.

Okay, so guidance today you would say is conservatively, just assuming a neutral equation?

Yes. We try to be conservative, and the last -- I think we've beaten the last six quarters. Today, we were flat so we're not happy about that. So hopefully we are conservative.

Okay. And then, talking about China monetization event, given the weakness in the Chinese stock market overall, what gives you confidence the deal will actually happen this year? And then you talked about the cash flow, what you would do with the cash flow, but is there any way to help us understand what the size of China Outfitters could do to your EPS?

Yes, they have filed a prospectus on the Hang Seng, so it is a public document and there have been reports on it. But, just to give visibility from what's -- it is -- the initial deal would probably be roughly about -- anywhere between $8 million to $10 million to Iconix in revenue recognition, so roughly $0.08 to $0.10. If it is successful -- obviously, as you mentioned, it's been -- the Hang Seng has been a little tricky over the last couple of months, but China Outfitters is a really good company -- strong cash flow, very profitable. And they're hoping to do the deal in the near future.

And I would just add that the $0.08 to $0.10 would be actually in the equity line; it would be $8 million to $10 million of income for the company.

Being a JV, it goes down below.

Understood. And then, the South American and European deals you're looking to sign on this year, would they impact -- would they be big enough to impact you this year, or are those 2012 opportunities?

Well, South America has been pretty strong and continuing to grow at a great rate, and that also would be down below as a 50-50 JV. So, we do see revenue continuing to -- Europe has been tough. It hasn't been the growth we would like and -- but there's a lot of good prospects there and hoping to announce some deals in the near future. But really most -- when you announce a big deal, the big benefit is usually in the following year because it usually takes about six months to start shipping.

Great. And lastly, can you just update us on some of your home businesses, how those are performing relative to your expectations?

Home has been pretty solid, but not robust. The best of the group has been Fieldcrest at Target, has really been outstanding growth. Target reorganized the business and made Fieldcrest their better business and really increased our market share. So that's been good. Cannon and Charisma at Sears and Costco have been solid, not strong growth but okay. And Royal Velvet has not been up to our hope, our expectations and we are working on some new initiatives there that could be very exciting.

Great, best of luck in the back half.

Ronald Bookbinder.

Good morning, and congratulations on another solid quarter. Just to hammer away on the organic growth again, if you look at the organic growth this past quarter, how did that compare to Q1?

As I mentioned, we are really having I think 32 different revenue centers and brands. They probably go up and down every quarter and having a portfolio approach we are not commenting on each quarter, but we're pretty confident that we are on track to hit our organic plan.

Okay. And on the acquisitions, Europe has been slow to ramp up. Are you looking at any European sportswear brands that could help ramp up Iconix Europe?

I can't think of any that are in our top five, so if you know of any please call me. But it's not on the top of the list. We're pretty active and in I would say at least four or five deals that we're hoping to get done, but I don't see any what I would call a as European sportswear brand.

Okay. And with the China monetization of London Fog, how does Candie's compared to the size of London Fog in China?

Let me just say the hopeful monetization of London Fog, because it hasn't happened yet, and as Diana mentioned, the Hang Seng is tough. Candie's is -- I believe today we have -- it's growing so quickly. I think we have 50 stores and another 50 opening in the back half. So I think Candie's is probably 12 months behind and hopefully it could be a big deal in the back half of 2012.

Okay, and that $0.08 to $0.10 on London Fog, that's only the half that you're turning into cash. The other half that's equity is not included in that; is that correct?

No. That -- because we are turning into equity, it would be based -- it's roughly the whole thing. But, it's our half because we have another partner in the deal, that would be our structure, including the value of our security.

Okay. And OP in the off-season, is Wal-Mart planning on ramping up sort of a non-summer sportswear of OP that we could see some sort of increase?

Honestly, I'd have to say, not really. We've been struggling to convince Wal-Mart that we are a year-round brand, not worse than last year, but it's not -- they definitely do it a lot heavier in the second quarter. But I would say we're on track with what we've done in the past.

Okay. And lastly you've talked about a Rocawear athletic line in the past. How is that progressing and, is there a timing of some sort of launch?

Not yet but, our hope would be to do something in the first half of 2012. But, we've been working hard and it's pretty exciting and we are hoping to get it done in the first half of '12.

Okay, great, thank you very much.

Ladies and gentlemen, that does conclude our Q&A portion of today's conference. I would now like to turn the call back over to management for closing comments.

Thank you, everybody, for joining us today and for your interest in Iconix. As always, our management team will be available throughout the day for individual questions, and have a wonderful day. Thank you.

Thank you for participating in today's conference. You may disconnect and enjoy the rest of your day.