Icon Energy Corp (ICON) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Iconix Brand Group earnings conference call. My name is Jennifer and I will be your coordinator for today. At this time, all participants are in listen-only mode, and later we will conduct a question and answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Warren Clamen CFO. Please proceed.

(technical difficulty) earnings conference call. Our speakers today are Mr. Neil Cole, Chairman and Chief Executive Officer, Mr. Yehuda Shmidman, Chief Operating Officer; and Mr. Warren Clamen, Chief Financial Officer.

At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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, believes, 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 this statement was made.

I would now like to turn the conference over to Mr. Warren Clamen, Chief Financial Officer. Please proceed.

Good morning, everyone, and welcome to the Iconix Brand Group's third-quarter 2011 earnings conference call. Today we'll review our quarterly performance, provide you with an update on our most recent business initiative, including our acquisition of Sharper Image and discuss the balance of 2011 and our 2012 outlook.

Reviewing our results for the third quarter ended September 30, 2011, total revenue was approximately $92.7 million. This is a 10% increase over the prior year quarter excluding the one-time royalty accrued in the third quarter of last year of approximately $12.5 million related to the multiyear license we signed with the ABC Network for the Peanuts TV specials.

This revenue increase in the third quarter was driven by strength across the majority of our portfolio as well as our increased ownership in Ed Hardy.

In the third quarter our free cash flow increased 22% to $44.9 million versus the prior year quarter. Our EBITDA increased 6% to $55.3 million and our EBITDA margin was 60%, a significant improvement over the prior year quarter and attributable to reduced expenses associated with Peanuts and the scalability of our platform.

Our non-GAAP net income, which excludes non-cash interest related to the two convertible debt instruments, was $30.1 million and our diluted non-GAAP earnings per share was $0.40.

Reviewing our results for the nine months ended September 30, 2011, we achieved strong top- and bottom-line growth. Our revenue increased 18% versus the prior year period to approximately $274.3 million excluding the ABC license that I previously mentioned.

For the nine months ended September 30, 2011, non-GAAP net income as previously defined increased 15% to approximately $96.2 million and our EBITDA increased 14% to approximately $172.2 million both as compared to the prior year period.

Free cash flow attributable to Iconix for the nine-month period increased 11% to $134.3 million versus the prior year period. Free cash flow per diluted share for the nine-month period was $1.78, which is calculated by dividing our free cash flow by the diluted share count for this period.

We believe free cash flow is an important metric to look out for our Company because there is a large non-cash component to our expense and tax structure. We estimate the incremental cash to our net income in 2011 to be approximately $45 million, which includes non-cash taxes, non-cash interest, amortization, and non-cash compensation.

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.

Moving to the balance sheet, we believe we are in a very strong position, and both S&P and Moody's recently upgraded their ratings on a portion of our debt due to our increased EBITDA, reduced debt levels and improved credit metrics.

We ended our quarter with approximately $236 million of cash and continue to generate significant free cash flow. Our trailing past 12 months net debt to EBITDA at the end of the quarter was approximately 1.7 times and approximately 75% of our portfolio is unencumbered, giving us significant borrowing capacity.

Today, we also announced that our Board of Directors has authorized a program to repurchase up to $200 million of our common stock over the next four years at management's discretion, allowing us to opportunistically buy back Iconix stock and deliver incremental value to our shareholders.

With that, I will turn the call over to Yehuda Shmidman, our Chief Operating Officer, who will provide you with an update to our business initiatives.

Thank you, Warren. In the third quarter, our recent direct to retail launches, including Mudd at Kohl's, Bongo at Kmart-Sears and Material Girl at Macy's continues to perform well. Kohl's has been allocating more space to Mudd, and for 2012 we see footwear as a further growth opportunity. Bongo continues to be the best-selling juniors brand on the floor at Kmart and Material Girl launched bath and body product in the third quarter alongside expanded denim, outerwear and intimate apparel businesses.

We also continued to have success this past quarter with our more established DTRs with retailers including Kohl's, Wal-Mart, Kmart/Sears and Target. The strength of our larger DTR brands demonstrates the advantages of our business model which has proven even more effective during tough economic times. A good example of this is at Wal-Mart where our three brands have grown as they leverage the power of our branding into basic day source thereby achieving a winning combination of private-label economics together with national branding.

On the traditional licensing side of the business, we saw strength in some of our upper-tier brands, including Badgley Mischka and London Fog. We also saw improvement in the Ecko business.

Our Rocawear business remains challenged, particularly on the men's side. However, it is still a top brand in its space.

With Peanuts, we are continuing to focus on growth, especially via new technologies and in fashion apparel. In the technology space, we have several global initiatives launching over the next six weeks, including a new Peanuts mobile game from Capcom, a Peanuts branded app featuring theme comic strips and an interactive digital storybook app.

Looking ahead to growth opportunities in 2012 and beyond, we are excited about some new initiatives in the US and around the world.

On the US front, we are excited about our new long-term DTR license with JCPenney for our Royal Velvet brand that we announced earlier this week. The launch will consist of sheets, fashion bedding, blankets, pillows, towels, rugs, bath coordinates and window treatments, all scheduled to debut spring 2012 in JCPenney stores and online at JCP.com. JCPenney is recognized by consumers as the go-to destination for home goods, and as such we see this as a substantial long-term growth opportunity.

Royal Velvet was previously licensed to Li & Fung where it had been underperforming. Reflecting a new startup launch with JCPenney and a long first contract year, we expect royalties from Royal Velvet to be down significantly in 2012. However, we have found that strategically it's sometimes better to take a near-term loss in order to secure a strong future as we did successfully with our Mudd brand when we launched with Kohl's.

Similar to the Mudd restructuring, the new partnership at JCPenney will take time to fully expand, and therefore we expect short-term revenues to be down followed by long-term revenue growth.

International expansion also remains an important long-term organic growth opportunity for our Company. In China where our first monetization event has been delayed due to macroeconomic conditions, our brands are performing well and our Iconix China team signed definitive agreements for new partnership for Royal Velvet which we expect to close in the first part of 2012. Our partner is projecting to open over 250 Royal Velvet stores over the next three years in greater China.

In Latin America our business is continuing to grow and in Europe we have a couple of interesting licensing deals and contracts which we hope will provide fuel to accelerate new business in the region.

Finally, in addition to our existing platform we are working on new opportunities in markets, including India, Japan and the Middle East. And with that, I will now turn the call over to Neil Cole, our Chairman and Chief Executive Officer.

Thank you, Yehuda and Warren, good morning everyone. We are pleased to report another strong quarter for our Company both on top and bottom line. Our plan portfolio continues to deliver strong results as we continue to expand our platform through new retail partners, new industries and new geographies. This week, we announced a couple of exciting initiatives that furthered this goal, including our first DTR with JCPenney for our Royal Velvet brand, our first entry into the consumer electronics market with the acquisition of Sharper Image.

Today, we announced that we signed a definitive agreement to acquire Sharper Image brand for approximately $55.6 million. Sharper Image is an iconic brand with strong consumer awareness that offers diversification for the Iconix portfolio into the consumer electronics segment. It is known for its innovative and fun products and we believe that with the right branding and marketing support, it has the potential to grow globally into a leading consumer products brand.

Sharper Image already operates under a licensing model which we expect to generate approximately $12 million to $13 million in royalty revenue in 2012 and it has very similar margins to other existing Iconix brands. The brand is sold across a variety of categories, including audio and video electronics, travel gear, personal home products, kitchen and bath accessories, exercise equipment and giftables, primarily through national big-box retailers, eCommerce and catalogs.

As we have said from the beginning, our brand management platform is leverageable across numerous consumer initiatives and industries and today's acquisition continues to prove that point. Acquisitions remain an important point of our long-term growth strategy. We plan to remain opportunistic with our current capital structure. We believe we are well positioned to execute with significant borrowing capacity.

Since we repaid the entire balance of our term loan, the majority of our portfolio is unencumbered enabling us to finance new acquisitions. In looking at our full year 2011 financial outlook, we are reaffirming our revenue guidance of $355 million to $365 million in revenue, our 2011 non-GAAP diluted earnings per share guidance of approximately $1.63 to $1.68 and our 2011 free cash flow guidance of $167 million to $172 million. We expect Sharper Image to be neutral to earnings this year due to the timing of the close and transaction costs.

At this time, we are also providing 2012 guidance. For 2012, we expect revenues to be in the range of $370 million to $385 million which reflects mid-single-digit organic growth for the portfolio when excluding the unfavorable impact of the Royal Velvet transition.

We expect the overall top line to come from category expansion, increased stores and additional rack count among our existing portfolio and a full year of Ed Hardy and our Sharper Image acquisition.

We expect the quarter's seasonality to be more evenly distributed this year with each half representing approximately 50% of our full-year guidance. The tiered royalty structure since we are more weighted to the first half will be offset by some of the newer initiatives that we expect to gain more traction in the back half, as well as Sharper Image which due to its gifting focus has a large holiday business.

We also expect to achieve substantial growth in our international joint ventures and with the MG-ICON business with Madonna. These are not reflected in our top-line revenue. These partnerships are recorded in the equity earnings on joint venture line of our income statements.

We expect 2012 non-GAAP EPS to be in the range of $1.77 to $1.84, 2012 GAAP EPS to be in the range of $1.62 to $1.69 and 2012 free cash flow to be in the range of $187 million to $194 million.

In closing, we believe our performance continues to demonstrate the power of the business model and the strength of our brands. As we look into 2012, we are excited about the many opportunities ahead as we continue to build our brands both domestically and internationally and further diversify our portfolio into new categories, distributions and geographies.

We also believe we continue to leverage our platform through new acquisitions and are always looking to add great iconic brands to our portfolio. With 28 diverse consumer brands in our portfolio that represent approximately $12 billion in annual retail sales, we have come a long way and looking ahead we are very focused on delivering continued value to our shareholders.

I would like to thank all of you for listening this morning and your continued support. And we would now like to open it up to question and answers.

(Operator Instructions) Robert Drbul, Barclays.

Hi good morning. Neil, I just had two questions, first on the Sharper Image deal. So when it sold before, you guys didn't buy it then. I'd just be curious to hear what you think has changed since that time when it sold. Do you think it's healthier now? The second question I have is -- you just announced a share repurchase this morning. Should we infer anything from the buyback, the new buyback program in terms of opportunities for M&A? And sort of how are you thinking about it from that perspective? Thanks.

We -- it's true we have been looking at Sharper Image for a few years and we were at the auction in the beginning. We've kind of maintained the discipline where we're not going to buy something unless we have a monetization, and at the time you know the brand was just closing stores and we didn't have enough licensees to justify the price.

You know, the past group put together -- today, we're inheriting over 40 license agreements in categories all across the US and the world. So, it had a nice base of royalty income to give us the comfort, and we also saw a lot of opportunity to expand it. So different times, a few years later, did some recent research, incredible brand recognition, over 85%, and still a strong perception of innovation and fun. So we thought it was a good time to venture into the [CE] business with this iconic brand.

As far as the buyback, you know we just felt as we looked at our stock price fluctuate over the last -- especially the last few months and we saw some times where it was just an incredible opportunity and an incredible buy. We wanted the flexibility during those times to be able to buy the stock. And we look at acquisitions at a certain level, and Iconix fits that level. And so the Board was pretty energetic in the opportunities to buy stock at the right price.

Great, and then my last question Neil is -- so with some of the moving pieces, with the Royal Velvet and some of the other businesses, is when you look at the full-year guidance today in terms of the revenues and then you look closer to 2012, is it the organic growth that you guys talk about? What sort of number is the portfolio performing at in your expectations right now?

You know we are projecting about mid-single digits going forward without taking the Royal Velvet reset that we have because of long first year with JCPenney. So, we're still thinking about just single-mid digits going forward.

Okay, thank you very much.

Eric Beder, Brean Murray.

Could you talk a little bit about what you are looking at going forward now in terms of acquisitions? And in terms of China you talked about the Royal Velvet deal. How aggressively are you looking to add more as China licenses, and how should we think about that going forward?

In acquisitions, we have a pretty good balance sheet. We were lucky to refinance in June and have a lot of gunpowder, so continuing to look at a lot of great brands and try to build on our portfolio. So it's obviously an important part of our growth strategy, but we're going to stay disciplined and hopefully continue to add great iconic brands.

As far as China, I will let Yehuda jump in and talk about what's happening over there.

Eric, it's Yehuda. We're very excited about China and continue to be and in terms of how aggressive we would like to be going forward, we think we have a lot of brands to add in terms of partnerships. Today with Royal Velvet, we now have six partnerships in place. We do still believe that China Outfitters, our partner to London Fog, will monetize soon. We also have another one of our existing five partnerships that we see looking for an IPO right behind China out there. So hopefully will have one or two monetizations from Iconix China in the near future.

And just to build on that, we've also identified another three or four partners that were working on to do deals with to continue to build out the portfolio over there and the retail landscape.

Okay, just a quick final question. Wal-Mart, they are closing their offices here in New York, going back to Bentonville. What does that mean to you guys in terms of the relation with Wal-Mart?

Well, it means I'm going to have to go to Arkansas (laughs). Wal-Mart has actually been a great partner and we've benefited with their back to basics. And Starter and Danskin are continuing to grow. OP has been a little off. We lost a couple of programs that were fashion-oriented, but the three businesses together are going to show positive gain this year and we have a great relationship there with the team with Andy and -- Andy Baron and Jeff Evans. They're pretty excited about our brands. It really fits into their basic category. As Bill Simon always talks about, they want national brands. I think we offer three of the strongest in the department. So we're pretty excited about building -- about their strategy and what it means for Iconix.

Great, thank you.

James Chartier, Monness, Crespi.

Good morning can you guys hear me?

Yes, hi Jim.

Okay, the first question -- Yehuda, did you mention you've got some deals working in Europe currently?

Yes. We're starting to see momentum there, and as you know, Jim, we've been focused on really getting Iconix Europe off the ground. We did have a slow start there, but now we have some deals in contract and especially with the momentum of Material Girl which has picked up around the world with a lot of interests. Obviously, we have a deal in place with Canada, with [the Bay], and now we're seeing interests from other areas. So, hopefully, if we can get a couple of deals done through Iconix Europe, we could start to get some real growth out of them for next year.

And are those deals included in your guidance for 2012?

It's -- as you know, with licensing, new licensing deals not necessarily material in the very beginning. Those take some ramp-up periods. It's really about getting Iconix Europe positioned for growth in the future.

And are those deals just around Material Girl, or are those some of your other brands as well?

Others as well.

And then Sharper Image -- do you see any opportunities to expand into different categories, or where do you see that growing?

We do. It's a pretty broad group of licensees today doing a lot of interesting innovative products. But we saw a few products we think we can bring into the group, and we also see a big opportunity in Asia. In the Japan market and the China market, there is some good brand recognition for it. So we do see expansion, both within categories, within retail, within a few of the big electronic big boxes. We just got a nice new program with RadioShack. So we're pretty enthused about the ability to add value and also do some great marketing that might have been missing in the past.

Great, and then, Warren, are you assuming in the guidance some kind of financing for the Sharper Image acquisition?

We are. We are in the process of securing the financing for the Sharper Image acquisition, and as well the potential share buyback so that we ensure that we have the liquidity for that -- the near term convert that is due in June 2012.

So if we're trying to figure out what kind of accretion this could have next year, should we assume -- what kind of interest rates are we assuming for it?

I would say it's about 400 to 500 basis points.

Okay, great, thank you.

Diana Katz, Lazard.

Hi, nice quarter. Yehuda, I was hoping you would go into some more detail on that Ecko business. You mentioned there was some improvement there. Is that from Zoo York or from Ecko itself?

No, it's from Ecko itself. We have seen some positive improvement in Ecko retail stores, which as you know operate as a license. They have approximately 100 stores in the US and we have seen some nice turnaround there. And also, in addition, some of the international business with Ecko has been picking up. So as a combination, we've been seeing some encouraging signs that there.

Also as far Diane as far as zoo York has really been wonderful and it's really expanding at JCPenney and Kohl's and other places. So, definitely a big growth story for us in 2012.

Okay, great. And then I was wondering if you could also talk about some of your other home brands outside of Royal Velvet, how they're performing.

You know, Fieldcrest is the shining star there. Target has really gone after the brand and somewhat dramatically improved the business. So we are excited about what's happening at Fieldcrest. Charisma is picking up momentum the last couple of weeks, especially at Costco, and that relationship and also performing as I believe the number one brand in its space at Bloomingdale's. And Cannon is okay, maintaining, not growing as dramatically as we would like, and Waverley is somewhat unplanned. It's not a big growth business, but it's growing small in the low-single digits.

Okay, great. And then, when is the Sharper Image deal expected to close?

You know, probably by the end of the day. It signed last night, and we're going to fund today.

Sorry -- are any of those revenues included, then, in the 2011 top line?

Probably not -- it might be a little bit, but a lot of the product was shipped in September and October for holiday, so there's very little left. And it could be 1 million or 2, but nothing dramatic. We also have a lot of deal costs and so we're seeing it somewhat neutral to earnings, but might be 1 million or 2 on the top line.

Thanks very much.

Steve Marotta, CL King.

Good morning, as it relates to Sharper Image, can you break out domestically and globally what they general sales mix is there?

Yes, it's pretty much America. We have -- I believe it's around 5% or 8% globally. But that's one of the opportunities. We do have trademarks around the world and there is good recognition in the Far East. So we do see a nice opportunity to grow globally, and possibly with our network that we have built around the world. But it's generally an American base here.

You sort of answered the follow-up question, which was -- as you look globally to the markets which hold the most potential for the brand, you're looking in the Far East?

Yes, in our due diligence we found a good appetite in both Japan and China.

And is it accretive to the tune of about $0.08 annually assuming no material organic growth, just at the current run rate, is that about right?

Yes, Steve it's Warren. It's probably a little bit less just because we're going to finance the acquisition, so you have to put in the financing costs. But it's around there, a little bit less.

Okay. I'm going to guess by your reticence to quantify Royal Velvet that you might not want to answer this next question -- but as it relates to Royal Velvet currently and a run rate, can you give a general ballpark for a modeling standpoint next year?

We try to -- we don't break down the individual brands in the 28 portfolio, but we're missing most of the year, although it is going to launch next May. All the momentum is in the back half and we had a pretty good minimum from Li & Fung that we're not going to enjoy -- and it's a long first year with JCPenney. So I guess I figured out a lot of ways to answer on your question.

And you did that very well, congratulations.

I have one other quick question, from a comparison standpoint, in the third quarter of last year, as I understand it, there were some nonrecurring restructuring charges from Peanuts. Can you call those out and perhaps quantify on an EPS standpoint what that impact was?

Yes, it wasn't a restructuring. We signed a deal with ABC for the specials for the next five years. And because it's old work that Charles Schultz created 30-40 years ago, the accounting as we had to book all $12 million when we signed the deal, even though it was for the next four years. So I think it was roughly, I believe, somewhere around $12 million of top-line revenue which we would only have earned $3 million in the quarter. So probably an extra $9 million up top, which probably comes down -- most of that comes down to the bottom.

I was actually specifically -- maybe I am misinformed. I thought excluding that, I understand that dynamic. I thought that there was a headcount reduction executed in third quarter of last year as it relates to the newly acquired Peanuts at the time?

I think that was more in the fourth quarter, Steve, that we did that. It was getting -- we got out of the Peanuts space and did some (multiple speakers) I think we did take a charge, a couple million dollars for rent in the building (multiple speakers). It is a combination of over the back half.

Fair enough, that's fine. Excellent, thank you very much.

Ronald Bookbinder, The Benchmark Company.

Good morning and congrats on the continued strong execution. (multiple speakers) Looking at the organic growth, you said this quarter was sort of low- to mid-single digits. How much of that do you think came from price increases, and how much from unit increases as you expand to more categories?

It's really tough for us to tell, Ron. The retailers just -- we just see sales and we don't really know -- we don't really see units probably until the end of the quarter and as we're going. So not really sure where -- how much came from price increases or unit sales.

And you mentioned in the text that you are looking for mid-single-digit increase in organic growth while you were looking for low- to mid-single this year. Are you more optimistic for 2012 for organic growth excluding the Royal Velvet impact?

We do have a couple of launches in the back half, which hopefully we're going to tell everyone about in the next couple weeks. But it's -- I think we've always been somewhat conservative and talked about in this large portfolio of mid-single digits or don't read too much into low -- it's an interesting world out there and there's a lot of macro issues. So I would conservatively say low to single digits. I'm sorry if we missed below when we talked about it, but I think mid-single digits is a good projection.

Okay. And on the Royal Velvet you talked about a significant decline. Can you just tell us how many million that you -- what you call significant is?

Yes, I think Steve tried to pin me there. And I think because of our partners and dealing with our new partner JCPenney and our past partner Li & Fung and Bed, Bath & Beyond, kind of can't give all that specific information. But I think if you really study the organic projection and look at what it is I think you could figure it out.

Okay. And then looking at The Sharper Image, you talked about the seasonality with shipping in September and October. How should we look at the quarters on a percentage of revenue basis as we model out this $12 million to $13 million?

I think it's probably -- I think you should look at it about 40% first half, 60% back half for next year, Ron.

Okay, and, lastly -- well, one more thing on Sharper Image. You mentioned China. Is there a possibility that you could do an Iconix China with Sharper Image sometime in the near future?

Yes, very good possibility.

And lastly, looking at Rocawear, what are the plans for Rocawear in 2012? And how is the athletic line coming along?

Yes we've been working on some really interesting things. Rocawear, as we've told everyone, has been a little tough, you know, that whole urban market. But we've been working with Jay and we're pretty excited about this new plan we have and a lot of the new product has been well received. So, hopefully, we can try to stabilize the business because it has been a little tough for us, especially on the men's side.

So as we look at 2012, we should be thinking Rocawear to continue to decline a little bit, or at best maybe flat?

I think it's planned to be down. When we average the whole portfolio with all the other new things in organic businesses, Rocawear on the men's side has definitely been planned down a little bit. The kids and the women's side have stabilized and are actually stable starting to go up again.

Okay thank you.

There are no further questions at this time. I will now turn the call over to Mr. Neil Cole, Chief Executive Officer, for closing remarks.

Okay, well thank you, everyone, for listening this morning and joining us today and your interest in Iconix. As always, our team will be available today for further questions, and thank you and have a wonderful day.

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