Icon Energy Corp (ICON) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group's fourth-quarter and full-year 2011 earnings conference call. Today speakers will be Neil Cole, Chief Executive Officer; Yehuda Shmidman, Chief Operating Officer; and Warren Clamen, Chief Financial Officer.

At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes. At this time I would like to read the 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, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the Company.

This may cause the actual results, performance or achievements of the Company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident and similar expressions identify forward-looking statements.

Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. I would now like to turn the presentation over to your host, Mr. Warren Clamen, CFO.

Good morning, everyone, and welcome to the Iconix Brand Group fourth-quarter and full-year 2011 earnings conference call. Today we will review our financial performance, provide you with an update of our most recent business initiatives and discuss our outlook for 2012.

Starting with the full year 2011, it was another record year for our Company. Our brands generated approximately $370 million, an 11% increase over 2010. We saw significant improvement in our EBITDA margin as we successfully integrated Peanuts and continued to reduce expenses as we leveraged our platform.

When we exclude last year's one-time litigation gain our EBITDA increased 18% to $229.6 million in 2011, and our EBITDA margin increased to approximately 62% in 2011 from 58% in 2010, an improvement of approximately 400 basis points. In 2011 our Company generated free cash flow of approximately $179 million or $2.37 per diluted share, which is calculated by dividing our free cash flow by our diluted share count for the period.

Our 2011 non-GAAP net income as defined in our press release increased 18% to approximately $127.4 million and our diluted non-GAAP earnings per share was $1.69 compared to $1.44 in the prior year.

Reviewing our results for the fourth quarter ended December 31, 2011, total revenue was approximately $95.5 million, a 9% increase over the prior year quarter. On a year-over-year basis, in the fourth quarter we reduced SG&A by approximately $4 million and improved our EBITDA margin by over 10 percentage points to approximately 60% from 49% which excludes last year's litigation gain.

In the fourth quarter our EBITDA was $57.3 million, a 34% increase over the prior year, again excluding last year's one-time litigation gain. We generated free cash flow of $44.9 million or $0.60 per diluted share for the quarter.

Our non-GAAP net income was $31.3 million, a 28% increase over the prior year quarter, and our diluted non-GAAP earnings per share was $0.41 compared to $0.33 in the prior year quarter. 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 out earlier this morning and on our website, IconixBrand.com.

Moving on to our palate sheet, we believe we are in a very strong position. We ended the year with approximately $182 million of cash and as of this morning we have cash on hand of approximately $200 million. In November of this year we entered into a $150 million revolving credit agreement that we have yet to draw down on, but which provides us with access to low cost capital allowing us to satisfy our upcoming convertible debt maturity of $287.5 million and to remain opportunistic with our acquisition strategy and our share repurchase program. Our Company also continues to generate significant free cash flow which we expect to be approximately $190 million for 2012.

While we plan to continue to execute on our growth strategy through acquisitions and organic initiatives, we believe we can also offer value to our shareholders by opportunistically buying back our own stock. We have begun to execute this strategy and, under our $200 million share repurchase program, we have already bought back $29 million in Iconix stock at an average price of [$16.82].

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

Thank you, Warren. Overall we are pleased with our brand performance in 2011 and pleased to report that our organic strategy of building our brands globally is on track. In 2011 we achieved worldwide organic growth in the mid-single-digits. Starting with our domestic business, there were some ups and downs.

On the positive side we continue to see strength with our Kohl's and Target direct retail brands. Mudd continues to gain share at Kohl's with its strong fashion basics program and we see footwear as an opportunity for 2012 as the category has now become part of the Kohl's license.

Candie's continues to show positive growth in its seventh year at Kohl's and we expect continued strength in 2012 as we are launching our new advertising campaign featuring Lea Michele, star of the hit show Glee.

Mossimo, which trended up in 2011, remains a strong and consistent business at Target with close to $2 billion in annual retail sales.

Fieldcrest has been a bright spot in our home business, up significantly in 2011, and we expect both Mossimo and Fieldcrest to benefit from Target's expansion into Canada.

At Sears and Kmart, Bongo posted strong growth as it finished its first full year and Joe Boxer continues to hold its standing as one of the largest brands in the softlines department at Kmart.

On the traditional licensing side we also saw strength in some of our upper Tier brands including Badgley Mischka and London Fog.

With Peanuts we had a strong year exceeding our expectations and are continuing to build on our digital offerings. In the fourth quarter we launched a Charlie Brown Christmas interactive app, we released Snoopy's Street Fair mobile game with Capcom, and partnered with Barnes & Noble to publish our first ever eBooks. On the apparel side a new line of Snoopy peril apparel at Uniqlo has begun rolling out worldwide.

Now for some of our more challenging businesses. Our Rocawear, Ecko and Ed Hardy men's businesses remain tough. And while we are working to improve all three, we expect this softness to continue through 2012.

We believe Jay-Z's commitment to Rocawear and our new marketing campaign, which includes our first ever TV commercial starring Jay-Z, will be a positive. However, with a shrinking urban market on a macro level it will be difficult to return to peak volume.

For Ed Hardy, while the fragrance and international businesses are doing well, we are working to reposition the US apparel business which has declined.

As for Ecko, the freestanding retail stores continue to perform well in the US and abroad, but that has not been enough to offset weaknesses in the wholesale apparel and footwear businesses.

At Walmart our Starter and Danskin Now brands have been stable as they capitalize on Walmart's back-to-basic strategy and become a core part of Walmart's athletic footprint. However, the OP business had a tough year end as Walmart eliminated some of its women's [full] categories and has positioned OP overall primarily as a surf and skate business.

Moving on to our international business, we are making significant progress and believe international markets will play a major role in the future organic growth of our Company.

In the fourth quarter we recognized our first monetization in China for our London Fog brand of approximately $6 million. The monetization was triggered by the IPO of China Outfitters, our partner for London Fog in China in which Iconix China received shares of a global offering.

Iconix China sold approximately half of its shares and is retaining the other half to participate in the future growth of China outfitters. We believe that this initial monetization is just the beginning of our long-term opportunity in China and anticipate that a second monetization is not too far behind.

We have already launched five brands in China that in the aggregate have approximately 300 stores. As well, we recently entered into a new partnership for Royal Velvet and we have a seventh deal in contract.

Turning to our other joint ventures, we are seeing positive results in Latin America where total royalties in the region were up 25% in 2011. Similar to our strategy in the US, we have been able to partner with some of the leading retailers including Falabella and Suburbia to grow our brands.

In Europe we are beginning to gain traction and recently we signed a direct to retail license with UK-based retailer, Sports Direct for OP and a new direct to retail license for Material Girl. We are continuing to explore new opportunities to maximize the value of our brands internationally and in the fourth quarter we entered into a new joint venture with Itochu Corporation for the OP brand in Japan and its surrounding areas which accounted for approximately $5 million of incremental revenue in 2011.

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

Thanks, Yehuda and Warren; good morning, everyone. In looking at our performance for 2011 in which we reported another record year for our Company, our business model continues to prove its long-term sustainability and profitability. With our diversified portfolio, growing international presence, acquisition activity, scalable platform we were able to deliver strong sales growth and profits despite challenges in some of our men's businesses.

In 2011 we executed on several important initiatives, we further diversified our portfolio and made our first step into consumer electronics with our acquisition of Sharper Image. We took control of our Ed Hardy brand and increased our stake in Zoo York to 100%. We developed Truth or Dare, our second brand other under the Madonna partnership and signed a worldwide fragrance deal with Coty.

We had our first monetization in China and are making progress in targeting new international markets. We strengthened our balance sheet by completing a $300 million convertible debt offering and paying off our term loan. We also entered into a $150 million revolving credit agreement that provides us with liquidity and flexibility to further execute on our acquisition and share repurchase initiatives and provides us with low-cost capital to satisfy our upcoming debt maturities.

Looking forward to 2012 a key focus of ours is to further build our worldwide footprint. With our brands becoming more mature in the US market we see international expansion as an important driver of our organic growth long-term.

In 2011 international represented approximately 22% of our business and our existing global partnership in China, Latin America, Europe, Japan and our Peanuts International platform and our newly formed joint venture in India, we are well on our way to achieving our long-term growth of growing international revenue to over a third of our total business.

As announced in a separate press release this morning, we're excited about our newly coined joint venture in India with the Reliance Brands Group -- Reliance Brands Limited, which is part of Reliance Industries Limited, India's largest private sector company that has been featured in the Fortune Global 500 list of the world's largest corporations and ranks 119th amongst the world's top 200 companies in terms of profits.

We believe India is one of the most compelling retail growth areas in the world and we are excited to bring them authentic Western brands. The new joint venture, which will be based in Mumbai, will follow a similar business model to that of Iconix US, which focuses on growing royalty revenue through licensing agreements with both manufacturers and retailers while providing marketing and brand management support.

We believe partnering with Reliance is an essential next step to our global expansion strategy. We expect the deal to formally close following receipt of Indian government approval toward the end of this quarter. We may also look to gain controlling rights of some of our joint ventures as we place a significant effort into driving international sales.

In the US, while we are facing some challenges, the majority of our portfolio remains healthy and we expect to see continued growth from some of our more recent launches including Zoo York, Bongo, Mudd and Material Girl. We also have several new exciting initiatives rolling out in 2012 that should be favorable for the back half of the year including our Royal Velvet launch at JCPenney, our Sandra Lee launch at Kmart/Sears and our worldwide launch of Truth or Dare fragrance and footwear.

With these new launches and a heavily weighted holiday business for some of the newer brands in the portfolio, including Peanuts and Sharper Image, we expect our 2012 sales and earnings to be more equally distributed on a quarterly basis.

In 2012 we expect growth from our existing brand portfolio -- from the portfolio in the US, international partnerships and Sharper Image acquisition to more than offset the negative impact of the Royal Velvet transition and continued softness in our men's business. As for our overhead, we will continue to look for efficiencies and leverage our existing infrastructure.

In addition, we remain focused on acquisitions and are well positioned to execute. However, as always, we remain disciplined. We will also continue to evaluate share repurchases as a potential use of our cash and an additional way to create shareholder value.

For the full year 2012 we are reaffirming our guidance and expect revenue to be in the range of $370 million to $385 million, non-GAAP EPS to be in the range of $1.77 to $1.84, and free cash flow to be in the range of $187 million to $194 million.

In closing, we remain optimistic about our ability to continue to drive revenue and earnings growth. Through our specialized business model we are working every day to create value for our portfolio of brands. We believe we are in a strong position in this ever-changing retail landscape as retailers and operators worldwide are looking for iconic brands to distinguish their stores and businesses.

In the US we have a great track record of finding best-in-class partners for our brands and we look for to achieving the same success around the world. I'd like to thank you all for listening this morning and your continued support and we will now, operator, turn it over to questions and answers.

(Operator Instructions). Susan Anderson, Citi.

Congrats on the great quarter. I was wondering if you can provide some more color on the India deal in terms of structure. I assume you guys are going to receive 50% of the JV's revenue. And then also if there's any licensees currently in place, and then maybe just the differences in margins versus the US?

Well, what we're going to be doing with Reliance in India is pretty similar to what we're doing in the US; it's going to be a license model, different then our China JV. And today we have two businesses in India that are going to be rolled into the JV. One is with Arvind for Mossimo, which actually is doing really well focused on [Ag Bazaar]. And then we also have a deal with Ed Hardy where they, I believe, have six stores today planning on a bigger role out.

So we have a great -- we've been working with Reliance for about a year to get this deal done, and we're excited and we think there's a lot of opportunity based on our studying the market over last year.

Okay, great. Thanks. And then also one last question if you can provide an update on Peanuts, any expectations for future licensing deals and what we can expect in terms of a potential licensing deal for the brand in the future in terms of like wholesale or DTR?

Well, Peanuts is a combination of both. As I believe we talked about this new deal we just did with Uniqlo, we also have DTRs with Benetton and also with H&M and Old Navy. But we also have over hundreds and hundreds of licensees worldwide.

Big interest in the digital space, pretty excited about our app business. We won two awards for number one app in November and December which were nice revenues for us in our new virtual game with Capcom. So there's a lot of growth there in different segments of the Peanuts business.

Okay, great. Thanks, guys.

Eric Beder, Brean Murray.

Could you talk a little bit about what you're going to -- now that you have Sharper Image under your belts what do you plan on -- how do you plan on taking that brand I guess to the next level?

Well, Sharper Image we -- I guess we bought around November, so we've been working on it the last couple months, analyzing, spent a lot of time at CES working with -- meeting all the licensees and studying the products. It's kind of easy for us because it was a licensing business. And we do have over I believe roughly 40 licensees today in different categories and different products.

So we're working on improving them, we're going to be launching a new ad campaign and an imaging of the brand. But basically just trying to step up every aspect of the business and working on bringing the brand promise of Sharper Image, which is innovative products and just great marketing to build on its heritage.

Okay. And how should we think longer-term about what you're doing with Ed Hardy in terms of the apparel? Where do you want to position that brand? It's had a kind of a rough last few years.

Yes, miraculously -- not miraculously, but Ed Hardy still has a wonderful international business. We just finished coming back from [MAGIC] and literally from every part of the globe there's Ed Hardy stores, over 50 stores coming in, looking for core Ed Hardy, of what made it successful in the US the last few years. We also have -- our fragrance business has remained strong. But yet the apparel business is somewhat broken and working on all sorts of new marketing ideas, branding ideas, product ideas and strategies to build it back up.

And finally, just a housekeeping question. Where is the China joint venture monetization on the income statement and how much is it on the income statement?

It's in the equity line, so equity earnings on joint ventures. And as we called it out in December it's about $6 million.

Thank you and congrats.

Diana Katz, Lazard Capital Markets.

Congratulations on the joint venture and the quarter. I was wondering for the India JV if you can clarify if in the first quarter of 2012 there will be any sort of immediate incremental revenue associated with this deal and if that's incorporated into current guidance?

Yes, there is an upfront payment that we do get on closing, waiting for India government to approve it and hopefully that will happen in the next couple weeks or could be couple of months, so we think it will close in the first or second quarter. And it's a similar payment that we've gotten around the world when we did Latin America and when we did our Europe JVs -- (multiple speakers).

Is that's incorporated into current top-line guidance?

It is. We've been working on this deal for well over a year and we knew we were close to signing and it's part of our reaffirmation of guidance today.

Okay, great. And then I was wondering, can you talk about some of the other brands at Walmart, how Starter and Danskin are performing and how you expect them to do in 2012?

We've been spending a lot -- we were down at (inaudible) I guess in December and there's a whole new team of people taking over. And luckily we have great brands down there and Starter and Danskin now have been somewhat seamless in the transition. We have strong basic businesses in hosiery and underwear and T-shirts, all the basics. So those two businesses have been pretty stable and kind of going along with the rest of Walmart's performance.

OP, we did see a hit in the back half of last year as they repositioned it more back to where they thought Op was strong in the swim and more spring/summer business. So we're doing pretty well back there. We also see some new opportunities down there that we're working on, possibly some new brands. So overall it's okay, although Starter and Danskin now have been pretty stable and we did lose some share in the back half on OP.

Okay. Also if you could talk about any impact at JCPenney on Royal Velvet from their Martha Stewart deal?

The business we're taking over was more of the Chris Madden business and it's a pretty significant business and we haven't seen any -- I believe that Martha is going to be in '13 and our launch is in May. So we have seen no difference based on the strategy so far.

Okay. And then finally, if you can just talk about maybe your plans for Waverly?

Waverly continues to be where it is today. We have a nice paint business at Lowe's, a pretty good business across the board at multiple retailers including JCPenney and others. So Waverly has been a pretty stable, good a solid brand for us.

Great, thank you very much.

Robby Ohmes, Bank of America-Merrill Lynch.

Hi, good morning, this is Helena Tse Colin in on behalf of Robby. Just to clarify on the total JV equity income line, was the biggest contributor this quarter versus I guess the trend of your prior quarters the one-time China monetization? And what do you -- and if not what was it? And what do you see the general trend line being for that line for 2012?

Yes, there was actually two contributors to that line this quarter, one was the China monetization. The other one was basically Ed Hardy used to be in that line and then we took control of it. If you remember, we took 85% so now it's consolidated on an annual basis. The second part of your question was the JV line going forward. I would say it's going to be around -- the net impact is about $4 million to $6 million on an annual basis.

Great. And then the second question would be can you maybe discuss other international territories? Obviously you announced the India JV closing I guess in the first half, but any other international territories you're looking at to -- over the next 12 months?

Absolutely. We're focused on many areas including the Middle East, we're focused in other parts of Asia such as Southeast Asia which we haven't yet developed, Australia. And then even within our current JVs we think there are more areas or more opportunities to come in places such as Brazil, which is part of our Latin America joint venture or Russia, part of our Europe joint venture. So I think plenty more to come on the international front.

Great, thanks.

Jim Chartier, Monness, Crespi & Hardt.

First, on -- so the India joint venture, it sounds like some existing licenses will now be part of that. So what's the impact of that on 2012 revenue?

Pretty small, those businesses we're just starting up. And as far as -- we'll be able to give a little more vision into the business when it closes in the future.

Okay. And then Neil, you talked about international being a third of revenues potentially by the end of 2013. A lot of that is in the joint venture line, so how should we be thinking about that comment and when we think about the business being a third international?

Some of it comes up top and some of it goes down below. So it's kind of tough to tell today. And so we're not -- it's tough to think about how the -- we just did a calculation, although the Company I think reported last year around $370 million, because it was in the JV line there was a big number flowing through the JVs where international already is 22% where it might look like it's in the mid-teens.

So, yes, it's a little tricky how the JV, because of Latin America and Europe and China, all comes through the bottom. But we do -- when we break it out sale for sale, we do see international revenues getting to a third over the next couple years.

Okay. And then you mentioned in the prepared remarks potentially taking control of some of the joint ventures. I guess what would the timing of that potentially be and what are the terms dictating that?

It's all up for discussion. We see some of these businesses really growing and we have to work with our partners and look at different ways of possibly getting more control of those businesses and taking them up to the top-line.

Okay, those are all the questions I had. Thank you.

Steve Marotta, C.L. King.

Neil, I think you mentioned something to the effect of possibly new brands at Walmart, and can you also talk a little bit about the opportunities at JCPenney given the changes there?

Yes, we're constantly looking for new brands and new revenue growth both through acquisition and expanding the brands we have today. So in both places we've been talking to management and just both companies are looking to grow and "transform" on the JCPenney level. So we're -- until we finalize any opportunities, and we obviously can't talk about them, but we do see opportunities for growth with both retailers.

Are they more likely, in your opinion, to be within the existing portfolio or something new?

It's tough to tell because we're working on both aspects with both of them.

Okay. And, Warren, with SG&A costs down in the fourth quarter on a year-over-year basis is there any reason to believe that SG&A costs could be flat to down on a dollar basis in 2012 or it's just 2011?

We do think there's a little bit of expansion. We have said that the EBITDA margins that we're projecting for 2012 are in the low 60s, 60%. So, yes, there's a little bit of expansion. We have again taken expenses out of the business.

Okay, I got you, I understand. Thank you.

Ronald Bookbinder, Benchmark Capital.

You mentioned in the text that you're looking at a second monetization in China. Would that be a new brand or would that just be the remaining part of London Fog china?

That would be a new brand. We have another one of our brands that we believe will be filing for IPO sometime hopefully this year.

And so does guidance include monetizations from China?

As you see, it's not that large. So it is -- we do think it's the normal part of our organic growth.

Okay. And looking at revenues on a quarterly basis, should we still be expecting them to be somewhat even across the year given Sharper Image balancing the back half of the year with the step downs that benefit the first half of the year?

Yes, a few things have happened. This year we're losing Royal Velvet in the first half, which was pretty big last year, and Truth or Dare is launching in the back half and we have a bigger Peanuts concentration there with -- in fact it's such seasonal holiday businesses. So yes, I would definitely even out the quarters a little more than where they've been higher in Q1 to even throughout the year.

Okay. And on the Walmart business, if you're looking for another brand should we be thinking of something about in the home area given that you already have strong exposure in men's, women's and juniors?

It's tough to -- obviously they're a private -- we can't disclose anything until anything is done. But we've been talking to them about all different types of opportunities.

Share repurchases, you mentioned that you began to get active on that. How do you balance that with investment in your own business and acquisition?

Today luckily we have a really strong balance sheet and when we pay back our convertible in June pretty much -- and then right behind it the securitization of the other trademarks. So pretty much all of our trademarks in the next 12 months will be free and clear and today we're under I think two to one on borrowing versus revenue.

So we think we have the opportunity to do both. We think we continue to buy our shares because we think they're at a great level whether it be I guess less than five times. So we like our stock, but we're also -- we know how this Company was built, and it was built through buying and acquiring great iconic brands. So we really truly believe we can do both as we continue to grow the business and create shareholder value.

Okay. And lastly, on these urban brands that are having such a tough time, should we be thinking about maybe an asset write-down or do you look to build these back up to where they were?

I think we can build them and they're not -- they're still very large brands, a lot larger than most -- a lot in our portfolio with incredible market share of hundreds and hundreds of millions of dollars. So we don't see them being written off, they have great revenue flows. And I believe we said publicly recently that Rocawear was still over a $400 million retail business and Ecko is not far behind.

So these are strong businesses with nice revenue flows, we just have to move with the market and they'll come back. Time has shown how the market works and how the consumer is fickle. And actually over the last month or two we've started to stabilize, tough compares in the first half because last year they were a lot stronger, but I think by the back half we'll be hopefully anniversarying where we were and be able to start building share again.

Okay, great. And good luck in 2012.

Steve Glagola, Barclays Capital.

I'm calling in for Bob Drbul. Could you just provide some color on how the Sears store closings are impacting the business?

Yes, the businesses we have at Sears Holdings are primarily at Kmart I would say. So far businesses have been doing actually really well. We have Bongo at Kmart and Sears which just finished its first full year, it did very well last year. We see growth ahead in 2012. And Joe Boxer, which has been in the store for a number of years, is still well-positioned as the key brand in the softlines department. Again heavily weighted towards Kmart overseers.

So we haven't seen a real impact at this point and we're very -- you know, we've been working with management there and the merchants and we think our brands are in good shape.

All right, thanks, guys. Good luck for '12.

At this time I'd like to turn the call back over to Mr. Neil Cole, CEO, for closing remarks.

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

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.