Icon Energy Corp (ICON) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Iconix Brand Group earnings conference call. My name is Ann and I will be a coordinator for today's call. As a reminder this conference is being recorded for replay purposes. At this time all participants are listen-only mode. (Operator Instructions). We will be facilitating a question and answer session following the presentation. Our speakers for today will be Mr. Neil Cole, Chief Executive Officer, Mr. Yehuda Shmidman, Chief Operating Officer, and Mr. Warren Clamen, Chief Financial Officer.

Before we begin the Company has asked me to read the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors all of which are difficult or impossible to predict and many 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 take -- not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made.

I'd now like to turn the call over to Mr. Warren Clamen.

Good morning, everyone, and welcome to the Iconix Brand Group second-quarter 2012 earnings conference call. On today's call we will review our second-quarter financial results, provide an update on brand initiatives, and discuss our overall outlook for the Company. Reviewing results for the second quarter ended June 30, 2012, revenue was $93.6 million, a 5% increase as compared to $89.3 million and the second quarter of 2011.

The anticipated transition of the Royal Velvet license and the year-over-year declines in our Men's businesses were offset by the strength across the remainder of our portfolio and the completion of our new joint venture in India, which contributed approximately $5.6 million to the top line. In the second quarter we generated $51.9 million of free cash flow, or $0.72 per diluted share, a 16% increase over the prior-year quarter. We have a re-occurring annual tax benefit of approximately $30 million which, combined with our non-cash compensation, and depreciation and amortization, create a re-occurring annual Delta of about -- of approximately $50 million to $60 million between our non-GAAP net income and our free cash flow.

EBITDA in the first quarter was approximately $58.4 million, as compared to approximately $58.1 million in the prior-year quarter. Our EBITDA margin in the second quarter was approximately 62%. The margin decline versus the prior year quarter primarily reflects a stronger peanuts business this year, which is lower -- which has a lower margin. Although expenses are slightly up year to date, we are still on track to be down approximately $9 million to $10 million for the full-year. Non-GAAP net income, which excludes non-cash interest related to our convertible notes, was $32.4 million compared to $32.3 million in the prior-year quarter. And diluted non-GAAP -- diluted non-GAAP earnings per share was $0.45 compared to $0.43 in the prior-year quarter.

GAAP net income and diluted EPS in the second quarter of 2011 included a non-cash non-re-occurring gain of approximately $21.5 million, related to the Company's acquisition of the global master license of the Ed Hardy brand in April 2011. GAAP net income for the second quarter was approximately $28.6 million, as compared to $41.5 million in the prior-year quarter, and GAAP diluted EPS was $0.40 compared to $0.55 in the prior-year quarter. Reviewing our results for the six months ended June 30, 2012, our revenue increased to approximately $182.1 million. We generated free cash flow of $99.4 million. Our EBITDA was approximately $115.2 million. Our non-GAAP net income, as previously defined, was approximately $64.4 million, and our diluted non-GAAP earnings per share was $0.88.

In terms of the seasonality, we expect revenue and earnings in the second half to be lower than the first half reflecting the tiered royalty structures for our larger direct-to-retail licenses, and the completion of the India joint venture in this second quarter which contributed approximately $0.05 to the 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 this morning or on our website, iconixbrand.com. Moving onto our balance sheet. We believe that we continue to be in an extremely strong position with our net debt to EBITDA under two times, and the majority of our portfolio essentially unencumbered, we have significant borrowing capacity.

We believe there are a variety of financial options available to the Company, including whole business securitization and the term loan market, which will allow us to continue to execute against acquisition strategy as well as share repurchases. At the end of the second quarter we paid off our $287.5 million convertible note through a combination of existing cash and borrowings under our $150 million revolving credit facility. Following this payment, we ended the quarter with approximately $50 million in cash and $490 million in long-term debt.

We have continued to buy back our stock under our $200 million share repurchase program. And since initiating the program in October, 2011, we have bought back a total of approximately $107 million, or approximately 10% of our shares outstanding as of today. In the second quarter we repurchased approximately $50 million worth of stock at a weighted average price of $15.58. Today, we have approximately $93 million remaining under the current program, and we plan to continue to be opportunistic and evaluate share repurchases as an effective use of our cash.

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

Thank you, Warren, and good morning, everyone. In looking at our overall brand portfolio, there have been strengths as well as some expected weaknesses. However, the majority of our brands remain healthy and we are excited about several growth initiatives, including the debut of Truth or Dare fragrance and footwear, Candie's category expansion into beauty products, Material Girl's direct-to-retail launch in Europe, and our newly formed joint venture in India. The new joint venture in India was formed in the second quarter with Reliance Brands Limited, marking our fourth international joint venture for our portfolio brands, adding to our existing partnerships in China, Europe and Latin America. The new joint venture is based in Mumbai and will follow the core business model of Iconix, focusing on growing royalty revenue through existing and new licensing agreements with both manufacturers and retailers.

On the international front, we are also gaining momentum in Europe as we recently launched two direct-to-retail partnerships, Material Girl with Otto and Ocean Pacific with UK-based SportsDirect. In addition, we are excited to announce that we have signed our third DTR in Europe, this one for our Danskin brand, and we plan to announce the retail partner in conjunction with the launch in the next few months. In total, international revenue represented 22% of our business last year, and our goal is to continue growing that base to a third of our revenue in the next few years.

As for our US business, we remain well positioned in the retail landscape, with partnerships across the major big box retailers. Some of our strongest performing brands in the quarter were Mudd, Bongo, Charisma and London Fog. Peanuts was also one of our top performing brands in the quarter. Some highlights include the success of our recently launched fashion DTR with UNIQLO; the continued success of our social gaming app with Capcom, which surpassed more than 5 million downloads since its launch this past year; and the grand reopening of Kiddyland's flagship Harajuku store this past quarter, one of Japan's most popular toy stores with an entire floor dedicated to Peanuts. We also have a new DTR launch planned for spring 2013 with LPP, an Eastern European fast fashion retailer with 900 stores across multiple countries, including Russia.

For Sharper Image, the beginning of our relaunch is underway with a fresh the marketing campaign featuring actress Megan Fox. Where preparing for the entire revamp of the brand in terms of product, packaging and image, that we plan to unveil in early 2013. As anticipated, the two largest declines in the past quarter were Royal Velvet, due to the short-term impact the license transition, and our Men's division. Looking ahead, we see our Men's division beginning to stabilize. For Rocawear, our core licensee is moving forward with the freestanding store strategy, and they are planning to open stores by the end of this year.

Our Ed Hardy business in the US remains tough, but we expect the fragrance business to remain strong as Elizabeth Arden recently acquired our licensee's company. We have also made improvements in the Ed Hardy international business by signing new agreements directly with operators in several countries including China, Brazil, Thailand and Japan, and we are also in contract in the Middle East. In total, we have approximate 50 Ed Hardy stores internationally, including 22 in China alone. And with that, I will not to the call over to Neil Cole our Chairman and Chief Executive Officer.

Thank you Warren and Yehuda, good morning to everyone. We are pleased with our overall performance in the second quarter and are encouraged about the progress we are making in building our brands worldwide. Our specialized business model remains strong, and continues to prove its relevance across industries and geographies as we enter new categories such as entertainment and electronics, and new markets such as India. We are -- we continue to generate significant free cash flow, which we plan to use to create additional shareholder value through additional acquisitions and additional share buybacks. In looking at the future, we see opportunities to organically grow the portfolio, both domestically and internationally, through our existing partners, new categories and importantly, global expansion. We believe our portfolio can achieve low single-digit organic growth on a long-term basis, and with acquisitions we would expect to be able to achieve the type of growth we have seen in the past years.

In terms of acquisitions, we are extremely well-positioned to execute. Our strong balance sheet, predictable free cash flow, and aggregate guaranteed minimum royalties of approximately $700 million only in the first terms of the agreements, give us significant borrowing power. With total debt capacity of approximately $1 billion we have the ability to focus on medium and large sized acquisitions. We are currently evaluating a number of opportunities in both fashion and new industries that have strong iconic brands, as well as numerous international properties. However, as always, we will remain disciplined and only execute on those acquisitions that we believe our in the best long-term interest of our shareholders and our Company.

Moving forward to our guidance, we are reaffirming our 2012 revenue guidance of $340 million to $350 million, our 2012 non-GAAP diluted EPS guidance of $1.65 to $1.74, and our 2012 free flow -- free cash flow guidance of $174 million to $181 million. The completion of our India joint venture with Reliance does not change our outlook, as it was previously planned in our full-year estimates.

In closing, we have built a unique brand management platform that today consists of 28 iconic brands that are sold across more than 40 different countries, and generate approximately $12 billion in annual retail sales. Once again, License! Global magazine has ranked Iconix as the number 2 licensor of consumer products in the world, second to only Disney. With a portfolio of brands that has an average age over 50 years old, our brands have proven their sustainability. Our US business remains strong and stable, and we hope to emulate that success around the world to our existing joint venture partnerships and new territories. I'd like to thank all of you for listening this morning, and your continued support, and now turn it over to question and answer.

Thank you. (Operator Instructions). Susan Anderson, Citigroup.

Good morning everyone and congratulations on a great quarter. I was wondering if you can give some color on the Rocawear brand in the quarter, and if you've seen any impact from the new JV marketing?

Yes, actually our business has been pretty good the last couple of months. Better than last year on lower inventories, and we really believe we've stabilized it and starting to grow her. We are excited about -- hopefully we were going to be opening up our first stores in the next 60 days. When I say our first stores I mean Roc Apparel, the company Jay-Z owns, is opening up 10 stores this year. And generally, a pretty good feeling that we've hit the bottom and we're back on our way up.

Great, sounds good. Then if you can maybe just give a little bit more color on the performance by brand, I think you mentioned some of the stronger brands, but maybe if you could also comment on some of the brands that under performed and the reasoning behind that?

The under performance -- the ones that we spoke about in the last two calls, the big hit is the transition from Royal Velvet, where we used to be at Bed Bath through Li & Fung, and now we just recently relaunched at JCPenney, a significant impact in the quarter, and over the next two quarters. The overall Men's business, a combination, as you mentioned, Rocawear, softness in some Ed Hardy, and a little softness in Ecco on the footwear side, but basically that's it.

What's encouraging to us is over 20 of our brands are moving in the right direction and really strong, most of the DTRs are I think up -- over I think close to 4% for the year so far. And feeling pretty good about where we are going forward.

Okay, great. Thanks, congrats again.

Bob Drbul, Barclays Capital.

Hi, this is Jessica Schoen for Bob. I had a question regarding your businesses in the international regions. I was wondering if you could give us any color on how things are going in those -- in the macro economic environment of those geographic regions?

Sure. In terms of the macro environment as a relates to us, we're feeling pretty good. Our business was over 20% last year growing to a third. We've got strength in our JVs but not just strength in our JVs, but across geography we have a number of DTRs globally now. We've got a partnership for Material Girl with OTTO in Europe, H&M with Peanuts, for example, Suburbia in Mexico with Mossimo, and the list goes on.

We're feeling pretty good. We are also looking from a macro perspective at new markets. We are looking to better and Brazil and Russia, we're looking to open up the Middle East and Southeast Asia. We're pretty excited about it. Of course, there's China as well, and in China today we've got about 400 stores for our seven brands that have launched in the region, and we are expecting to hit our plan to have about 500 or more by the end of this year.

Okay. Then on the initiatives you were talking about for the menswear businesses last time, you mentioned the TV commercial and the freestanding stores. Would you say you are starting to see that impact in your business or do think there's a general stabilization from other trends?

I think once again it is just good product, general stabilization and we are starting to see an uptick so I think it is going to be a slow rebuild. But we are pretty encouraged about the progress we've made.

All right, great. Thank you so much for taking my question.

Eric Beder, Brean Murray, Carret & Co.

Good morning. Could you talk about how we should -- what is embedded in your projections in terms of share counts going forward? And, I'm assuming that at these levels you are still aggressively buying back stock?

We say that we are going to look -- be very opportunistic in buying back stock at certain levels for sure. Again, we bought back about $107 million to date. I think what you can assume is since there's a range that the fully diluted number for the full year will be somewhere between $71 million and $72 million.

Okay. And could you update on Royal Velvet at JCPenney, how that is shaping up? I think we are getting pretty close to the rollout. How is that looking?

It is looking very good. We've actually started the rollout, we do believe we are positioned as a core home brand at JCPenney. We've been featured regularly in the Penney's direct mail pieces which look really, really great. It is absolutely a full lifestyle presentation so you're seeing multiple categories, we are no longer just a towel, as we've always believed Royal Velvet is a lifestyle brand. And we also see new products rolling out towards the back of this year and into spring of next year and beyond.

Are you going to have a shop in shop for that brand?

We are getting our own area as far as -- I don't know if it can be called a full shop in shop, but it is the key focus of their home area.

Okay. And in terms of some of the Wal-Mart brands, how is OP and Danskin doing there?

OP we had a really strong first six months of the year ahead of last year. Although Wal-Mart is focusing it more as a spring/summer lifestyle brand, so back half we're planned to be, somewhat to last year, off. And Danskin and Starter are both pretty strong and pretty much equal to last year, and selling a lot of the basics, hosiery and T-shirts and all the key programs, so continue to keep our real estate.

Great. Thank you.

Jim Chartier, Monness, Crespi, Hardt & Co.

Good morning. Can you just give us a little more color on the SG&A growth in the quarter, it was up 9.5% versus being down 3.5% in first quarter?

Yes, Jim. The main driver of the expense increase was the mix of Peanuts revenue in Q2 versus Peanuts revenue in Q2 last year, and Peanuts has margins. But again, we will -- we are forecasting that SG&A year over year full year will be down about $9 million to $10 million as we had planned, so you'll see it reversed in Q3 and Q4.

Over the last few months when we saw the back half, where it was coming out, when we made all our expense initiatives, most of them hit in Q3 and Q4.

Where are the SG&A reductions coming from?

Just general, the Peanuts integration that we took some expenses in Q3, Q4 last year obviously won't repeat. We have some compensation decreases. General SG&A, we just went through a whole cost cutting initiative that kicks in in the second half of this year.

Where there any one-time expenses related to that cost-cutting initiative in second quarter?

No.

Okay. Can you tell us how much did Peanuts increase as a percentage of the mix this year versus last year?

We actually don't give specific guidance on brands.

Okay, it seems like a lot of SG&A increased just related to one item.

Right, it is one of the primary drivers, there was a couple of other smaller ones, nits & nats here and there across the board, but that was the biggest one, it wasn't the only one.

We've also kept marketing pretty strong, a lot of worldwide initiatives, with Madonna and a few other which we think is important, which will level out throughout the year.

Okay. Then how is Royal Velvet going to be positioned relative to Martha Stewart at JCPenney?

I think Royal Velvet is going to have hopefully the core business on the soft side of the towels and sheets, and we also have furniture, and I think more of the, hopefully the volume contemporary business. We have, quite obviously, have not seen Martha nor do I know when it's actually coming, but we have -- if you go in the stores today Royal Velvet really looks great. It is taking a big part of -- they used to have a brand called Chris Madden, which has been converted, and it is really contemporary and looks and fabulous.

Great. Best of luck.

Diana Katz, Lazard Capital Markets.

Hi, congratulations on the quarter. Wanted to talk about Mudd. Kohl's definitely continues to call out Mudd as its best performing juniors line. I was surprised to see they took some space away from Mudd and Candie's for a junior line with Vera Wang. Is that concerning in your eyes for the future performance of Mudd and Candie's there, or do you view it as a positive for the overall floor?

What we've seen and been told by the people at Kohl's is that it is really not a significant share, and they think our businesses continue to grow. So we are not really concerned about and hopefully we want Kohl's to be successful, so the more interest and excitement, we pretty much have a big majority of the junior business so the better they do overall, I think will be the better for our business in both Candie's and Mudd.

Okay, great. And the past few quarters you've highlighted both Bongo and Charisma and London Fog as top performers. Can you talk about some of the strengths within those brands and what you see in the back half?

Yes. I see them continuing. Kmart is doing a really spectacular job with Bongo, and the business is up almost double this year, over 50%. And Charisma, pretty excited at what's hap -- Costco has also double-digit gains, and we are growing share there.

And London Fog, we are pretty excited coming into our key period, we had a good second quarter in Hudson Bay and other parts around the world, so all three brands continue to have good momentum, continue to do good in the back half, which will help us a little bit offsetting the plan -- the planning down of (technical difficulty) and also the Royal Velvet transition.

Okay, great. Best of luck.

Steve Marotta, CL King & Associates.

Good morning, everybody. Talking about Europe, you signed three new licenses there. The OP, Danskin DTR, I missed the third, I would like to review that. Also can you talk a bit about, is that a shift in the European business? I know that's been one of the softer spots for Iconix, and can you talk about opportunities to continue to roll out brands there and how that JV is doing overall?

Sure, and it is a shift, you're absolutely right. We are coming off a string of old licensees who are now, really, out of the picture. And coming in to the picture are these new launches that we are really very excited about. As you mentioned, the 3 DTRs we have in place today, the OTTO Material Girl launch has launched, you can see on their website, it was featured on their homepage during that first week and was really pushed out there. It will also be in their catalog, and might have a brick-and-mortar piece as well.

What you've got with SportsDirect, we are in store with OP and that's looking very good. Then with Danskin, our retail partner has asked us not to mention their name yet, as they want to mention it closer to the actual launch, but we are signed and we're locked and loaded on product development, so it's very exciting. But beyond that, we do think they are more DTRs. We are still pursuing the large volume, big-box retailers across Europe, whether it's Tesco, whether it's Carrefour, whether it's Asda and the like. So we think with Europe this momentum is a good sign -- signal for the future.

Great. And also, Warren, can you quantify the impact of India on future earnings at all? Either later this year or next year? Is it quantifiable? I know it is recently signed.

Yes, that business [builds], so I think if the impact -- the material impact is going to be in 2013.

Can you quantify it at all?

No. We are still working with Reliance to do the plan and I would even push back a little even from Warren and say the real material impact is probably 2014, 2015. I mean, it is going to be a slow build, and it is a developing nation, as we all know, and they're building a lot of malls and a lot of stores, and we think it is going to be three to five years to really be substantial for our P&L, but we are excited about -- Reliance has some incredible plans and great partnerships, and we do think it will be really great for our Company over the next three to five years.

Great. Lastly just a housekeeping issue. Tax rate assumed for the year please?

About 35.5%. 35.5%, 36%, between that.

Thank you very much, appreciate it.

Ronald Bookbinder, The Benchmark Company.

Good morning. The expansion of the brands Material Girl and OP into Europe, how much did that contribute in Q2? Because aren't those licenses front-end loaded for the first 18 months?

No, actually the opposite. I think those will contribute a lot in 2013. As Yehuda mentioned, we ended a lot of deals last year to do these new deals, and most of them, the minimums are over -- usually over 18 month, first year to get going. So we're going to see a lot of impact, Europe will -- a little closer than India -- we're thinking 2013 through 2015 you're really going to see a nice build happening in Europe.

Okay. And you mentioned Royal Velvet product extensions that you feel it could be a lifestyle brand. Are you talking about expanding it to sweat suits and stuff like that? Or how can -- how do you see it progressing out of home goods?

Right. Actually JCPenney has extended into a lot of new categories like window treatments and furniture. But ironically, we've opened up London -- Royal Velvet stores in China, they do have a whole line of apparel, mostly pajamas and robes and slippers, which look really fabulous so we are studying that to look at what we can do in other parts of the world.

But basically, when we talked about expansion, we were talking outside of the core [towels and] sheets into more furniture and window treatments and other things that would be in the JCPenney home area.

And on Rocawear, you mentioned 10 stores this year, is that 2012 or is that over the next 12 months?

2012.

Okay. Great, thank you.

We have no further questions at this time.

Okay. Well, thank you, everybody for listening this morning and your interest. As always, our team will be available for most of the day for questions and answers and discussions, but we will talk to you soon, thanks again.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.