Icon Energy Corp (ICON) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, welcome to the Iconix Brand Group third quarter 2012 earnings conference call. As a reminder this conference is being recorded for replay purposes. At this time all participant are in listen-only mode. (Operator Instructions). We will be facilitating a question and answer session following the presentation. (Operator Instructions).

Before we begin, the Company has asked me to read the following statements. 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, confidence, 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 like to welcome today, Mr. Neil Cole, Chief Executive Officer, and Mr. Warren Clamen, Chief Financial Officer. And now I would like to turn the presentation over to you host for today's call, Mr. Warren Clamen, Chief Financial Officer, please proceed sir.

Thank you. Good morning everyone, and welcome to the Iconix Brand Group third quarter 2012 earnings conference call. On today's call we will review our third quarter financial results, provide an update on our existing portfolio of brands, and discuss our recent announcement to acquire the Umbro brand, as well as our outlook for 2012 and 2013. Renewing results for the third quarter ended September 30, 2012, revenue was $86.6 million as compared to $92.7 millionin the third quarter in 2011. As anticipated healthy trends across the majority of our portfolio continue to be offset by the transition of Royal Velvet license, and the year-over-year declines in our Men's businesses. In the third quarter we generated $43.2 million of free cash flow, or $0.61 per diluted share, compared to $44.6 million, or $0.59 per diluted share in the prior year quarter. EBITDA in the third quarter was approximately $51.8 million, as compared to $55.3 million in the prior year quarter, and our EBITDA margin in the third quarter was approximately 60%.

NonGAAP net income which excludes noncash interest related to our convertible notes was $28.7 million, as compared to $30.1 million in the prior year quarter. Diluted nonGAAP earnings per share was $0.41 compared to $0.40 in the prior year quarter. GAAP net income in the third quarter was approximately $27.1 million, a 4% increaseas compared to approximately $26 million in the prior year quarter, and GAAP diluted EPS was $0.38 compared to $0.34 in the prior year quarter.

Reviewing our results from the nine months ended September 30th, 2012, our revenue was approximately $268.7 million, we generated free cash flow of approximately $142.6 million, or $1.97 per diluted share. Our EBITDA was approximately $167 million, and our EBITDA margin for the nine months was approximately 62%. Our nonGAAP net income as previously defined was approximately $93.1 million, and our nonGAAP earning per share was $1.28. EBITDA free cash flow and nonGAAP net income, and nonGAAP diluted EPS are all nonGAAP metrics, and reconciliation tables for each can be found in the press release sent earlier this morning, and on our website ICONIXbrand.com.

Moving on to our balance sheet as we announced yesterday, we intend to launch a new $1.1 billion securitization program during this quarter. However, due to the Securities law restrictions related to private placement, we will not be discussing the proposed securitization, or answering any questions regarding that on the call today. As for share repurchases, since initiating our $200 million program a year ago, we have already bought back$107 million, and plan to continue to evaluate share repurchases as an effective use of our cash. Today we have approximately $93 million remaining under the current share repurchase program. With that I'll turn the call over to Neil Cole, our Chief Executive Officer. Neil.

Thank you, Warren. Good morning everyone. Over the past few weeks we have announced several exciting initiatives, including the acquisition of Umbro, and the launch of a new movie,that we believe positions our Company for long term growth. While 2012 has had certain challenges for us, with the transition of the Royal Velvet licence, and a tough Men's business,we are excited about our growth prospects heading in to 2013, as we further expand our international footprint, and begin to see stabilization in some of our Men's brands. For our men's brands, we expect to see an improvement in 2013, as we focus on expanding distribution, specifically for our Rocawear brand. Earlier this month,our licensee opened its first Rocawear store at the Barclays Center in coordination with the Jay-Z's historic eight night shows, and we expect an additional four to six stores to be open in time for this year's Black Friday.

In the third quarter and for the year-to-date, our top performing woman's brand had been Bongo, Rampage, and Badgley Mischka. We also recently launched a number of new initiatives for some of our woman's brands, that we are having great success with, and should continue to drive growth in 2013. This fall Truth or Dare launched its footwear collections in Macy's and Nordstroms, and will be introducing an intimate collection for the holidays. Material Girl will be rolling out to all Macy's Junior doors by next spring, and itis also having success worldwide with DPRs in Canada, Europe, and Australia. Also, the initial response for the new Candie's Beauty collections has been positive, and we expect Candie's to benefit this holiday from an increased assortment of holiday dresses and gifting items.

In addition, our Target brands, both Mossimo and Fieldcrest, continue to perform well in the third quarter, and going forward will benefit from Target's expansion into Canada. One of the most exciting initiatives on the horizon which we anticipate will be a significant contributor to our organic growth is the worldwide release of a Peanuts feature film in 2015. When we acquired Peanuts in 2010, we knew that it was an enormous untapped opportunity to engage the next generation, and through this movie, we will have the opportunity to connect with consumers across numerous demographics and geographies. To create a film we are working with top partners in the entertainment industry. 20th Century Fox and Blue Sky Studios will finance, animate, produce, and distribute the film. Consistent with our Iconix licensing model, Iconix will not incur any of the expenses. The film will be directed by Steve Martino, who previously directed Dr. Seuss' Horton Hears a Who, and Fox's recent box office smash, Ice Age Continental Drift

In connection with this release, the movie we expect to see a big lift in our existing Peanuts business, which we believe should ramp-up in the year prior to the release. In addition, we will receive a share of box office sales and generate incremental royalty revenue associated with movie merchandise. With its worldwide distribution and appeal, the Peanuts movie is one of the many international initiatives we have in place, that will likely drive our international business beyond our initial goal of one-third of our total portfolio revenues. In 2013 with the Umbro acquisition, we already expect international to represent approximately 30% of our business, combining the Peanuts and Umbro businesses with our Latin America, Europe, China and India joint ventures, we will have an extremely strong presence and platform across the world, that should facilitate growth for the entire Iconix portfolio.

Moving on to Umbro, last week we announced that we signed a definitive agreement to acquire the internationally known Umbro brand from Nike, which will further diversify us into new markets and enhance our athletic platform, which combined with Starter and Danskin will represent approximately $2.5 billion in annual retail sales. Founded 88 years ago, Umbro is the original football brand more commonly known as Stockers here in the US. The brand has an extremely loyal following of consumers, that generate approximately $900 million of worldwide retail sales in 2012.

The purchase price is $225 million, and we expect the brand to generate approximately $40 million to $45 million of royalties in 2013. This is a traditional Iconix acquisition in terms of metrics and brand margins. Which we anticipate will be approximately to 75% or 80%. Today Umbro has thirty licensees, and is sold in over 100 countries, with 97% of retail sales coming from outside the United States. Umbro's largest markets today are Europe and South America, and we believe we can continue to grow the brand in these markets.

We also see Asia and the US as additional opportunities for growth. Umbro will be the second major brand that we have acquired from Nike, and we look forward to achieving the same success with Umbro that we have had with Starter since we have acquired it in 2007. In addition to Umbro, we have a very strong acquisition pipeline, and continue to evaluate a number of opportunities that we believe would be great additions to our portfolio a couple, a couple of which we believe could be actionable in the near future.

Before I take you through our guidance, I waned to announce that Yehuda Shmidman has left the Company to pursue a new opportunity. We wish him the best, and currently have no plans to replace him at this time, with the hire of Seth Horowitz in April to oversee the Mens' business, Lanie List who oversees the Woman's business, and Dan Castle, our VP of International, we believe we have a strong team in place to drive continued success for our Company.

Moving on to guidance, in 2012, we are reaffirming our full year guidance, and expect to achieve the higher end of the revenue guidance of $340 million to $350 million, however we expect our nonGAAP diluted EPS to be at the low end of the $1.65 to $1.74, based primarily on certain financing and acquisition-related costs anticipated in the fourth quarter of this year. We are also reaffirming our current cash flow guidance of approximately of $174 million to $181 million.

At this time, we are also providing 2013 guidance which includes the expectation of Umbro closing in the fourth quarter and the impact of our planned financing. For 2013 we expect the revenues to be in the range of $395 million to $405 million. We expect 2013 nonGAAP diluted EPS to be in the range of $1.85 to $1.95, and 2013 free cash flow to be in the range of $196 million to $203 million.

In closing, we believe our Company is well-positioned to achieve the type of growth that we are have experienced over the past several years. With the acquisition of Umbro along with our organic growth initiatives, we expect to deliver over 12% revenue andearnings growth in 2013. We remain focused on international as a key driver to our organic strategy, and believe we can grow international to approximately 40% of our business in the next few years.

Acquisition also remains a key component to our long term growth strategy, and with a strong balance sheet we have the capacity to continue to diversify our portfolio with additional Iconix Brands. After we close the Umbro deal, we will have 29 brands in our portfolio that represent over $13 billion in annual retail sales. We believe our Company is stronger than ever, and we look forward to continuing to grow our business, and deliver incremental growth value to our shareholders. I would like to thank all of you for listening this morning, and for you continued support. we would now like to turn it over to our question and answer time.

Thank you. (Operator's Instructions).

Operator, are there any questions?

Yes Eric, please go ahead.

Good morning.

Good morning, Eric.

Could you talk a little bit about, one the Umbro had $40 million to $45 million in royalties, where do you think that can go, and how do you look upon, you mentioned that Europe and South America were the largest markets, where are the key categories where they think they can expand that business?

Umbro has an incredible footprint around the world, but most of it is functional. It is a lot of cleats, what most people call boots, and soccer balls, and shin guards. The big opportunity is to extend it more into lifestyle apparel, and doing more functional sports, track suits, and T-shirts. We see an opportunity there, we see a big opportunity in South America with the World Cup and the Olympics coming there. A couple of territories like the US is totally unpenetrated, it is like 3% of our total revenue comes out of the US, so we think we have a big opportunity there, especially with youth soccer, which is such a big business in America. There are lots of opportunity and we are pretty excited as to what Umbro does to our portfolio.

Could you give us an update on Royal Velvet with JC Penney, I know that started to come into the stores, and how is that progressing? How do you see that going forward?

It looks phenomenal and they have done a really great job of executing it. We see it only getting better, it is definitely a little lower than we anticipated. But it is better than other metrics that are happening with JC Penney alone. But we have a good long term deal there, and we are excited about how good they are doing as far as executing it, and we see it definitely growing from here, and we are hoping to roll out shops next year.

Okay, when we look in your 2013 guidance,what is the biggest upside or downside driver there that drives the business? I am guessing Men's is somewhere in there. Where do you really see the variables in that year?

Well, the big growth in looking at going from say roughly $350 million to over $400 millionObviously it comes from Umbro. International throughout the world, we see growth happening. in a lot of our territories higher than the US, places like Latin America, Europe, China, India. We are talking to a lot of new territories about going into business in Canada, Russia, Korea. So lots of international opportunities to really take our brands around the world.

We see the beginning of Peanuts. We know everyone is going to want to get in on the movie merchandising which is a huge business. We definitely think we will have an uptick on Peanuts. The Madonna businesses are starting to roll out around the world and doing well. I think the rest of the portfolio kind goes with the stores. Target is doing really well with Mossimo. WalMart and K-mart are stable with their brands. Kohl's is a little off this year, but we believe it will come back in 2013.

The big acquisition for this Company will continue to be acquisitions. We have a lot of opportunities, more than I think I have ever seen. Hoping to be very inquisitive going forward. I think all of those different drivers will hopefully give us good growth, as we have been accustomed to in the last five years.

A question for Warren, on the 2013 guidance, what tax rate and share count are you assuming?

We are actually assuming a low 30s for a tax rate. There is improvement because of the Umbro tax structure, and share count will be our assumption is between 70 and 71 million shares.

Great, thank you.

Your next question comes from the line of Suzanne--

Hi, guys, congratulations on the good quarter.

Thank you.

I was wondering if you could talk a little bit about your expectations for SG&A expense going forward. It looks like it has continued to goes up, and maybe next year up a little bit more. Could you put just a little bit more color on that?

Sure, actually we are still projecting it to be down year-over-year, Q4 should be considerably down, we are still estimating in the low 60s for the EBITDA margin, so you will see a turnaround in Q4, we had said it was going to be down about $9 million or $10 million for the year, it i probably going to be down about $7 million for the year, excluding any deal costs or anything else. For 2013, I would estimate it in the low-60s again, maybe a slight improvement over 2012.

Okay, great. Then I was wondering if maybe you could talk a little bit about the Rocawear brand, and you still seeing it stabilize, anything new going on there, did it improve at all given the new marketing campaign?

Yes, we definitely see an upticking, we have started to roll the licensees that J, the Company J. Allen started to roll out stores, we opened up in the Barclays Center, and we have six new stores opening in the next couple of months. The product is performing better than it has in the past. It definitely has some weakness on the Women's side, but Men's is starting to come back which has been the base of the company. We feel like we have hit the bottom there, and are on our way back.

Okay, great. Then just on the acquisition front I think in the press release, you had mentioned that there ispotential for more down the road. Where are you looking at? Is it going to be something similar to Umbro, kind of like your core, or are you guys still looking in other categories outside of apparel and consumer in general I guess?

We are seeing a little bit of everything, we have a couple of really exciting non-apparel deals that we are working on. But there are also some great lifestyle power brands that are going to be coming up for sale, so a combination of both. We are also excited about similar to Umbro, we are seeing a lot of international opportunities, a lot of brands that have good worldwide footprints, not necessarily focuses on the US.

Okay, great. Thanks a lot.

Thank you.

Thanks, your next line question comes from the line of Jessica Schoen. Please go ahead.

Good morning.

Good morning.

I was wondering if you could provide a little bit more color on the revised guidance for the international business that comprised 40% of the total revenues, and what will be the biggest drivers in getting you to that goal?

Well the guidance for next year takes international to 30%, which was our target a couple years ago, in my narrativeI mentioned I think we can get the 40%, and it is going to be a combination of a lot of things. Peanuts has a great world wide footprint, where I think more than two-thirds of that revenue comes from outside the US, and the movie is going to be released in languages all over the world, so we think the movie is going to be a big driver of international over the next couple of years.

We are also seeing a lot of excitement coming out of our South American business, although that goes below the line. We are seeing a lot of activity in some new DTRs coming out of Europe. And we are also talking to a lot of new territories, we are seeing some exciting opportunities in places like Brazil and Russia, southeast Asia, Australia, Japan. It has been a big focus of the Company, and we are pretty excited, and believe that we can grow up to 40% over the next couple of years.

Great. You also mentioned the Umbro business and its penetration domestically, it sounds like there could be some more opportunity there. Can you elaborate on how you might drive those royalty revenues in the US?

Well, today we have a, when I say today, it is when we close over the next few weeks or months, an agreement with Dick's, which Umbro has had for many years, so we have a nice DTR with Dick's, but we do have the ability to work on the fashion side and sell more athletic apparel to retailers in department stores. Obviously, Iconix has that ability. We see a big ability to grow the basic sportswear throughout America.

Great. Thanks for taking my question.

Thank you. Your next question comes from the line of Jim Chartier. Please go ahead.

Good morning.

Good morning, Jim.

First for Warren a couple of questions, what is the quarter ending debt and cash balance?

The cash balance is around $70 million, and the debt is probably, I am not sure exactly it is about $450 million or $460 million.

Okay, and then were there any one-time expenses in third quarter?

No.

Okay. And then was there anything precluding you from doing share repurchases in this quarter?

The only thing Jim that precluded us a little bit was we were deep in the middle of two or three strong acquisitions, and we talked about our financing, so the big question was how to use our capital, and we felt that acquisitions was the best at this time. Hopefully, as our new financing is completing, we will be able to do both in a significant way.

Okay. great. And then Royal Velvet, should your royalty revenues from that grow next year? Or is this a long first year deal?

Yes, it is a long first year it was about a 20-month first year, so next year should be somewhat flat to this year.

Okay. And then any other major revenue drivers for next year?

As I mentioned, before I think the revenue drivers are Umbro, international, Peanuts, Madonna, and some more acquisitions.

Okay. And on Umbro, do you have any for the sportswear and fashion licenses. Will that be new licensees, or existing licensing expanding the business?

It will be new. We are working on some exciting concepts that we have developed. But once again I think America and quote and unquote football is not a huge business. We have we are going to get some big growth out of South America. We have got a wonderful licensee there, a great company there, and actually we have got licensees all over the world.

It is powerful to have. Really Umbro is 97% outside of the US, which is one of the reasons we liked it. Most of the growth will come there. Although we do think we will be able to take a minimal US license, and at least double or triple it.

Okay, and Warren, what should we think about for the joint venture line for this year and next year?

Like Neil said, I think it is going to show similar growth. Than the overall Company.

Okay. And then Material Girl, how many Macy's doors is it in now, and how many Junior doors do they it have?

I believe today, we are going from like 550 to all doors, which is about 800.

Okay.

We are also getting some good traction on Truth or Dare, mostly the footwear side.

Right. Okay. And just to make sure I understand what you think will progress with Peanuts, so you think 2014 you will have new licensees signed in anticipation of the movie in 2015?

Yes, actually I think in 2013 we are going to sign a lot of new deals. People want to get in on the ground floor, it is going to be a major motion picture, when you look at what some other movies have done, whether it be a Cars or a Shrek or a Toy Story. It is tremendous revenues and opportunities. So I think it is going to start happening hopefully, actually we even seenactivity since we have announced it over the last month. Hopefully we will start seeing the fruits of it in 2013, and get really powerful in 2014 and 2015.

Great. Thanks for taking my call. Best of luck.

Thank you Jim.

Your next question comes from the line of Steve Marotta, please go ahead. Please go ahead.

Good morning everybody. Stripping away the effects of the Umbro acquisition in 2013, what is the assumption for organic sales growth?

It is in the low single digits.

Okay. And from this my calculation, I get the Umbro acquisition to be accretive to the tune,I know it is a wide range, nonGAAP $0.15 to $0.23, is that in the ball park?

It all depends on how you do financing, and where you get the money, and at what interest rate which we are not allowed to talk about for another couple of weeks. I am sure you could do it. And then also, we have probably typical financing, and then we have some good tax benefits also.

Okay. And also, as it relates to business at WalMart, can you give us a little bit of an update on Starter, Danskin, and OP?

Yes, we have been okay. Starter and Danskin have been, Danskin has been the big excitement. over the last month or two as far as comping up. Starter is relatively flat, maybe off a point or two. OP has been the drop where WalMart has decided to really focus on spring, summer and swim. So we have lost some momentum there for the time being until we win it back. But Starter and Danskin have pretty much hang on, and together, they are probably up a little together.

Great, thank you very much.

Thank you. Your next question comes from the line of Diana Katz, please go ahead.

Thank you for taking my question. I just wanted to go over Umbro just a little bit more. Warren, you mentioned SG&A next year could be possibly be down? Does that include continuedsponsorship, of I guess the soccer sponsorship?

What we are doing with the licensees are doing a lot of the sponsorship themselves, so they don't pass through our line, where we are continuing to sponsor Team Norway, Team Canada, Team Peru, Team Ireland.

We also have hundreds of other clubs. We don't have to take a lot of those expenses. Nike had taken out the big expense when they took Team England and Manchester, or Man City. Okay. And then how are you envisioning advertising for the next year for the rest of the portfolio?

Pretty much flat to this year, there are a couple of brands we might spend a little more on, but I would say utilize this year. Our big goal is to convince the licensees to spend more and to coop with us to really help drive sales.

Great, and then when do you envision getting back to the mid signal digit organic growth rate assumption that you had?

The big question is I think a lot of it is going to come in the next couple of years, as we build our international businesses, the USis a tough game to continue to grow, because of the way our deals are structured, and the huge market share that we haveat Target, WalMart, Kohl's, et cetera, so having such huge businesses with our tiered structure, we believe we are in the low single digits, but hopefully we will get be able to get a lot higher with our strong international footprint that we are building.

Okay. And then for 4Q, can you let us know the amount of financing and acquisition costs in the quarter? I just to be clear, we should include those costs in our nonGAAP EPS assumption?

Unfortunately, Diana we are unable because of Securities laws to talk about any of the financing costs.

And deal costs we are still working on, so until we are done, we are not going to know how that is all going to work, so we are not commenting on those two issues yet.

Okay, then just lastly, can you maybe give a little more color on the particulars of how Yehuda's, or the COO role will be filled with your current staff in place?

We have the new executive Seth who is handling Men's and Lanie in Women's, and then DP, Yehuda was more of a relationship-type person it really wasn't a true COO. And really just taken that over the last six months, and I guess didn't really like it so much. So Warren is probably going to pick up a lot of the operational, computer, and IR stuff that Yehuda had started to take.

Okay. Thanks very much. Best of luck.

Thanks Diana.

Thank you, we have no further questions at this time. I would now like to turn the call over to Neil Cole, Chairman and CEO for closing remarks.

Thank you all for joining us today. And your interest in Iconix. Hopefully our city will recover, and we will all get back to normal as soon as we can. As always, our team will be available today for further questions and comments throughout the day. Thank you all.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.