Icon Energy Corp (ICON) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group fourth-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

Our speakers on the call today are Neil Cole, Chief Executive Officer, and Warren Clamen, Chief Financial Officer.

Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historically fact 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, accept, 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 the date the statement was made.

I would now like to turn the conference over to your host for today, Mr. Warren Clamen, Chief Financial Officer. Please proceed, sir.

Good morning, everyone, and welcome to the Iconix Brand Group fourth-quarter and full-year 2012 earnings conference call. On today's call, we will review our financial results, provide an update of our existing portfolio of brands, and discuss our recent acquisitions of Buffalo and Lee Cooper, as well as our outlook for 2013.

Reviewing the results for the fourth quarter ended December 31, 2012, revenue was $85.1 million, as compared to $95.5 million in the fourth quarter of 2011. As anticipated, healthy trends across the majority of our portfolio continue to be offset by the transition of the Royal Velvet license and the year-over-year declines of our men's businesses. In the fourth quarter, we generated $37.9 million of free cash flow, or $0.54 per diluted share, as compared to $41.9 million in the prior-year quarter. EBITDA in the fourth quarter was approximately $50 million, as compared to $57.3 million in the prior-year quarter, and our EBITDA margin for the fourth quarter was approximately 59%.

Non-GAAP net income, which excludes non-cash interest related to our convertible notes, was $28.9 million, as compared to $31.3 million in the prior-year quarter. Diluted non-GAAP earnings per share was $0.41, compared to $0.41 in the prior-year quarter, noting that with lower revenues in 2012, we were able to deliver similar earnings per share to our shareholders as compared to 2011.

GAAP net income for the fourth quarter was approximately $26.1 million, as compared to $27.2 million in the prior-year quarter; and GAAP diluted EPS was $0.37 per diluted share, compared to $0.36 in the prior-year quarter. Our weighted average diluted share count for the fourth quarter was approximately 70.3 million, compared to approximately 75.4 million in the prior-year quarter. This reflects our repurchases, which I will discuss later on the call.

Reviewing our results for the full-year December 31, 2012, our revenue was approximately $353.8 million, as compared to $369.8 million in the prior year. For 2012, we generated free cash flow of approximately $180.5 million, or $2.51 per diluted share, and $179.2 million, or $2.37 per diluted share in 2011. Our EBITDA for the year was approximately $217 million, as compared to approximately $229.6 million in the prior year.

Our non-GAAP net income, which excludes non-cash interest related to our convertible notes and a one-time gain in 2011 -- and a one-time accounting gain in 2011, was approximately $122 million, as compared to approximately $127.4 million in the prior year. And our diluted non-GAAP earnings per share was $1.70, as compared to $1.69 in the prior-year quarter, again, demonstrating that we were focused throughout 2012 in delivering similar earnings per share as compared to 2011, despite revenue declines. EBITDA, free cash flow, non-GAAP net income, and non-GAAP diluted EPS are all non-GAAP metrics, and reconciliation tables for each can be found in the press release sent earlier this morning, and on our website, Iconixbrand.com.

Moving on to our balance sheet, we ended the year with approximately $255 million of cash. In addition to generating $180 million of free cash flow, in the fourth quarter we launched a new $1.1 billion securitization facility, under which we have borrowed $600 million at an interest rate of 4.23%, and have a yet-to-be-placed revolver of $100 million. We used a portion of the securitization proceeds to finance our purchase of the Umbro brand in the fourth quarter, to pay our 51% stake in the Buffalo brand earlier this month, to acquire the Lee Cooper brand that we announced this morning, and to repay amounts outstanding under our previous facilities. We are excited about our ability to leverage the strength of our brands, predictable and stable cash flows, to secure financing at attractive prices. With this facility in place, as we -- and a strong balance sheet and strong free cash flow, we believe we are well positioned to grow our business through additional acquisitions.

Since our last earnings call, we accelerated our share repurchase activity and bought back approximately $78 million of shares. Since initiating our current $200 million authorization in October '11, we have repurchased approximately 10 million shares at an average price of $18.32, representing $185 million, or 14% of our shares outstanding. To reflect our continued commitment to share repurchases, today we announced that our Board has authorized a new $300 million share repurchase program.

With that, I will turn the call over to Neil Cole, our Chief Executive Officer.

Good morning. Thank you, Warren. Good morning, everybody. As I take a look at our Company today, with a portfolio of over 30 brands that represent approximately $13 billion in annual retail sales, it is clear that we've come a long way. However, it is our future that I am most excited about. Over the past year, we have executed on several exciting initiatives, including the launch of a new $1.1 billion securitization facility, our acquisition of the Umbro brand, the Buffalo brand, and the Lee Cooper brand, along with the signing of a new Peanuts movie deal, the formation of a joint venture in India, all of which we believe position us for significant growth in the years to come.

In addition, the profile of our portfolios continues to evolve, as we successfully diversify across geographies and consumer segments. To best manage our growing portfolio, we have created four separate verticals, each of which have their own business leaders, including women's, men's, home, and entertainment.

Starting with our Entertainment segment, we are excited to announce that we recently hired Leigh Anne Brodsky, a licensing professional with over 20 years experience in the entertainment business, to oversee Peanuts Worldwide and Iconix Entertainment. We believe her experience will be invaluable as we gear up for the launch in 2015 of the Peanuts movie with 20th Century Fox and Blue Sky Studios. In anticipation of the movie, we have already begun to line up a list of new licensees, which we expect will drive additional revenue over the next few years. We also believe we can successfully build a stable of entertainment-based properties through the acquisition of additional entertainment and character brands.

Our women's brands remain healthy, with large businesses across key retailers. Our Mossimo brand remained a top performer in 2012, with retail sales exceeding $2 billion. Other top-performing women's brands for the year were Rampage and Bongo, which continued to expand into new categories.

Our home brands continue to perform well, with strength from Charisma, Sharper Image, and Fieldcrest in 2012. As for Royal Velvet, now that it is one year into its transition, there should only be upside from here.

Moving on to our men's brands, as you know, 2012 was a challenging year, and we continue to work closely with our licensees to revitalize these businesses. We have also been working on a few smaller initiatives in this segment, and in 2012 we acquired interest in three small, but emerging, growth brands. These include Billionaire Boys Club and Ice Cream, of which we are joint venture with Jay Z, and we acquired 50% from founder Pharrell Williams and his partners; and Modern Amusement, of which we own 51% through a partnership with Mossimo Giannulli. Over the past few months, our acquisition pace has picked up, and we are excited to have added three iconic brands to the portfolio, including Umbro, Buffalo, and Lee Cooper.

The Umbro brand, which we acquired in December, has been a great addition to our athletic platform, and we are excited to announce that we've already found strong replacements for the territories Nike served directly. While today that brand is predominantly sold in international markets, we are working on a strategy to build out the brand in the US, and also see big opportunities in markets such as Brazil and China. In addition, this year we plan on launching a new marketing campaign leading up to the World Cup in Brazil in 2014.

Earlier this month, we acquired a 51% interest in the Buffalo brand for $76.5 million. Buffalo is a lifestyle brand founded in Canada in 1985, and we believe through our global licensing platform we can help grow the brand in the US and internationally. Today the brand generates approximately $25 million in annual royalty revenue, and is primarily sold through better department stores, including Macy's, Dillard's, and Lord & Taylor. It also has 30 stand-alone retail stores, mainly in Canada, which will be operated by our core licensee, which is run by the Bitton brothers. We also believe there could be an opportunity to leverage our Canadian partner's platform for other brands in our portfolio.

This morning we also announced that we acquired the Lee Cooper brand for roughly $73 million. Lee Cooper is an iconic global denim brand with over 100-year-old British heritage, and has a strong group of over 35 international licenses that are expected to generate approximately $14 million in annualized royalty revenue, which represents approximately $500 million in global retail sales. The brand is sold in over 80 countries, predominantly in Europe, Asia, and the Middle East, along with India, and we believe with our platform and relationship in North and South America, we can further expand the brand into new geographical areas.

In addition, we look forward to working with the brand's strong licensee base to continue to grow and possibly form new partnerships for the rest of our portfolio. Today the brand has slightly higher overhead than a typical brand in our portfolio; however, with its international tax advantages, we expect it to be just as accretive as a typical Iconix acquisition. In addition, as an existing licensing business, we expect this to be a seamless transition with potential synergy opportunities.

With the successful completion of these three acquisitions, we still remain focused on additional acquisitions. With our strong balance sheet, projected free cash flow of over $200 million, and our ability to borrow additional amounts under our $1.1 billion securitization facility, we believe we have strong financial flexibility and are well positioned to continue to execute on our acquisition and buyback strategies.

On the international front, we continue to make progress. In 2012, we formed a joint venture in India with Reliance brands, marking our fourth international joint venture for our portfolio of brands. Through this joint venture, we have already gained traction, and recently signed our second direct-to-retail license in India, with Arvind for the Ed Hardy brand, and are close to signing a third deal for our London Fog brand.

In addition, in the fourth quarter we monetized our remaining stake in OP Japan, which drove incremental revenue of approximately $6.5 million. We also monetized our Zoo York and Artful Dodger brands in China, resulting in $3.7 million of equity earnings. International expansion has been a key focus for our Company, and a fast-growing component of our overall portfolio. With our three most recent acquisitions of Umbro, Buffalo, and Lee Cooper, all of which have strong international businesses, we expect international to represent approximately 33% of our business in 2013, compared to 24% in 2012.

Moving on to guidance. To reflect our acquisition of the Lee Cooper brand, we are increasing our guidance for 2013 as follows. We are increasing our revenue guidance to a range of $425 million to $430 million, from $415 million to $425 million. We are increasing our non-GAAP diluted EPS guidance to a range of $2.05 to $2.15, from $2.00 to $2.10. We are also increasing our free cash flow guidance to a range of $203 million to $210 million, from $196 million to $203 million.

In closing, as we move to 2013 and beyond, we see our Company returning to historical growth levels, fueled by our strong portfolio of brands, our organic initiatives, including international opportunities, as well as our most recent acquisitions, and our continued ability to be opportunistically acquisitive. For 2013, we believe we are on track to deliver approximately 20% growth on both the top and bottom line, and we hope that we can continue to execute on both organic initiatives and acquisition strategy; we will achieve growth levels similar to which we have achieved over the past seven years. And we look forward to continuing to deliver strong growth and value to our shareholders.

I'd like to thank you all for listening this morning and your continued support. With that, I'd like to turn it over to the operator for questions and answers.

(Operator Instructions)

Bob Drbul, Barclays.

Good morning.

Good morning, Bob.

Hello, Neil. I've just got a couple questions for you. On the acquisitions, with Buffalo and then Lee Cooper, can you talk about the outlook for the denim market? You seem to be making some investments in that area, and what you see around the category, and the outlook for the category and how these brands are positioned there.

First of all, I was just handed a note that I misspoke on the call, as far as guidance. The numbers -- our guidance next year is $425 million to $435 million, not $430 million.

The way we look at these brands is we look at them as lifestyle brands. For instance, Lee Cooper has a huge shoe business, footwear business, across the world, mostly in the Middle East and India. We sell as many tops as we do bottoms. Same thing with Buffalo. If you go into a Buffalo store, and there's one in Manhattan that's phenomenal, in Soho, more than half the businesses is tops and accessories and all sets of products.

The way I look at denim, denim is a base fabric that's always been around and is the most comfortable thing people wear, and it's a big part of people's wardrobe. We don't look at what the denim trends is this year or next year, we just look at great lifestyle brands. And we believe both Buffalo and Lee Cooper qualify.

Okay. And then, Neil, can you expand a little bit more in terms of the outlook for Umbro and the game plan there. I think you mentioned the possibility of some new US distribution. Can you tell us what you've done since you acquired it, and what are the very initial steps in terms of putting your game plan into play here?

Well, Umbro is this incredible lifestyle brand, based with a very strong British heritage, almost 90 years old. Little different than a lot of other acquisitions. We kept a pretty big team over in the UK, in Manchester. We have about 35 people there. And we have a pretty big network of licensees worldwide that we help orchestrate buying the kits and the uniforms and league sponsorships, et cetera. So we've just been working on a transition with Nike over the next 12 months, where all of their territories, licensees are taking over.

So we're in the process of signing a European license. In the US, we have Dick's as a core licensee, but we've also signed a few other licensees to supplement the market. But we think our really big opportunities are South America and China, two great countries. Obviously, in South America, they have the World Cup coming next year, and then right behind it, the Olympics. We have a powerful group of licensees down there, a company called Doss, who's one of the largest footwear makers, who does all the cleats, or the boots. So, we're excited about Brazil, China, and really, the brand. It's going to be an exciting growth brand for our Company.

Great. Thanks very much.

Thanks, Bob.

Jim Chartier, Monness, Crespi and Hardt.

Good morning.

Good morning, Jim.

On the last call, you said you were going to have some one-time acquisition of financing costs in fourth quarter. Can you just go through what those were?

Is it a few million dollars in the Umbro acquisition?

Right. You said the financing cost that we -- we disclosed the financing cost related to the securitization --

Right. So can you be more specific on the acquisition-related costs?

We don't usually give that detail, but it's usually in the neighborhood of about $1 million to $2 million, in terms of specific direct-related cost of the acquisitions.

Okay. And then, how much Umbro revenue did you see in fourth quarter?

We don't really disclose specific -- we sort of program the guidance.

Jim, we basically said it's around $40 million, and we had about a month's worth. Although December is not a key month, because we don't get to ship after Christmas

Right. And then, you said that the margins from Lee Cooper were a little bit lower. Is there an opportunity to bring those in line with the Company average over time?

Yes, there is. And we'll have to analyze the business as we get -- and possibly even leveraging, along with what we have over there with Umbro and our European joint venture. So, there could be a possibility of lowering that overhead and consolidating the three organizations.

Okay. On the Peanuts, when do you start to expect to recognize revenue from new licenses for the Peanuts brand, is that 2014, or you do start to see some of that in 2013?

I think we're going to see some in the back half. We've already started a movie trailer. Last week was Toy Fair, and we had incredible reactions with some of the biggest companies in the world. So I think people are going to start gearing up a little bit in the back half of this year. '14 will be strong, and '15 will be incredible, as far as the opportunities for Peanuts.

Great. And then, just curious on your earnings guidance. This morning you raised it only $0.05, when I would've thought that the Lee Cooper acquisition would've been more than $0.05 accretive for this year.

As we said, the margins are slightly off. That is offset by a favorable tax structure, but it's about $14 million and we only have about 10 months of it in. So that's about $0.05.

Okay.

And there's also a $0.10 spread we have there, so you could argue --

Right.

And there's one-time acquisition costs, also.

Yes. That would be in the first quarter.

And then, for you to access the additional $500 million of your securitized notes, how long does that process take and would you do it ahead of announcing a deal?

The process would take probably, I don't know, a couple weeks, et cetera. We don't have to go to back to the rating agencies to get it re-rated to take down the other $400 million. $100 million is a revolver that can be taken down any day, and we will take a look at that in terms of when we need it.

We could do it either before or after. We also have the ability, the markets are wide open, as far as the convertible side, the high yield side. Capital -- we're pretty excited about the opportunity for capital. It's just finding the great iconic brands to purchase.

Great. Thank you.

Thanks, Jim.

Steve Marotta, CL King and Associates.

Good morning, everybody. Congratulations on a great quarter. Could you talk a little bit about what the portion of the new sales guidance for $425 million to $435 million in 2013 will be acquisition-related?

None. The only thing would be the three acquisitions we've done -- completed already, that's in those numbers.

Yes, that's what I mean. That's what I'm referring to.

I think what -- the press releases we've done over the last two months is, when we bought Nike, we said Umbro was about $40 million. When we bought Buffalo, on a full-year basis, Buffalo was $25 million. And we've said this morning that Lee Cooper is about $14 million. And each of them kicked in at different times.

Sure. No trouble. You may have said this, and forgive if you did, if and when you bring Lee Cooper in a big way to the US, what kind of positioning will it look like here?

I'm not so sure that Lee Cooper can come to the US in a big opportunity. I think they've tried. And so, we're not sure. We have a lot of work to do. But the reason we bought Lee Cooper, it has such an incredible business in the Middle East, with a company called Landmark, it's in hundreds of stores with beautiful presentations. Also, we have an amazing business in India. So I would say US is not the biggest opportunity for Lee Cooper. I think we have better opportunities in South America and Asia. But it could be. We'd have to analyze it more and discuss a US strategy a little bit down the road. But we haven't anticipated any revenue from the US.

Okay. Can you talk a little bit about the puts and takes in the equity interest in joint ventures income in the fourth quarter of $6.7 million?

We sold the remaining interest we had with OP in Japan to Itochu, a deal that we made about a year and a half ago, and they had the right to buy the rest. And we also did some equity interest on Artful Dodger and Zoo York in China. So that comprised those deals.

Okay. And what are the tax assumptions for 2013? Will they differ much, based on the increased international exposure?

They will, actually. The international tax rates are definitely lower. We're forecasting in the low 30s for that. At the end of this year, at about 35%. It would be in the low 30s for 2013, Steve.

Excellent. Terrific. Thank you.

Thanks, Steve.

Susan Anderson, Citi.

Good morning, guys. Congratulations on another great acquisition.

Thanks, Susan.

I was wondering if you could maybe talk a little bit about the growth of the organic brands and maybe touch a little bit more on the Men's business, particularly Rocawear. I know that's been stabilized for a while. I think we should start to cycle that in the first quarter. So should we start to see a little bit of a lift shift on the overall top line as a result?

The Men's business, as we've talked about over the last year, has been pretty challenging and we budgeted them pretty conservatively in '13. Rocawear, we think we've stabilized. The men's core business is doing pretty -- is okay, and we've done a lot of renewals on a lot of the categories in kids and others. So, we think Rocawear -- we're planning it pretty much flat to last year. But we are working on some new strategies to hopefully expand the business.

Marc Ecko is doing okay, and we are starting to grow the tailored part of that business. And Ed Hardy, the big story's been our international push into India, Europe and China. The stars in the men's portfolio have been Zoo York; very excited about Starter, we are now taking it into all the better stores, again with the NFL and the NBA, and obviously the Umbro business. So those have been the -- the men's business is planned to start creeping back and gaining rev share again.

Okay. And then what about the brands at, say, the mid-tier department stores which have been struggling, such as Kohls, and then how's the Royal Velvet doing at JCPenney?

Actually, Kohls for the first time in -- ever, since -- they were our first big DPR, with Candies. Last year was not an up year, for the first time. But we have total confidence in Kohls, and we know they're going to figure it out. And actually, we've started to see a little turn in the last six weeks. So we're confident both Candies and Mudd will be fine. They're in great hands.

As far as Royal Velvet, it looks fabulous. We're rolling out our shops in May. And it's even doing better than we thought it would, even though, I think JCPenney's is obviously having a little troubles. But were really excited about how they're executing the product.

Great. That sounds good. And just one housekeeping question. Is the new share repurchase program in guidance?

No. There's no assumption for further share repurchase in the guidance.

Okay. Great. Thanks a lot, you guys.

Thanks, Susan.

Robbie Ohmes, Bank of America Merrill Lynch.

Good morning, guys. How are you?

Good morning, Robbie.

Neil, I was just hoping to get an update on MG Icon and what the outlook for 2013 looks for the growth of that JV, and where you see the drivers and expansion there. Thanks.

MG Icon actually had a really good year. Macy's has kind of turned the corner and growing. So, we're pretty excited about that business, and investing about MG Icon, besides from Macy's, we've taken it around the world. We have a great deal with Myer in Australia, a great deal with Hudson Bay, Ottawa and Europe, we're starting to enter new territories, in negotiations for even more. I think we had a 15%, 20% growth in MG Icon last year, and we see it continuing to be strong going into this year.

So, as we're looking at your 2013 guidance, between MG Icon and some your other JVs, like India, et cetera. Could that line start to really uptick in 2013? Or how should we think about the JV earnings line over the next year, and maybe even a three-year look, if you guys could give us that?

We're definitely forecasting those businesses -- those are the growth businesses. So, we could definitely see an uptick for 2013, and for sure in '14 and '15, those are where we see a large growth opportunity, Steve.

Those, we're thinking are double digit, where the regular organic, we're projecting low single digits. But we see good opportunity down below the line.

Great. Thanks a lot, guys.

Thanks, Robbie.

Danielle McCoy, Brean Capital

Hello, guys. Congratulations on a good quarter.

Thanks, Danielle.

A lot of my questions have actually been answered, but I wanted to see if you guys could put a little bit more color on what you're seeing in the M&A world and how long you look at it going forward?

Well, we bought three companies in the last three months. So we're very active. And there's more to go. There's so many great opportunities out there. We just have to be selective and get great iconic brands. We're focused a little bit around the world now. We see growth markets in some of the emerging markets, there's a big opportunity for us; and we have such great partners around the world to help expand our global footprint. So we're looking at a lot of international deals, as our last three were. And we also see a lot of opportunities in building out in the verticals we talked about. And Entertainment is one that we're hoping to do a lot more deals in and working hard on.

So we're hoping to keep going. The first seven years, we grew at a rate of well over 34% CAGR. This year, we're projecting about 20-some odd percent. But if we keep going at this rate, hopefully we can continue the rates we've done over the last seven years.

Okay. Great. How should we think about the tax rate going through 2013?

I think Warren just said, we're thinking low 30s, because of a lot more of the international acquisitions, different than the mid-30s last year.

Okay. Great. Thank you, guys. Good luck.

Thank you.

I would now like to turn the presentation back over to Mr. Neil Cole for closing remarks.

Thank you all for joining us today and your interest in Iconix. As always, our team will be available for further questions throughout the day. Thank you. 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.