Icon Energy Corp (ICON) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group second-quarter 2013 earnings conference call. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session toward the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. On today's conference, today's speakers will be Mr. Neil Cole, Chief Executive Officer; and Mr. Warren Clamen, Chief Financial Officer.

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, or 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 it the conference over to your host, Mr. Warren Clamen, Chief Financial Officer. Please proceed, Sir.

Good morning, everyone, and welcome to the Iconix Brand Group second-quarter 2013 earnings conference call. On today's call, we will review our financial results, provide an update on our overall business, and discuss our outlook. Reviewing results for the second quarter ended June 30, 2013, it was a record quarter for our Company with revenue of approximately $115.1 million, a 23% increase as compared to approximately $93.6 million in the second quarter of 2012. Our strong top line reflects healthy trends across the majority of our portfolio, our recent acquisitions, and continued focus on international expansion, including the formation of a new joint venture in Canada.

EBITDA for the second quarter increased 24%, to approximately $72.7 million, as compared to approximately $58.4 million in the prior-year quarter, and our EBITDA margin in the second quarter was approximately 63%. Compensation expenses were approximately $3 million higher than expected this quarter, as we began to expense non-cash compensation related to performance-based bonuses that we anticipate to be earned this year. In the second quarter, we generated $60.8 million of free cash flow, or $1.03 per diluted share, compared to $51.9 million, or $0.72 per diluted share, in the prior-year quarter. Non-GAAP net income, which excludes non-cash interest related to our two convertible notes, increased 32%, to approximately $42.7 million, as compared to $32.4 million in the prior-year quarter. And diluted non-GAAP earnings per share increased 60%, to $0.72, as compared to $0.45 in the prior-year quarter.

In the second quarter, the Company monetized its previously written-off auction rate securities and received $5.4 million in cash which is included in the interest and other expense net line on the P&L. On a full-year basis, as it relates to our guidance, this one-time gain on the auction rate securities is more than offset by the incremental interest expense of approximately $7 million related to the $275 million of additional debt we pulled down on our securitization in the second quarter. In addition, in the second quarter, the formation of our new joint venture in Canada contributed approximately $9.8 million to our revenue. Similarly, the second quarter of 2012 included the formation of our joint venture in India, which contributed approximately $5.6 million to revenue in the prior-year quarter.

Reviewing the results for the six months ended June 30, 2013, our revenue increased 21% to approximately $220.2 million, as compared to $182.1 million in the prior-year period. We generated free cash flow of approximately $112.7 million, or $1.79 per diluted share, compared to $99.4 million, or $1.35 per diluted share, in the prior-year period. Our EBITDA increased 19%, to approximately $137.2 million, as compared to $115.2 million in the prior-year period. Year to date, we incurred approximately $4.5 million of expenses related to completed acquisitions, as well as acquisition initiatives. Our non-GAAP net income, as previously defined, increased 23%, to approximately $78.9 million, compared to $64.4 million in the prior-year period. And fully diluted non-GAAP earnings per share increased 42%, to $1.25, compared to $0.88 in the prior-year period. EBITDA, free cash flow, non-GAAP net income, non-GAAP diluted 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.

We have continued to focus on share repurchases as one of the ways to create additional shareholder value. And in the second quarter, we bought back 5.2 million shares, bringing our total share repurchase for the first half of 2013 to 11.9 million shares, which represents 18% of our shares outstanding as of the beginning of the year, at an average price of $25.42. Since initiating our share repurchase program in October 2011, we have repurchased approximately $447 million of our stock, or approximately 28% of our shares outstanding, as of the beginning of the program, at an average price of $22.09. We plan to continue to be opportunistic with these share repurchases. We have approximately $53 million remaining under our current authorization, and today we announced that our Board of Directors has approved a new program to repurchase up to an additional $300 million of our common stock.

Moving on to our balance sheet, we believe that we continue to be in a very strong position. As part of our $1.1 billion securitization facility we launched last November, this quarter we opportunistically pulled down $275 million at an attractive rate of 4.352%. We felt it was a good opportunity to take advantage of the credit market and believe having cash on hand positions us well to execute on our acquisition strategy, as well as continued share repurchases. Between our existing cash, which was approximately $441 million at the end of the quarter, our strong free cash flow, which is projected to be over $200 million this year, our undrawn $100 million revolver, $125 million remaining capacity under our securitization facility, and the ability to upside the facility with additional brands and further leverage our balance sheet, we have significant availability which we plan to put to work to drive continued shareholder value.

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

Thank you, Warren. Good morning to everyone. With record performance in the second quarter, we continue to make progress on our growth initiatives, driving over 20% revenue growth and 60% earnings per share growth. Looking ahead, we plan to continue to deliver growth as we expand our global footprint, acquire iconic brands, and further add value to opportunistic share repurchases.

Starting with international, we have been extremely focused on building our portfolio of brands around the world and expect international to represent approximately 33% of our business this year. Today, across our portfolio, our brands have approximately 1,300 freestanding stores worldwide and 65 international direct-to-retail partnerships. In the second quarter, we continued to make progress on our international strategy and signed a new joint venture in Canada with our Buffalo JV partners to expand our entire portfolio of brands into Canada. Our existing Canadian business generates approximately $7 million in annual royalty revenue, which primarily comes from three of our existing brands, including London Fog, Mossimo, and Ecko. We believe by partnering with Buffalo, we can significantly increase our presence in Canada by leveraging their relationships and our diversified portfolio of over 30 iconic brands. This marks our fifth international joint venture as we continue to work on and explore opportunities to sign new joint venture partners in additional territories around the world.

On the acquisition front, our pipeline remains strong. As Warren mentioned, we are well positioned, with over $500 million of liquid assets plus the ability to further draw down on our securitization and leverage our brands, which provides us with additional capacity to continue to execute on our acquisition strategy. Over the past eight years, with the acquisition of 30 brands, we have demonstrated our ability to successfully acquire and add value to our brands. And we are confident that we can continue to execute on this acquisition strategy. However, as always, we will remain disciplined and also have the option to drive shareholder value through continued share repurchases as we have done over the past year and a half.

As for our existing businesses, our overall portfolio remains healthy. Starting with the women's brands, business remains on plan, with strength from Mossimo at Target, as it rolls out into Canada; Bongo, which remains the number one junior brand at K-mart and Sears; and with Danskin with its strong fashion performance [basic] collection at Walmart. We have also made progress with Buffalo and are already seeing international opportunities, as well as the potential for category expansion. Our Buffalo brand received worldwide recognition as Nik Wallenda walked across the Grand Canyon on a tight rope wearing Buffalo jeans.

In our men's division, overall growth has been supported by the acquisition of Umbro and Lee Cooper, which have both been great additions to our portfolio. For Umbro, we have strong new partners for the territories that Nike used to service directly. We assigned new licenses and are in the process of a broader rollout in the United States and are also focused on other areas that have, we think, great potential, such as Brazil. For Lee Cooper, we are working with a strong group of international licensees to further expand the brand in Europe, Asia, and the Middle East, and are leveraging our existing platform and relationships to build out the brand in both North and South America.

We have also made progress on certain men's initiatives, including the acquisition of the remaining 49% of Ecko which provides us with better control and flexibility to expand the Ecko and Marc Ecko brand throughout the world. For Rocawear, we have new brand initiative that we expect to announce in August at The Magic Show in Las Vegas. And for Ed Hardy, we have an expansion plan in place that will take the brand into significantly more doors for spring 2014.

Our home brands continue to perform well. Charisma has been very strong at Costco and is expanding with Costco into Canada. Royal Velvet is being positioned as one of the largest home brands at JCPenney and has been benefiting from JCPenney's focus on its overall home strategy.

For the Peanuts brand, we are making progress on engaging new audiences through our digital efforts, including games, apps, e-books, and numerous social media initiatives. We are also gearing up for the movie, which will launch in over 70 countries and 40 different languages in the latter part of 2015. We are extremely excited about the revenue potential from the movie and believe that between the anticipated lift in our existing business, new licensees related to the movie, and our share of box office receipts the movie will catapult to significant organic growth for our overall Company.

Moving on to our 2013 full-year guidance, we are maintaining our revenue guidance of $425 million to $435 million for 2013. We are raising our non-GAAP diluted earnings per share guidance by $0.10 to a range of $2.20 to $2.30. Our full-year guidance now assumes a weighted average share count of approximately 60 million to 61 million shares for full-year 2013. We are maintaining our free cash flow guidance of approximately $2,003 million to $2,010 million (sic - see press release "$203 million to $210 million").

In closing, this is an exciting time for our Company as we continue to deliver strong results with a growing top line and shrinking share count. We believe the performance we have achieved year to date and over the past several years demonstrates the power of our business model. And over the next few years, we expect to see additional growth as we continue to build our existing brands around the world and further leverage our strong balance sheet, and continue to add iconic brands to our portfolio. We are energized about what we can do with our existing cash and borrowing capacity and believe we can create tremendous value through a combination of acquisitions and share repurchases, as we have done in the past.

I'd like to thank you all for listening this morning and for your continued support. And now I'd like to turn it over to questions and answers.

Thank you.

(Operator Instructions)

First question comes from the line of Bob Drbul from Barclays.

Hi, good morning. First question that I have is on the Starter business, you don't really talk much about that. Can you just talk about what's happening within Walmart with Starter and any competitive pressures that are going on there, and maybe elaborate a little bit more on Ocean Pacific and the Danskin Now businesses within Walmart?

Starting with Starter, our business is definitely down a little bit. I think we're down about 5% for the year. They are bringing in a couple of new brands, competitive. I don't think it's on the floor yet but rumor has it that Russell has done a program with them. We are projecting the brand down going forward, probably $100 million or $200 million. But one of the benefits to us is it's at the higher -- we still have a tiered structure so it's at a really low royalty. What's been wonderful is with Walmart's permission, we've gone non-exclusive and Starter now has a big program with both Foot Locker and Sports Authority where we're rolling out our new higher-priced and better products with the Iconix Starter jacket. It's all going to be hitting in the next two or three weeks. We think probably we can increase the Starter business [at Walmart] because it's at a lot higher royalty rates, the upstairs business that were doing. A combination of the higher products and the new distribution, hopefully we're projecting our '14 business with Starter probably to be up.

As far as the other business with Walmart, Danskin Now with doing wonderful, no competitive project there. I don't think anybody could get a better female brand than Danskin. We're excited about the growth business with Walmart and it is doing well this year. OP, with new management I guess about a year-and-a-half ago, they trimmed us down into the fall. So, where we had a really good for six months of the year, back half we planned considerably down. And on a year basis, I think it's planned to be down by about 10% but that was in our budget. Overall, the three good healthy businesses. We got our renewal on all three brands about three months ago. That's a story on those three brands.

And then, as you look at the rest of the year, are there any other major reductions? What are you feeling the most pressure in, in the back-half of the year, maybe relative to where you were three months ago? Or any big changes, especially on the revenue side?

Pretty much on track. It's been a choppy retail environment, to say the least. I think we pretty much planned for it and we adjusted. Our new forecast, we feel pretty good about. I can't look at one area and say that -- obviously we've spoken at length over the last year-and-a-half about our men's brands, Ed Hardy, Ecko, and Rocawear. But we've planned them very conservatively and have new initiatives with all three. With Ecko, we bought back the rest of the business and we're re-launching part of the business, Marc Ecko Cut & Sew. We're going to be announcing a new partner in the next week or two that's going to be really great. Rocawear, we're working on a new initiative that we're going to announce at Magic that we're pretty excited about, a new brand expansion that Jay's onboard and excited where that goes. And Ed Hardy, we have a lot of new doors and a new expanded distribution for 2014. I think those have been the three challenged brands, but we plan them conservatively for the rest of the year so don't feel pressure there. We feel we've addressed all of them for growth in 2014.

Great, thanks very much, Neil.

Thanks, Bob

The next question comes from Steve Marotta from CL King and Associates.

Good morning, everybody. Let me add my congratulations to the quarter. Can you talk about the $10 million that was received from the Canada JV? Was that embedded in previous revenue guidance?

Somewhat. Over the last six years, we've done five of these JVs plus we've had a monetization in Canada. It is part of our strategy and we do embed some international one-timers. I really actually personally don't call them one-timers although some of the analysts do. It is our strategy. We believe that by doing these deals and giving equity to people that have boots on the ground, the businesses will grow dramatically and we've proved it. Our JV business which is below the line and we don't get credit for it was up 56% this quarter. And we're continuing to grow our business I think pretty dramatically because we have partners that own half. A good example is our oldest JV was in Latin America. When we did the deal and I believe they gave us about $5 million about five years ago, our royalties were [$1.7 million]. This year they're going to be close to [$10 million].

So, we believe that by doing these deals going forward that it's best with our partners we don't get credit below the line, but it is a strategy. We do anticipate -- I believe we have two of them in contract today -- and we somewhat planned them but there could hopefully be some upside. But once again, very conservatively we've looked at these and have been consistent over the last six years with them.

That's very helpful. You mention two in contract. That means there could be two more between now and the end of the year. Is that accurate?

Correct.

I understand. Towards that end as it relates specifically to the Canada JV, this will be recognized again in that below-the-line item. That's accurate? And the second question is, is there a put and take on the revenue line? Because you mentioned you did already have some existing revenue coming from Canada.

Correct. We're going to probably lose about $3.5 million to $4 million in the back half, with the pickup earlier which is why we didn't raise top line. Yes, it does go with the bottom of the line. But some of the things we are considering doing, there are put and calls in all the new JVs so that one day we might be able to purchase them and put them back to the top line. Because it seems like sometimes we don't get credit down below for all those big international businesses we're building.

That's very helpful. Thank you very much.

The next question comes from the line of Ronald Bookbinder from The Benchmark Company.

Good morning. Thank you for taking my questions. You guys have done a terrific job of building the international business and it's got a side benefit of lowering your tax rate. What is the goal for a percentage of revenue to come from international?

This year we're up to about 33%. Our last three acquisitions were international businesses, in Umbro, Lee Cooper, and Buffalo. A lot of it will come from depending on what type of businesses we buy. But our business in America is -- I'm not going to say it's -- I guess mature might be a good word -- and there's just such tremendous opportunity around the world. One of the areas could go to 40%, 50%. The exciting things is the Peanuts movie is going to be shown in, I believe, 50 countries or 70 countries in 40 languages. We have such a huge Peanuts franchise around the world that that could extremely catapult both organic and international revenues over the next couple of years. There's just such growth around the world.

Today, another thing some people don't give us credit for when I read reports, we have 11 JVs or 11 companies that we own equity in China. Today, we've only done one monetization. We're hoping to do 10 or 15 more over the next couple years. Today, we have over 1,000 different stores just in China with our brands. And none of those stores do we get any revenue for, or even above or below the line, because those of you who know our China strategy, it will be based on individual monetizations as they start rolling out over the next few years.

International's very exciting. Is where the growth of the world is. In talking to my team, as I send them on planes constantly, tell them that's where America was 20 years ago. When you look at countries like Brazil and you look at India and China, just tremendous growth rates. We have to make sure we participate and not only own brands that are well known around the world, but also that come from places like the UK with Umbro and Lee Cooper, et cetera, et cetera. So, we're excited about international. That's probably a long-winded answer and hopefully one day, 40% or 50% as we continue to grow our business model.

You've mentioned a couple times the Peanuts potential in 2015, 2016. Would you like to throw out a ballpark as to what you think those revenues could be?

Actually, I think it's going to be '14. We're starting to already sign deals and we're going to get a nice bump next year. The way I look at it I don't want to get too optimistic, but when you look at any of the blockbuster movies, and I think Peanuts hopefully will be one of them, when you look at Toy Story or Shrek or Cars, and on and on, or Ice Age, these businesses bring over $1 billion worldwide. They also have the opportunity to increase merchandising, another billion dollars. In both of those, we have a really healthy royalty. I'm not going to do the math for you, but pretty excited about what the movie is going to do for our Peanuts franchise. We're signing incredible, long-term strategic talks with the best companies in the world to take advantage of what's going to happen.

Lastly, Sharper Image. We haven't heard much about that in a while. It seems like it was going to be launched and then the launch got postponed. What's happening with Sharper Image?

It's been pretty steady. Royalties are similar to when we bought them, probably around $13 million or $14 million. The excitement there's been in our online business of about 30%, 40% this year. I'd love you to go to SharperImage.com. We have an incredible direct-to-consumer business, great licensee, and that business is growing really well. We do need to do some work on some innovative products and licensees to really take that business to another level, but we've been holding our own for the last couple years, as we look for new growth strategies.

Okay. Thank you and good luck going forward.

Your next question comes from Jim Chartier from Monness, Crespi, and Hardt

Good morning.

Hi, Jim

My first question is for Warren on the capital structure. You guys have done a great job leveraging the balance sheet and cash flow to buy back stock and make deals. But going forward, what do you see as a targeted debt-to-EBITDA level? And what's the upper limit for your comfort level?

We talk about this all the time, Jim. Currently, we're just over 4 times net debt-to-EBITDA. Again, we have these guaranteed revenue streams of $700 million plus, generate $200 million of free cash flow. The debt that we do have on our balance sheet for securitization is self-amortizing. It pays down. Naturally, that leverage ratio goes down as we pay down. We haven't specifically said what are max is. We do look at this, but we do feel like we can leverage the balance sheet and we have. That's the answer. We're at 4.5 today. We're very comfortable there. And if opportunistically we buy something again, you add EBITDA, so obviously the leverage ratios would go down.

Okay. Then on a monetization events, are you expecting some events in the second half of this year? And then modeling forward and thinking about next year, what do you guys consider sustainable level of monetization events that we should expect in the revenue line going forward?

What do you mean by monetization there, Jim?

Like the Canadian joint venture.

International organic business? Are you talking about -- similar to what --

Like this Canadian joint venture that you announced morning.

As I mentioned, we have two deals in contract. As you know, we have a pretty wide guidance of $0.10 so you could argue they're in. You could argue they're not in, and it usually doesn't move the needle either way.

Okay. And then, Marc Ecko, have you done anything on the footwear license? Do you expect to do something on footwear license going forward?

We have a great new company. I'm pretty excited about the opportunities for both Marc Ecko and -- We are also going to be launching Zoo York footwear is coming out with a great company and both Marc Ecko and Ecko will have product and licensees for 2014.

Great. Then, I believe in the original structure for the Marc Ecko deal, Marc Ecko himself got the first $2 million of royalty revenue? Do you now capture that, now that you own 100% of the business?

No, Marc gets a small percent of every dollar we bring in. But there's no minimum of $2 million. No, he continues to be our creative director and continues to share in perpetuity in some formula of very small number, way less than 1%.

Okay. Then finally, the compensation expense you mentioned in this quarter, was that a shift from the second half of the year into this quarter? Or is it just incremental to your entire year, versus prior expectation?

No, Jim, it was a shift. Historically we've had that expense in Q4. Now, it's going to be in Q2, Q3, and Q4. So for the full-year, we're at 60% EBITDA margins overall.

Great. Best of luck.

It's basically an accounting, where if you feel that you're going to hit the performance bonuses this year with business being so strong, and our revenues, the account itself. We're achieving those numbers.

Great, thanks a lot.

I'd now like to turn the call back to Neil Cole for closing remarks.

If there's any last questions, if anybody wants to. Because it seems like you let me off easy. I'll give you another 10 seconds for questions.

We have a question from Kate McShane from Citigroup.

Yes, good morning. I just have a very general question. We always appreciate hearing your opinion on the state of the US consumer and retail, and if you can give us any insight into how real retailers are feeling, as we go into back-to-school and the back half of the year?

I hate to use the term cautiously optimistic, but it's been a tough first six months. I used the word choppy because some weeks are great and then some weeks are difficult. They blame it on the heat. Blame on the rain. It's been pretty choppy. I think inventories have been adjusted to be conservative for the second half, but we're seeing some good and some bad. I think the strong are gaining share and the weak are losing. I can't tell you about the American consumer has a whole, but it just seems, I'd say, just okay at best in the US, where other parts of the world there seems to be a lot more growth and excitement happening. I don't know if that answers your question, Kate. Best I could do.

Thank you.

We have a further question from Jim Chartier from Monness, Crespi, Hardt.

Neil, you mention the Starter rollout at Foot Locker and Sports Authority in the back half of this year. Are there any other major notable initiatives that you guys have in the second half of the year that should drive some growth?

I don't see any sizable -- as I mentioned we are going to be -- this new Rocawear business we're launching fourth quarter. Ed Hardy might have a lot of doors in the fourth quarter. But obviously, we're benefiting from Mossimo's rollout throughout Canada. That's been really good for us today. They have 67 stores open and when they get all 100 stores open over the next couple months, that'll continue to grow that business. JCPenney I think is getting better and better. At least our Royal Velvet and our Zoo York businesses are picking up steam. Other than that, I'd say business as usual.

Okay. Then on Mossimo in Canada, does that fall under your existing license? So, are those revenues coming in at the lowest royalty tier?

Actually, that's a good question. Mossimo does, but Fieldcrest is a new deal at the high end of the tier. We'll see some nice pick up more on the Fieldcrest side than the Mossimo side

Great, thanks again.

Thank you. Okay. Well, I'm not going to ask that question again because I didn't expect anyone to take me up on it last time. Once again, thank you all for listening today. Thank you for your interest in the Company. Management will be around most of the day for those that want to take questions, whether it be from shareholders or analysts. Once again, thanks and have a wonderful day.

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining and have a good day.