Icon Energy Corp (ICON) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Iconic Brands Group second quarter 2014 earnings conference call. With us on the call today are Neil Cole, Chief Executive Officer; Seth Horowitz, Chief Operating Officer; and Jeff Lupinacci, Chief Financial Officer. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time.

(Operator instructions)

Please note, today's conference is being recorded. Before we begin, I will read the following 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 which are beyond the control of the company.

This may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident, and similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. I will now turn the conference over to Mr. Lupinacci. Sir, please go ahead.

Good morning everyone and welcome to the Iconix Brand Group second quarter 2014 earnings conference call. On today's call we will review our financial results, provide an update on our overall business, and discuss our full year outlook.

Reviewing results for the second quarter ended June 30, 2014. It was a record quarter for our company, with revenue of approximately $118.9 million, a 3% increase as compared to approximately $115.1 million dollars in the second quarter of 2013.

Our strong top-line reflects positive results across our women, home, and entertainment businesses, as well as the expansion of our international strategies. EBITDA in the second quarter increased 8%, to approximately $78.2 million, as compared to approximately $72.7 million in the prior year quarter. And our EBITDA margin in the second quarter was approximately 66%, up from 60% in the first quarter of 2014, and 63% in the second quarter of 2013.

In the second quarter, we generated $60 million of free cash flow, or $1.14 per diluted share, compared to $60.8 million, or $1.03 per diluted share in the prior year quarter. Non-GAAP net income was approximately $39.6 million, as compared to approximately $42.7 million in the prior year quarter.

In the second quarter, we recorded a one time, non-cash tax charge of approximately $2.1 million dollars, related to a change in state tax law requiring us to re-value our deferred tax liabilities at a higher tax rate. Diluted non-GAAP earnings per share in the second quarter increased 4% to $0.75, compared to $0.72 in the prior year quarter.

Reviewing results for the six months ended June 30, 2014, our revenue increased 7%, compared to approximately $235.1 million, as compared to $220.2 million in the prior year period. We generated free cash flow of approximately $118 million, an increase of 5%, compared to $112.7 million in the prior year period, and free cash flow, per diluted share, of $2.23, a 25% increase, compared to $1.79 in the prior year period.

Our EBITDA increased 8%, to approximately $147.9 million, as compared to $137.2 million in the prior year period. Our non-GAAP net income was approximately $78.9 million, compared to $78.9 million in the prior year period. And our diluted non-GAAP earnings per share increased 19% to $1.49, compared to $1.25 in the prior year period.

Our non-GAAP diluted share count for the six month period ended June 30, 2014, was 53 million shares, and includes a correction into the first quarter 2014 non-GAAP diluted share count by 1.2 million fewer shares, related to the accounting for our convertible note hedges. EBITDA, free cash flow, non-GAAP net income, and non-GAAP diluted earnings per share, 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, www.iconixbrand.com.

In the second quarter, we bought back 800,000 shares, bringing our total share repurchases for the first half of 2014 to 3.7 million shares, at an average price of $39 per share. Since initiating our share repurchase program in October 2011, we have repurchased approximately $725 million worth of our stock, or approximately 38% of our shares outstanding as of the beginning of the program, at an average share price of $26.04. We plan to continue to be opportunistic with share repurchases, and have approximately 575 million remaining under our current authorization.

Moving on to our balance sheet, we continue to be in a very strong position between our existing cash, our undrawn revolver, additional capacity in our securitization facility, and our strong free cash flow, we have access to significant capital to create additional shareholder value. For GAAP accounting purposes on our balance sheet, we reclassified our convertible debt of $603 million to current liabilities, related to the triggering of a conversion right for both of our convertible notes. However, this does not present a realistic economic picture, and we do not expect any of the notes to be converted, as the market value of the converts are higher than the conversion value.

With that, I will turn the call over to Seth Horowitz, our Chief Operating Officer.

Thank you Jeff, and good morning everyone. Our overall portfolio continues to perform well. There has been tremendous excitement and growth for our Peanuts brand.

We continue to make progress on our international expansion. Our women's fashion and home businesses experienced positive growth in the quarter, and we are excited about the opportunities to build out our worldwide sports and entertainment platforms.

Starting with Peanuts, the second quarter was another strong quarter for the brand, and we expect to see continued growth as we approach the 2015 launch of the brand's first ever full length feature film. Ahead of the movie, we are securing major promotion and licensing deals around the world, and at the most recent licensing show last month, we unveiled the new movie art work for merchandising programs that would begin to ship next year.

At this show, we also held an international summit with over 200 partners worldwide that represent over 100 countries. In the first six months of 2014, we have signed over 130 new Peanuts licenses around the world.

Another area of future growth that we are excited about, is in the sports market with our Umbro, Starter, and Danskin brands. Active wear has been a growing and important segment of the marketplace, and is a fast growing part of our company, expected to represent over 20% of business this year. Danskin now continues to be the core opening price point athletic brand at Wal-Mart, and Wal-Mart is furthering its commitment to the brand and will improve the assortment and in store presentation.

For Starter, through our relationship with G3, we have signed over 200 colleges to co-brands Starter Apparel, shipping for holiday 2014. This is in addition to all five major sports leagues, which we continue to roll-out.

Umbro enjoyed strong sell-throughs throughout the World Cup, and Tim Howard, one of the heroes for the US World Cup team, will be wearing Umbro in goal for Everton in this upcoming season. Through global marketing and local licensing initiatives, Umbro has signed several new significant teams around the world to wear the brand, including Everton, and Whole City of the English Premiere League, both [Nance Fefse] and RC Lense of the French division one, and Vasco da Gama in Brazil.

Our woman's and home brands had a strong second quarter, driven by strength across our direct-to-retail partnership, including Candies and Mudd at Kohl's, Bongo at Kmart Sears, OP at Wal-Mart, Royal Velvet at J.C. Penney, Charisma at Costco, and Canada Kmart Sears. These brands have become fixtures within their respective retailer, and both continue to be important as they provide the retailer with strong national brands at private label economics.

As expected, our men's fashion brands Rocawear, Echo and Ed Hardy were down year-over-year, as 2014 remains a transition year. However, new core licensees for each of these brands started shipping product in the first six months of 2014.

They have secured an additional distribution, and are experiencing strong sell-throughs. We believe this is a new beginning for these brands, and anticipate we have turned the corner.

In the second quarter, we sold the rights to the sharper image eCommerce and US catalog businesses for $10 million to our licensee Camelot, at a 10 times revenue multiple, resulting in $7.8 million of revenue in the second quarter. Going forward, we will continue to receive a royalty on Sharper Image product sold by our licensees to both Camelot and all global retailers and Camelot will own and manage the catalog eCommerce and catalog business which is more of a curated speciality shop that sells multiple brands.

We believe this partnership will create increased exposure and distribution for the Sharper Image brand. We look forward to working in partnership with Camelot to build-out the catalog business around the world.

With that, I'll turn the call over for Neil Cole, our Chief Executive Officer.

Thank you Seth and Jeff, good morning everyone. With record performance in the second quarter we made progress on our initiatives and plan continued to deliver growth as we expand our global footprint, capitalize on the upcoming Peanuts movie, and execute on our acquisition strategy.

Starting with international, we have been extremely focused on building our portfolio of brands around the world. And expect international to represent approximately 40% of our business this year. Across our entire portfolio of brands, we have over 30 international direct-to-retail partnerships, over 900 international licensees, and over 1300 stores and shop-in-shops of our brands worldwide.

Through the second quarter, led by Peanuts, we have signed over 130 new license agreements outside the United States. This also includes 29 new licenses in the recently acquired Latin America, the 50% formerly owned by ILA.

Today, we have seven international joint ventures with best-in-class partners that have local expertise. We are looking to form similar partnerships in additional territories to help us build out our brands in unpenetrated markets, including the Middle East and Japan.

In the second quarter, we broadened our relationship with global brands, a recent spin-off of (inaudible) by adding additional brands and territories to our existing joint ventures. Our Southeast Asia joint venture will now include Korea for a majority of our brands, a region that global brands is well established in. Their presence in Southeast Asia and local expertise in this market, has already proven itself to be valuable, as we look forward to partnering with them to build-out our portfolio of brands in Korea as well.

We have also expanded our European relationship with global brands to include Echo, Ed Hardy New York and the Sharper Image brands, increasing the scale and reach of our joint venture. As a result of all of these transactions, we have recorded a gain of approximately $14 million in the second quarter.

On the acquisition front, our pipeline remains strong, and with our strong balance sheet, we are well positioned to continue to execute on our acquisition strategy. Over the past nine years, with the acquisition of over 30 consumer brands, we have demonstrated our ability to successfully acquire and add value to brands, and we are confident we can continue to execute. However, as always, we will remain disciplined and also have the option to drive shareholder value through continued share repurchases.

Moving on to our full 2014 year guidance, we are raising our revenue guidance to $455 million to $465 million. We are also raising our non-GAAP diluted EPS guidance to $2.60 to $2.70 per share, and we are raising our free cash flow guidance from $215 million to $222 million.

In closing, we believe our ability to continue to deliver growth in a diverse way, through many different channels, including international, sports and entertainment brands, and direct to retail partnerships all demonstrate the power of our business model. As we look to the future, we believe we can continue to drive significant growth and increase value to our company and shareholders, through our global expansion plan, our worldwide Peanuts business, and the addition of Iconix brands that we will condition to acquire.

I would like to thank you all for listening this morning, and your continued support, and we would now like to open it up to questions and answers.

Thank you.

(Operator instructions)

Bob Drbul from Nomura.

Good morning this is Karen O'Brien filling in for Bob, how are you?

Good Karen.

Can you give us any more color on what sort of bump we can expect from the Peanuts movie? Since Peanuts operates at a lower margin, should we expect to see some contraction next year?

Well what we should expect to see is increased revenues, and yes lower EBITDA will come as Peanuts continues to grow. We haven't put out a specific number yet for what we see as the movie revenues. We will be doing that on our third quarter conference call when we put out our 2015 number.

But as I mentioned you know, in our, in the script before, we have signed over 130 new licensees that we hadn't had before in the first six months of this year. We think it is going to be pretty dramatic.

The movie is going to be played in 70 countries, 40 different languages, and we have an incredible director who has had a couple of movies that have been close to $1 billion in sales. We are pretty excited about it and we'll get more clarification in the next conference call.

Great thanks. One more. Can you briefly touch on what category you are finding most intriguing from an M&A standpoint?

Well, I'll find them intriguing when we close them. You know, don't really, you know, we are looking at a lot of opportunities, you know, something that we have talked a lot about is both entertainment and sports.

Yes.

We see those two categories as global, because American entertainment plays worldwide, as does sports. Those are two areas we're looking at. But it doesn't mean the next one won't be another fashion brand, because it is some of our heritage. But we are excited about opportunities in the, on the entertainment side.

Okay great. Thanks, congrats.

Thank you.

John [Curren] from Cowen.

Hey guys, this is (audio difficulty). I was wondering if you could walk us through some of the (audio difficulty).

Having trouble.

(audio difficulty)

John, I'm

Pardon me, it seems like he is on speaker phone at the moment. If you could life the handset, it improve the audio quality.

Hi, sorry this is Jerry on for John. I was wonder if you could walk us through some of the organic growth trends you are seeing develop in the North American business for the second half? And then also if you could talk a little bit more about the international business and how Latin America is performing relative to your expectations, since you brought that back in? Thank you.

Thank you. And welcome on-board Cowan. Basically, some of the back-half trends we have are, you know, similar to really the first six months of the year, we see continuing strong business in our woman's DTR's, businesses with Kohl's, Candies, Mudd, businesses that are, Wal-Mart business OP, and Danskin have been strong.

We continue to see women's home has been pretty good. Four out of our five home brands have been up, some close to double digits, and we see that continuing with strength of Royal Velvet at J.C. Penney has emerged as one of the top brands there, or the top brand.

And as I mentioned before, Peanuts will continue to pick up momentum over the next 12 months or the next few quarters. I think those are the key. Domestic brands continue to get pressure on the men's side, as we have talked about, we think we continue to get near the bottom, but that has been a trend that we have been fighting.

We are encouraged about what we think should be a lot of Peanuts --a lot of new men's products in the back half of the year. And on the international side, very excited about what's happening with ILA ticking up. As we mentioned, we signed up 29 licensees since Iconix has taken over just three or four months ago. (audio difficulty).

Steve Marotta, CL King & Associates

Good morning everybody, a couple of questions. As it pertains specifically to men's, could you mention which licensees begin to ship in the first half of 2014? Which categories those were? And when you would expect, in aggregate, that the men's business would begin to generate positive year over year sales comparisons for you?

Good morning this is Seth. I'm going to take on that question.

In the first six months of the year, the Ed Hardy brand has shipped in incremental, 500 doors of distribution. That includes apparel, accessories, the Rocawear brand has transitioned to a new licensee, it was a relatively smooth transition, continues to ship better department stores with very strong sell-throughs, and Echo Unlimited has transitioned to a new core men's apparel licensee, that just recently shipped about 300 new doors of distribution.

We also have a new core footwear licensee for Echo Unlimited that will ship this holiday, so we do believe that we have turned the corner. We have new licensees shipping product for the most part, to new distribution where the brands and the product have been received extremely well.

Can you talk a little bit about when you would expect to gain any aggregate for those three brands on a year over year basis to at least be flat or positive?

We look at 2015 as the year when that will happen.

Okay, and the last question I have is SG&A costs were a little bit lower than our --than my expectations. Can you talk a little bit about, either potential reasons why? Although you probably don't have my model in front of you, but can you talk a little about SG&A costs and expectations for the balance the of the year?

Sure this is Jeff. SG&A was down slightly. We had lower advertising marketing expenses. Those, for the first half of the year, we do anticipate those coming back in Q3 and Q4, but that was the biggest decline --in advertising marketing expenses for the first half.

So is it a --you are saying it is a shift from first half to second half? Or just a matter --was it --that planned? Or is advertising promotion planned a little bit lower for the entire year?

It is a shift.

Okay got you.

Back half of the year.

Excellent, thank you.

You are welcome.

(Operator instructions)

Ronald Bookbinder, Benchmark Company.

Good morning and congratulations.

Thanks Ronald.

On international, you are now at 40% of revenue. Where do you see that growing to?

Well you know, I see continuing to grow, especially with the incredible Peanuts franchise we have around the world, with the movie. It all depends on the type of acquisitions we have going forward.

You know, the last three acquisitions were international brands in Umbro, Lee Cooper, and Buffalo. And you know, that number could shift dramatically, based on the type of acquisitions we have going forward, which obviously we can't, exactly predict.

Yes. And Umbro in the US, is it gaining traction? And starting to grow? Because it was what, about 3% of its business was US when you bought it?

That is accurate. And yes, the Umbro brand is growing traction. We are working closely with our DTR partner Dick's Sporting Goods to expand upon the assortment, which continues to perform very well. And our initial read-on product that was complementary to the World Cup sold through extremely well.

And lastly, Iconix China, you had talked about possible monitizations on the last call, how is that progressing and how do you see Iconix China continuing to develop?

Yes, you know one of the IPOs we are projecting in June we are hoping to happen in the third quarter. However, we are not sure we are definitely going to be a seller, and we are considering possibly that monetization might happen in early 2015. Because it is based on a multiple of how we performed this year, and our performance is pretty strong this year.

In our guidance, we are not projecting any revenue coming from China. But there's two great stories right now with brands that are performing really well, that we are hoping that we can monetize over the next 12 months.

Okay great. Thank you very much.

Thanks Ron.

Jim Chartier, Monness, Crespi, Hardt and Company

Hi, good morning.

Good morning, Jim.

Just along the revenue line, I just wanted to be clear, there is $7.8 million of revenue from selling Sharper Image eCommerce business, and then another $14 million related to the sales from brands through international joint venture?

Correct. Roughly.

Okay, and so

And also, just to clarify, on the Sharper Image, we are going to continue to get royalty by product that is being sold to the eCommerce site. And we also have a joint venture with our, with Camelot to take the catalog around the world.

Okay. So if I back out that revenue and the $9.8 million from your JV last year, it looks like revenue from the rest of the business was down about $8 million. Is that entirely due to the men's business?

I think it is a combination of a few different. I think that number's more like $7 million, but most of it is men's, and was also a lot of sell-down of old Nike Umbro which was done in the first half of a year ago. And then we have increases in Peanuts, women's and home.

Umbro, was that down in second quarter because you were anniversarying the sell-down from last year?

Yes, Nike sold off at the end that business somewhere, probably about $5 million of royalty we received in the first half of a year ago. The other variance that happened last year in the second quarter is we got $5.5 million from auction rate securities a year ago. Although that doesn't go into the top-line, it was a huge contributor to EBITDA.

Okay. So Umbro, given the strength of the World Cup, is that return to growth then in third quarter, versus being a drag in the first half of the year?

Yes.

Okay. And on the taxes, what tax rate should we be using for the rest of the year?

Our tax rate we are projecting to be in the low 30%s for the remainder of the year.

For the third quarter and fourth quarter?

Correct. In the low 30%s as I mentioned we had a $2.1 million one time, non-tax charge.

Non-cash.

Non-cash, in the second quarter. Regarding deferred tax liabilities, that was in Q2, and we are projecting tax rates in the low 30s for the remainder of 2004.

Okay, and then on the men's business, should we think about that as flat in the back half of the year, or a slower rate of decline than the first half of the year?

I think the latter.

Okay thanks. Best of luck.

Thanks Jim.

Stove Marotta, CL King and Associates.

Asked and answered. Thank you.

Eric Beder, Wunderlich

Good morning guys.

Good morning Eric.

Good morning. Could you talk a little bit about you know, the ability --about your cash ability and online ability to do both acquisitions and share repurchases? I know this is one of the driest spells you have had in terms of doing acquisitions. Kind of talk to me about we you are in that thought process in terms of doing both at the same time, or one or the other.

You know something that has worked well for us over the last couple of years is the balance. Where we bought back roughly about $700 million of our stock at a wonderful price in the $20s. And we've also --was able to do three great acquisitions for equal --little less money. But we like the balance of using both.

What is wonderful, is we have a really strong cash flow, this year we're projecting close to another $220 million. We have well over $0.5 billion available to us between cash and our current facilities. That is without even using the securitization warehouse vehicle we have as we continue to buy more properties. We continue --like a mix of continued buying great Iconix IP along with continuing to buy our stock as we see value in both.

Great in terms of the guidance, what are you assuming in your guidance in terms of share repurchases for the back half of the year?

We are not assuming any share repurchases in the back half in our guidance.

Great. Thank you and good luck the rest of the year.

Thank you, and that concludes our question and answer session for today. I would like to turn the conference back to Iconix for any closing comments.

Okay. We'd like to thank you all for listening this morning and your interest in our company. As always, management will be available for the rest of the day to take individual questions, and everyone have a wonderful day. Thank you.

Thank you. Ladies and gentlemen thank you for your participation in today's conference, this does conclude the program and you may now disconnect. Everyone have a good day.