Iconix Brand Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Iconix Brand Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference Ms. Jaime Sheinheit, Vice President of Investor Relations. Please go ahead.

[Jaime Sheinheit:]

Good morning, and welcome to the Iconix Brand Group first quarter 2016 earnings conference call. On today's call, we have with us John Haugh, our President and CEO; Dave Jones, our Chief Financial Officer; and Peter Cuneo, our Executive Chairman. The agenda for today's call will include opening remarks from John and update on our business segments. Dave will then walk you through our financial results for the first quarter. And turn the call back to John for some closing remarks. We will then open up the call for questions. Before we begin, I'll 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 of which are beyond the control of the company. These 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 to not 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 the call over to John Haugh.

[John N. Haugh:]

Thank you, Jamie, and good morning, everyone. I'm very happy to be here today. Let me first start by once again thanking Peter, Dave and the rest of the Iconix management team for all the hard work over the past year. With a number of issues behind us, management can now better allocate it's time to rebuilding organic growth and regaining confidence with our shareholders. Since joining the company, I worked to understand the business overall, to review our portfolio, to assess our marketing capabilities and strategy, to meet with many of our customers and our licensees and to create our go-forward strategy. It is clear to me that with a diversified portfolio of over 30 brands and more than 1,700 licensees – excuse me, licenses worldwide, Iconix is well-positioned going forward as the industry leader to further leverage and monetize our brand and our global licensing platform. My strategic review and analysis of the business is ongoing. And we are currently in the process of developing a long-term growth plan that will detail where we see the largest opportunities for our company and our shareholders. We will be focused on organic growth, both domestic and international, and we will continue to evaluate strategic acquisitions, as well. Based on conversations I have been having with key licensees and partners, I'm confident that we can strengthen our brand and continue to provide solutions to help drive sales growth for our wholesale and retail licensees. I also believe there is significant opportunities to further develop our portfolio of brands globally. As I said on the previous call, I also understand the need to create a balance between driving growth and improving the balance sheet, which will be a key focus for me and our management team. Moving on to some quarter one highlights, overall the Iconix portfolio remains healthy with solid businesses across the women's and home segment, a growing entertainment platform and stabilizing men's business. Starting with the women's segment, licensing revenue for our women's business was up 2% in the first quarter after taking into account the sale of Badgley Mischka. Our strongest performing women's brand was Danskin which has a longstanding direct-to-retail partnership with Walmart that we will be further supporting with a new enhanced marketing program that will be launching this month As we stated on the last earnings call, we have been shifting our marketing strategy to better target digital and social audiences and this past month we announced two exciting campaigns for our Candie's, a material girl brand For Candie's we have tapped Modern Family star, Sarah Hyland as a brand's first ever creative director. It's a move that will help us reposition Candie's from a junior resource to a brand for young women right out of college and entering the work force. Sarah is a fashion authority and we're excited she can lend that to the Candie's brand. For Material Girl we have named 19 year old singer and social media phenomena, Pia Mia as the new face of the brand and the first ever fashion director. To leverage this relationship across social media, we've also formed our first partnership content creator, StyleHaul, to produce a six episode digital docu series about Pia Mia's life including her new role as the Material Girl spokesperson. In every episode she will wear Material Girl pieces and links to buy the clothing will be provided. Given Pia Mia's Instagram following and StyleHaul's community of over 500 million individuals across the globe, the reach for Material Girl will be significant. In the men's segment, licensing revenue was down 15% in the first quarter. Our men's fashion brands are currently going through a transition period that as expected has impacted short-term results. However, we do not expect this negative trend to continue and for the balance of the year, we have projected an improvement in the men's segment with full year licensing revenue in men's flat to slightly up. For Ecko, our new core licensee started on April 1 of this year with a relatively seamless transition and we have already seeing positive results from our new strategies, including the direct involvement with the retail community, which for Ecko includes JC Penney, Dillard's and other major national retailers. Yesterday in New York, we held a very successful first ever Ecko brand Summit with over 20 licensees, including domestic and global partners as well as our brand ambassadors Manny Santiago and Danny Garcia. For Rocawear, the wind down period of the formal licensees ran through the first quarter of 2016 which has pushed out the timing for the relaunch of the brand from the new licensee community to fall of 2016. On the sports side of our men's portfolio, the Starter brand, which we recently renewed at Walmart was down in the first quarter as the brand shifted out of some accessory categories. The strengthen the importance of Starter to Walmart, we are launching a brand new marketing campaign this week. In addition, we believe we have an uptapped jewel in the Starter Black Halo business. For Umbro, our brand was also down in the first quarter primarily due to challenging macroeconomic conditions in important markets like Russia and Scandinavia. However, for the full year we continue to believe Umbro businesses will be up versus last year with particular strength in Chile, Argentina, France and the U.K. and from our new license in China. The home segment remains solid and excluding the Sharper Image brand, licensing revenue for the overall home portfolio was flat in the first quarter. Our home business is anchored by strong direct-to-retail partnerships, including Royal Velvet at JCPenney, Charisma at Costco, (07

[David K. Jones:]

Thanks, John. Good morning, everybody. Reviewing results for the first quarter of 2016 the company generated $94.6 million of licensing revenue, a 1% decline as compared to $95.8 million in the prior-year quarter. Licensing revenue included approximately $1.3 million of revenue related to acquisitions for which there was no comparable revenue in 2015 and was negatively impacted by approximately $1 million due to the sale of the Badgley brand in the first quarter of 2016. The overall impact of foreign exchange rates was nominal. SG&A expenses were $51.5 million in the first quarter of 2016, a 30% increase as compared to $39.7 million in the first quarter of 2016. However, in 2016, SG&A included approximately $5.5 million of special charges which related to professional fees associated with the continuing correspondence with the Staff of the SEC, the SEC investigation, the previously disclosed class action and derivative litigations, and costs related to the transition of the Iconix management team, as compared to only $0.4 million in the first quarter of 2015. SG&A in first quarter of 2016 also included an incremental $2.3 million of agent and talent fees due to strong revenue in the Peanuts business, an incremental $4 million of debt reserves, the largest of which was due to a failure of a Peanuts licensee in China, and an incremental $1.8 million in compensation expense. Compensation expense is projected to be up for the full year. This is partially related to our improved pay practices that focused on performance based compensation as compared to discretionary bonuses in the past. Under this new compensation structure, we will be accruing for bonuses over the course of the year. Historically, we expensed and paid these bonuses in the following year. Therefore, 2016 total expenses will include both the previously announced retention bonuses and the accrual of 2016 bonuses that will be paid in 2017. Looking ahead, excluding special charges, we expect SG&A dollars for the remaining three quarters of the year to be approximately $50 million per quarter. Operating income in the first quarter of 2016 was approximately $54.2 million which includes the $11 million- gain related to the sale of Badgley and the company's interest in BBC and IceCream. This is a 3% decline as compared to approximately $56 million in the first quarter of 2015. But excluding special charges, operating income grew 6% to approximately $59.7 million in the first quarter of 2016, as compared to $56.3 million in the first quarter of 2015. Operating margin in the first quarter was 57%, as compared to 58% in the prior-year quarter. With no additional gains from sales of trademarks incorporated into our full year forecast, we expect the operating margin to be closer to the mid-40%s for the remaining three quarters of the year and approximately 50% for the full year. Interest expense in the first quarter of 2016 was approximately $21.2 million, basically flat to the first quarter of 2015. Our reported interest expense includes non-cash interests related to our outstanding convertible notes, and amortization of deferred financing costs. And excluding those items, cash interest paid during the first quarter of 2016 was $11.5 million compared to $11.3 million in the prior-year quarter. The company's effective tax rate was 31.5% in the first quarter of 2016. After accounting for the tax benefits related to the amortization of the company's intangible assets for tax purposes, the company paid cash taxes in the first quarter of 2016 of approximately $3.7 million, which is comprised primarily of withholding taxes and foreign income taxes. I expect the full year tax rate to be 31.5% to 32.5%. Non GAAP net income was approximately $26.9 million in the first quarter of 2016, flat to the first quarter of 2015. Non GAAP diluted earnings share was approximately $0.53 as compared to $0.54 in the first quarter of 2015. The company generated approximately $51.6 million of free cash flow in the first quarter of 2016, a 63% increase as compared to approximately $31.7 million in the first quarter of 2015. Free cash flow in the first quarter of 2016 included approximately $14 million related to the sale of the Badgely brand and $3.58 million related to the sale of the company's interest in the BBC and IceCream brands. The company ended the quarter with $247.4 million of cash, which includes approximately $120 million of domestic unrestricted cash, $87 million of unrestricted cash held internationally, and $41 million of restricted cash. As of today, after April debt service and paying fees associated with our new $300 million senior secured term loan, domestic unrestricted cash is approximately $80 million and domestic unrestricted international cash is approximately $90 million. The company ended the quarter with total debt on its balance sheet of approximately $1.44 billion. As I mentioned on April 4, we received the net proceeds from our $300 million senior secured term loan. The funds are obviously to be used to repay the company's convertible notes due in June. Finally, we're maintaining our full year guidance for 2016. We believe the business is on plan to achieve revenue of $370 million to $390 million non GAAP diluted earnings per share of $1.15 to $1.30 and free cash flow of $155 million to $170 million. As we model out the remainder of the year, one important thing to keep in mind is that interest expense will step up in the second quarter reflecting the higher rate on our new term loan. And for the second quarter, we'll be paying interest on both the term loan and some of the convertible notes that mature in June. We expect interest expense to be approximately $29 million in the second quarter, of which approximately $7 million is non-cash interest expense related to our convertible notes, and we expect interest expense to be approximately $26 million in the third quarter and fourth quarter of 2016, of which approximately $4 million per quarter will be non-cash interest related to the convertible notes. I'll now turn the call back over to John for some closing remarks.

[John N. Haugh:]

Thanks, Dave. I am pleased with our results today and that we are on track to achieve the guidance the company provided in our last call. In looking at the overall performance of our portfolio this quarter, when isolating a few anticipated challenges, the overall portfolio is healthy. I think this will become even more evident as the year progresses and we see certain brands turn positive in the back half of the year. With that said, I know that our brands are marketed and our partnerships need to be reenergized and I'm on the task. I am very optimistic about the future of Iconix. We believe the company is regaining control of its business. And over the coming months, I look forward to sharing with you our vision for long-term growth. We anticipate hosting an Investor Day in late summer, early fall to present our go-forward strategy. We recognize how important it is to communicate with our investors. And we thank you for your support. I would like to thank you for all participating this morning. We would now like to open the call up to questions-and-answers.

[Operator:]

Our first question comes from Dave King with ROTH Capital Partners. Your line is open.

[David Michael King:]

Thanks, good morning, everyone. I guess first off on the guidance for the men's business of flat to slightly up for the year, what gives the confidence there that we've turned the corner and then maybe more importantly how much of that is guaranteed through GMRs?

[John N. Haugh:]

So the men's business is interesting, because it was very big and as some trends changed, we frankly didn't keep up. What's interesting about where we sit today is, we've got some strong brands inside there. Ecko has tremendous appeal particularly to the Hispanic customer. We have strong relationship with JCPenney, we have a strong relationship with Dillard's and we have some more relationships that you're going to hear about soon. We had as we mentioned our first ever brand summit yesterday and had licensees from around the world attend and they walked out very energized and believe that the brand is back to where it should be. At one point Ecko was a $500 million retail business. It's significantly off of that today. Does it get back there? We don't know. But it certainly can grow from where it is today and people walked out very energized. Rocawear used to be a really strong business. It's come off. We actually have gone into a small DTR relationship meaning number of stores from a test, but an expanded line larger than we put forward before. And we're optimistic that there is a demo out there that isn't being served that Rocawear can serve. Finally Ed Hardy is an important brand inside there. And with the leadership in men's relatively new, a little less than a year, we have had a lot of progress with Ed Hardy and you're going to see it in more ways and with more licenses and more presence than we've had in quite a long time. So we've got some good strong brands there. Frankly, it is a lot of wholesale business or licensee business more than DTR. Starter we renegotiated with Walmart so that is the DTR business. Walmart did take back a category of hosiery which has affected the sales a little bit. We have seen that as an opportunity for us to strengthen that brand overall as I mentioned earlier, which we think we can do. We've got a new campaign that literally starts I think this week or next week. And the Starter Black which is kind of an up-market, upstairs business for us, we think is the jewel just sitting there. If you noticed last year the Super Bowl saw several athletes wearing the jacket unprompted. You saw Kirk Cousins at one point putting the jacket on when he was doing a press conference with the Redskins. So we think that's a brand we've had a lot of interest from people in trying to I'll call kind of re-energize, resuscitate that brand. So men's, we feel like we've turned the corner. Part of it – got frankly so low that maybe we hit a floor. But on a more positive side, we have three or four strong brands in there that the market is saying if we put lot of energy behind and we market, and create some demand, they're 100% behind us.

[David Michael King:]

Okay. And do you think that's, you know, more back half related for the year as opposed to have you seen that turn the corner yet? It sounds like a lot of this is conversations and stuff from yesterday. And you know – second quarter, would we start to see some of that benefit or is that still too early?

[John N. Haugh:]

You know we're in a long lead business. But I think one of the things that Benny (22

[David Michael King:]

Okay. That's great color. Switching gears a bit, in terms of operating income, you know, if I back out the $11 million in gains that you had this quarter, I get to an operating margin of 45% or so. And you're guiding to similar levels for the remainder of the year. You know, but Peanuts I would assume is sort of coming off which is a lower margin business. So, if anything, I would think there might be some upside to those operating margin targets. What am I missing, what are sort of the puts and takes there? Thank you.

[David K. Jones:]

Yes. Dave, just on the 45% I think if you – in the first quarter if you back out the gain on the sale, but you also back out the one-time special charges we're at 51.5%. And then, like we said, we've got some extra comp expense going through the year. So I think you know those mid 40%s are reasonable projections. Obviously, we always hope for upside. And we're certainly conscientious on the SG&A side and we'll try and manage that as best as we can. But I think those are reasonable assumptions as you look at the rest of the year.

[David Michael King:]

Okay. That's helpful. And then lastly for me and I'll step back. On free cash flow, so it looks like you are for this year expecting $17.5 million of trademark and JV gains. I guess that some of that might be Complex Media thing. I guess what's sort of the rest of that, how should we be thinking about it? And then longer term on free cash flow, I think you've shared in the past that you think you can get to $160 million as a sustainable sort of number. Is that still what you're thinking? I asked that particularly with, you know, the (25

[David K. Jones:]

Dave, the $17.5 million that you referred to, that's basically the collection on the notes receivable that we have associated with some of the prior sales. I think if you – you look in this earnings release, we've tried to provide quite a bit of extra detail and color and so there's a reconciliation of the free cash flow the year in there. We are still – we are keeping our guidance of $155 million to $170 million for the year and we are still comfortable with that base free cash flow $160 million going forward.

[David Michael King:]

Fair enough. Thanks and good luck.

[John N. Haugh:]

Thank you.

[Operator:]

Thank you. Our next question comes from Eric Beder with Wunderlich Securities. Your line is open.

[Eric M. Beder:]

Good morning.

[John N. Haugh:]

Good morning.

[Eric M. Beder:]

Hello? Hi. Let me just – I just want to clarify some of the comp – is the Complex Media transaction in the guidance or is it not?

[John N. Haugh:]

No. It's not, Eric.

[Eric M. Beder:]

Okay. So any gains from that will come – will be accretive or additive to the business?

[John N. Haugh:]

Correct.

[Eric M. Beder:]

Last conference call you talked about how you expect after about two years or so for about 40% to 50% of the next round of convertible bonds to be available in terms of paying off by cash. Is that still the number you're looking at? And what's your thought process in terms of the next round? Congratulations by the way entering the first round.

[David K. Jones:]

Okay. Thanks, Eric. Yes, I think we're still thinking that 40% to 50%. In terms of priorities for cash, obviously, we're looking to balance driving growth and strengthening the balance sheet. We're investing in people, brands, marketing, part of our organic growth strategy. Interestingly we do delever by driving EBITDA and paying down debt. We naturally delever through our annual amortization on the securitization and the term loan. And that's about $75 million a year. So that's half a turn a year just in required principal payments. We'll be looking at the solutions for the 2018, obviously. And we've got cash that we generate, current cash and future free cash flow. There is quite a few options for us I think at this point. But that's something we're thinking about today. We've got a great relationship with our new lender in Fortress. And we've got some options on acquisitions, both domestically and internationally. We've got about two years on the 2018's, and we'll continue to look at them.

[Eric M. Beder:]

And should we think about – it sounds like you guys are getting very close to organic growth overall here, should we be thinking about that as Q2, Q3 and how should we think about the Q4 with – the Peanuts will be kind of not being anniversaries this year?

[John N. Haugh:]

Eric, its John. I think one of the things that I realized – but I think we've all realized as management and board is organic growth and strategic acquisitions are what will power us forward. So we're spending a lot of time right now on understanding that correct mix, organically what will come domestically, what will come internationally, organically what will come from DTRs versus a wholesale business organically, what will come from what brand. So as we go through that and we've got – everybody engaged in a project right now to really craft this go-forward strategy, which again we plan to share early, I suspect early September with an Investor Day. Because again, as I mentioned earlier, we're a long lead business, we're holding with where we think we're going to deliver this year a lot of our work. And we've got some really I think good thinking going on right now. This stuff just takes a little while to (29

[Eric M. Beder:]

Okay. That makes sense. And overall how pleased were your, how pleased were you guys with now it's basically done with the Peanuts movie which is something you guys want to do again? And how should we think about that, the impact of that going forward?

[John N. Haugh:]

If I can, why don't I ask Peter Cuneo, who is here with us and he is our Executive Chair and also very, very deep in entertainment to give a point of view on that, if we can.

[Peter F. Cuneo:]

Sure. Eric. This is Peter. The Peanuts movie I think was successful in the U.S. I think it was a less successful internationally. I think that what the movie points us simply is that we have some work to do with the younger generation on the Peanuts and the characters. I think we all know and this was not a surprise that the – on a global basis the younger generations don't know the Peanuts and the characters as well as older generations, so that will be a focus for our marketing programs and our media content in the future reaching out to those generations. I think John already mentioned that we do have some new Peanuts content hitting on the Boomerang network very shortly actually. So we're working on all of those media forms. As far as another film is concerned that's certainly under consideration. Typically, in franchise films, as you know, it would be common for a film to come perhaps every three years as a guess, some are longer, some are shorter. So while we don't have specific plans, we can tell you about today, that's certainly something that we're thinking about very seriously.

[John N. Haugh:]

If I could just add one thing on top. The interesting thing about Peanuts, we're doing some work on it right now. Obviously, we work very, very closely with the family and Kraft (32

[Eric M. Beder:]

Okay. Congrats and good luck on the rest of the year.

[John N. Haugh:]

Thank you.

[Peter F. Cuneo:]

Thanks, Eric.

[Operator:]

Thank you. Our next question comes from Patrick Marshall with CRT Capital Group. Your line is open.

[Patrick Clement Marshall:]

Hi. So I was wondering, first I just want to clarify your cash number that – the number you reported as of 3/31/2016, that is before a $33 million outflow from refinancing the converts, correct?

[David K. Jones:]

That is correct.

[Patrick Clement Marshall:]

Okay. And then do you have any further update on the SEC investigation?

[David K. Jones:]

Yes. So we've got the two pieces with the SEC. The comment later, we're not expecting final sign off from the SEC until their review of the 2015 10-K is complete. On the other side, on the SEC investigation, it's ongoing and there's really not too much more of we can say about that one.

[Patrick Clement Marshall:]

So do you have any idea as to what timing might look like or no?

[David K. Jones:]

No. It's always difficult to predict timing with these types of things but it will be difficult for us to take a guess on timing.

[Patrick Clement Marshall:]

Okay. And then I guess one final question. I noticed in 4Q you guys – that there was a really strong rebound in margins in the men's segment. Is that more to do with just extraordinarily weak 4Q or some potential initiatives that have been ongoing in 1Q?

[David K. Jones:]

Yes. You know what, Patrick we'll have to get back to you on that one. I would just don't have a the Q4 data in front of us.

[Patrick Clement Marshall:]

Okay. Thank you.

[David K. Jones:]

Thanks.

[Operator:]

Thank you. Our next question comes from Jim Chartier with Monness, Crespi and Hardt. Your line is open.

[Jim A. Chartier:]

Thanks for taking my questions. First for Dave. Can you – was there any bonus from 2015 that was expensed and paid?

[David K. Jones:]

No. What kind of – the 2015 bonus was really replaced with the retention bonus that we put in place and so that's being expensed through 2016. On top of that, we're accruing for the 2016 bonuses that would be paid in 2017. Those are all performance-based now as opposed to discretionary. In the past, typically what we did was – they were expensed when paid, which is the appropriate accounting. But with more of a – you know, formula-based plan now, we're accruing that during 2016. So we do have a bit of double up unfortunately on the expense, but it will just be for 2016.

[Operator:]

Thank you. Our next question comes from Steve Marotta with CLK & Associates. Your line is open.

[Steven L. Marotta:]

Good morning, everybody. Most of my questions have been asked and answered. Just one question. Dave, can you please remind us what the marketing spend was in 2015, what the estimate is for 2016 and has there been any change in this year's budget?

[John N. Haugh:]

Steve, hi it's John. I don't know that we've traditionally broken that out. I will tell you that as you heard Peter say a couple times and as I talked a little bit, we are committed to driving our brands through more marketing and frankly through a more contemporary marketing than where we might have been historically. There will still be celebrity presence, but we will have people more engaged in the business maybe I will call it even little bit more authenticity where they're out there pressing hard. One sec. Go ahead.

[David K. Jones:]

Steve, sorry. It was about – marketing was about $33 million in 2015. I think we had talked about potentially up to 15% additional spend in the current year. We've also talked a bit about a shift in the type of marketing and advertising. So we're in Q1 and it will be interesting to see – and there is a lot of work to do through the rest of the year focusing on that, the mix within marketing and advertising. And quite honestly seeing where we can drive some more value for less dollars, hopefully.

[Peter F. Cuneo:]

Steve, this is Peter again. I think that last point is worth mentioning again. It's not just the increase in advertising dollars that we have budgeted in 2016 over 2015. It's how we're spending the money. And we actually think by shifting to very heavily to social media from past years, we're actually going to get more bang for our buck. So even if our advertising spending were to be up some percentage we actually think the effectiveness of our overall advertising would be much greater.

[Steven L. Marotta:]

That's helpful. Thank you.

[Operator:]

Thank you. I'm showing no further questions at this time. This does conclude today's program. Thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.