Iconix Brand Group, Inc.
Q1 2014 Earnings Call Transcript

Published: 30 Apr 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group First Quarter 2014 Earnings Conference Call. My name is Patrick, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Before we begin, I do have a statement that the company has asked me to read. Safe Harbor statements under 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 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. On the call with us today, we have Mr. Neil Cole, Chief Executive Officer; Jeff Lupinacci, Chief Financial Officer; and Seth Horowitz, Chief Operating Officer. I would now like to turn the conference over to Mr. Neil Cole. Please proceed, sir.

[Neil Cole:]

Good morning, and thank you, and welcome to the Iconix Brand Group 2014 conference call. This morning, we are pleased to be joined by Jeff Lupinacci, our new Chief Financial Officer; and Seth Horowitz, our Chief Operating Officer. Jeff joined our company this April with over 20 years’ experience in finance, most recently serving as Global Chief Financial Officer of IPG Media Brands, where he managed finance, technology and legal operations for 45 offices around the world. He also has extensive background in M&A, having led a number of acquisitions during his work at Interpublic Group and at Koch Industries. We are excited to have him join the team and believe, with his international and M&A experience, he will be a great asset to our company, as we continue to grow our worldwide footprint. We are also excited to have Seth in his new role as Chief Operating Officer. Since joining Iconix in 2012, Seth has been extremely valuable to our company. With his expertise in sports marketing, having previously served as CEO of Everlast, he led the transition of the Umbro International business model and reestablished Starter as a premier athletic brand with league collaborations. Moving onto the first quarter results, Jeff will start with the review of our Q1 financials, and Seth will take you through some of the brand highlights and initiatives, and I will rejoin or close with comments about our future growth strategies. With that, I'll now turn it over to Jeff Lupinacci.

[Jeff Lupinacci:]

Thank you, and good morning, everyone. I'm excited to be here today and to be part of this dynamic company with its outstanding financial track record. Reviewing results for the first quarter ended March 31, 2014, it was a record quarter for our company with revenue of approximately $116.1 million, an 11% increase as compared to $105.1 million in the first quarter of 2013. In the first quarter, we generated $58 million of free cash flow, a 12% increase of $58.1 million ( sic ) [ $51.8 million ] in the prior year quarter, and free cash flow per non-GAAP diluted share of $1.07, a 37% increase over $0.78 in the prior year quarter. EBITDA in the first quarter increased 8% to $69.8 million as compared to $64.6 million in the prior year quarter, and our EBITDA margin in the in the first quarter was approximately 60%. GAAP net income for the first quarter was approximately $59.8 million, a 75% increase as compared to $34.2 million in the prior year quarter, and GAAP diluted earnings per share for the first quarter increased approximately 101% to $1.03 compared to $0.51 in the prior year quarter. In the first quarter, we have acquired the remaining 50% of our Latin America joint venture, and as a result, we recognized a $38 million pretax noncash gain related to the remeasurement of our initial investment in Iconix Latin America. International expansion is a focus of growth for our company, and with complete ownership and control of Iconix Latin America, we believe we are better positioned to capitalize on unique opportunities in each local market. Non-GAAP net income was $39.3 million, an 8% increase over $36.2 million in the prior year quarter. Our diluted non-GAAP earnings per share increased 33% to $0.72 compared to $0.54 in the prior year quarter. Our non-GAAP diluted share count in the first quarter was 54.4 million shares, an 18% reduction as compared to 66.7 million shares in the prior year quarter. EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted earnings per share are non-GAAP metrics, and reconciliation tables for each can be found in the press release sent earlier this morning and our website, iconixbrand.com. In the first quarter, we continued to create shareholder value through additional share repurchases. We used $109 million to buy back 2.9 million shares at an average stock price of $37.73. Since initiating our share repurchase program in October 2011, we have repurchased approximately $690 million of our stock or approximately 37% of our shares outstanding as of the beginning of the program at an average share price of $25.52. We plan to remain opportunistic and will continue to evaluate share repurchases as a way to return value to our shareholders. Moving on to our balance sheet. We continue to be in a very strong position. Between our existing cash, our undrawn revolver, additional capacity on our securitization facility and our strong free cash flow, we believe we have access to significant capital to create additional shareholder value. With that, I'll turn the call over to Seth Horowitz, our Chief Operating Officer.

[Seth A. Horowitz:]

Thank you, Jeff, and good morning, everyone. 2014 is off to a strong start, with revenue up double digits in the first quarter. There are 2 divisions that are key growth vehicles for Iconix

[Neil Cole:]

Thank you, Seth and Jeff, and I'm pleased with our first quarter results and believe our ability to drive 33% earnings per share growth demonstrates the power of our business model. Through our diversified portfolio of brands and expanding global footprint, we continue to achieve strong growth and generate significant free cash flow. As we look into the future, we believe we can continue to deliver significant growth and value to our company and our shareholders through 3 key initiatives

[Operator:]

[Operator Instructions] Your first question comes from the line of Bob Drbul with Nomura.

[Robert Scott Drbul:]

I guess, the first question that I have is on the Peanuts side, in terms of the contribution to this year in the fourth quarter, what's the magnitude that we should think about as those initiatives begin to gain traction? And are there any other newer developments? You're talked about, I think, the ABC deal, but any other new developments around the movie that are worth noting at this point?

[Neil Cole:]

Yes. It's -- we haven't yet quantified the movie opportunity, but getting a large piece or a nice piece of the movie receipts of what actually happens in the theaters -- I can only say that we have major contracts in almost every country in the world and demand to be associated with Peanuts over the next 18 months. And we -- what we've been asking all of our partners, who want to join up for '15, is that they start participating in the end of '14. So at this point, I'm not -- I can't quantify, but we do know there'll be a substantial amount of increased revenue starting in the fourth quarter and going all the way, probably into the -- we're realizing to the second quarter of '16. So we'll have a nice 18-month run with the demand. Yes, the movie is going to be in over 75 countries. I think it's in 40-some-odd languages, and we're getting just good buzz worldwide.

[Robert Scott Drbul:]

Okay. And then on -- I guess, Seth could answer this one. But in terms of the Wal-Mart businesses, the Starter business, specifically, can you talk a little bit about the competitive dynamics that have unfolded and sort of have we settled in a little bit in terms of some of the newer brands from a competition perspective? Were there -- and any comment on sort of how Op has done sort of, with the weather being as tough as it's been sort of year-to-date?

[Seth A. Horowitz:]

So -- Bob, this is Seth. Danskin continues to grow and be a very important piece of the Wal-Mart business. In terms of Op, while the first quarter was tough, we've already seen an uptick in business, partially based on weather and partially based on expanded assortment on the Wal-Mart floor. And Starter, we believe, has found its place on the Wal-Mart floor, and at the same time, we've had this new business grow with these league collaborations, whether it be at Foot Locker, at Dick's Sporting Goods or Sports Authority. That's kind of a brief update on those 3 brands.

[Robert Scott Drbul:]

Okay. I guess the last question that I have is the share repurchase program has been quite an addition. And I don't know if it's for Jeff or for Neil, but when you look at sort of where you are today with the balance sheet where you are, how does the share repurchase fit in the future given what you've already accomplished?

[Neil Cole:]

Yes. Bob, I think the key attribute -- I think what's going to happen with share repurchases is based on acquisition and our best use of capital. What we do is every time we look -- we continue to be very aggressive as we've been in the past with acquisition. And we continue to value the target versus us and what's a better return on capital. And as long as -- depending on the ability to act and use capital to acquire great brands and great royalty versus continuing to buy share backs is what we do constantly. And when we -- probably when we're close to a deal, we might slow down a little et cetera, as we continue to look at the capital -- our strategy and our balance sheet, what's best. But obviously, we're also -- as we've discussed in the past, pretty cautious regarding leverage, which makes us weigh both acquisition and share repurchase as we look at our balance sheet.

[Operator:]

Your next question comes from the line of Steve Marotta with CL King & Associates.

[Steven Louis Marotta:]

A couple of questions. Can -- maybe, Jeff, can you talk about the increase in SG&A costs on a year-over-year basis and if we can expect the roughly $48 million that was spent in the first quarter to be a run rate?

[Jeff Lupinacci:]

Sure. From an SG&A perspective, the higher SG&A is related to the strong Peanuts business, as Neil and Seth have alluded to. So those expenses, quarter over quarter, is about $11 million. And as we -- as has been discussed, the Peanuts business from a margin perspective is lower than the rest of the portfolio. So that's what you're seeing from an SG&A perspective. That's the main driver.

[Steven Louis Marotta:]

And based on the strength that's expected from Peanuts for the balance of the year, including the fourth quarter into next year, from a run rate standpoint, it would stand to reason that we're in that ballpark?

[Jeff Lupinacci:]

Yes. That's within the ballpark. Correct.

[Neil Cole:]

That would be fair. Yes.

[Steven Louis Marotta:]

As it pertains to the Peanuts ABC contract that was completed in the first quarter, was there a singular recognition of revenue in the quarter? You've mentioned $17 million. I'm not sure if that's amortized over the course of time, or that's recognized in Q1.

[Neil Cole:]

Yes. Actually, we have to -- because it's pretty unique accounting where -- because we don't change the specials and they've been in the same way for about 50 years, we have to recognize some of the present value. So it's a $21 million deal, we recognized $17 million in the first quarter, although it's only -- it's a low margin, 30% margin. And from an EPS point of view, it's about a 6% impact.

[Steven Louis Marotta:]

Okay. And just to reiterate the joint venture that was signed associated with Lee Cooper was $4 million of, sort of, onetime recognition in the first quarter. Is that accurate?

[Jeff Lupinacci:]

Correct.

[Steven Louis Marotta:]

And lastly, actually, 2 quick questions. What's the remainder of the current share repurchase authorization and the expectations for the tax rate going forward?

[Neil Cole:]

On share repurchases, we have roughly about $600 million available to us. So we just did a new plan last quarter, that's over the next couple of years. And as far as taxes, Jeff, do you want comment?

[Jeff Lupinacci:]

Sure. From a tax perspective, we are seeing favorability related to our growing international business as we discussed, specifically, Umbro and Lee Cooper. And for modeling, you could expect our taxes to be at the high-20s for the remainder of the year -- for the year. That's with the -- that's what you can project.

[Steven Louis Marotta:]

And one other further question. The Latin American JV, how much was that incremental to sales in the first quarter based on the fact that it closed on March 3?

[Neil Cole:]

Very little. I think it was less than $1 million as far as in -- as far as what we moved from bottom line the top line.

[Operator:]

Your next question comes from Ronald Bookbinder with Benchmark.

[Ronald Bookbinder:]

On the joint ventures, do you see yourself continuing to buy out joint venture partners? And what does that margin look like compared to the company average?

[Neil Cole:]

Down the road, in a lot of our new deals that we've done the last 4 or 5, we have put in mechanisms to buy out the joint vent partner down the road. Usually, we do have a call or somewhere around the fourth or fifth year. So we do think it's important to have that ability as we continue to build our presence around the world and continue to buy more IP. As far as margins, it's pretty similar to the rest of the portfolio where we should make, on a non-Peanuts brand, somewhere around 80%. And where Peanuts -- obviously, we have the family share. So that margin goes down into the 30s, but -- which creates the average of around 60%. But most of the JV should be similar to the rest of the Iconix portfolio.

[Ronald Bookbinder:]

And on the actual Peanuts movie revenue flow, not the merchandise but the actual film itself, will that all be recognized in 1 quarter next year? Or will that be heavily recognized in 1 quarter and then flow out as the -- as ticket sales decline after the big launch?

[Neil Cole:]

Yes. They will -- most of that will be in -- I should say most, the way I'm learning the movie business, a lot of it -- most of it is going to be fourth quarter, however a substantial amount is going to be in the first half of '16 because of all the secondary, call it, Netflix or DVDs that come 6 months later. The movie's opening, it's got a staggered opening around the world, where U.S. is first, and for instance our -- Japanese, which is a huge territory for Peanuts, opens on Christmas Day. So there will be a lot of first quarter '16 movie receipts along with '14. But what's exciting for us next year is the merchandising build, which is a big revenue for us, and that's already going to happen in the fourth quarter of this year. But the large build there, I believe, will also be second and third quarter of '15, as far as March sales.

[Ronald Bookbinder:]

Okay. And lastly, with the store closings continuing at Sears Holdings, while you're expanding JOE BOXER into more categories, what do you see as the future of JOE BOXER? And when does that contract come up?

[Neil Cole:]

I think JOE BOXER is on its 13th year at Kmart, and sales grew last year, and they're going to grow again this year. So we have a strong brand, and somewhere, I think, around 4, 5 years ago, we had a tough negotiation with Sears on renewal. And we did look at other opportunities in case they weren't going to renew, as we always do. Although we've never not had a big renewal, we do get paranoid about a year before most of them. And we have tremendous demand for the JOE BOXER brand. So it's a pretty strong brand that we believe we could place elsewhere, God forbid, if anything happened with Kmart one day.

[Operator:]

Your next question comes from the line of Jim Chartier with Monness, Crespi & Hardt.

[James Andrew Chartier:]

My first question, how much revenue moves up to the top line from consolidating the Latin America joint venture? And then the same question for the European joint venture.

[Neil Cole:]

Yes, I would say the 2, based on a 3-quarter basis, could be anywhere between $10 million and $12 million.

[Ronald Bookbinder:]

For the 2 combined?

[Neil Cole:]

Correct. A lot of instances, we're outside the JVs. For instance, Umbro and Peanuts and Lee Cooper had not yet been put into the JVs, which was part of the negotiation on the buyout.

[James Andrew Chartier:]

Okay. And that's a 3-quarter run rate. So for a full year, it'd be something like $13 million to $15 million?

[Jeff Lupinacci:]

Yes, correct. But hopefully, we'll see growth next year when we do get the benefit of the full year.

[James Andrew Chartier:]

And then can you just talk through what were the drivers of the increase in the guidance, both on the top line and EPS line?

[Jeff Lupinacci:]

Yes. It was -- mostly, as we've shown in the first quarter, it was Peanuts, and then there was what you just identified. So those are the key drivers. Our organic business or our traditional department store DTR business has been somewhat stable. It's a tough first quarter with a lot of people blaming it on weather or the consumer in February, March, but really seeing a good rebound in April. But those businesses are mostly stable, not getting a lot of growth there. The growth of this company is going to come over the next couple of years, I believe, from outside of America and, obviously, with what we're talking about with Peanuts over the next couple of years. And number one is acquisition. I think we proved that over the last 8 years. We are going to continue to acquire great iconic brand and monetize them. Although our portfolio is pretty stable compared to most, then we have pretty powerful businesses with most mass merchants and retailers and department stores in America. With what's happening in America, we don't see large growth there over the next couple of years, but we do see stability.

[James Andrew Chartier:]

Okay. And then what's the outlook for Umbro in this World Cup year? And what kind of growth can we expect to see there?

[Seth A. Horowitz:]

This is Seth. So we do expect to see growth in Umbro this year and some of that's based around the World Cup. We have two global programs, one going through the Gap, which we're very excited about. And another one is a launch around country pride that's being distributed by our 40 licensees around the world. So we do anticipate this being a strong year for Umbro and world football, soccer and believe we can carry that momentum forward.

[James Andrew Chartier:]

Can you just talk through what the key initiatives in the men's business are, what licenses are being transitioned this year? And just what gives you the confidence that they'll start to grow again in 2015.

[Neil Cole:]

Sure. So Ecko Unltd. I'll start with where we have a new licensee in apparel and a new licensee in footwear, and those licensees have maintained their distribution at Dillard's, as well as opening up distribution to mid-tier, and they will both start shipping in the back half of 2014. We're also excited about the international opportunities around Ecko Unltd., with the strong Canada business, South Africa, Brazil, and opening stores for the first time in China. Ed Hardy has 8 new core licensees that started shipping Wal-Mart at the end of Q1 this year, and we anticipate that will go well. Again, a brand with strong international recognition. We expect to have about 40 stores in China by the end of the year for Ed Hardy, and we've also transitioned Rocawear to a new core men's licensee and footwear licensee that's maintained distribution in better department stores.

[James Andrew Chartier:]

Very helpful. And then just, finally, on SG&A. Last year, you had $3.5 million of acquisition-related costs. Did those all go away this year? Were there any kind of deal-related costs this year?

[Neil Cole:]

There are. There are some. Obviously, we can't divulge too much about negotiations and other diligence we're doing on some acquisitions. So there are some deal costs in the current year.

[Operator:]

Your next question comes from the line of Danielle McCoy with Brean Capital.

[Danielle McCoy:]

I guess, just overall trends maybe that you guys are seeing within the department store channel?

[Neil Cole:]

That's a tough question. Obviously, it's been a little tricky out there. Not many new department stores are opening up stores, and we have a lot of what I call invasion of the foreign specialty stores. And -- but that said, there's been some stability. Obviously, well-read that Target has had a tough time, but they're coming back. We've seen good increases over the last few weeks back to a series of what I would call, normality, although having difficult -- earlier in the quarter. And Wal-Mart's been pretty strong for us, Kohl's, Macy's. It's just been a tricky 3 or 4 months where it's been pretty spotty, where a lot of people are blaming, whether it be weather or mall traffic. But April has been really pretty strong. So hopefully, things are getting back to a good, solid, steady environment.

[Danielle McCoy:]

Okay, great. And just regarding the M&A market, I guess, the competition for deals, that's out there right now?

[Neil Cole:]

When you're working on a deal, you never -- they don't tell you who you're competing against. So I wouldn't know if the competition -- I've heard there's a lot of -- I've seen, obviously, a lot of people that like our model. But obviously, we're looking at pretty bigger scale deals that require tremendous capital. So I don't think in the deals that we're pretty engaged on and hopefully going to get done, that we see a lot of competition.

[Operator:]

Your next question comes from the line of Bruce Geller with DGHM.

[Bruce Howard Geller:]

You mentioned that the men's fashion business was down. I'm curious if you can elaborate on how much because you alluded to 2014 being a transition year. But I thought, in the past, you had kind of thrown out 2013 as being the transition year. So it sounds like, maybe it's continued in the wrong direction. So can you just elaborate on how much it was down? And then also, I think you made an investment last year, late last year, in a media company that kind of targets the same demographic that was supposed to help in regards to this business. And I'm curious how that's been playing out.

[Neil Cole:]

Yes. As far as quantifying the men's business, we definitely -- as we transitioned over the last 6 months to new licensees, it's taken a little longer than we thought. And -- but what's exciting is we did take a couple of the businesses, like Ed Hardy and Ecko, down into new distribution. So we do see the volume coming, and we do, hopefully, in the back half, we will get some traction because they are incredibly powerful brands with 80%, 90% recognition. And we now have great suppliers in place with strong distribution capabilities in good markets. So it has been disappointing, and out of our portfolio of 35 brands, the 3 or 4 brands are in this space of men's fashion have been difficult. But what's exciting, on the flip side, what Seth was talking about before is the rise of sports and entertainment and how large a portfolio, where today our men's fashion business is only about 20% of our portfolio. But it's also -- these are strong brands that are growing worldwide. Although in America, this category has had some issues. But hopefully, we've seen the end and we're going to start seeing uptick in the back half. On the complex side, we invested in this very strong media company that works with young men's. And we started to do some initiatives there in working with them that will be helping our brands going forward. I hope that answers your question, Bruce. I'm sorry.

[Bruce Howard Geller:]

Yes. I mean, could you elaborate on that a bit in terms of the initiatives? I just would like to get some visibility into how -- kind of how you're kind of looking to get the return on that investment, how you envision that playing out?

[Neil Cole:]

Well, as far as the initiatives of -- this tremendous amount of campaigns that are running, utilizing our brands through the complex network where they service over 100 different young men's websites. So that's just -- it's just marketing and branding and continuing to drive share of mind. As far as our investment in complex, we -- a strong company with good growth in the right space, media, web. And we're hopefully comfortable that, that will be a good investment. But really, more bottom of the line and something that won't be hitting our earnings. Either which way over the next couple of years.

[Bruce Howard Geller:]

Okay. And then another question related to Kohl's. It seems like they're bringing on some more national brands and some new brands that seem like they might encroach on some of the space that you've had there in the past few years. And I'm curious how you're viewing your business there for the balance of the year with some of the new initiatives they are taking. Some of those initiatives are going to potentially displace some of your floor space there.

[Neil Cole:]

Yes. We don't see that displacing the way it's been -- the way Kohl's has explained it to us. The other deals they've done have been more for the contemporary market and not the junior market. Both Candie's and Mudd are by far the dominant players there, and we do not see our businesses going down, only up. And so we're pretty comfortable with our position within Kohl's.

[Bruce Howard Geller:]

Okay. And then lastly, could you provide any further insight on the potential for the IPO of some of your China JVs? I know you've talked about that in the past. How close are some of these to potentially going IPO and to what degree? Do you have any of that factored into your current guidance?

[Neil Cole:]

Yes. Obviously, I've met a long drive [ph] but you figure out the United States IPO market, understanding the Chinese, whether it be the Hong Kong or the Shanghai markets and how their equivalent to the Securities and Exchange Commission works is not my forte. The Candie's deal, I believe it's public. A lot of the specifics -- because they have filed it or maybe not it's not -- which is why I was told I can't talk too much about it, but we're hoping soon. But we have an interesting arrangement there where we have the opportunity to sell or we can wait. And probably going to wait a little while because the company is in such a huge growth where we feel that if we put our shares now, we could make double next year. So we'll probably going to wait. The second IPO that we think is going to be filed in the next few months is also non disclosable, but a great company that is expanding. So neither of those are in any of our guidance for 2014.

[Operator:]

We have a follow-up question from the line of Ronald Bookbinder with Benchmark.

[Ronald Bookbinder:]

I just had a quick question on the London Fog IPO. How has your stock done over the years? Because you took, I think, 50% in stock and 50% in cash. How did that work out?

[Neil Cole:]

Not great, yet. The -- it's a public securities, the name of the company is called China Outfitters, and we're pretty flat with our investments since they, I believe, went public 2 years ago. But they've added a lot of new, exciting initiatives, and we keep hearing hopeful prospects out of China. But the company, easy to look it up, China Outfitters, has not appreciated like we would hope, but I've been told it will in the near future.

[Operator:]

There are no additional questions at this time. I would now like to turn the call back over to Mr. Neil Cole for closing remarks.

[Neil Cole:]

Okay. Well, thank you, all, for joining us today and your interest in Iconix. We're actually doing an off-site conference today at Barclays in the early morning, but we'll be back in the office this afternoon for all those who would like to speak to us individually, probably from 3

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.