Iconix Brand Group, Inc.
Q3 2012 Earnings Call Transcript

Published: 1 Nov 2012

[Operator:]

Good day ladies and gentlemen, and welcome to the Iconix Brand Group Third Quarter 2012 Earnings Conference Call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator instructions) We will be facilitating a question-and-answer session following the presentation. (Operator instructions) Before we begin, the company has asked me to read the following statement, 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 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 would like to welcome today Mr. Neil Cole, Chief Executive Officer, and Mr. Warren Clamen, Chief Financial Officer. I would like to turn the presentation over to your host for today’s call, Mr. Warren Clamen, Chief Financial Officer. Please proceed, sir.

[Warren Clamen:]

Thank you. Good morning everyone, and welcome to the Iconix Brand Group third quarter 2012 earnings conference call. On today’s call, we will review our third quarter financial results, provide an update on our existing portfolio of brands, and discuss our recent announcement to acquire the Umbro brand, as well as our outlook for 2012 and 2013. Reviewing results for the third quarter ended September 30, 2012, revenue was $86.6 million, as compared to $92.7 million in the third quarter of 2011. As anticipated, healthy trends across the majority of our portfolio continued to be offset by the transition of Royal Velvet license and the year-over-year declines in our Men’s businesses. In the third quarter, we generated $43.2 million of free cash flow or $0.61 per diluted share, compared to $44.6 million or $0.59 per diluted share in the prior year quarter. EBITDA in the third quarter was approximately $51.8 million as compared to $55.3 million in the prior year quarter, and our EBITDA margin in the third quarter was approximately 60%. Non-GAAP net income, which excludes non-cash interest related to our convertible notes, was $28.7 million as compared to $30.1 million in the prior year quarter. Diluted non-GAAP earnings per share was $0.41 compared to $0.40 in the prior year quarter. GAAP net income in the third quarter was approximately $27.1 million, a 4% increase, as compared to approximately $26 million in the prior year quarter and GAAP diluted EPS was $0.38 compared to $0.34 in the prior year quarter. Reviewing our results for the nine months ended September 30, 2012, our revenue was approximately $268.7 million. We generated free cash flow of approximately $142.6 million, or $1.97 per diluted share. Our EBITDA was approximately $167 million, and our EBITDA margin for the nine months was approximately 62%. Our non-GAAP net income was approximately $93.1 million and our non-GAAP earnings per share was $1.28. EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted EPS are all non-GAAP metrics and reconciliation tables for each can be found in the press release sent earlier this morning and on our website iconixbrand.com. Moving on to our balance sheet, as we announced yesterday, we intend to launch a new $1.1 billion securitization program during this quarter. However, due to securities law restrictions related to private placements we will not be discussing the proposed securitization, or answering any questions regarding that on the call today. As for share repurchases, since initiating our $200 million program a year ago, we have already bought back $107 million, and plan to continue to evaluate share repurchases as an effective use of our cash. Today, we have approximately $93 million remaining under the current share repurchase program. With that, I will turn the call over to Neil Cole, our Chief Executive Officer. Neil.

[Neil Cole:]

Thank you, Warren. Good morning everyone. Over the past few weeks we have announced several exciting initiatives, including the acquisition of Umbro and the launch of a new movie, that we believe positions our company for long-term growth. While 2012 has had certain challenges for us with the transition of the Royal Velvet license and a tough Men’s business, we were excited about our growth prospects heading into 2013 as we further expand our international footprint, and begin to see stabilization in some of our Men’s brands. For our Men’s brands, we expect to see an improvement in 2013 as we focus on expanding distribution, specifically for our Rocawear brand. Earlier this month, our licensee opened its first Rocawear store at the Barclays Center, in coordination with Jay-Z’s historic Eight Night Shows, and we expect an additional 4 to 6 stores to be open in time for this year’s Black Friday. In the third quarter and for the year-to-date our top performing women’s brands have been Bongo, Rampage, and Badgley Mischka. We also recently launched a number of new initiatives for some of our women’s brands that we’re having great success with, and should continue to drive growth in 2013. This fall Truth or Dare launched its footwear collection in Macy’s and Nordstrom, and will be introduced in the intimate collection for holiday. Material Girl will be rolling out to all Macy’s junior doors by next spring and is also having success worldwide with DTRs in Canada, Europe and Australia. Also the initial response to new Candie’s junior collection has been positive, and we expect Candie’s to benefit this holiday from an increased assortment of holiday dresses and gifting items. In addition, our Target brands, both Mossimo and Fieldcrest, continued to perform well in the third quarter, and going forward will benefit from Target’s expansion into Canada. One of the most exciting initiatives on the horizon, which we anticipate will be a significant contributor to our organic growth is the worldwide release of our Peanuts feature film in 2015. When we acquired Peanuts in 2010 we knew there was an enormous untapped opportunity to engage the next generation. And through this movie, we will have the opportunity to connect with consumers across numerous demographics and geographies. To create a film we’re working with top partners in the entertainment industry, 20th Century Fox and Blue Sky Studios will finance, animate, produce, and distribute the film. Consistent with our Iconix licensing model, Iconix will not incur any of the expenses. The film will be directed by Steve Martino, who previously directed Dr. Seuss' Horton Hears a Who!, and Fox’s recent box office smash, Ice Age, Continental Drift. In connection with this release, the movie we expect to see a big lift in our existing Peanuts business, which we believe should ramp up in the year prior to the release. In addition, we will receive a share of box office sales, and generate incremental royalty revenue associated with movie merchandise. With its worldwide distribution and appeal, the Peanuts movie is one of the many international initiatives we have in place that will likely drive our international business beyond our initial goal of one third of our total portfolio’s revenues. In 2013, with the Umbro acquisition, we already expect international to represent approximately 30% of our business. Combining the Peanuts and Umbro businesses with our Latin America, Europe, China and India joint ventures we will have an extremely strong presence and platform across the world that should facilitate growth to the entire Iconix portfolio. Moving on to Umbro, last week we announced that we signed a definitive agreement to acquire the internationally renowned Umbro brand from Nike, which will further diversify us into new markets and enhance our athletic platform, when combined with Starter and Danskin will represent approximately $2.5 billion in annual retail sales. Founded 88 years ago, Umbro is the original football brand, more commonly known as soccer here in the US. The brand has an extremely loyal following of consumers that generate approximately $900 million of worldwide retail sales in 2012. The purchase price is $225 million, and we expect the brand to generate approximately $40 million to $45 million of royalty in 2013. This is a traditional Iconix acquisition in terms of metrics and brand margins, which we anticipate will be approximately 75% to 80%. Today Umbro has 30 licensees and is sold in over 100 countries with 97% of retail sales coming from outside the United States. Umbro’s largest markets today are Europe and South America, and we believe we can continue to grow the brand in these markets. We also see Asia and the US as additional opportunities for growth. Umbro will be the second major brand that we have acquired from Nike, and we look forward to achieving the same success with Umbro that we have had with Starter, since we acquired it in 2007. In addition to Umbro, we have a very strong acquisition pipeline, and continue to evaluate a number of opportunities that we believe will be great additions to our portfolio, a couple of which we believe could be actionable in the near future. Before I take you through our guidance, I wanted to announce that Yehuda Shmidman has left the company to pursue a new opportunity. We wish him the best and currently have no plans to replace him at this time. With the hire of Seth Horowitz in April to oversee the Men’s business, and (inaudible) who oversees the Women’s business, and Dan Castle, our VP of International, we believe we have a strong team in place to drive continued success for our company. Moving on to guidance, for 2012 we’re reaffirming our full year guidance and expect to achieve the higher end of the revenue guidance of $340 million to $350 million. However, we expect our non-GAAP diluted EPS to be at the low end of the $1.65 to $1.74, based primarily on certain financing and acquisition related costs anticipated in the fourth quarter of this year. We are also reaffirming our current cash flow guidance of approximately of $174 million to $181 million. At this time, we are also providing 2013 guidance, which includes the expectation of Umbro closing in the fourth quarter, and the impact of our planned financing. For 2013 we expect revenues to be in the range of $395 million to $405 million. We expect 2013 non-GAAP diluted EPS to be in the range of $1.85 to $1.95, and 2013 free cash flow to be in the range of $196 million to $203 million. In closing, we believe our company is well positioned to achieve the type of growth that we have experienced over the past several years. With the acquisition of Umbro, along with our organic growth initiatives, we expect to deliver over 12% revenue and earnings growth in 2013. We remain focused on International as a key driver to our organic strategy and believe we can grow International to approximately 40% of our business in the next few years. Acquisitions also remain a key component to our long-term growth strategy, and with a strong balance sheet we have the capacity to continue to diversify our portfolio with additional Iconix brands. After we close the Umbro deal, we will have 29 brands in our portfolio that represent over $13 billion in annual retail sales. We believe our company is stronger than ever and we look forward to continuing to grow our business and deliver incremental growth value to our shareholders. I like to thank all of you for listening this morning, and for your continued support. We now like to turn it over to the question-and-answer time.

[Operator:]

(Operator instructions).

[Warren Clamen:]

Operator, are there any questions?

[Operator:]

Yes.

[Warren Clamen:]

Okay. Can you put the questions through if there are any? Okay. First question, is there someone on?

[Operator:]

Eric, please go ahead.

[Eric Beder:]

Good morning.

[Neil Cole:]

Good morning Eric.

[Eric Beder:]

Could you talk a little bit about when the Umbro at $40 million to $45 million in royalties, where do you think that can go, and how do you look upon like – you certainly mentioned that Europe and South America are large – what are the key categories where you think they can expand that business?

[Neil Cole:]

Well, Umbro has an incredible footprint around the world, but most of it is functional. [Cleats] what most people call boots, and soccer balls and chin guards, the big opportunity is expanding it more into lifestyle apparel and doing more functional sports, tracksuits, and T-shirts and you know, we see an opportunity there. We see a big opportunity in South America with the World Cup and the Olympics coming there. And really a couple of territories like the US is totally un-penetrated. It is like 3% of our Total revenue comes out of the US. So we think we have a bigger opportunity there, especially with youth soccer, which is such a big business in America. So lots of opportunities and we are pretty excited what Umbro does to our portfolio.

[Eric Beder:]

Could you give us an update on Royal Velvet with J.C. Penny, I know they are starting to come into the stores and how is that progressing and how do you see that going forward?

[Neil Cole:]

It looks phenomenal, and they have done a really great job executing it. And you know, we see it only getting better. You know, it is definitely a little lower than we anticipated, but it is better than other metrics that are happening with J.C. Penny alone. But we have good long term deal there, and we are excited about how good they are doing it as far as executing it, and we see it definitely growing from here, and we are hoping to roll out to shops next year.

[Eric Beder:]

Okay. When you look into 2013 guidance what is the biggest upside or downside driver there that drives the business. I’m guessing Men’s is somewhere in there, but where do you really see kind of the variables in that – in that core – in that year?

[Neil Cole:]

Well, the big growth as we in looking at going from let us say roughly $350 million to over $400 million, now obviously it comes from Umbro. International throughout the world, we see growth happening in lot of our territories higher than in US, places like Latin America, Europe, China, India, and we’re talking to a lot of new territories about going to business in Canada, or Russia, Korea. So lots of international opportunities to really take our brands around the world. When we see the beginning of Peanuts, we know everyone is going to want to get in on the movie merchandizing, which is a huge business. So we definitely think we are going to have an up tick on Peanuts. The Madonna businesses are starting to roll out around the world and doing well. And I think the rest of the portfolio, you know, kind of goes with the stores, and you know, Target is doing really well with Mossimo, you know, Wal-Mart and Kmart are stable with their brands. We saw clothes a little off this year, but we see – we believe it will come back in ’13. And the big acquisition for this company is going to be continue to be acquisitions. We have a lot of opportunities, more than I think I have ever seen, and you know, hoping to be very inquisitive going forward. So I think all those different drivers will hopefully give us good growth as we have been accustomed to in the last 5 years.

[Eric Beder:]

Great, and a question for Warren on the 2013 guidance, what tax rate and share count you are assuming?

[Warren Clamen:]

For tax, we are assuming low 30s for a tax rate. There is improvement because of the Umbro tax structure, and share count would be, our assumption is, between 70 million and 71 million shares.

[Eric Beder:]

Great. Thank you. Congrats on the quarter.

[Warren Clamen:]

Thanks Eric.

[Operator:]

Your next question comes from the line of (inaudible). Please proceed.

[Unidentified Analyst:]

Hi, guys. Congrats on a good quarter.

[Neil Cole:]

Thank you.

[Unidentified Analyst:]

I was wondering if you could talk a little bit about your expectations for SG&A expense going forward. It looks like, you know, it has continued to go up and maybe next year up a little bit more, so just a little bit more color on that?

[Neil Cole:]

Sure. It is actually we are still projecting it to be down year-over-year. Q4 should be considerably down. We are still estimating in the low 60s for the EBITDA margin. So you will see a turnaround in Q4. We had said it was going to be down about 9 and 10 for the year. It is probably going to be down about 7 million for the year, excluding any deal costs or anything else. For 2013, I would estimate in the low 60s again, maybe slight improvements over 2012.

[Unidentified Analyst:]

And then I was wondering if you could maybe talk little bit about the Rocawear brand, are you still seeing it stabilize, you know, anything new going on there, is it improving at all given the new marketing campaign?

[Neil Cole:]

Yes. We definitely see it up ticking. We have started to roll the licensee – the company Jay owned started to roll out stores. We opened up in the Barclays Center, and we have six new stores opening in the next couple of months. And the product is performing better than it has in the past. Definitely some weakness on the Women’s side, but Men’s is starting to come back, which has been the base of the company. So we feel we have hit the bottom there, and on our way back.

[Unidentified Analyst:]

Okay, great. And then just on the acquisition front, I think you know in the press release you had mentioned that there is potential for it more down the road. Where are you looking at, is it going to be something similar to Umbro, kind of like your core, or you guys still looking in other categories outside of apparel, and consumer in general I guess?

[Neil Cole:]

We are seeing a little bit of everything. We have a couple of really exciting non-apparel deals that we are working on. But there is also some great lifestyle apparel brands that are going to be coming up for sale. So a combination of both and you know, also excited about similar to Umbro we are seeing a lot of international opportunities, a lot of brands that have good worldwide footprints, not necessarily focused on the US.

[Unidentified Analyst:]

Okay, great. Thanks a lot.

[Neil Cole:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Jessica Anne Schoen. Please go ahead.

[Jessica Anne Schoen:]

Good morning.

[Neil Cole:]

Good morning.

[Jessica Anne Schoen:]

I was wondering if you could provide a little bit more color on the revived guidance for the international business that comprise 40% of the total revenues, and what will be the biggest drivers getting you to that goal?

[Neil Cole:]

Well, you know, the guidance for next year takes International to 30%, which was kind of our target a couple of years ago. In my narrative I mentioned I think we will get to 40%, and it is going to be a combination of a lot of things. You know, Peanuts has a great worldwide footprint where I think more than two thirds of that revenue comes from outside the US and the movie is going to be released in languages all over the world. So we think the movie is going to be a big driver of International over the next couple of years. We are also seeing a lot of excitement coming out of our South American business, you know, although that goes below the volume, we are seeing a lot of activity from new DTRs coming out of Europe. So pretty – and we’re also talking to lot of new territories, where we see some exciting opportunities in places like Brazil and Russia, Southeast Asia, Australia, Japan. It has been a big focus of the company, so we’re pretty excited and believe that we can grow to 40% over the next couple of years.

[Jessica Anne Schoen:]

Okay, great. And then Nike, you also mentioned the Umbro business and its penetration domestically, it sounds like there could be some more opportunity there, can you elaborate on how you might drive those royalty revenues in the US?

[Neil Cole:]

Yes, well today we have – when I say today, it means when we close over the next two weeks or months, an agreement with Dick’s, which Umbro has had for many years. So we have a nice DTR with Dick’s, but we do have the ability to work on the fashion side and sell more athletic apparel to retailers in department stores. So obviously Iconix has that abilities, so we see a big ability to grow the basics sportswear throughout America.

[Jessica Anne Schoen:]

Great. Thanks for taking my question.

[Neil Cole:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Jim Chartier. Please go ahead.

[Jim Chartier:]

Good morning.

[Neil Cole:]

Good morning Jim.

[Jim Chartier:]

First for Warren a couple of questions, what is the quarter ending debt and cash balance?

[Warren Clamen:]

The cash balance is around 70 million, and the debt is probably around I’m not sure exactly, it is about 450, 460.

[Jim Chartier:]

Okay. And then where there any one-time expenses in the third quarter?

[Warren Clamen:]

No.

[Jim Chartier:]

Okay. And then was there anything precluding you from doing share repurchases in this quarter?

[Neil Cole:]

The only thing Jim that precluded us a little bit was we were – we are deep in the middle of two or three strong acquisitions. And we were – and we talked about our financing. So, the big question was how to use our capital, and we felt that acquisition was the best at this time. You know, hopefully as our new financing is completed we will be able to do both in a significant way?

[Jim Chartier:]

Okay, great. And then Royal Velvet, should your royalty revenues from that grow next year versus a long first year deal?

[Neil Cole:]

Yes, it is a long first year. It was about a 20 month first year. So next year should be somewhat flat to this year.

[Jim Chartier:]

Okay, and then any other major revenue drivers for next year.

[Neil Cole:]

As I mentioned, I think the revenue drivers are Umbro, International, Peanuts, Madonna, and some more acquisitions.

[Jim Chartier:]

Okay, and then on Umbro do you have any, for the sportswear and fashion licenses, will that be new licensees, or existing licensees expanding the business?

[Neil Cole:]

It will be new. And we are working on some exciting concepts that we have developed. But once again I think America and “football” is not a huge business. I think we’re going to get some big growth out of South America. We have got a wonderful licensee there, a great company, and we got actually licensees all over the world, powerful that have – so we think – you know the Umbro was 97% outside the US, which is one of the reasons we liked it. And most of the growth will come there, although we do think we will be able to take a minimal US license, and at least double or triple it.

[Jim Chartier:]

Okay, and then Warren what should we think about the joint venture alliance for this year and next year?

[Warren Clamen:]

You know, as Neil said, I think it is going to show similar growth than the overall company.

[Jim Chartier:]

Okay. And then Material Girl, how many Macy’s doors is it in now, and then how many junior doors do they have?

[Neil Cole:]

We today were going from like 550 to all doors, which is about 800.

[Jim Chartier:]

Okay. And then on Peanuts…

[Neil Cole:]

We are also getting some good traction on tools that are there, across the – mostly the footwear side.

[Jim Chartier:]

And just to make sure I understand what you think is going to progress with Peanuts, so it is kind of 2014 you think you will have new licensees signed in anticipation of the movie in 2015?

[Neil Cole:]

Yes, actually I think in ’13 we are going to sign a lot of new deals. People want to get down on the ground before it is going to be a major motion picture. When you look at what some other movies have done, whether it be a Cars, or Shrek, or a Toy Story, it is tremendous revenues and opportunity. So, I think it is going to start happening hopefully – we’ve actually even seeing activities since we have announced it over the last month. So, hopefully we are going to get – start seeing the fruits of it in ’13, and get really powerful in ’14, ’15.

[Jim Chartier:]

Great. Thanks for taking my call. Best of luck.

[Neil Cole:]

Thank you Jim.

[Operator:]

Thank you. Your next question comes from the line of Steve Marotta. Please go ahead.

[Steve Marotta:]

Good morning everybody. Stripping away the effects of the Umbro acquisition in 2013, what is the assumption for organic sales growth?

[Neil Cole:]

It is in the low single digits.

[Steve Marotta:]

And from my calculation, I get the Umbro acquisition to be accretive to the tune, I know that is a wide range, non-GAAP $0.15 to $0.23. Is that in the ballpark?

[Neil Cole:]

Well, you know, it depends on how you do financing, and where you get the money and at what interest rate, which we are not allowed to talk about for another couple of weeks.

[Steve Marotta:]

Okay.

[Neil Cole:]

Because, you know, it is – I’m sure you can do it. And then also, you know, we have a probably typical financing, and then we have some good tax benefits also.

[Steve Marotta:]

Okay, and also as it relates to business at Wal-Mart, can you give us a little bit of an update on Starter, Danskin, and OP?

[Neil Cole:]

Yes. We have been okay. Starter and Danskin have pretty – you know, Danskin has been the big excitement over the last month or two as far as comping up. Starter is relatively flat, maybe off a point or two, and you know, OP has been drop where Wal-Mart decided to really focus on spring, summer and swim. So we got some momentum there for the time being till we win it back. But Starter and Danskin now pretty much hang on together. They are probably up a little together.

[Steve Marotta:]

Great. Thank you very much.

[Neil Cole:]

Thank you Steve.

[Operator:]

Thank you, and your next question comes from the line of Diana Katz. Please go ahead.

[Diana Katz:]

Hi, thank you for taking my question. I just wanted to go over Umbro a little bit more. Warren you mentioned SG&A next year could possibly be down, does that include continued sponsorship of kind of I guess the soccer sponsorship?

[Warren Clamen:]

What we are doing – the licensees are doing a lot of the sponsorships themselves. So they don’t pass through our line, where we are continuing to sponsor Team Norway, Team Canada, Team Peru, Team Ireland. We are also at hundreds of other clubs. So we don’t have to take a lot of those expenses. Nike had taken up the big expense when they took Team England and Manchester, or Man City.

[Diana Katz:]

Okay, and then how are you envisioning advertising for next year for the rest of the portfolio?

[Warren Clamen:]

Pretty much flat to this year. We might – there is a couple of brands we might spend a little more on.

[Diana Katz:]

Okay.

[Warren Clamen:]

But I would say utilize this year and our big goal is to convince the licensees to spend more and to co-op with us to really help drive sales.

[Diana Katz:]

Great. And then you know, when do you envision getting back to you know that mid-single digit organic growth rate assumption that you had?

[Neil Cole:]

Well, you know the big question is I think a lot of it is going to come in the next couple of years as we build our International business. The US is a tough game to continue to grow because of the way our deals are structured and the huge market share we have at Target, Wal-Mart, Coles, et cetera. So having such huge businesses with our tiered structure you know, we believe we are in the low single digits, but hopefully we will be able to get you know, a lot higher with our strong international footprint that we are building.

[Diana Katz:]

Okay, and then for 4Q, can you let us know the amount of financing and acquisition costs in the quarter, and just to be clear, we should include those costs in our non-GAAP EPS assumption?

[Warren Clamen:]

Unfortunately Diana, we are unable because of security laws to talk about any of the financing costs.

[Neil Cole:]

And deal costs we’re still working on, so it is a little – until we are done, we are not going to – we don’t know how that is all going to work. So we’re not commenting on those two issues yet.

[Diana Katz:]

Okay, and then just lastly, can you may be give a little more color on the particulars of how Yehuda’s or the COO role will be filled with your current staff in place?

[Neil Cole:]

Well, we have the new executive, Seth, who is handling Men’s and (inaudible) in Women’s and [Warren, VP]. Yehuda was more of a relationship and a tight person, and really wasn’t a true COO, and had really just taken that over the last six months and I guess didn’t really like it so much. So, Warren is probably going to pick up a lot of the operational, computer and IR staff that Yehuda had started to take.

[Diana Katz:]

Okay. Thanks very much. Best of luck.

[Neil Cole:]

Thanks Diana.

[Operator:]

Thank you. We have no further questions at this time. I would now like to turn the call over to the Neil Cole, Chairman and CEO, for closing remarks.

[Neil Cole:]

Okay. Well, thank you all for joining us today and interest in Iconix. Hopefully our city will recover and we will all get back to normal as soon as we can, and as always our team will be available today for further questions and comments throughout the day. Thank you all.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.