Icon Energy Corp. (ICON) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. On today's conference, today's speakers will be Mr. Neil Cole, Chief Executive Officer; and Mr. Warren Clamen, Chief Financial Officer. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company. This may cause the actual results, performance or achievements of the company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident or similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. I would now like to turn the conference over to your host, Mr. Warren Clamen, Chief Financial Officer. Please proceed, sir.

Good morning, everyone, and welcome to the Iconix Brand Group Second Quarter 2013 Earnings Conference Call. On today's call, we will review our financial results, provide an update on our overall business and discuss our outlook. Reviewing results for the second quarter ended June 30, 2013, it was a record quarter for our company with revenue of approximately $115.1 million, a 23% increase as compared to approximately $93.6 million in the second quarter of 2012. Our strong top line reflects healthy trends across the majority of our portfolio, our recent acquisitions and continued focus on international expansion, including the formation of a new joint venture in Canada. EBITDA for the second quarter increased 24% to approximately $72.7 million as compared to approximately $58.4 million in the prior year quarter, and our EBITDA margin in the second quarter was approximately 63%. Compensation expenses were approximately $3 million higher than expected this quarter as we began to expense noncash compensation related to performance-based bonuses that we anticipate to be earned this year. In the second quarter, we generated $60.8 million of free cash flow or $1.03 per diluted share compared to $51.9 million or $0.72 per diluted share in the prior year quarter. Non-GAAP net income, which excludes noncash interest related to our 2 convertible notes, increased 32% to approximately $42.7 million as compared to $32.4 million in the prior year quarter, and diluted non-GAAP earnings per share increased 60% to $0.72 as compared to $0.45 in the prior year quarter. In the second quarter, the company monetized its previously written off auction rate securities and received $5.4 million in cash, which is included in the interest and other expense net line on the P&L. On a full year basis, as it relates to our guidance, this onetime gain on the auction rate securities is more than offset by the incremental interest expense of approximately $7 million related to the $275 million of additional debt we pulled down on our securitization in this second quarter. In addition, in the second quarter, the formation of our new joint venture in Canada contributed approximately $9.8 million to our revenue. Similarly, the second quarter of 2012 included the formation of our joint venture in India, which contributed approximately $5.6 million to revenue in the prior year quarter. Reviewing the results for the 6 months ended June 30, 2013, our revenue increased 21% to approximately $220.2 million as compared to $182.1 million in the prior year period. We generated free cash flow of approximately $112.7 million or $1.79 per diluted share compared to $99.4 million or $1.35 per diluted share in the prior year period. Our EBITDA increased 19% to approximately $137.2 million as compared to $115.2 million in the prior year period. Year-to-date, we incurred approximately $4.5 million of expenses related to completed acquisitions, as well as acquisition initiatives. Our non-GAAP net income, as previously defined, increased 23% to approximately $78.9 million compared to $64.4 million in the prior year period, and fully diluted non-GAAP earnings per share increased 42% to $1.25 compared to $0.88 in the prior year period. EBITDA, free cash flow, non-GAAP net income, non-GAAP diluted EPS are all non-GAAP metrics and reconciliation tables for each can be found in the press release sent out earlier this morning and on our website, iconixbrand.com. We have continued to focus on share repurchases as one of the ways to create additional shareholder value. And in the second quarter, we bought back 5.2 million shares, bringing our total share repurchase for the first half of 2013 to 11.9 million shares, which represents 18% of our shares outstanding as of the beginning of the year at an average price of $25.42. Since initiating our share repurchase program in October 2011, we have repurchased approximately $447 million of our stock or approximately 28% of our shares outstanding as of the beginning of the program at an average price of $22.09. We plan to continue to be opportunistic with these share repurchases. We have approximately $53 million remaining under our current authorization. And today, we announced that our Board of Directors has approved a new program to repurchase up to an additional $300 million of our common stock. Moving on to our balance sheet. We believe that we continue to be in a very strong position. As part of our $1.1 billion securitization facility we launched last November, this quarter, we opportunistically pulled down $275 million at an attractive rate of 4.352%. We felt it was a good opportunity to take advantage of the credit market and believe having cash on hand positions us well to execute on our acquisition strategy, as well as continued share repurchases. Between our existing cash, which was approximately $441 million at the end of the quarter; our strong free cash flow, which is projected to be over $200 million this year; our undrawn $100 million revolver; a $125 million remaining under the -- remaining capacity under our securitization facility; and the ability to upsize the facility with additional brands and further leverage our balance sheet, we have significant availability, which we plan to put to work to drive continued shareholder value. With that, I will turn the call over to Neil Cole, our Chief Executive Officer.

Thank you, Warren. Good morning to everyone. With record performance in the second quarter, we continued to make progress on our growth initiatives, driving over 20% revenue growth and 16% earnings per share growth. Looking ahead, we plan to continue to deliver growth as we expand our global footprint, acquire iconic brands and further add value through opportunistic share repurchases. Starting with international. We have been extremely focused on building our portfolio of brands around the world and expect international to represent approximately 33% of our business this year. Today, across our portfolio, our brands have approximately 1,300 freestanding stores worldwide and 65 international direct-to-retail partnerships. In the second quarter, we continued to make progress on our international strategy and signed a new joint venture in Canada with our Buffalo JV partners to expand our entire portfolio of brands into Canada. Our existing Canadian business generates approximately $7 million in annual royalty revenue, which primarily comes from 3 of our existing brands, including London Fog, Mossimo and Ecko. We believe, by partnering with Buffalo, we can significantly increase our presence in Canada by leveraging their relationships and our diversified portfolio of over 30 iconic brands. This marks our fifth international joint venture as we continue to work on and explore opportunities to sign new joint venture partners in additional territories around the world. On the acquisition front, our pipeline remains strong. And as Warren mentioned, we are well positioned with over $500 million of liquid assets plus the ability to further draw down on our securitization and leverage our brands, which provides us with additional capacity to continue to execute on our acquisition strategy. Over the past 8 years, with the acquisition of 30 brands, we have demonstrated our ability to successfully acquire and add value to our brands, and we are confident that we can continue to execute on this acquisition strategy. However, as always, we will remain disciplined and also have the option to drive shareholder value through continued share repurchases, as we have done over the past 1.5 years. As for our existing businesses, our overall portfolio remains healthy. Starting with the women's brands. Business remains on plan with strength from Mossimo at Target as it rolls out into Canada; Bongo, which remains the #1 junior brand at Kmart and Sears; and with Danskin, with its strong fashion performance-based collection at Wal-Mart. We have also made progress with Buffalo and are already seeing international opportunities, as well as the potential for category expansion. Our Buffalo brand received worldwide recognition as Nik Wallenda walked across the Grand Canyon on a tightrope wearing Buffalo jeans. In our men's division, overall growth has been supported by the acquisition of Umbro and Lee Cooper, which have both been great additions to our portfolio. For Umbro, we had strong new partners for the territories that Nike used to service directly. We have signed new licenses and are in the process of a broader rollout in the United States and are also focused on other areas that have even great potential, such as Brazil. For Lee Cooper, we are working with a strong group of international licensees to further expand the brand in Europe, Asia and the Middle East and are leveraging our existing platform and relationships to build out the brand in both North and South America. We've also made progress on certain men's initiatives, including the acquisition of the remaining 49% of Ecko, which provides us with better control and flexibility to expand the Ecko and Marc Ecko brand throughout the world. For Rocawear, we have a new brand initiative that we are set to announce in August at the Magic Show in Las Vegas. And for Ed Hardy, we have an expansion plan in place that will take the brand into significantly more doors for spring 2014. Our home brands continue to perform well. Charisma has been very strong at Costco and is expanding with Costco into Canada. Royal Velvet is being positioned as one of the largest home brands at J.C. Penney and has been benefiting from J.C. Penney's focus on its overall home strategy. For the Peanuts brand, we are making progress on engaging new audiences through our digital efforts, including games, apps, e-books and numerous social media initiatives. We are also gearing up for the movie, which will launch in over 70 countries and 40 different languages in the latter part of 2015. We are extremely excited about the revenue potential from the movie and believe that between the anticipated risk [ph] in our existing business, new licensees related to the movie and our share of box office receipts, the movie will catapult significant organic growth for our overall company. Moving on to our 2013 full year guidance. We are maintaining our revenue guidance of $425 million to $435 million for 2013. We are raising our non-GAAP diluted earning per share guidance by $0.10 to a range of $2.20 to $2.30. Our full year guidance now assumes a weighted average share count of approximately 60 million to 61 million shares for full year 2013. We are maintaining our free cash flow guidance of approximately $2,003 to $2,010 million (sic) [$203 million to $210 million]. In closing, this is an exciting time for our company as we continue to deliver strong results with a growing top line and shrinking share count. We believe the performance we have achieved year-to-date and over the past several years demonstrates the power of our business model. And over the next few years, we expect to see additional growth as we continue to build our existing brands around the world and further leverage our strong balance sheet and continue to add iconic brands to our portfolio. We are energized about what we can do with our existing cash and borrowing capacity and believe we can create tremendous value through a combination of acquisitions and share repurchases, as we have done in the past. I'd like to thank you all for listening this morning and for your continued support. And now I'd like to turn it over to questions and answers.

[Operator Instructions] First question comes from the line of Bob Drbul from Barclays.

I guess the first question that I have is on the -- I guess, on the Starter business, you didn't really talk much about that. Can you just talk about what's happening within Wal-Mart with Starter and any competitive pressures that are going on there and maybe elaborate a little bit more on Ocean Pacific and the Danskin Now businesses within Wal-Mart?

Yes, starting with Starter. Our business is definitely down a little bit. I think we're down about 5% for the year. They are bringing in a couple of new brands that are competitive. I don't think it's on the floor yet, but rumor has it that Russell has done a program with them. And we are projecting the brand down going forward, probably $100 million or $200 million. But one of the benefits to us is it's at the higher -- we still have the tier structure, so it's at a really low royalty. And what's been wonderful is, with Wal-Mart's permission, we've gone nonexclusive, and Starter now has a big program with both Foot Locker and Sports Authority where we're rolling out our new, higher-priced and better products with the Iconix Starter jacket, and it's all going to be hitting in the next 2, 3 weeks. So our plan is, we think, probably, we could increase the Starter business all up because it's in a lot higher royalty rates, the upstairs business that we're doing. So a combination of the higher products in this new distribution will hopefully -- we're protecting our '14 business with Starter probably to be up. As far as the other business with Wal-Mart, Danskin Now is doing wonderful. No competitive project there. I don't think anybody could get a better female brand than Danskin. So we're excited about the growth business with Wal-Mart, and it is doing well this year. Op, they -- with new management, I guess, about 1.5 years ago, they kind of trimmed this down into the fall, so where we had a really good first 6 months of the year. Back half, we planned considerably down. And on a year basis, I think it's planned to be down about 10%. But that was in our budget. So overall, 3 good healthy businesses. We got our renewal on all 3 brands about 3 months ago, so that's the story on those 3 brands.

Okay. And then, I guess, just as you look at the rest of the year, are there any other sort of major reductions, or like what are you feeling the most pressure in, in the back half of the year maybe relative to where you were 3 months ago, or any big changes to -- especially on the revenue side?

It's pretty much on track. It's been a choppy retail environment, to say the least, but we pretty much planned for it and readjusted, and our new forecast we feel pretty good about. And I can't look at one area and say that -- obviously, we've spoken at length over the last 1.5 years about our men's brands, Ed Hardy, Ecko and Rocawear. But we planned them very conservatively and have new initiatives with all 3 with Ecko as we bought back the rest of the business and we're relaunching part of the business, the Marc Ecko Cut & Sew. We're going to be announcing a new partner in the next week or 2 that's going to be really great. Rocawear, we're working on a new initiative that we're going to announce at Magic that we're pretty excited about, a new brand expansion that Jay is all onboard and excited where that goes. And Ed Hardy, we have a lot of new doors and a new expanded distribution for 2014. So I think those have been the 3 challenge brands. But we've planned them conservatively for the rest of the year, so don't feel pressure there, but feel that we've addressed all of them for growth in 2014.

The next question comes from Steve Marotta from CL King & Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Can you talk about the $10 million that was received from the Canada JV? Was that embedded in previous revenue guidance?

Somewhat. We've -- over the last 6 years, we've done 5 of these JVs plus we've had a monetization in Canada. So it is part of our strategy and we do embed some international onetime -- and I really actually personally don't call them onetimers, although some of the analysts do. It is our strategy. We believe that by doing these deals and getting equity to people that have boots on the ground, the businesses will grow dramatically, and we've proved it. Our JV business, which is below the line and we don't get credit for it, was up 56% this quarter. And we're continuing to grow our business, I think, pretty dramatically because we have partners they don't have. So a good example is our oldest JV was in Latin America. When we did the deal, and I believe they gave us about $5 million about 5 years ago, our royalties were $1.7 million. This year, we -- they're going to be close to $10 million. And -- so we believe by doing these deals going forward that it vests our partners. We don't get credit below the line. But it is a strategy and we do anticipate -- I believe we have 2 of them in contract today. And we've somewhat planned them, but there could hopefully maybe be some upside, but it's, once again, very conservatively we've looked at these and have been consistent over the last 6 years with them. Steven Louis Marotta - CL King & Associates, Inc., Research Division: That's very helpful. You mentioned 2 in contract. That means there could be 2 more between now and the end of the year. Is that accurate?

Correct. Steven Louis Marotta - CL King & Associates, Inc., Research Division: I understand. And towards that end, as it relates specifically to the Canada JV, this will be recognized again in that below-the-line item, that's accurate? And the second question is, is there a put and take on the revenue line, because you mentioned you did already have some existing revenue coming from Canada?

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

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

You guys have done a terrific job of building the international business, and it's got a side benefit of lowering the tax rate. What is the goal for percentage of revenue to come from international?

Yes. This year, we're up to about 33%. But if you look at, we've -- our last 3 acquisitions were international businesses in Umbro, Lee Cooper and Buffalo. So a lot of it will come from depending on what type of businesses we buy. But our business in America is -- I'm not going to say it's -- I guess mature might be a good word. And there's just such tremendous opportunities around the world. One of the areas where this -- it could go to 40%, 50%. One of the exciting things, the Peanuts movie is going to be shown in, I believe, 50 countries or 70 countries in 40 languages. And we have such a huge Peanuts franchise around the world that, that could extremely catapult both organic and international revenues over the next couple of years. And there's just such growth around the world. I mean, today, another thing some people don't give us credit for when I read reports, we have 11 JVs in -- or 11 companies that we own equity in China. And today, we've only done 1 monetization. We're hoping to do 10 or 15 more over the next couple of years. And those -- today, Iconix, we have over 1,000 different stores just in China with our brands, and none of those stores do we get any revenue for, or even above or below the line, because those of you that know our China strategy, it will be based on individual monetizations as they start rolling out over the next few years. So international is very exciting. It's where the growth of the world is. In talking to my team, I -- as I send them on planes constantly, tell them that's where America was 20 years ago. When you look at countries like Brazil and you look at India and China, just tremendous growth rates, and we have to make sure we participate and not only own brands that are well known around the world, but also that come from places like the U.K., with Umbro and Lee Cooper, et cetera, et cetera. So excited about international. That's probably a long-winded answer, and hopefully, one day, 40%, 50% as we continue to grow our business model.

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

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

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

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

Next question comes from Jim Chartier from Monness, Crespi and Hardt. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: My first question for Warren on the capital structure. You guys have done a great job leveraging the balance sheet and cash flow to buy back stock and make deals. But going forward, what do you see as a target debt-to-EBITDA level, and kind of what is the upper limit for your comfort level?

Yes, we talk about this all the time, Jim. Currently, we're just over 4x net debt-to-EBITDA. Again, we have these guaranteed revenue streams of $700-plus million, generate $200 million of free cash flow. The debt that we do have on our balance sheet, the securitization is self-amortizing. It pays down. So naturally, that leverage ratio goes down as we pay down. But we haven't specifically said what our max is. We do look at this, but we do feel like we can leverage the balance sheet, and we have. So that's kind of the answer. We're at 4.5 today. We're very comfortable there. And if, opportunistically, we buy something again, you add EBITDA. So obviously, the leverage ratios would go down. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then on the monetization events, are you expecting some events in the second half of this year? And then kind of modeling forward, thinking about next year, what do you guys consider a sustainable level of monetization events that we should expect in the revenue line going forward?

I don't know -- what do you mean by monetization there, James? James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Like the Canadian joint venture?

The international organic business? Are you -- I mean -- you mean to tell me that -- similar to what... James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Like this Canadian -- the Canadian joint venture that you announced this morning.

Yes. As I mentioned, we have 2 deals in contract. And as you know, we have a pretty wide guidance of $0.10. So you could argue they're in, and you could argue they're not in. And it usually doesn't move the needle either way. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then Marc Ecko, one, have you done anything on the footwear license? Do you expect to do something on footwear license going forward? And then...

Yes. We have a great new company and pretty excited about the opportunities for both Marc Ecko -- and we're also going to be launching Zoo York. Footwear's coming out with a great company, and both Marc Ecko and Ecko will have product and licensees for 2014. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Great. And then I believe, in the original structure for the Marc Ecko deal, Marc Ecko himself got the first $2 million of royalty revenue? Do you now capture that now that you own 100% of the business?

No, Mark has a -- gets a small percent of every $1 we bring in. But there's no minimum of $2 million. But no, he continues to be our creative director and continues to share in perpetuity, in some formula of a very -- of a small number, way less than 1%. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then finally, the compensation expense you mentioned in this quarter, was that a shift from second -- from the second half of the year into this quarter, or is it just incremental to the entire year versus your prior expectation?

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

There's basically an accounting where if you feel that you're going to hit your -- the performance bonuses this year, with business being so strong and our revenues, the accounts felt that we had -- we're achieving those numbers.

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

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

We have a question from Kate McShane from Citi.

I guess I have a very general question. I wondered if -- we always appreciate hearing your opinion on the state of the U.S. consumer and retail. And if you can give us any kind of insight into how retailers are feeling as we go into back-to-school in the back half of the year?

I think everyone's -- I hate to use the term cautiously optimistic, but it's been a tough first 6 months. And it's been -- I use the word choppy because some weeks are great and then some weeks are difficult. And they -- blame it on the heat, blame it on the rain, and so it's been pretty choppy. I think inventories have been adjusted to be conservative for the second half, but we're seeing some good and some bad. And I think the strong are gaining share and the weak are losing. But it's -- I don't -- I can't tell you about the American consumer as a whole, but it just seems, I'd say, just okay at best in the U.S., where other parts of the world there seems to be a lot more growth and excitement happening. I don't know if that answers the question, Kate. Best I could do.

And we have a further question from Jim Chartier from Monness, Crespi and Hardt. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Neil, you mentioned the Starter rollout at Foot Locker and Sports Authority in the back half of this year. Are there any other kind of major notable initiatives that you guys have in the second half of the year that should drive some growth?

Yes, I don't see any sizable -- as I mentioned, we're going to be -- this new Rocawear business we're launching could launch -- it's in fourth quarter. Ed Hardy might have some extra -- a lot of doors in the fourth quarter. But obviously, we're benefiting from Mossimo's rollout throughout Canada. That's been really good for us. Today, they have 67 stores open. And when they get all 100 stores open over the next couple of months, that'll continue to grow that business. J.C. Penney, with what -- I think is getting better and better. And at least our Royal Velvet and our Zoo York businesses are picking up steam. But I think those are -- generally, other than that, I'd say business as usual. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then on Mossimo in Canada, does that fall under your existing license? And so are those revenues coming in at the lowest royalty tier?

Yes, actually, that's a good question. One of the -- Mossimo does, but Fieldcrest is a new deal at the high end of the tier. So we'll see some nice pickup more on the Fieldcrest side than the Mossimo side. Okay. Well, I'm not going to ask that question again because I didn't expect anyone to take me up on it last time. So once again, thank you all for listening today. Thank you for your interest in the company. And management will be around most of the day for those that want to take questions, whether it be from shareholders or analysts. And thank you -- once again, thanks, and have a wonderful day.