Icon Energy Corp. (ICON) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Iconix Brand Group Third Quarter Earnings Conference Call. [Operator Instructions] Management 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 hard or 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 now like to hand the conference over to your hosts for today, Neil Cole, CEO; and Warren Clamen, Chief Financial Officer.

Good morning, everyone, and welcome to the Iconix Brand Group third quarter 2013 earnings conference call. On today's call, we will review our financial results, discuss the brand highlights, provide an updated guidance for 2013 and initiate 2014 guidance. Reviewing results for the third quarter ended September 30, 2013, it was a record third quarter for our company with a revenue of approximately $107.2 million, a 24% increase as compared to approximately $86.6 million in the third quarter of 2012. Our strong top line reflects healthy trends across the majority of our portfolio, our acquisitions of Umbro, Buffalo and Lee Cooper and continued focus on international expansion, including the formation of a new joint venture in Australia, which contributed approximately $5 million to our revenue in the quarter. EBITDA in the third quarter increased 27% to approximately $65.6 million as compared to approximately $51.8 million in the prior year quarter. And our EBITDA margin in the third quarter was approximately 61%. In the third quarter, we generated $54.3 million of free cash flow or $0.97 per non-GAAP diluted share compared to $43.2 million or $0.61 per non-GAAP diluted share in the prior year quarter. Non-GAAP net income increased 15% to approximately $33.1 million as compared to approximately $28.7 million in the prior year quarter. And diluted non-GAAP earnings per share increased approximately 44% to $0.59 compared to $0.41 in the prior year quarter. Our non-GAAP net income and non-GAAP diluted EPS exclude noncash interests related to our 2 convertible notes. And new for this quarter, they also exclude the incremental diluted shares we recorded this quarter related to both the convertible notes. Based on our closing stock price on September 30, 2013, which is the first quarter that there were potential diluted convertible shares for GAAP purposes. However, we will not be responsible for issuing these shares as they are covered by both the convertible notes hedges. Reviewing results for the 9 months ended September 30, 2013, our revenue increased 22% to approximately $327.4 million as compared to $268.7 million in the prior year period. We generated free cash flow of approximately $167 million or $2.76 per non-GAAP diluted share compared to $142.6 million or $1.97 per non-GAAP diluted share in the prior year period. Our EBITDA increased 21% to approximately $202.8 million as compared to $167 million in the prior year period. Our non-GAAP net income, as previously defined, increased 20% to approximately $112 million as compared to $93.1 million in the prior year period, and our diluted non-GAAP earnings per share increased approximately 45% to $1.85 versus $1.28 in the prior year period. EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted shares and EPS are all non-GAAP metrics, and reconciliation tables for each can be found in the press release sent out earlier this morning or on our website, iconixbrand.com. In the third quarter, we also contributed to create shareholder value -- continued to create shareholder value through share repurchases, having bought back 3.1 million shares in the period, bringing our total share repurchases for the 9 months ending September 30, 2013, to 50 million shares or 23% of our shares outstanding as of the beginning of the year at an average price of $27.07. Since initiating our share repurchase program in October 2011, we have repurchased approximately $551 million of our stock or approximately 32% of our shares outstanding as of the beginning of the program at an average price of $23.59. We plan to continue to remain opportunistic with share repurchases and have approximately $250 million left under our current authorization program. Moving on to our balance sheet. We continue to be in a very strong position. We ended the quarter with $326 million of cash on hand, have an undrawn revolver, and we're projecting to generate over $200 million of free cash flow next year. We also have additional capacity under our securitization facility and the ability to upsize the facility with additional brands. With these resources, we plan to continue to create shareholder value through a combination of new acquisitions and continued share repurchases. With that, I will turn the call over to Neil Cole, our Chief Executive Officer.

Thank you, Warren, and good morning to everybody. I am pleased to report strong results for the third quarter as we continue to expand our global footprint and support and grow our existing portfolio. We also successfully integrated our recent acquisitions and added value through continued share repurchases. Starting with international, we have made significant progress. This year, we expect our international business to almost double, representing more than 1/3 of our overall business. This is up from just 6% just a few years ago, and we estimate this will grow to approximately 40% of our revenue in 2014. This growth has primarily been driven by our recent acquisitions of 3 international brands, as well as our continued efforts to partner with strong local operators who have relationships and market expertise to build our brands in these new territories. To date, we now have 7 international joint ventures, including new partnerships that we recently formed in Australia and Southeast Asia. Including our joint ventures, recent acquisitions and our worldwide Peanuts platform, we have 30 international direct-to-retail partnerships, over 800 international licensees and over 1,300 standalone stores for our brands across the globe. Looking ahead, we expect international expansion to provide strong organic growth for our brands. However, the revenue from our 50-50 international joint ventures is not captured in our top line. For 2013, we expect revenue from our nonconsolidated joint ventures to be approximately $25 million. However, we anticipate the revenue from these joint ventures will grow to $44 million in 2014. Our Iconix Latin America business continues to grow. And today, we have 6 direct-to-retail deals and a total of 51 licensees in the region. In China, our partners expect to have over 700 stores open by year end, and one of our partners is on track for an IPO in the first half of next year. We are also making progress in India and recently signed our fourth long-term license for Umbro. And we are gaining traction in Europe with our recent launch of London Fog and Belle at Badgley Mischka in Karstadt, Germany. In September, we formed our sixth international joint venture with Pacific Brands of Australia and New Zealand. Pacific Brands is headquartered in Melbourne, Australia with over 5,000 employees and is a leading vertical operator, marketer, brand owner and retailer in Australia, making it an ideal partner to help grow our footprint in the region. Also, this October, we formed a joint venture in Southeast Asia with Li & Fung, the world's leader in consumer goods design, development, sourcing and distribution. And we plan to continue to evaluate similar partnerships in additional territories and geographies around the globe. Moving on to some brand highlights in the quarter. In our women's segment, Danskin Now is a standout with sales up double digits at Wal-Mart. Bongo continues to perform well as a core junior brand at both Kmart and Sears. And we have seen an improvement in Candie's and Mudd at Kohl's, which were both up in the third quarter. In our men's division, Starter had a strong quarter with the relaunch of classic satin jacket, which is now available at leading retailers, including Sports Authority, Foot Locker, Hibbett's and on all league websites. ZOO YORK continues to perform and recently released a Chaz Ortiz signature apparel collection exclusively at JCPenney's and a ZOO YORK KINGS premium apparel and hardgoods collection for skate shops. To support our young men's portfolio, we recently made a $25 million strategic investment in Complex Media, a premier multimedia lifestyle destination for millennial males and a leader in young men's digital marketing, which will allow us to further engage our core consumer. Our home brand continues to perform well with strength from Charisma at Costco and Fieldcrest -- as Fieldcrest rolls out in Canada with Target. Peanuts has a strong holiday momentum with 3 in-store programs at Hallmark, UNIQLO and Kohl's. Longer term, we remain excited about the Peanuts movie and expect to see additional growth in 2014 as we signed new licensees in anticipation of the movie, which is scheduled to launch in over 70 countries and 40 languages in 2015. We are also excited to announce that Fox and Blue Sky Studios has brought on Paul Feig, the Director of Bridesmaids and The Heat, to produce and oversee the film, which we believe further adds to the long list of talented movie professionals working to make this a worldwide success. On the acquisition front, we are well positioned to execute and will continue to balance acquisitions with share buybacks as our primary use of cash. Our acquisition pipeline remains strong, as seen with our recent acquisitions over the -- in the last year of Umbro, Buffalo and Lee Cooper. And we continue to evaluate international properties, as well as domestic brands we believe we could plug into our global footprint. With our strong acquisition track record, we are confident that we can continue to execute. However, as always, we remain disciplined and also have the option to drive shareholder value through continued share repurchases, as we have demonstrated over the past few years, in which we have bought back 32% of our outstanding shares. Moving on to guidance. For 2013, we are reaffirming our full year revenue guidance of $425 million to $430 million of revenue. We are raising our non-GAAP diluted EPS guidance by $0.10 to a range of $2.30 to $2.40, primarily reflecting a lower share count. Our full year guidance now assumes a weighted average share count of approximately 59 million shares for full year 2013. We are maintaining our free cash flow guidance of 2003 (sic) [$203 million] to 2010 (sic) [$210 million]. At this time, we are providing 2014 guidance. For 2014, we expect revenue to be in the range of $440 million to $455 million. This excludes approximately $44 million of royalty revenue from our nonconsolidated joint ventures. If we factor in this revenue, our guidance implies mid to high single-digit organic growth for 2014. We expect 2014 non-GAAP diluted EPS to be in the range of $2.50 to $2.60 and 2014 free cash flow to be in the range of $210 million to $217 million. In closing, we believe the performance we have achieved year-to-date with double-digit revenue and earnings growth demonstrates the power of our business model and the strength of our portfolio. Looking ahead into 2014 and beyond, we expect to continue to deliver strong growth in both organic initiatives as well as acquisitions as we continue to build our global footprint and further leverage our strong balance sheet to add iconic brands to our portfolio. In addition, we plan to continue to balance acquisitions with share repurchases, as we have done successfully over the last few years, to increase value for our shareholders. With that, I'd like to thank you all for listening this morning and continued support. And with that, I'd like to turn it over to questions and answers.

[Operator Instructions]

[Operator Instructions] And your first question comes from the line of Jim Chartier of Monness, Crespi, Hardt. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: My first question. You formed the Southeast Asia joint venture in the fourth quarter. What do you expect that to contribute to revenues in the fourth quarter?

Somewhere around $3.5 million worth of revenue. And it's with Li & Fung. It's one of the largest global suppliers, which we think is very strategic to help us in other parts of the world. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Great. And then for your 2014 outlook, what do you expect from the contribution from the IPO of your China -- Chinese company and/or other monetization events in the year?

None of them are factored into guidance. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: So you don't assume any formations of joint ventures in the guidance for next year?

I'm not sure specifically how we will roll out our international strategy. But there's no -- there's just normal organic growth from international. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And so can you just give a little more color on which brands you expect to grow next year and what the major initiatives are for next year?

The big growth drivers of 2014 are going to be Peanuts. As we build up to the major movie, we're starting to see major programs rolling out with most major retailers pretty much around the globe. So we're excited about that. We're getting strength throughout the portfolio brands like Starter, Badgley Mischka, Royal Velvet, Bongo, Umbro are all showing growth going into next year. And then all the joint ventures, as we mentioned, net line's going from around $25 million to $44 million, although it's down below. We're seeing a lot of international growth. So it's a combination pretty much across the portfolio and around the globe. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Great. And then for one, SG&A grew more than I expected this quarter. Is there anything unusual in SG&A this quarter?

I don't think so. It was about $1 million or $2 million over the last quarter, and that's pretty much the run rate. It wasn't -- it didn't grow that much, Jim, but Q4 should be around the same, maybe slightly lower.

And your next question comes from the line of Ronald Bookbinder of The Benchmark Company.

So looking at 2014, Peanuts really should be a big deal. What do you think the revenue from Peanuts or the incremental revenue as it ramps up of Peanuts' contribution to next year will be?

Yes, I think we've kind of made it a policy not to apply it on individual brands throughout the 33 different brands we have.

Okay. And what is driving Starter? Is it just the satin jackets going outside of Wal-Mart? And how is Starter doing that at Wal-Mart with Russell there now?

Yes, the big driver is the business that we have with Foot Locker and Sports Authority. It was with the jacket, which is going to be expanding a few other product categories. And then Starter continues to perform great. Even with Russell's higher price point at Wal-Mart, we think Starter is in a wonderful position. And the combination of what we're doing in the malls and with Wal-Mart really shows the strength of the brand, and the business is planned up next year.

And so what are the product categories is it going to outside of the Wal-Mart channel?

We're looking at products like hats, which just kind of fits with the jackets. And we also have a pretty good business we call Starter Black around the globe, where it's more of a high-fashion business, kind of what Starter was many years ago. Good business in Europe, starting in Southeast Asia. So pretty much a lot of different products and very different what you'd see in Wal-Mart today.

And lastly, on the youth brands, Ed Hardy, Rocawear. Is Rocawear beginning to turn? Has it started to turn? And what is the future with Ed Hardy?

Yes, Ed Hardy has started to turn as we've expanded the distribution and are selling more to the mass channel. So Ed Hardy is growing in the fourth quarter and is planned for nice growth next year. Same thing with the Ecko side on the Marc Ecko Cut & Sew business. Rocawear is still not planned up, and it's still causing some -- a little downward trend, but we're looking at a new brand launch, which we've been working hard on and hopefully will be announcing soon, which will help move us back in the right direction.

[Operator Instructions] And our next question comes from the line of Bruce Geller of Dalton, Greiner. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: Could you elaborate a little bit on the Complex Media transaction? Typically, when you guys make an acquisition, there's a royalty stream associated with it. This was a little bit different in that regard. So could you maybe talk about the strategic nature of the transaction and how you ultimately expect to monetize it?

Yes, Complex is a company we discovered because Marc Ecko, who was a licensee of ours and is one of the founders of the company, and Marc introduced us. And it's an incredible -- it's a profitable media company, which in of itself was pretty exciting to see. And they have over 100 websites that all aggregate and this amazing platform that really is the leader talking to millennial males, which is really hard for us to reach because they don't really read fashion books and they're really online. So we got fascinated with the company. We're alongside some very powerful venture capital that all have monetization timelines. And so we felt it was a good below-the-line investment that was strategic for all the men's brands, which have been the weakest part of our portfolio over the last couple of years. So it's obvious that we are very different from what we've done in the past. I mean, it was a strategic investment that helps shore the men's business, which we think is going to be very profitable, but we -- it does go below the line, and we don't get revenue in the short term. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: Okay, and my next question relates to the Royal Velvet business at JCPenney. There are -- JCPenney's obviously been in the news a lot, and there's talks of their home business struggling. But now with Martha looks like pulling out, is that a potential opportunity for Royal Velvet to improve your business there or increase your level of business there?

Yes, yes. Our business there, ironically, has been really strong and a lot higher than planned. And we believe we're hopefully going to be one of the, if not the largest home business there. And I do think Martha's exit opens up more share to us. So we are moving for JCPenney and believe it's going to be a strong home business, hopefully, for many years to come. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: Great. And then lastly, can I just clarify, you did make some reference to it in one of the earlier questions, but with respect to your guidance for next year, if this Chinese joint venture does an IPO some time in the first half, as you mentioned, would that be purely or completely incremental to the guidance that you've given?

Yes. And once again, that wouldn't be top line because it is a joint venture. So it would enhance our profitability and that line down below, but it wouldn't enhance our top line. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: And it -- would it obviously enhance your free cash flow?

Correct.

Let me clarify that. That's assuming we sell our stock. So sometimes, we -- in the last China IPO, we sold half and kept half. So it all depends on our belief in the company, and so it's not necessarily going to turn into cash, but it will turn into an EBITDA profit.

And your next question is from the line of James Chartier of Monness. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Warren, what are you modeling for the joint venture line for fourth quarter of this year, and then how should we think about it for next year?

So for the -- I think it's going to be around $9 million, $10 million for the whole year for 2013. And we're modeling it to actually all double, between $19 million and $20 million. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Great. And then Neil, can you just give us a little color on what you guys are seeing at retail today?

Yes, I mean, it's a mixed bag, and there's no steady trends. We use the word choppy. And the business has picked up the last week or 2 with the weather, but it's not the best environment we've ever been in. But our business is holding up pretty strong, and obviously, it's across so many different channels. And what's encouraging, most importantly, is across so many parts of the world where we're seeing a lot better trends in other parts of the world and a lot of growth. America's an interesting game, but I think we're well positioned. But it's definitely -- I'll use the word choppy.

You have no more questions. I would now like to turn the call over to Mr. Neil Cole for closing remarks.

Okay, well, thank you, everyone, for joining us today and your interest in Iconix. As always, our team will be available today for further questions, and I appreciate the interest and have a wonderful day.