Icon Energy Corp. (ICON) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2013 Iconix Brand Group Earnings Conference Call. My name is Mark, and I'm your operator for today's call. [Operator Instructions] I would like to advise all parties, this call is recorded for replay purposes. [Audio Gap] 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 and 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 turn the conference over to your host for today, Neil Cole, Chief Executive Officer; and Warren Clamen, Chief Financial Officer. Mr. Clamen, please proceed.

Thank you. Good morning, everyone, and welcome to the Iconix Brand Group Fourth Quarter 2013 Earnings Conference Call. On today's call, we will review our financial results and discuss some brand highlights, company initiatives and our outlook for 2014. Reviewing results for the fourth quarter ended December 31, 2013, it was a record fourth quarter for our company, with revenue approximately $105.3 million, a 24% increase as compared to $85.1 million in the fourth quarter of 2012. Our strong top line primarily reflects our acquisitions of Umbro, Buffalo and Lee Cooper and continued focus on international expansion, including the formation of 2 new international joint ventures in Southeast Asia and Israel, which together contributed approximately $7 million to revenue. In the fourth quarter, we generated $62.9 million of free cash flow, a 66% increase over $37.9 million in the prior-year quarter, and free cash flow per non-GAAP diluted share of $1.13, a 109% increase over $0.54 in the prior-year quarter. EBITDA in the fourth quarter increased 20% to approximately $60.1 million as compared to approximately $50 million in the prior-year quarter, and our EBITDA margin for the fourth quarter was approximately 67%. Non-GAAP net income was $30.2 million, a 5% increase over $28.9 million in the prior-year quarter. In the fourth quarter of 2013, we incurred $9.6 million of incremental cash interest expense compared to the prior-year quarter related to our securitization facility and our 1.5% convertible notes. Our dilutive non-GAAP earnings per share increased 32%, to $0.54 per share 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. In addition, our non-GAAP diluted EPS excludes approximately 3.7 million shares, which are covered by our convertible note hedges. Reviewing our results for the full year ended December 31, 2013, our revenue increased 22% to approximately $432.6 million as compared to $353.8 million in the prior year. We generated free cash flow of approximately $229.9 million, a 27% increase over $180.5 million in the prior year, and free cash flow per non-GAAP diluted share of $3.87, a 54% increase over $2.51 in the prior year. Our EBITDA increased 21% to approximately $262.9 million as compared to $217 million in the prior year. Our non-GAAP net income, as previously defined, increased 17% to approximately $142.2 million as compared to $122 million in the prior year, and our diluted non-GAAP earnings per share increased about 41% to $2.39 compared to $1.70 in the prior year. 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 out earlier this morning and on our website, iconixbrand.com. In the fourth quarter, we also continue to create shareholder value through additional share repurchases. And for the full year of 2013, we spent $436 million buying back 15.8 million shares at an average price of $27.60, or 24% of our shares outstanding as of the beginning of the year. 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 price of $25.52. We plan to remain opportunistic and have continued buying back stock in the first quarter of this year, with approximately $110 million repurchased so far in 2014. We currently have approximately $110 million remaining under our existing authorization. And today, we announced that our Board of Directors has approved a new program to repurchase an additional $500 million of our common stock over the next 3 years. Moving on to our balance sheet. We continued to be in a strong position. We ended the year with over $335 million of cash, inclusive of restricted cash, have an undrawn revolver, and we are projecting to generate approximately $215 million in free cash flow this year. We also have potential additional capacity under our existing 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 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, everyone. 2013 was a strong year for our company, with over 20% top line growth and over 40% non-GAAP EPS growth. This was primarily driven by 3 key initiatives: number 1, the continued expansion of our worldwide footprint; secondly, the acquisition of 3 global brands; and last, our continued commitment to share repurchases. Starting with our international strategy, we continue to make great progress in building our worldwide platform. And in 2013, we formed 4 new international joint ventures in Canada, Australia, Southeast Asia and Israel. We have structured these partnerships similar to our other previous signed deals in Latin America, China, Europe and India, in which we have 50% ownership, and our strategy has been to identify partners in each territory that have the relationships and networks similar to what we have in the United States, and leverage their expertise to expand our portfolio of brands into new geographies. In 2013, international reach represented approximately 37% of our total business, up from 24% in 2012. This large shift to international has come from our international joint ventures, our worldwide Peanuts platform, which generate approximately 2/3 of its royalty revenue outside of the United States, and our recent acquisitions of Umbro and Lee Cooper, 2 truly global brands, both founded in England over 90 years ago. Across our entire portfolio of brands, today, we have 30 international direct-to-retail partnerships, over 800 international licensees and well over 1,300 stores for our brands worldwide. Moving on to acquisitions and share buybacks. Over the past couple of years, we have created significant value with our balanced approach to these 2 initiatives. If you look at our previous 3 acquisitions of Umbro, Buffalo and Lee Cooper, and our share repurchase activity in 2013, we spent approximately $400 million on each. Today, we believe that between our existing cash, our revolver and our strong balance sheet that we are well positioned to continue to execute on both acquisitions and share buybacks. Our acquisition pipeline remains strong. We continue to evaluate international brands, as well as domestic brands with global appeal. We also continue to look at opportunities outside of our existing footprint that we believe fit with our overall asset-light business model. With our strong track record in which we have acquired an average of 2 to 3 brands per year for the past 9 years, we believe that we can continue to execute. However, as always, we will remain disciplined. While international expansion and acquisitions are expected to be the primary drivers of our growth, keeping our existing portfolio of brands fresh, relevant in existing markets is equally as important to us. Looking at our overall portfolio, our Women's business remained healthy. Danskin Now at Wal-Mart had been strong, with sales up double digits in the fourth quarter, and momentum has continued into 2014 as more key items have been added to the assortment. Bongo had another record year, and we are rolling out new programs in 2014, and Mossimo continues to grow in its 14th year at Target. As for our Men's brands, we believe that we've stabilized and we are in the process of a smooth transition to key new licensees for both Rocawear and Ecko. Marc Ecko himself is getting more involved and is back as the owner of the core licensee of Marc Ecko Cut & Sew. Also for Ed Hardy, we have a new distribution strategy and have several new licensees offering a wide range of product categories. On the athletic side, Starter had a strong quarter, with the launch of NFL and NBA team jackets, and we are planning for expanded distribution and product categories throughout 2014. After 12 months of owning the Umbro brand, we have successfully converted the Nike wholesale business to the Iconix model, with new licensees in the U.K., Germany, Italy and the U.S. In the fourth quarter, we also took advantage of an attractive offer from Vicente [ph] the owners of Umbro in Japan, to extend their ownership into South Korea. For this deal, Vicente [ph] paid us $10 million, a strong valuation for a territory with no existing business, and as an ongoing revenue stream, it will pay Iconix an annual marketing fee. This fee will help support Umbro's overall worldwide marketing strategy, including our push to reignite the brand's position in soccer or probably more appropriately, football worldwide, with initiatives such as the recent signing of the top premier English league club, Everton. In our Home division, Charisma continues to grow through its partnership with Costco. Royal Velvet has been enjoying increased market share as JCPenney positions it as its largest home brand. Cannon sales continue to be strong, as Sears is focusing on fewer brands in the home division. And Sharper Image had a strong holiday in its e-commerce and catalog businesses. For our Peanuts brand, we have a number of initiatives that should drive strong growth in 2014. We are particularly excited about the movie and are focused on setting up our licensing program to best capitalize on the movie, which is scheduled to launch in over 70 countries, in 40 languages in November 2015. In addition, we are also working on an ongoing strategy through new content that we believe will continue to connect Peanuts with the next generation before and after the movie release. Moving on to guidance. For 2014, we are reaffirming our full year 2014 revenue guidance of $440 million to $455 million, our non-GAAP diluted EPS guidance of $2.50 to $2.60, and our free cash flow guidance of $210 million to $217 million. In closing, as I look at where our company is today and the powerful global platform we have built over the last 9 years since converting to the licensee model, I am proud of how far we have come. As the second-largest licensing company in the world after only Disney, our portfolio of brands represent $13 billion in global annual retail sales. From 2005 to 2013, we have delivered approximately 40% compounded annual growth for both revenue and earnings per share. Going forward, we plan to continue to drive additional growth through our organic initiatives and our acquisition strategy of asset-light businesses and global brands. Further, with our significant free cash flow and strong balance sheet, we plan to continue to opportunistically buy back our stock as we have successfully done over the past couple of years. There are so many opportunities out there in terms of new brands and new markets, and we believe we'd continue to build on what we've already accomplished and continue to deliver increased value to our shareholders. I'd like to thank you all for listening this morning and your continued support, and happy now to turn it over to questions-and-answers.

[Operator Instructions] First question comes from the line of Robert Drbul of Nomura Securities.

Neil, I guess, 2 questions, on the brands. Could you elaborate a little bit more sort of on the update with the Peanuts in terms of what we should be looking for here, sort of the biggest developments most recently? What's on -- - going to come for the Peanuts brand for 2014 into 2015? And can you also elaborate a little bit more on what's happening with the Starter brand and the distribution of it and how you're thinking about that?

Okay, great. Peanuts is definitely a growth brand, as we head into the big movie launch in 2015. We had, amazingly, the specials just over the last few months were incredible growth, #1 in their category every night against top shows. So the Peanuts brand is strong, great commercial during the Super Bowl, right before with MetLife, and just tremendous amount of momentum. And we're really in the process of building out the retail footprint, making deals with the best retailers or the largest retailers across America, both in the fourth quarter of '14 and leading throughout '15. So we really believe we have an opportunity to reignite the brand in a major way, not just with movie merchandise but over the next 2 or 3 years. We have new content coming with 500 shorts that are just being created as we speak, and plans for, hopefully, something exciting post-movie on new content. So Peanuts is a big growth vehicle for us, really through the back half of this year and a big driver in '15 growth. As far as Starter, we've had a real resurgence where we're "cool" again. And being put on all the right athletes and right fashion people across America, back into the better stores like Foot Locker and other sports stores with our satin well-known jacket and planning to expand that throughout the year. Business is off a little bit as Wal-Mart has brought in a couple of other sports brands. But in the fourth quarter, we more than made up for it with distribution in different markets outside of Wal-Mart. So those are 2 of the -- 2 key drivers of growth for our business.

And Warren, on, I guess, the share buyback and the share count, I guess, how did you -- what would be the ending share count for 2013? And what's the assumption in the $2.50 to $2.60 on share count and the buyback in those numbers?

So Bob, I would say the assumption that you should use at the ending is about $54 million, that -- or 54 million shares, sorry. That doesn't include any additional buybacks, but it does include some dilution from the convertible as of what we have in the numbers today, so as of the closing price. So kind of what the buybacks from Q1 offset the dilution from the convertible, but 54 million shares is the number to use.

For the full year, the first quarter and the full year?

Yes, well that was -- yes. Well, first quarter could be a little further down because we did buy back more shares than, I believe, were offset. So -- but we're about at 54 million.

And the next question comes from the line of Steven Marotta of CL King & Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Wanted to just talk a little bit about what you had said regarding the Umbro fee for Southeast Asia, I believe it was $10 million. Is that fully recognized in the fourth quarter? And the acquisitions, again, just reiterating, accounted for roughly $7 million in the quarter, is that accurate?

Correct. There are some costs and taxes and fees associated with that, but it's roughly about $17 million that are accounted for. There is an ongoing royalty or revenue stream, marketing fee coming out of Korea in the future of a few million bucks, but that was what was accounted for in the fourth quarter. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay, that's great. And you already touched on this a little bit, but specifically, merchant licenses that are associated with the Peanuts movie over the course of the next year, will those be specifically called out or is that just going to be a matter of ongoing business?

I think it's going to be a matter of ongoing business. We will, in some form, probably be in every store in America. But there will be others that we'll have more exclusive type arrangements with and will get preferential distribution. But I'm not so sure I want to antagonize the other ones that don't get it. So we probably will just do it business as usual as we dramatically grow the rev share. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. Also, you mentioned a new distribution strategy for Ed Hardy. Could you go into a little bit of detail on that?

Yes, we're going to be selling a lot more to the mass people, and you'll see distribution in Wal-Mart and Kmart and other places, really into Mid-America where Ed Hardy has good roots. Steven Louis Marotta - CL King & Associates, Inc., Research Division: And lastly, the unseasonable weather trends are on the tips of everybody's tongue. Can you talk a little bit about how that has affected your business, if at all?

We haven't seen anything that dramatic. It's been -- we've seen a pretty choppy atmosphere for the last 3 or 4 months to begin with, with or without the weather and all the other -- some other drivers that have happened around. So it's been a pretty choppy retail environment, but we planned it and have good contracts, minimums and pretty solid brand entrenchment in all the stores. So we're still encouraged where we are in this crazy world.

The next question comes from the line of Jim Chartier of Monness, Crespi, Hardt. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: I was wondering, one, if you could tell us what the contribution from the acquired brands was in the fourth quarter? I know you normally give it in the Qs and the K.

From acquisition-related? James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Right. So what did the incremental revenues from Umbro, Lee Cooper and Buffalo?

Right. I mean, we don't usually comment on that, on specific brands, Jim. Plus we also had Umbro in last year, we bought it in the middle of the fourth quarter. So one against the other. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: And then I saw that you had extended the Peanuts deal with ABC in December. Was there any incremental benefit from that extension in the fourth quarter?

No, that was a 2014 event. The deal actually closed in the beginning of '14. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: And so what's the incremental revenues from that deal?

There's nothing in the 2013 numbers. We'll go through that in Q1 2014. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: But to just help us model, I guess, for the first quarter to understand what the contribution was.

The thought of what would happen with ABC was in our projected -- is in our current guidance. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: I think a couple of years ago, it's like $12.5 million of revenue. Is it in the same ballpark?

I don't think we want to comment on first quarter yet, but we maintained our guidance for the year.

A question comes from the line of Eric Beder of Brean Capital.

Can you talk a little bit about the general M&A environment in terms of the size of the targets? Is there a lot more competition now since there's a lot of private equity getting even more involved in the licensing business? And is there any specific focus or are we still kind of trying to find just kind of the best kind of athlete in the draft here in terms of the M&A?

Yes, as always, we're looking for great brands. I think where it's a little different for Iconix is kind of focused around the world and we've got teams, whether it be bankers or M&A working in different parts, and we're seeing a lot more from a global perspective than we've ever seen. And just looking at a lot of different type of opportunities, both -- even some that are one consider not necessarily brands but great asset-light models. And we realize, to move our needle, we're going to have to look at bigger deals. And we've realized, to work on a brand that brings in $5 million or $10 million, takes as much time as a brand that brings in $30 million or $40 million. And looking through our history, we bought an average of 2 or 3 brands a year, usually brought in over $40 million to $50 million of inline royalty. So we're hoping to continue to do that. And so it's going to take probably 1 or 2 big fish and a lot of small ones.

In terms of your business with Macy's, how has the Madonna-driven line there and how have you done in terms of some of the other lines there?

It's -- actually, that brand is pretty strong, continues to grow. Every year, it gets bigger and better. So majority [ph] of our business has been pretty good with Macy's.

You have -- currently have no further questions at this time. [Operator Instructions]

Okay. Well, obviously, we're going to be available for questions all day in the office. The management makes themselves available for both analysts and shareholders to shed more light. But thank you, all, for joining us today and your continued interest in Iconix. As always, as I mentioned, we're available throughout the day for questions. But thank you, and look forward to talking to you again in the next couple of months for the first quarter. Thank you.