Icon Energy Corp. (ICON) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group Second Quarter 2014 Earnings Conference Call. With us on the call today are Neil Cole, Chief Executive Officer; Seth Horowitz, Chief Operating Officer; and Jeff Lupinacci, Chief Financial Officer. [Operator Instructions] Please note, today's conference is being recorded. Before we begin, I will read the following 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 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 that the statement was made. I will now turn the conference over to Mr. Lupinacci. Sir, please go ahead.

Good morning, everyone, and welcome to the Iconix Brand Group Second Quarter 2014 Earnings Conference Call. On today's call, we will review our financial results, provide an update on our overall business and discuss our full year outlook. Reviewing results for the second quarter ended June 30, 2014. It was a record quarter for our company with revenue of approximately $118.9 million, a 3% increase as compared to approximately $115.1 million in the second quarter of 2013. Our strong top line reflects positive results across our Women's, Home and Entertainment businesses, as well as the expansion of our international strategy. EBITDA in the second quarter increased 8% to approximately $78.2 million as compared to approximately $72.7 million in the prior year quarter. And our EBITDA margin in the second quarter was approximately 66%, up from 60% in the first quarter of 2014 and 63% in the second quarter of 2013. In the second quarter, we generated $60 million of free cash flow or $1.14 per diluted share compared to $60.8 million or $1.03 per diluted share in the prior year quarter. Non-GAAP net income was approximately $39.6 million as compared to approximately $42.7 million in the prior year quarter. In the second quarter, we recorded a onetime noncash tax charge of approximately $2.1 million related to a change in state tax law requiring us to revalue our deferred tax liabilities at a higher tax rate. Diluted non-GAAP earnings per share in the second quarter increased 4% to $0.75 compared to $0.72 in the prior year quarter. Reviewing results for the 6 months ended June 30, 2014. Our revenue increased 7% compared to approximately $235.1 million as compared to $220.2 million in the prior year period. We generated free cash flow of approximately $118 million, an increase of 5% compared to $112.7 million in the prior year period, and free cash flow per diluted share of $2.23, a 25% increase compared to $1.79 in the prior year period. Our EBITDA increased 8% to approximately $147.9 million, as compared to $137.2 million in the prior year period. Our non-GAAP net income was approximately $78.9 million compared to $78.9 million in the prior year period, and our diluted non-GAAP earnings per share increased 19% to $1.49 compared to $1.25 in the prior year period. Our non-GAAP diluted share count for the 6-month period ended June 30, 2014, was 53 million shares and includes a correction to the first quarter 2014 non-GAAP diluted share count by 1.2 million fewer shares related to the accounting for our convertible note hedges. EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted earnings per share 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. In the second quarter, we bought back 800,000 shares, bringing our total share repurchases for the first half of 2014 to 3.7 million shares at an average price of $39 per share. Since initiating our share repurchase program in October 2011, we have repurchased approximately $725 million worth of our stock or approximately 38% of our shares outstanding as of the beginning of the program at an average share price of $26.04. We plan to continue to be opportunistic with share repurchases and have approximately $575 million remaining under our current authorization. Moving on to our balance sheet. We continue to be in a very strong position. Between our existing cash, our undrawn revolver, additional capacity on our securitization facility and our strong free cash flow, we have access to significant capital to create additional shareholder value. For GAAP accounting purposes on our balance sheet, we reclassified our convertible debt of $603 million to current liabilities related to the triggering of a conversion right for both of our convertible notes. However, this does not present a realistic economic picture, and we do not expect any of the notes to be converted as the market value of the converts are higher than the conversion value. With that, I will turn the call over to Seth Horowitz, our Chief Operating Officer.

Thank you, Jeff, and good morning, everyone. Our overall portfolio continues to perform well. There has been tremendous excitement and growth for our Peanuts brand. We continue to make progress on our international expansion. Our Women's Fashion and Home businesses experienced positive growth in the quarter, and we are excited about the opportunities to build out our worldwide sports and entertainment platforms. Starting with Peanuts. The second quarter was another strong quarter for the brand, and we expect to see continued growth as we approach the 2015 launch of the brand's first-ever full length feature film. Ahead of the movie, we are securing major promotion and licensing deals around the world. And at the most recent licensing show last month, we unveiled the new movie artwork for merchandising programs that will begin to ship next year. At this show, we also held an international summit with over 200 partners worldwide that represent over 100 countries. In the first 6 months of 2014, we have signed over 130 new Peanuts licenses around the world. Another area of future growth that we are excited about is in the sports market with our Umbro, Starter and Danskin brands. Activewear has been a growing and important segment of the marketplace and is a fast-growing part of our company, expected to represent over 20% of our -- of business this year. Danskin now continues to be the core opening price point athletic brand at Walmart, and Walmart is furthering its commitment to the brand with improved assortment and in-store presentation. For Starter, through our relationship with G3, we have a signed over 200 colleges to co-brand Starter apparel, shipping for holiday 2014. This is in addition to all 5 major sports leagues, which we continue to roll out. Umbro enjoyed strong sell-throughs throughout the World Cup, and Tim Howard, one of the heroes for the U.S. World Cup team, will be wearing Umbro in goal for Everton this upcoming season. Through global marketing and local licensing initiatives, Umbro has signed several new significant teams around the world to wear the brand, including Everton and Hull City of the English Premier League, both Nantes FC and RC Lens of the French Division 1 and Vasco de Gama in Brazil. Our women's and home brands had a strong second quarter, driven by strength across our direct-to-retail partnerships, including Candie's and Mudd at Kohl's, Bongo at Kmart/Sears, Op at Walmart, Royal Velvet at J.C. Penney, Charisma at Costco and Cannon at Kmart/Sears. These brands have become fixtures within their respective retailers and will continue to be important as they provide the retailer with strong national brands at private label economics. As expected, our men's fashion brands, Rocawear, Ecko and Ed Hardy were down year-over-year as 2014 remains a transition year. However, new core licensees for each of these brands started shipping product in the first 6 months of 2014. They have secured additional distribution and are experiencing strong sell-throughs. We believe this is a new beginning for these brands and anticipate we have turned the corner. In the second quarter, we sold the rights to the Sharper Image e-commerce and U.S. catalog businesses for $10 million to our licensee Camelot, at a 10x revenue multiple, resulting in $7.8 million of revenue in the second quarter. Going forward, we will continue to receive a royalty on Sharper Image products sold by our licensees to both Camelot and all global retailers. And Camelot, will own and manage the e-commerce and catalog business, which is more of a curated specialty shop that sells multiple brands. We believe this partnership will create increased exposure and distribution for the Sharper Image brand. We look forward to working in partnership with Camelot to build out the catalog business around the world. With that, I will turn the call over to Neil Cole, our Chief Executive Officer.

Thank you, Seth and Jeff. Good morning, everyone. With record performance in the second quarter, we made progress on our initiatives and plan to continue to deliver growth as we expand our global footprint, capitalize on the upcoming Peanuts movie and execute on our acquisition strategy. Starting with international. We have been extremely focused on building our portfolio of brands around the world and expect international to represent approximately 40% of our business this year. Across our entire portfolio of brands, we have over 30 international direct-to-retail partnerships, over 900 international licensees and over 1,300 stores and shop-in-shops of our brands worldwide. Through the second quarter, led by Peanuts, we have signed over 130 new license agreements outside the United States. This also includes 29 new licenses in the recently acquired Latin America, the 50% formerly owned by ILA. Today, we have 7 international joint ventures with best-in-class partners that have local expertise. We are looking to form similar partnerships in additional territories to help us build out our brands in unpenetrated markets, including the Middle East and Japan. In the second quarter, we broadened our relationship with Global Brands, a recent spinoff of Li & Fung, by adding additional brands and territories to our existing joint ventures. Our Southeast Asia joint venture will now include Korea for a majority of our brands, a region that Global Brands is well established in. Their presence in Southeast Asia and local expertise in this market has already proven itself to be valuable, as we look forward to partnering with them to build out our portfolio of brands in Korea as well. We have also expanded our European relationship with Global Brands to include Ecko, Ed Hardy, Zoo York and the Sharper Image brands, increasing the scale and reach of our joint venture. As a result of all these transactions, we have recorded a gain of approximately $14 million in the second quarter. On the acquisition front, our pipeline remains strong. And with our strong balance sheet, we are well positioned to continue to execute on our acquisition strategy. Over the past 9 years with the acquisition of over 30 consumer brands, we have demonstrated our ability to successfully acquire and add value to brands, and we are confident we can continue to execute. However, as always, we will remain disciplined and also have the option to drive shareholder value through continued share repurchases. Moving on to our full 2014 year guidance. We are raising our revenue guidance to $455 million to $465 million. We are also raising our non-GAAP diluted EPS guidance to $2.60 to $2.70 per share, and we are raising our free cash flow guidance to $215 million to $222 million. In closing, we believe our ability to continue to deliver growth in a diverse way to many different channels, including international, sports and entertainment brands and direct-to-retail partnerships all demonstrate the power of our business model. As we look to the future, we believe we can continue to drive significant growth and increase value to our company and shareholders through our global expansion plans, our worldwide Peanuts business and the addition of Iconix brands that we continue to acquire. I'd like to thank you, all, for listening this morning and your continued support, and we would now like to open it up to questions and answers.

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

This is Karen O'Brien [ph] filling in for Bob. Can you give us any more color on what sort of bump we can expect from the Peanuts movie? And since Peanuts operates at a lower margin, should we expect to see some contraction next year?

Well, what we should expect to see is increased revenues. And yes, lower EBITDA will come with -- as Peanuts continues to grow. We haven't put out a specific number yet for what we see as the movie revenues. We will be doing that on our third quarter conference call, when we put out our 2015 number. But as I mentioned in our -- in the script before, we signed over 130 new licensees that we hadn't had before in the first 6 months of this year. So we think it's going to be pretty dramatic. The movie is going to be played in 70 countries, 40 different language, and we have an incredible director who's had a couple of movies that have been close to $1 billion in sales. So we're pretty excited about it, and we'll give more clarification in the next conference call.

Great. And one more. Can you briefly touch on what category you're finding most intriguing from an M&A standpoint?

Well, I'll find them intriguing when we close them. Don't really -- we're looking at a lot of opportunities. Something that we've talked a lot about is both entertainment and sports. We see those 2 categories as global because American entertainment plays worldwide, as does sports. So those are 2 areas we're looking at. But it doesn't mean the next one won't be another fashion brand, because we -- it is some of our heritage. But we are excited about opportunities in the -- on the entertainment side.

Our next question comes from the line of John Kernan from Cowen.

This is Jerry Gray on for John. I was wondering if you could just walk us through some of the organic growth trends that you're seeing [indiscernible] in the second half and maybe talk...

Having trouble...

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John, I'm... [Technical Difficulty]

Sorry. This is Jerry on for John. I was wondering if you could walk us through some of the organic growth trends you're seeing develop in the North American business for the second half. And then also if you could talk a little bit more about the international business and how Latin America is performing relative to your expectations since you brought that back in.

Great, thank you. Basically, some of the back-half trends we have are -- we -- similar to, really, the first 6 months of the year, we see continuing. Strong business in our women's DTRs businesses with Kohl's, Candie's, Mudd, businesses that -- our Walmart business, Op, and Danskin have been strong. So we continue to see Women's -- Home has been pretty good. 4 out of our 5 home brands have been up, some close to double digits, and we see that continuing with strength. Royal Velvet at J.C. Penney has emerged as one of the top brands there with e-commerce [ph] brand. And as I mentioned before, Peanuts will continue to pick up momentum over the next 12 months or the next few quarters. So I think those are the key. Domestic brands continue to get pressure on the Men's side. As we talked about, we think we continue to get near the bottom, but that has been a trend that we've been fighting. We are encouraged about what we think -- shipping a lot of new Peanuts -- a lot of new men's products at the back half of the year. And on the international side, very excited about what's happening with ILA picking up. As we mentioned, we signed 29 new licensees since Iconix has taken over just 3 or 4 months ago. So pretty strong -- we think ILA is [indiscernible] of our model internationally.

And our next question comes from the line of Steven Marotta from CL King and Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: A couple of questions as it pertains specifically to Men's. Neil, could you mentioned which licensees began to shift in the first half of '14? Which categories those were and when you would expect, in aggregate, that the Men's business would begin to generate positive year-over-year sales comparisons for you?

This is Seth. I'm going to take on that question. In the first 6 months of the year, the Ed Hardy brand has shipped an incremental 500 doors of distribution. That includes apparel, accessories. The Rocawear brand has transitioned to a new licensee. It was a relatively smooth transition, continues to ship better department stores with very strong sell-throughs. And Ecko Unltd. has transitioned to a new core men's apparel licensee that just recently shipped about 300 new doors of distribution. We also have a new core footwear licensee for Ecko Unltd. that will ship this holiday. So we do believe that we have turned the corner. We have new licensees shipping product, for the most part, to new distribution where the brands and the products have been received extremely well. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Do you -- can you talk a little bit about when you would expect, again, in the aggregate, for those 3 brands on a year-over-year to, at least, be flat or positive?

We look at 2015 as the year when that'll happen. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. And the last question I have is that SG&A costs were a little bit lower than our -- than my expectations. Can you talk a little bit about either potential reasons why, although you probably don't have my model in front of you? But can you talk a little bit about SG&A costs and expectations for the balance of the year?

Sure, this is Jeff. SG&A was down slightly. We had lower advertising marketing expenses and those -- for the first half of the year. We do anticipate those coming back in Q3 and Q4, but that was the biggest decline in advertising and marketing expenses for the first half. Steven Louis Marotta - CL King & Associates, Inc., Research Division: So is it a -- you're saying it's a shift from first half to second half? Or is it just a matter -- was it bad planned? Or is advertising and promotion planned little bit lower for the entire year?

It's a shift to the back half of the year.

[Operator Instructions] Our next question comes from the line of Ronald Bookbinder from The Benchmark Company.

On international, you're now at 40% of revenue. Where do you see that growing to?

I -- it's -- I see it continuing with the grow, especially with the incredible Peanuts franchise we have around the world with the movie, but it all depends on the type of acquisitions we have going forward. The last 3 acquisitions were international brands, in Umbro, Lee Cooper and Buffalo. And that number could shift dramatically based on the type of acquisitions we have going forward, which, obviously, we can't exactly predict.

And Umbro in the U.S., is it gaining traction and starting to grow? Because it was, what, about 3% percent of its business was U.S. when you bought it.

That's accurate. And yes, the Umbro brand is growing traction. We're working closely with our DTR partner, Dick's Sporting Goods, to expand upon the assortment, which continues to perform very well. And our initial read on product that was complementary to the World Cup sold through extremely well.

Okay. And lastly, Iconix China. You talked about possible monetizations, I think, on the last call. How is that progressing? And what -- how do you see Iconix China continuing to develop?

Yes. It's -- one of the IPOs we are projecting in June, we're hoping to happen in the third quarter. However, we're not sure we're definitely going to be a seller. And we're considering possibly that monetization might happen in early 2015 because it's based on a multiple of how we performed this year, and our performance is pretty strong this year. So in our guidance, we're not projecting any revenue coming from China. But there's 2 great stories right now of brands that are performing really well that we're hoping that we can monetize over the next 12 months.

Our next question comes from the line of Jim Chartier from Monness, Crespi, Hardt & Co. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Just on the revenue line. I just want to be clear. There's $7.8 million of revenue from selling Sharper Image e-commerce business and then another $14 million related to the sales of brands into an international joint venture.

Correct, roughly. And we also -- just to clarify, on the Sharper Image, we're going to continue to get royalty by product that is being sold to the e-commerce site, and we also have a joint venture with our -- with Camelot to take the catalog around the world. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. So if I back out that revenue and the $9.8 million from a JV last year, it looks like revenue from the rest of business was down about $8 million. Is that entirely due to the Men's business?

I think it's a combination of a few different. I think that number is more like $7 million. But we -- most of it is Men's. It was also a lot of sell-down of old Nike, Umbro, which was done in the first half of a year ago, and then we have increases in Peanuts, Women's and Home. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. So Umbro, was that down in second quarter because you were anniversary-ing that sell-down from last year?

Yes. Nike sold off at the end of that business, somewhere probably about $5 million of royalty that we received in the first half of a year ago. [indiscernible] The other variance that happened last year in the second quarter is we got $5.5 million from auction rate securities a year ago. Although that doesn't go into the top line, it was a huge contributor to EBITDA from last year. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. So Umbro, given the strength of the World Cup, did that return to growth then in third quarter versus being a drag in first half of the year?

Yes. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And on the taxes, what tax rate should we be using for the rest of the year?

Our tax rate, we're projecting to be in the low 30s for the remainder of the year. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: For third quarter and fourth quarter?

Correct, in the low 30s. As I mentioned, we had $2.1 million onetime nontax charge.

Noncash.

Noncash, in the second quarter, regarding deferred tax liabilities. That was in Q2. And we're projecting tax rate in the low 30s for the remainder of 2014. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then on the Men's business, should we think about that as flat in the back half of the year or a slower rate of decline than the first half of the year?

I think it's the latter.

And our next question is a follow-up from the line of Steve Marotta from CL King & Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Asked and answered.

Our next question comes from the line of Eric Beder from Wunderlich.

Could you talk a little bit about the ability -- about your cash ability and online ability to do both acquisitions and share repurchases? I know this is kind of one of the drier spells you've had in terms of doing acquisitions. Can you talk to me about where that thought process flows in terms of doing both at the same time or one or the other?

Something that's worked well for us over the last couple of years is the balance, where we bought back roughly about $700 million of our stock at -- with -- at a wonderful price in the 20s, and we also was able to do 3 great acquisitions for an equal -- little less money. But we like the balance of using both. What's wonderful is we have a really strong cash flow. This year we're projecting close to -- another $220 million. We have well over $0.5 billion available to us between cash and our current facilities. That's without even using the securitization warehouse vehicle we have as we continue to buy more properties. So we continue like -- a mix of continued buying great iconic IP, along with continuing to buy our stock, as we see value in both.

Great. And in terms of the guidance, what are you assuming in your guidance in terms of share repurchases for the back half of the year?

We're not assuming any share repurchases in the back half in our guidance.

And that concludes our question-and-answer session for today. I would like to turn the conference back to Iconix for any closing comments.

Okay. Well, we like to thank you, all, for listening this morning and your interest in our company. As always, management will be available for the rest of the day to take individual questions. And everyone, have a wonderful day. Thank you.