Icon Energy Corp. (ICON) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group's Third 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]. Before we begin, I would like to 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 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'd now like to turn the conference over to Mr. Jeff Lupinacci. Sir, you may begin.

Good morning, everyone, and welcome to the Iconix Brand Group Third Quarter 2014 Earnings Conference Call. On today's call, we will review our financial results, provide an update on our overall business, discuss our full year outlook for 2014 and provide guidance for 2015. Reviewing results for the third quarter ended September 30, 2014. It was a record third quarter for our company with revenue of approximately $113.8 million, a 6% increase as compared to approximately $107.2 million in the third 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. Non-GAAP net income was approximately $38.3 million, an increase of 16% as compared to approximately $33.1 million in the prior year quarter. Diluted non-GAAP earnings per share in the third quarter increased 23% to $0.73 compared to $0.59 in the prior year quarter. In the third quarter, we generated $61.8 million of free cash flow, a 14% increase as compared to $54.3 million in the prior year quarter and free cash flow per diluted share of $1.17, a 21% increase as compared to $0.97 per diluted share in the prior year quarter. EBITDA in the third quarter was approximately $65.5 million, essentially flat to the prior year's third quarter. And our EBITDA margin in the second quarter was approximately 58%. Reviewing results for the 9 months ended September 30, 2014. Our revenue increased 7% to approximately $348.8 million as compared to $327.4 million in the prior year period. Our non-GAAP net income was approximately $117.2 million, a 5% increase as compared to 121 -- $112 million in the prior year period. And our diluted non-GAAP earnings per share increased 20% to $2.22 compared to $1.85 in the prior year period. We generated free cash flow of approximately $179.8 million, an 8% increase, compared to $167 million in the prior year period and free cash flow per diluted share of $3.40, a 23% increase compared to $2.76 in the prior year period. Our EBITDA increased 5% to approximately $213.4 million as compared to $202.8 million in the prior year period. EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted earnings per share are all non-GAAP metrics. The reconciliation tables for each can be found in the press release sent earlier this morning and on our website, iconixbrand.com. In the third quarter, we brought back 700,000 shares, bringing our total share repurchases for 2014 to 4.4 million shares. Since initiating our share repurchase program in October 2011, we have repurchased approximately 28.5 million shares or approximately 39% of our shares outstanding as of the beginning of the program at an average share price of $26.36. We plan to continue to be opportunistic with share repurchases and have over $500 million remaining under our current authorization. Moving on to our balance sheet. We continue to be in a very good 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. With that, I will turn the call over to Seth Horowitz, our Chief Operating Officer.

Thank you, Jeff. Good morning, everyone. Our third quarter and year-to-date results reflect the positive organic growth of our existing portfolio. The cornerstone of our domestic business continues to be supported by strong, stable direct-to-retail licenses. We recently renewed Danskin Now with Walmart, Mudd with Kohl's, Material Girl with Macy's and Fieldcrest with Target, continuing our successful track record of renewing every material DTR. In addition, we recently signed an exciting new DTR for our Waverly brand with Walmart, marking our fourth DTR with them. The new collection which covers the fabric and crafts world, will be branded Waverly Inspiration. Going into 2015 across all of our licensees, we have over $750 million in go-forward guaranteed minimum royalties, excluding renewals. Overall, our portfolio continues to perform well with our Women's Fashion, Home and Entertainment segments, all up in the quarter. Our Men's Fashion business improved from Q2 to Q3 as expected, as Rocawear, Ecko Unltd. and Ed Hardy are all experiencing levels of success with new licensees and diversified distribution. Danskin Now continues to be a top performer at Walmart, and we expect continued strength going into 2015. Bongo and JOE BOXER continue to perform well at Kmart/Sears. Royal Velvet, once again, had another strong quarter at JCPenney as JCPenney continues to increase its focus on the home category. Our international business, driven by our global brands, Umbro, Lee Cooper and Peanuts and the solid performance of our JV partners across the portfolio, has resulted in double-digit organic growth in international revenue in Q3. This revenue now represents approximately 40% of our business. In the third quarter, we signed a joint venture with Global Brands Group, a spin-off of Li & Fung, for the Lee Cooper and Umbro brand in China. For Umbro, China was a territory that Nike had previously operated with over 1,200 retail locations at its recent peak. Last year in 2013, we received $19 million of revenue from Nike for a transition period of its directly operated territories. This new deal replaces the final remaining territory that Nike had operated. In the third quarter, we recognized $18.5 million of revenue from this venture, and we believe there is tremendous opportunity for substantial revenue in the years to come. Our JV success, recognized in both top line and equity earnings, is further highlighted by the new and highly successful Lee Cooper DTR with Big W in Australia and the continued success of Falabella with Ecko Unltd. and Mossimo in Latin America. We're also gaining traction with Walmart companies around the world to roll out our successful domestic DTR brands: Op, Danskin Now and Starter. To support this global growth of our portfolio, we have been increasing our investment in international local marketing. The big excitement around Peanuts continues to be the launch of the movie, which has various release dates across the fourth quarter of 2015 and the first quarter of 2016. On the merchandising side, we will have major programs in place at key retailers across the globe to support the movie, which will be launching in over 70 countries. This includes regional department stores such as Macy's, Target, the Bay, Suburbia and Liverpool; and specialty chains, such as Forever 21, Uniqlo and H&M. We have signed 59 new deals in the third quarter bringing the total new deals signed for Peanuts for the first 9 months of the year to over 180, positioning the brand for strong growth in 2015 and 2016. With that, I will turn the call over to Neil Cole, our Chief Executive Officer.

Thank you, Seth and Jeff, and good morning, everyone. We are pleased with our performance in the third quarter as we continue to demonstrate the strength of our brands and the power of our business model. With solid brand performance domestically and double-digit growth around the world, we continue to execute in line with our strong track record. As we look to 2015, we are enthusiastic about the progression of several of our key initiatives as we evolve into a global presence across all brand segments. Starting with international. In 2015, we expect our international business to achieve another year of double-digit growth growing to over 40% of our business as we continue to leverage our existing joint ventures, pursue new DTR opportunities, establish new partnerships and begin to see results of our China joint venture. Today, 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 for our brands worldwide. We also have 7 international joint ventures with best-in-class partners that have the local expertise, knowledge and relationships to help us build our brand in these international territories. In China, our partner for the Candie's brand, La Chapelle, had an IPO and was listed on the Hong Kong Stock Exchange. The IPO triggered a put option, which gives us the right to sell a minority interest in Candie's China back to La Chapelle at a predetermined formula. We currently do not expect to exercise our option at this time as we feel strongly about the Candie's brand in China in a strong upside potential. Candie's currently has over 500 stores in China and is expected to deliver strong growth this year and next. On the acquisition front, we continue to look at a wide variety of opportunities. This month, we made a small acquisition in the men's page -- space where we acquired 51% of the Nick Graham brand for $6 million. Nick Graham is a men's wear designer sold at better department stores. Nick was the founder and creative genius behind JOE BOXER. And together with Nick, we believe we can build his autonomous brand into a full lifestyle brand. We have become increasingly interested in entertainments and sports as these categories has proven to be truly global in appeal as seen with our Peanuts and Umbro brands. We are also looking at larger acquisitions than we have done in the past. As we evaluate each opportunity, we believe a big advantage we have today is our worldwide footprint and our ability to plug a brand into our network and leverage our strong best-in-class partners around the world. With our strong balance sheet, we have over $500 million of capital readily available to us plus the ability to further leverage our portfolio. But as always, we will remain disciplined. Moving on to our guidance. For 2014, we are reaffirming our full year revenue guidance of $455 million to $465 million. We are raising our non-GAAP diluted EPS guidance to $2.72 to $2.77. And we are maintaining our free cash flow guidance of $215 million to $222 million. Looking ahead to 2015, we expect continued strength as we deliver on our organic initiatives. At this time, we are providing 2015 revenue guidance of $485 million to $500 million. We include brand revenue from our nonconsolidated joint ventures. We expect total organic revenue across our entire portfolio to grow at over 10% in 2015. We are also providing 2015 non-GAAP diluted EPS guidance of $2.90 to $3.10 and 2015 free cash flow guidance of $2.20 -- I'm sorry, of $220 million to $230 million. In closing, for 2014, we are on track to deliver another record year for our company. And we plan to continue the trend in 2015 as we execute on our global growth strategy. Since converting to an asset-light, highly profitable business model in 2005, we have generated a 40% revenue CAGR and a 36% earnings per share CAGR over the past 8 years. We have built a powerful portfolio of brands with a large, stable U.S. business. And we plan to replicate that success in international markets around the globe. In 2015, we expect international to represent over 40% of our revenue. Our business model remains attractive with its low-risk profile, strong, consistent free cash flows. And we believe we have significant upside opportunities through both organic and future acquisitions. Further, with our strong balance sheet, we are well positioned to execute on both our acquisition strategy and continued opportunistic share repurchases. We are excited about the future of our company. And as we approach our 10th year anniversary, we believe we can continue to build on the success we have achieved and continue to add value to our company and to our shareholders. I'd like to thank you, all, for listening this morning and your continued support. And we'd now like to turn it over to questions and answers.

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

I guess the first question that I have is on all the DTRs that you talked about, the renewals, were the terms essentially all the same? Were there any major change in terms?

No, they were essentially the same.

Okay. And then on the Peanuts side, when should we start to see a lot of these licenses and the partnerships with the retailers? Like when will that start to be in the stores? And like what would be the -- and then in terms of the revenue pieces of it, fourth quarter, like, how do we think about the ramp on the revenue side for Peanuts?

Yes, we're going to start really seeing it, I'd say, in a major way, in the summer of 2015. So we're going to start seeing some good merch shipments starting in the second quarter. And as far as the movie goes, where we do get revenue based on box office, it's really going to be spread over fourth quarter and first quarter. We're in about 70-some-odd countries, which about half open in November, December; the other half are going to be the first part of the year. Then you also get a lot more of the back-end DVD and Netflix and all those, the screening after. So pretty much balanced between Q4 in '15. And Q1, where you will see a really large ramp.

Got it. And then on that -- was it, Waverly going into Walmart as a DTR, right?

Yes.

In terms of any repositioning that needs to happen there, and is it the same sort of structure that you have with your other brands in terms of the, in the scalability or the ramp on the royalty payments?

It's a similar deals to what we usually have. And that's going to really start hitting in the first quarter of this year.

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

Jeff, can you expand upon the guidance for organic growth up 10% next year? Can you give any comments on what that implies for incremental revenues from Peanuts? And are there any other specific brands that are really driving that growth acceleration next year?

Yes, it's pretty much across the board. Where the growth is coming from is international, will be up double digits. And Peanuts will be up double digits. So those are the bright spots. Men's is going to -- we're continuing to plan it off a little bit single digits or close to flat and small organic growth in both women's and in home. But the big growth for our business is coming from international and from Peanuts.

Okay, then just on the entertainment segment, it's obviously been a big growth vehicle for you guys. Can you talk about the opportunities there to build that business, both organically and through acquisitions? And then Jeff, what's your cushion for cash in the balance sheet? What are the upper balance in terms of leveraging the capital structure?

I'm sorry, so the first part of the question was focused on entertainment?

Entertainment side.

Yes, we think we have tremendous opportunities than out of our -- the acquisitions that we're really hoping to include in the near future. Majority are focused on the entertainment side. Peanuts has been growing exponentially all the way over from last year. And we see it totally over a couple of years to well over 50% growth. And there's so many different types of merchandising and revenue structures all the way from the advertising component to the merch component. And what we like most is the global component and having such a strong footprint in most major retailers around the globe. So in entertainment, when you get a brand like Peanuts and some of the other opportunities we're looking at, it gives us the ability to scale globally, which has been an important part of our future in how we've been setting up our joint venture arrangements around the world. Jeff, you want to talk about the financials?

Yes, from a balance sheet perspective, John, obviously, the strong position went up over $200 million of cash. Our -- we talked about leverage, our net debt to EBITDA is about 4.4x. And we have access to capital and ability to upsize the securitization with additional brands as we add into that securitization facility. So we feel like we're in great shape and the good perspective on leverage as well.

Okay. And if I can just squeeze just one more question on the international business. Do you have any plans to potentially bring some of those joint venture agreements back in-house and consolidate them similar to what you did with Latin America?

Yes, we are always looking of the potential to do that. We have wonderful partners that are really making the businesses grow exponentially. But most of our agreements give us the ability to buy back the other half of the JVs over a period of a few years. And we think we're going to -- in the back half of this year, we'll probably be gaining control of a few different of the joint ventures.

Our next question comes from the line of Steve Marotta of CL King & Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Of the 180 new licensees that have been signed in 2014 for Peanuts, are those of general normal duration? Or are they a little shorter -- or are some of them shorter-term oriented, specifically associated with the movie?

All different types. We definitely have a few long term that we're excited about. But there's also, in that world, they do, do deals for 1 or 2 years. And there are more nonexclusives than is traditionally in the Iconix fashion portfolio. So it's a variety of different types but we're excited because it's really in so many different countries and so many powerful retailers that have really big global businesses. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay, great. The Li & Fung and Umbro in China, 2 questions there. I just wanted to understand, you recognized about $18.5 million of revenue in the third quarter. Is that accurate?

Yes, that's accurate. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. And then the second question is how does that interact at all with the China JV? Or is it completely and utterly absolutely 100% separate?

It's completely independent transaction to the existing China JV. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay.

But also, Steve, to give context to what we recognize, Nike had a really substantial business in China, over 1,200 stores. So we were able to replace -- begin to replace some of the market share and having a JV with global brands or -- now it's called, Global Brands, it used to be Li & Fung. Will give us the ability to bring back that market share and kind of offset the revenue that we have from Nike over the last couple of years when we purchased it. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. Lastly, are there other major DTR agreements that are up for negotiation over the next 6 to 12 months?

I don't know of any substantial -- they're always rolling, but I don't know of any in the next 12 months. I believe in '16, there's a couple, but nothing imminent.

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

You talked about bigger acquisitions going forward. Would that slow share repurchases? Or do you feel you have enough availability to do both?

I think we have enough availability to do both. Ideally, over the last couple of years when we're about -- I guess 2 years ago, we were very inquisitive [ph] when we bought 3 brands. We also purchased the same amount of dollars in share buyback. And we've been trying to balance them. But once again, every time we look at an acquisition, we also look at Iconix as far as the different metrics and the different cash flow returns. And we look at both. And ideally, balance is good, but with the lack of good acquisitions and our ability to capital, we sometimes could buy more than others. But we -- ideally, we'd love to have an equal balance between acquisitions and buyback.

And you said that the men's division was showing some strength. Is it still declining? Or is it actually growing at this point that it's fully bottomed, and at least, stable to slightly up?

So we experienced growth in Q3 over Q2, still down year-over-year. But we do anticipate those groups or that group of brands to grow year-over-year in 2015.

Terrific. And this Lee Cooper, Umbro JV with Global Brands, I mean this is a big switch from your strategy with Silas. Is there a change in your philosophy as to how to approach China or what?

Yes, it's -- this was just a great opportunity. And Silas and Veronica were kind of, maybe kind of busy in some of the other exciting things they're doing. And Global Brands seem more focused on the opportunity. We also work with Global Brands on Peanuts in China, so the combination of working with that group on what we consider our 3 global brands being Umbro, Lee Cooper and Peanuts that have big revenue share, we felt was a natural. We also work with Global Brands in Southeast Asia. So it's becoming more important -- and it is our traditional model of loyalty and licensing rather than the investment side or the business we have in gaining stock that we do through the Chou joint venture.

And lastly, what is the time period for the rollout of Walmart International for your brands?

It's been -- it takes a little while. And each country is different. They run independently. And we've been getting a lot of traction in Canada, getting a lot of traction in Mexico, South America. So Walmart's got such a vast footprint around the world. And we're working really hard to get each country one by one.

Is there any specific market that you're most excited about where you think your brands will really resonate and can move the needle?

Yes, 2 areas. We think we're making a big improvement in Canada this year. Then the other area which we're very excited about as a company, not just Walmart, is Brazil. We put together an organization out there. When we brought back ILA, we put our own team on the ground in Brazil. And we're negotiating a lot of big opportunities on the DTR front and expanding our Walmart business.

Our next question comes from the line of Jim Chartier of Monness, Crespi & Hardt. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: First question just on the Umbro deal in China. How much revenue was Umbro -- was China generating for Umbro in 2014?

We had a transition agreement with Nike that was giving us roughly about $19 million over the 12-month period that we got in '13 for the whole world. But China was the one area where are we hadn't found a replacement as of yet. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And where are you guys in terms of negotiating joint venture opportunities in Japan and Middle East? I think you mentioned last quarter that you were close on those.

Yes, we're continuing to make good progress, and I'm sure something will happen over the next 6 months. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then was there any benefit to the joint venture line this quarter from the IPO of the Candie's business in China?

No, not yet. We are probably going to exercise that opportunity in either '15 or '16. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then just can you give a little more color on kind of the progress of the men's business? I think you mentioned last quarter the number of doors at Ed Hardy was distributed in. Has that number grown? Or is it planned to grow in 2015? And then where is the Marc Ecko footwear license?

So the Ed Hardy brand had very strong sell-throughs in Q3, and we anticipate that the door count will grow in 2015. And then the second question on Marc Ecko footwear, the Ecko Unltd. footwear by ACI will launch at Fanny [ph] in December. James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division: And start shipping in mid-2015?

Correct.

Our next question comes from the line of Elizabeth Pierce of Brean Capital.

I have a couple of questions on the Walmart side on the international. Is it all 3 brands? And is it all -- are they all going to be rolling out simultaneously?

Yes. No, each country is a little different. In Canada, we're getting a lot of good traction on Starter and Op. And in South America, it's more focused on Danskin. So each country is a little different. In Mexico, it's a big Op business. And they are now taking in Danskin and Starter. So they are all like treated like individual accounts with different focuses.

Okay. And then on the Waverly product in Walmart, I mean not all Walmart stores have craft, right? So is just a handful? Or what's the number of stores that still carry kind of fabric and crafts, do you know?

I think it's about -- approximately about 1,000 stores.

Okay, okay. And does that have potential for moving into the international one as well, kind of piggybacking on what you're doing with the other ones, the other 3?

Yes, probably less so because I think the other 3 brands have more of a global recognition than Waverly, which is pretty U.S.-focused.

Right. I was just thinking though that there's still up a lot of consumers in those markets, emerging markets that still do a lot of their own selling, et cetera. Okay. And then question on -- I was curious on your comment just a few minutes ago. You said that there is a lack of good acquisitions. Did I hear that correctly?

No.

Okay. I thought that's what you said when you were talking about balancing share buyback and doing that large acquisitions, maybe you've -- I just misunderstood that.

I think I was commenting on that we haven't closed a large acquisition in the last year. Not that we haven't worked on them and not that there's a lack of them. We worked on a lot of different deals that didn't happen for various reasons. But most importantly, we're being very careful and disciplined as we always have and sticking to the metrics at how we buy trademarks.

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

Could you talk a little bit about, in your assumptions, what CapEx rate you're assuming since it seems you're moving around a little bit? And what share counts you're assuming in your projection in terms of both the conversion and in terms of potential buyback?

Eric, for this year, we're still assuming low 30s for the tax rate for 2014. And share count, we're assuming 52 million shares for fourth quarter, and roughly, 50 million for next year.

So you're assuming share repurchases. So the tax rates stayed at about the 30s as you add more international? How should we think about the tax rate then?

We're -- assume low 30s. And yes, we're -- as we grow that internationally, that effective tax rate we're comfortable to stay in that range and potentially even decrease, yes.

Okay. And on the Chinese joint venture, I just want to understand this. So the $19 million that you mentioned, was that just China? Or is that the entire amount that Nike was giving you for the shared services agreement?

$19 million that we -- we received, I think, $18 million for our China for 50% of our JV business. But Nike, in the transition agreement, as they transitioned to out of all of their territories and handed it over to us, had guaranteed us $19 million in the period of '13.

That's [indiscernible] territory. Okay. And so the $18.5 million, that's for starting the venture, restarting the venture with Li & Fung. Is that correct?

Yes, they're now called, Global Brands. But yes, that's for 50%.

Okay. And when do you expect that to actually -- did they pick out the stores? Are they going to -- when do you expect that to start generating significant revenue that you had before?

Yes, probably in the second, third quarter of '15.

And with no further questions in queue, I'd like to turn the conference back over to Mr. Neil Cole, CEO, for any closing remarks.

Okay. Well, I'd like to thank you, all, for listening this morning and your interest. Management will be available for questions today if anyone has any specific questions or would like one-on-ones. Thank you very much, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.