Icon Energy Corp. (ICON) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the Q&A session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Cristina Cosentino, Senior Director of Financial Reporting. Ma'am, you may begin.

Good morning and welcome to the Iconix Brand Group's fourth quarter 2018 earnings conference call. On today's call, we have with us, Bob Galvin, our Chief Executive Officer; and John McClain, our Chief Financial Officer. During today's call, we will be making some forward-looking statements within the meaning of the Federal Securities laws. 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 as forward-looking statement. Listeners are cautioned to not to place undue reliance on these forward-looking statements which speak only as of the date statement was made. I would now like to turn the call over to Bob Galvin.

Thank you, Cristina. 2018 was a challenging and transitional year for Iconix. We saw a determination of a number of DTRs including the wrap-up of Mossimo, Danskin and Royal Velvet. We experienced the Sears bankruptcy, an impact to our Bongo, Cannon and Joe Boxer businesses. We also experienced the departure of a number of executives, planned and unplanned. I joined the Company in mid October of 2018, and our new CFO, John McLean, joined in February 2019. With that all of this, the Company and its people have remained optimistic and focused on the task at hand of cleaning historical issues and building for the future. During the past five months, we have made progress critically analyzing the business model and restructuring a number of areas and practices. Our goals coming into 2019 were to stabilize the business and create a foundation for growth in 2020 and beyond. While Iconix has grown in the past via acquisitions, that will not be our focus for the foreseeable future. We have a portfolio of almost 30 brands that are still in the process of being harvested and will keep us busy while we maximize their potential. We are happy to report on a number of positive developments for 2019. We will be receiving a clean opinion from our auditors for the 2018 audit. We are in compliance with our various debt agreements as of December 31, 2018, and forecast continued compliance through 2021. We have significantly reduced our SG&A with extensive cost reductions and expense management. We are signing new deals for former DTR brands and are having ongoing negotiations for certain categories for these brands. We are working with NASDAQ to resolve our outstanding delisting issues and believe that we have made significant progress towards their resolution including the recent 1-for-10 reverse stock split. Our strategy that we will utilize for 2019 will be focus on continuing reducing our cost and managing expenses to align with expected revenues, adjust the go-to-market strategy and have internal resources supported by licensing agents, look to enter into a licensing arrangement with larger multinational organizations focus on all utilizing categories and territories for our brands but with emphasis on the bigger opportunities and continuing to grow internationally. How are we executing against that strategy? We have instituted changes that we expect to reduce our SG&A by approximately $40 million for fiscal 2019 compared to SG&A in 2018. Excluding this year's write-off, we expect SG&A costs will be reduced by approximately $30 million. We have achieved these reductions in the areas of personnel and related costs, professional fees, receivables management and other expense management. John will cover this in more detail later. We have reduced headcount from 24 VPs to 18 and total employees year-over-year from about 156 to 122. In the U.S., we have reduced headcount from 81 to 53. My direct reports have increased during this time, which allows me to stay on top of the business and to be more involved in the day-to-day operations. The result has been an increase in global collaboration by various brand managers across all segments and territories as they are now interacting with their peers in other parts of the world. As mentioned, we have also revised our go-to-market strategy. Part of this strategy was setting up shared services, across the brands as well as utilizing licensing agents on a pay-for-performance basis. We have engaged 6 agents who have required expertise and focus them on specific brands, channels or categories. We believe we are getting traction with this approach as a number of potential deals have been generated and under consideration. We believe that these deals would not have been tied up expect for the agents and their relationships. Since October 2018, we have renewed or entered into over 80 licensing deals across the globe. These deals represent an aggregate GMRs of over $45 million during the life of the agreements. We have recently announced the number of new deals that help elevate our brands including former DTR brands. We were pleased to announce a multiyear license with Royal Velvet to Himatsingka. Himatsingka has a long history in the industry and is already secured their first retail deal. We have also licensed PONY to One Step Up for men's, women's and children's footwear and apparel beginning in 2019 for a multiyear agreement. They have already placed orders and began shipping to Foot Locker, Champs, Kixx USA, this spring. We expect the pony.com website to be up and running by mid-April service by the team at One Step Up. Key footwear products are expected to launch, include Retro Classics in various materials and colors, and we expect apparel will launch for the third quarter back to school timeframe. G3 has also been an outstanding partner for Iconix during the transition period and has expanded its categories for Starter under a new deal executed in 2019, which we are excited to announce will include the launching of Starter footwear likely at the end of 2019. We have also renewed and extended our deal in South America with Umbro with us. As mentioned, we are focusing on larger partners who can support multiple brands, territories and categories on a global basis. We are also looking to find strategic alliances on a regional basis. We are working with various licensees to determine how we can reduce everyone's overall cost primarily through better, smarter sourcing. We are evaluating, if some of our partners can be suppliers not only for the local market, but also for our licensees needs on a global basis. Internationally, we are also focused on cross-selling categories with our current partners. Our partners and consumers know our brands in their markets. We were focused expanding categories to meet those needs and opportunities. I have recently returned to my most recent trip abroad. This was to Japan and Korea. The reception to our brands and the potential in both countries was pretty amazing. Follow-up meetings have been taking place and we expect to generate significant new business in these territories. We saw increased brand awareness with Jenna Dewan for Danskin in 2018 and expect similar opportunities in 2019. London Fog has done collaboration in 2019 with Jeremy Scott that is getting great reviews. We are also very excited to have Savannah Chrisley from the top-rated cable show Chrisley Knows Best, as creative director for Rampage, which was announced earlier this week. The brand will be featured on their cable show beginning later this year. Finally, Vanilla Star has entered into a license deal for Ed Hardy, which we believe will help reconnect the brand with influencers. Finally, we believe that a number of misunderstood facts regarding our current debt. Our securitization facility has been anticipated repayment date of January 2020, and a legal maturity date of 2043. Therefore, we do not have a mandatory requirement to pay-off the securitization debt in full in January of 2020. Moreover, based on our current budgets and forecasts, we expect to be in compliance with financial our covenants under our debt facilities through 2021. This is a direct result of cost-cutting actions we have taken as well as our expectations for new business and our revenue pipeline. John will go into more detail with the debt agreements now, we continue to explore opportunities to restructure our debt, and we are actively evaluating to all strategic alternatives. John?

Thanks Bob. This is my first earnings call and I'm pleased to be here. So to dig it right in, on a total company basis, revenue was down 18% in the quarter and 17% for the year as expected, principally as a result of previously announced transition of our Danskin, OP and Mossimo DTRs in our Women's segment and the impact of the Sears bankruptcy on our Joe Boxer, Cannon and Bongo brands. Total company adjusted EBITDA decreased 37% for both the quarter and a year. On a segment basis, as expected revenue on the woman segment was now 56% for the three months and 41% for the year. As previously discussed, the decline was principally the result of the transition of our Danskin, OP and Mossimo DTRs and the impact of the Sears bankruptcy on Joe Boxer & Bongo. In the men segment, revenue was up 38% for the quarter and down 2% for the year. The quarter revenue showed a strong performance in Buffalo, Ecko and Umbro. The year was negatively impacted by the transition of Starter from Walmart to Amazon, which was largely offset by strong performance from the Buffalo brand and the success coming from our multiyear Umbro distribution agreement with Target. Our home segment was down 34% for the quarter and down 15% for the year. For the quarter, the decline was principally impacted the Sears bankruptcy on our Cannon brand. The full-year was negatively impacted by both the Sears bankruptcy and by the terms of the renewal of the Waverly Inspirations contract at Walmart. Our international division continues to be a strong contributor to our business. In Q4, its revenue grew 4% primarily on the strength of Umbro, where the full-year saw Umbro, Lee Cooper and Starter contributing to the 10% increase. Our SG&A expense in the fourth quarter was 29 million, a 29% decrease compared to 40.9 million in the fourth quarter of 2017. The reductions were principally related to lower stock com costs, which was tied for the Company's performance and lower advertising costs, as we had a more targeted focus on how we invest in on marketing spend. For the year, SG&A was up 6% which had lot of gives and takes with the overall increase essentially represent the 8 million bad debt expansion quarter related to this Sears bankruptcy. Our 2018 to 2017 income statements for the quarter and the full-year quarter included number one-time items including severance, costs associated with terminating licensees, litigation settlement, impairment charges, gains on sales trademarks and non-cash gain under the consolidation of joint venture and investment. In the fourth quarter, as part of our normal test for impairments, the Company reported approximately 59 million of impairment charges related primarily the Massimo, Mudd, Joe Boxer and Cannon brands. The earnings release we filed today has details and reconciliation related to all such items. Turning to the balance sheet, we had 82.6 million of cash on hand at the end of quarter, 45.6 million of which was in the U.S. and unrestricted. Our face value debt balances have decline approximately 62 million from 827 million at the end of 2017 to 765 million at the end of this year. Of the 765 million outstanding of 5.75% convertible growth notes represent approximately 110 million of the balance as compared with the 125 million at exception. These notes unless otherwise converted will mature in August 2023. Our senior secured term loan, which is approximately 189 million, bears an interest at LIBOR plus 7% and matures in August 2022. Balance of the 465 million relates to our securitization facility, which has a weighted average interest rate of approximately 4.63% in year-end. This facility has a legal maturity date of 2043, and an anticipated repayment date of January 2020. If the debt is not refinance by 2020 then the interest rate goes up. The additional interest which of course on top of current interest isn’t payable until 2043 and is not compounded. We're currently in compliance with the total leverage ratio and asset coverage ratio financial covenants under our credit agreement as well as our interest on the debt service coverage ratio under our securitization facility. Additionally, our current three-year projection shows to be in compliance through 2021 as Bob mentioned, due to the decrease in our debt service coverage ratio within the securitization facility, we forecasted as of our next quarterly payment date in April, we will be in rapid amortization status. This means that all collections in excess of our management fees and certain others fees and expenses will go directly towards debt service. Maybe I'll just spend another minute on securitization on the basis of how this facility works. Facility is secured by certain brands and generally the collections from the licensing of these brands as received into the facility, these collections go to pay our management fee, followed by interest and then principal. Under normal operations, if there's any residual, it comes back to Iconix. When we're in a cash trap, a certain portion of the residual will sit in a reserve account and be available to pay interest of principle in the future, if cash receipts were insufficient to do so. In a rapid amortization, the residual would immediately be used to pay down principal. Iconix will continue to receive its management fee from the securitization and we do not believe the loss of our residual, if any will have a significant impact on our operations. As a reminder, for people as they look at our reported financial statements, we completed a reverse of 1-for-10 stock split few weeks ago and reflected that split in our reported per share numbers. Shareholders approved the reverse stock split back in September and we affected the split to meet NASDAQ listing requirements regarding maintaining a trading pricing of over a dollar. As we look ahead to 2019, we are currently anticipating full-year revenue to be between $145 to $160 million, and adjusted EBITDA to be between 70 million and 80 million. This adjusted EBITDA reflects the benefits of the cost rationalization efforts as Bob previously mentioned. These savings come primarily from reduced workforce, lower legal fees, as we work to settle claims and better manage the use of outside resources, lower professional fees again from better managing the process, lower advertising cost as we spend less on sponsorships and other non-productive investments. And finally, in all other areas we -- where we have reviewed and eliminated all non-essential spending. Additionally, we expect to see a much lower bad debt expresses we critically review our partner relationships on the front end and then improve monitoring and cash collection methods. With that, I turn the call back over to Bob.

Thank you, John. I've known John for over a decade and I'm thrilled that he has joined Iconix. He has already made a positive impact in the short-time here and having John in the Company allows me to focus more of my attention to drive global revenues. We intend to hold our annual shareholder meeting on May 7th in New York City at the Iconix offices. We have also revised our homepage in order to allow investors and other interested parties the opportunity to sign-up to receive our press releases. Operator will now open the line to questions.

[Operator Instructions] Our first question comes from Eric Beder with SCC Research. Your line is now open.

When you look at 2019 and especially what you are seeing in terms of the new licensing agreements and other pieces. Do you expect that 2019 will kind of be a kind of the bottom here in terms of revenue that we should be thinking about the licensing agreement as we've seen over the last few weeks as a driver for 2020?

Yes, I think we're going to see uptick. We're building the pipeline, Eric, as we get these deals in place, having joined the Company of late in the year, a lot of the deals that we're entering into and negotiating currently will really start to take in 2020 and beyond. So, we're fueling the pipeline at this point and will realize those in 2020 and beyond.

And when you look at the need for infrastructure as these new deals kick-in in 2020 and beyond, do you see -- how leverageable is the remaining infrastructure that you have at the Company I guess I'm asking here?

Yes, I don’t think we have to add cost to manage additional revenues and more deals, Eric. I think the cost structure we have in place is more than adequate to manage all of those businesses and new deals. And so, I think our cost structure is, if anything else can be reduced further as we move forward and not increased.

When you look at the licensing agreements that are coming today, it looks like the DTR business is obviously going to significantly decline. Is there a future going forward for new DTRs? Or is it really more of kind of traditional licensing method? And what should we be expect in terms of that?

Yes, I think we are focusing more on what I would call wholesaling manufacturing relationships and deals with large players who can help go-to-market with us that much easier. I don’t eliminate larger DTRs, but I don’t think that's going to be the norm as we move forward.

And last question. You've talked about M&A. You are not, as you said, you're focused on debt repayment and growing business. What about the flipside in terms of divesting businesses? What's your thought process there? And how you are thinking about that?

Sure. We would be opportunistic in divesting any of the businesses that we owned. We don’t have a for sale shingle out on top of the brands, but if someone is interested, we will always entertain discussions.

Thank you. [Operator Instructions]

With no other questions, we would like to thank everyone for their support, their participation, and we look forward to a much more productive 2019. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.