Icon Energy Corp. (ICON) Q2 2019 Earnings Report, Transcript and Summary

Hello, and welcome to Iconix Brand Group Q2 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I’d now like to introduce your host for today's conference, Cristina Cosentino, you may begin.

Good afternoon and welcome to the Iconix Brand Group second quarter 2019 earnings conference call. On today's call, we have with us, Bob Galvin, our President and 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 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 call over to Bob Galvin.

Thank you, Cristina. Good afternoon, everyone. It's been around 12 weeks since we last reported results to you, and we continue to deliver on our plan. We are pleased to report that our second quarter results are in line with our expectations and guidance. Our cost savings that we put in place at the end of 2018 continue to pay dividends and we remain focused on the business. We reduced expenses by approximately $12 million or 43% in the second quarter when compared to last year, and $28 million or 45% through the first six months. John will provide details later in the call. While second quarter revenue for 2019 was down when compared with the second quarter of 2018, as expected, more than half of that decline was due to the loss of the DTRs for Mossimo, Danskin and Royal Velvet, and the impact of the Sears bankruptcy on Joe Boxer, Cannon and Bongo. On the positive front, we have recently signed contracts with the new Sears for Joe Boxer and Cannon. And while these new agreements are at lower GMR levels than the prior agreements, these new contracts will favorably impact results in the back half of the year. These new agreements are non-exclusive and give us the opportunity to expand distribution which has already begun in Cannon. During the quarter, we also finalized significant new agreements for Rampage women's footwear in the U.S. and major renewals for Lee Cooper in the U.K. and Ireland, for Umbro in several Eastern European countries, for Mudd in the U.S., and for London Fog footwear in the U.S. We have also added to the FILA Korea brand roster with the addition of Zoo York for apparel and footwear product categories. Overall, we have signed a total of 111 new or renewed license agreements in fiscal 2019, which total aggregate GMRs of approximately $79 million. We were slightly up year-over-year in our international business when excluding the nearly $600,000 of business we saw last year, related to the World Cup. We're also pleased that we have resolved several of the outstanding lawsuits during the first half of 2019 that have plagued Iconix for a number of years. I will now turn the call over to John.

Thanks Bob. On a total Company basis, first quarter revenue was down 31%, principally as a result of the previously announced transition of our Danskin and Mossimo DTRs in our women's segment, Royal Velvet in our home segment, and the impact of the Sears bankruptcy on our Joe Boxer, Cannon and Bongo brands. Additionally, in the quarter, our Buffalo brand had lower sales than last year. Our operating income was $18.5 million this quarter versus an operating loss of $95 million last year, as the prior year quarter included a few one-time items including impairment charges related to the Mossimo brand. The earnings release we filed today details in reconciliations related to such items. Total Company adjusted EBITDA decreased 17% for the quarter while our adjusted EBITDA margin improved to 59% from 49% as our expense decrease outpaced our revenue decline. On a segment basis, as expected, revenue in the women's segment was down 52% for the three months. As previously discussed, decline was principally the result of the transition of our Danskin with the Mossimo DTRs and the impact of the Sears bankruptcy on Joe Boxer and Bongo. In the men's segment, revenue was down 37% for the quarter. The decline was principally due to lower sales in Buffalo, Pony and Umbro. The home segment was down 38% for the quarter, which is principally the impact of the Sears bankruptcy and our Cannon brand, and the transition of our Royal Velvet DTR. In the international segment, revenue was down 3% with decline being the absence of the World Cup business that we had in 2018 and softness in China. Our SG&A expense in the second quarter was $16.4 million, a 43% decrease compared with $28.6 million in the second quarter of 2018. The expense reduction plan that we began in the fourth quarter of 2018 has continued to yield expense savings in all major categories with the most significant reductions in personnel related costs, professional fees and advertising. Additionally, we collected some accounts receivable which have been previously written off, totaling almost $1.3 million, which also had the effect of lowering SG&A. The expense savings and the collection of the bad debts drove the improvement in EBITDA margin for the quarter, which I mentioned went to 59% from 49% last year. While Bob mentioned that we signed 111 agreements this year for $79 million in GMRs, I wanted to add that 111 represents an 18% increase in the number of deals signed versus last year and the $79 million represents a 29% increase in the dollar amount of GMRs compared to last year. The number of renewals we have signed is flat year-over-year, while the number of new deals increased 38% as we've been focused on finding those new opportunities. Now, turning to the balance sheet. We had $67.1 million of cash on hand at the end of the quarter with $43.5 million of which was in wholly-owned subsidiaries and unrestricted. Our face-value debt balances declined approximately $17 million over the quarter from $752 million at the end of first quarter to $735 million at the end of this quarter. Of the 735 million outstanding, our 5.75% of convertible notes represent approximately $95 million of the balance as compared with the $106 million at prior quarter end. These notes, unless otherwise convertible, mature in August 2023. Our senior secured term loan, which is approximately $187 million, bears interest at LIBOR plus 7% and matures in August 2022. The balance of the $453 million relates to our securitization facility, which has a weighted average interest rate of approximately 4.7% at quarter end. This facility has a legal maturity date of 2043 and an anticipated repayment date of January 2020. As we discussed during our prior calls, if the debt is not refinanced by 2020, then the interest rate goes up. And the additional interest, which is on top of current interest, isn't payable until 2043 and is not compounded. We are currently in compliance with the total leverage ratio and asset coverage ratio of financial covenants under our credit agreement as well as our interest-only debt service coverage ratio under our securitization facility. Additionally, our current three-year projection shows to be in compliance through 2021. Due to decrease in our debt service coverage ratio within the securitization facility, we are now in rapid amortization status. In rapid amortization status, Iconix will continue to receive its management fee, and all collections in excess of our management fees and certain other fees will go directly towards debt service. As a reminder on the securitization, this facility is secured by certain brands. Generally, the collections from the licensing of these brands is 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 rapid amortization status, 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. And finally, as we look at guidance for the remainder of 2019, we remain on our plan. For adjusted EBITDA, we have raised the lower end of our range, and now anticipate adjusted EBITDA to be between $74 million and $78 million. For revenue, it’s a little more complicated. With the new accounting guidance, standard number 606, certain advertising that we do for the brands is recorded net against revenue rather than as an SG&A costs. It's very difficult to estimate those types of costs at the beginning of the year. And we need to refine our estimate now and increase such costs by about $2 million. This simply represents a reclass from an SG&A expense to account for revenue, with no adjusted EBITDA impact. And making this reclass, we drop the lower end of the revenue range by $2 million. But it obviously did not impact adjusted EBITDA as we have raised those estimates. Our new range for revenue is now $145 million to $150 million. And with that, I turn the call back over to Bob. Bob?

Thank you, John. We are pleased with the progress that we are making, and we'll continue to work hard at executing our plan throughout the remainder of this year. With that, operator, I will now open the line for a question.

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

Good afternoon. Congratulations on some solid EBITDA.

Thanks, Eric.

When you look at the landscape out there for some of your brands, like OP and some of the ones that have kind of gone a little bit dormant. What are you seeing, and what are you seeing internationally with some of the disruptions we've seen in terms of politically and other pieces for some of the brands affecting you?

Eric, we didn't get that last part of the question.

Internationally, what are you seeing in terms of demand for U.S. licenses, given some of the people have been talking about Brexit and some of the other intermediation occurring internationally?

Sure. I'll take the second part of that question. Eric, we're seeing continued demand since approximately Thanksgiving. I've made four trips over to Europe; I've been to Japan, Korea and China. And the demand and the meetings and interest has not waned at all in any of those discussions as we're presenting our portfolio. So, we're positive and optimistic on the brand structure overseas and the growth that our brands present themselves.

When you look at...

If we could circle back on the first part of the question again. With OP and some of the other DTRs, we continue to have positive meetings in multiple categories across a number of different channels of distribution, Eric. What we haven't had success in is doing anything on a large scale DTR basis, but the interest in product categories is there. It's now striking those deals and continue to fuel that pipeline for ‘20 and ‘21.

Great. And I’d just ask my next question. So, basically, now, I saw you just did a Danskin deal and that does have some impact in shoe deal, which does have some impact in this year. But how should we be thinking about the impacts of all these deals you signed, any impact -- how should we think about them for 2019 and how should we thinking about them for 2020?

Yes. Eric, generally, the deals that we sign, average on around three years, maybe a little bit more than three years. Right? So, as we signed deals at the end of the second quarter, for instance, right, three years, but we’d have six months of that deal, revenue recorded in the current year. So, as you look at it in the back part of the year, obviously, you'd be talking less than call, it 6 out of 36 months. So, while there is a positive impact, the majority of it is after in ‘20 and ‘21. But, all these deals that we sign now will benefit ‘20 for a full year's worth of revenue.

Housekeeping question. So, the interest on the convertible, it's due I believe this month. Do you plan on paying that in cash or in stock?

We are paying that in cash and we had announced, I think it needs to be paid within the next -- I think before 15, but we're paying in cash.

Okay. Final question. When you look at the price cut - excuse me, the cost cutting, you've done an incredible job and cleaning up the SG&A side of the balance sheet -- excuse me, the income statement. Are we pretty much near the end of that? And in this -- how much leverage can you now do on your base you reestablished for SG&A?

Again, I think that we continue to look at opportunities to take costs out of the organization that don't add value. And we will continue to optimize those. I think, we've got a good run rate at this point in time. But, we continue to look at the business. And if there are opportunities to streamline what we do, we will continue to take advantage of that. And again, for us that EBITDA as a percentage of revenue is something that we focus on and we look to continuously to improve that leverage. Some quarters, based upon some of the spending and some of the way that revenues flow, we’ll have some ups and downs. But, we continue to look to see the type of improvement that we had for this quarter, and want to see how we can strive to continue with that.

And Eric, I would say that if you look at where the platform sits now, and as we're structured, we have the ability to lever greatly this platform. We could add an awful lot at the top-line without having to add significant amount incrementally in costs. And we will continue to do that. So, the opportunity is there to do it and we're out there looking for these new agreements and will continue to work hard at it.

Okay. And let me just -- I think one more here. The Sears properties that are now -- so now two parts with the Sears properties. Are the Sears properties now in the new, post bankruptcy vehicle? And secondly, I know you said they've gone non-exclusive. How excited are you about the potential to take those to potentially other places?

Yes. Again, having them non-exclusive, I think is important for us. Because not only do we have a customer who's used to seeing those in Sears, but we're already having traction for people who want the brand outside. Cannon has been the first one that we've gone after in a meaningful way. And we're looking to do a couple of things a little bit creatively with Joe Boxer to be announced.

And yes, the first part of your question was, does this pertain to the new Sears and the continuing stores? Yes, the deal we signed is with the new TransformCo, which is the continuing stores that they have.

Great. Again, congratulations and good luck for the rest of the year.

Thanks, Eric.

Thank you. I'm showing no further questions in the queue. Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.

Thank you.