Icon Energy Corp. (ICON) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Iconix Brand Group Earnings Conference Call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session. [Operator Instructions] I would not like to hand the conference over to your speaker today. Jim Michael, Iconix's newly hired Director of Financial Reporting. Please go ahead, sir.

Good afternoon, and welcome to the Iconix Brand Group's third 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.

Good afternoon everyone. First, I'd like to welcome Jim to the Iconix team. Jim has a wide breadth of industry experience, including 13 years at Kate Spade, which is formerly Liz Claiborne. Welcome, Jim. It's been around 13 weeks since we last reported results to you and we continue to deliver on our plan. We are pleased to report that our third quarter results are in line with our expectations and guidance. Our cost savings that we put in place at the end of 2018 continued to pay dividends and we remain focused on the business. Adjusted EBITDA margin for the quarter increased to 59% from 35% last year, while adjusted EBITDA margin for the 9 months increased to 56% this year from 44% last year. We have reduced expenses by approximately $32 million or 34% year-to-date. John will provide more detail later in the call. Our third quarter revenue for 2019 was down when compared with third quarter of 2018. As expected, more than half of that decline was due to the loss of DTRS for Massimo, Danskin and Royal Velvet and the impact of the Sears bankruptcy on Joe Boxer, Cannon and Bongo. During the quarter we finalized significant new agreements for fields Crestone, OP swimwear and accessories in China, Buffalo underwear and small leather goods in Asia, and Lee Cooper for eyewear in Asia Pacific, apparel and bags in certain European countries and bags and accessories in Israel. We also had major renewals for Umbro in Brazil, Cannon nightwear and underwear in the Middle East and for Rocawear watches in the U.S. and Canada. Overall, we have signed a total of 155 new or renewed license agreements in fiscal 2019, which total aggregate GMRs of approximately $126 million over the life of the agreements. We are also pleased that since our last call, we have entered into a settlement in respect of our shareholder class action litigation and we have reached an agreement in principle with the SEC staff regarding the ongoing SEC investigation. We have been working diligently over the last year to settle these matters and to put them behind us once and for all so we can focus and concentrate on the future. On the shadow of the litigation, we have reached an agreement for $6 million, all of which we believe will be reimbursed by our insurance carriers. On the SEC investigation, we have recorded a $5.5 million charge, representing the amount we believe will be paid on final settlement. As mentioned in prior calls, we have also resolved several other outstanding lawsuits during the first half of 2019. So to date, we have made great progress resolving long-running material legacy disputes and legal matters. I will now turn the call over to John.

Thanks, Bob. Our total company basis, third quarter revenue was down 23% for prior year principally as a result of the previously announced transition of our Danskin Dtrs in the women's segment, Royal Velvet in our home segment, and the impact of the Sears bankruptcy on our Joe Boxer, cannon and Bongo brands. Buffalo and Starter are best performers in a quarter. We had an operating loss of $8 million this quarter versus $12 million of operating income last year. This year's results include a $17 million impairment charge on our investment in Marcy media. The anticipated settlement of $5.5 million with the SEC and $4.6 million of contract asset impairments related to assets that are recorded under the new revenue recognition standard, $3.6 million of which were recorded upon adoption of the new standard in 2018 and were not recorded to revenue. The earnings release we filed today has details and reconciliations related to such items. Total company adjusted EBITDA increased 30% for the quarter while adjusted EBITDA margin improved to 59% from 35% as our expense decrease outpaced our revenue decline. On a segment basis as expected revenue in the women's segment was down 32% for the 3 months. As previously discussed with the client was principally the result of the transition of our Danskin and Massimo DTRs and the impact of the Sears bankruptcy on Joe Boxer and Bongo. In the men segment, revenue was up 9% for the quarter, and the improvement was principally due to the higher sales in Buffalo and Starter. The home segment was down 51% for the quarter, which is principally the impacts of the Sears bankruptcy on our Canon brand, the transition of our Royal Velvet DTR and the impact and then in certain advertising costs against revenue at Charisma. In the international segment, revenue was down 17% with the decline being attributable to lower sales in Lee Cooper and Umbro. The decline in number reflects our decision to terminate our licensing in China. And we are now in the process of assessing options that are available to us in China for Umbro. Our reported SG&A expense for the quarter was $26.3 million, a 13% decrease compared with $30.2 million in the third quarter of 2018. The expense reduction plan that began in the fourth quarter 2018 has continued to yield expense savings, with the most significant reductions in advertising, professional fees, consulting and bad debts. On an adjusted EBITDA basis, SG&A expenses are down 56%. The 2018 adjusted EBITDA results include an approximate $8 million bad debt charge related to Sears and Kmart. And when excluding that from the 2018 results, SG&A is still down 39%. So anyway we look at it, we've achieved significant reductions. These expense reductions drove the improvement in EBITDA margin for the quarter, which went to 59% from 35% last year. Bob had mentioned that we signed 155 agreements this year for $126 million in GMRs. I wanted to add that the 155 represents a 29% increase in the number of deals signed versus last year at the same time. The number of renewals we have signed as of 13% year-over-year while the number of new deals increased 42% as we continue to focus on finding new opportunities. The $126 million GMRs represents a 69% increase in the dollar amount of GMRs versus last year. And out of the $126 million New GMRs, 59% or $74.5 million are renewals, and of those renewals over 66% benefits years 2022 and later. This is tremendous show of confidence in our brands and in Iconix. Returning to the balance sheet, we had a $59.2 million of cash on hand at the end of the quarter, $32.9 million of which was in wholly-owned subsidiaries and is unrestricted. Also subsequent to quarter end, we collected the $15.9 million receivable we had recorded related to a previously filed federal income tax refund. That is not included in the $59.2 million cash balance. Face value debt balances declined approximately $12 million over the quarter from $735 million at the end of the second quarter to $723 million at the end of this quarter. Of the $723 million outstanding, a 5.75% convertible notes represent approximately $94 million of the balance as compared with $95 million at prior quarter end. These notes unless otherwise converted will mature in August 2023. Our senior secured term loan which is approximately $183 million bears interest [indiscernible] plus 7% and matures in August 2022. The balance of $446 million relates to our securitization facility, which has a weighted average interest rate of approximately 4.61% at quarter end. This facility has a legal maturity date of 2043 and an anticipated repayment date of January 2020. As we discussed during prior calls, that 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 covered 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 projection shows we're being compliance through at least 2021. Due to a decrease in a debt service coverage ratio within the securitization facility, we are now in rapid amortization status. Again, as another remind rapid amortization status, Iconix will continue to receive its management fee and all collections in excess of management fees and certain other fees and expenses will go directly towards that service. As a reminder on securitization, this facility is secured by certain brands and 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. And under normal operations, if there's any residual it comes back to Iconix. 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 for as long as it is in compliance with the interest-only debt service coverage ratio. 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 to the guidance for the remainder of 2019, we remain on plan. For adjusted EBITDA we maintain our previous guidance of between $74 million and $78 million for adjusted EBITDA. And for revenue, we have held the low end of the range and slightly reduced the high end of the range. So our new range for revenue is now $145 million to $149 million. With that, I'll turn the call back over to Bob.

Thank you, John. We believe that the actions and decisions taken to date this year are helping to put us in a better position for 2020 and beyond. With that, operator, we will now open the lineup for question.

Thank you. [Operator Instructions] Our first question comes from Deciel Bowman [ph] with Iconix. You may proceed with your question. Our next question comes from Eric Beder with SCC Research. You may proceed with your question.

Good afternoon. In terms of the SG&A savings, you guys have done a really great job of camping down [indiscernible]. In terms of SG&A savings you've gotten it down to about where you've got it here. Is their opportunity for further SG&A savings here from the levels you have and where would that be if there was?

Yes, I think there are, Eric. We continue to look at our operations both domestically, as well as internationally to make sure that we're delivering value, both to our partners - licensing partners and retail partners. So we continue to assess where there's value being added and where there's not and that's an ongoing process. And we'll continue for the rest of this fourth quarter and into the first quarter of next year.

When you look at the opportunities for replacing some of the DTRs, especially the larger ones in the U.S. how does that look in 2020 and what are you seeing out there in the market for the appetite to take on some of these brands like OP and Massimo in the U.S?

Again, we're gotten less traction than I would have liked with the Massimo. Frankly, is one that was very significant in the past, and it has had more success outside the U.S. than it has in the U.S. With OP I think we're getting some traction on that. We'll see I think some improvement going into 2021 because obviously any of the deals that we're signing today, there may be some second half of 2020 benefit, but the lion's share will come in 2021.

In terms of the Sears/Kmart brands, I know that those went to non-exclusive basis. What opportunity does that give you to expand those outside of Sear/Kmart?

Sure, we're having - again, with Joe Boxer, we did bring back Nick Graham as creative director and I think we're putting together a pretty compelling offering that will be taken to the market probably in the next 60 days. The nice thing with that is it's establishing us for 2021 which happens to be the 35th anniversary for Joe Boxer. So a lot of what we're doing is moving towards that for a big marketing push and we want to have people in place during 2020 in order to gain the benefit of that. And Cannon, we've been very fortunate in signing a number of deals outside of Sears where Canon and its legacy has not been an issue whatsoever.

And finally, China. So you seem to have signed some new licenses and shifted to new licenses. How important did you see that going forward?

I think China's continuing to be an important market for us. We think that we have had the wrong partner for Umbro. We've terminated that and we're assessing other options in order to expand that. The start of business, I was there for the first store opening in Beijing in May. And I think we're up to close to 20 stores already for Starter. Lee Cooper has been a very nice launch for us there. So we're experiencing I think, pretty good momentum but with a lot of runway left for us in China.

Great, congrats and good luck for the rest of the year.

Thank you. And I'm not showing any further questions at this time. I would not like to turn the call back over to John McClain for any further remarks.

Thank you, operator. This concludes the Q&A part of the call. Ladies and gentlemen, thank you for participating today. Concludes our program. Everyone have a wonderful evening.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.