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Executives

Neil Cole - Chairman of the Board, President, Chief Executive Officer

Warren Clamen - Chief Financial Officer

Analysts

Todd Slater - Lazard Capital Markets

Bob Drbul - Barclays Capital

Robby Ohmes - Merrill Lynch

Ronald Bookbinder - Global Hunter Securities

Eric Beder - Brean Murray, Carret & Co.

Mark Kaufman - MLK

Jim Chartier - Monness, Crespi, Hardt & Co.

Jeff Klinefelter - Piper Jaffray

Mimi Bartow - Telsey Advisory Group

Iconix Brand Group Inc (ICON) Q3 2008 Earnings Call November 3, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Iconix Brand Group’s third-quarter 2008 earnings conference call. My name is Krista and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator Instructions) The company has asked me to read the following Safe Harbor statement.

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 would now like to turn this presentation over to your host for today’s call, Mr. Neil Cole, Chief Executive Officer, and Mr. Warren Clamen, Chief Financial Officer.

Mr. Clamen, please proceed.

Warren Clamen

Thank you. Good morning, everyone and welcome to the Iconix Brand Group’s third quarter 2008 earnings conference call. Reviewing our results for the third quarter ended September 30, 2008, revenue increased 29% to approximately $55.1 million, as compared to approximately $42.7 million in the prior year quarter. EBITDA increased 23% to approximately $37.9 million, as compared to approximately $30.8 million in the prior year quarter and EBITDA margins were approximately 69% for the quarter.

Free cash flow increased 13% to $31.5 million this quarter, as compared to $27.9 million in the prior year quarter. Net income increased 8% to approximately $18.3 million, compared to $17 million in the prior year quarter.

Diluted EPS were $0.30 per share, as compared to $0.28 per share in the prior year quarter which included $0.02 and $0.01 of non-cash compensation expense, respectively. Free cash flow per diluted share was $0.52 for the quarter.

For the nine months ended September 30, 2008, revenue increased 44% to approximately $162.5 million, as compared to approximately $112.6 million in the prior nine-month period. EBITDA for the nine-month period increased 31% to $111.8 million, as compared to $85.4 million in the prior-year period and free cash flow increased 22% to approximately $91 million, as compared to approximately $74.8 million in the prior year period.

Net income for the nine-month period increased 19% to approximately $53 million, compared to $44.5 million in the prior year period and diluted earnings per share increased to $0.87 from $0.73 in the prior year period, which included $0.06 and $0.01 of non-cash compensation expense respectively. Free cash flow per diluted share for the nine-month period was $1.49.

EBITDA and free cash flow are both non-GAAP metrics and reconciliation tables for each can be found in the press release sent earlier this morning and on our website, www.iconixbrand.com. Free cash flow is an important metric to look at for our business, as our GAAP earnings include several reoccurring non-cash items; specifically non-cash taxes, depreciation and amortization and non-cash stock-based compensation expense.

Going forward, we estimate our annual free cash flow will be approximately $50 million higher than our reported GAAP net income. In the third quarter, our free cash flow was $13.2 million or $0.22 higher than GAAP earnings and for the nine-month period, this difference was $38 million or $0.62 higher.

Total debt at the end of the quarter was $673 million and the earliest maturity of any debt is 2012. Our pro forma net debt-to-EBITDA is currently below four times and we are comfortable at these levels given the high visibility of our guaranteed minimum cash flows. As of January 1, 2009, we will have over $500 million in aggregate guaranteed minimum royalties through the current terms of our existing licenses excluding any renewals.

Our weighted average interest rate on all debt for the third quarter was approximately 4.8%. At the end of the quarter, the company had approximately $84 million in cash and this cash balance was prior to the $26 million we paid for the Waverly acquisition, which closed on October 6.

We spent a great deal of time evaluating the best use of the cash that our business generates. Today, we announced that our Board of Directors has authorized a program to repurchase up to $75 million of stock over the next three years. We feel at certain price levels buying back our shares would create great value for shareholders. However, we will also remain committed to our growth strategy that includes acquiring iconic brands, and we will continue to evaluate what are the best options for the company and its shareholders.

Before I turn the call over to Neil, I would like to discuss one last point. As most of you are aware, and beginning only in 2009 a new GAAP accounting rule will require us to record incremental non-cash interest related to our convertible debt for 2009 and for 2008 comparability purposes. The impact of this change in accounting policy will be $0.14 per diluted share for 2009 and $0.13 for 2008, all of which relates to non-cash interest.

This change in accounting policy will not impact the actual economics of our convertible debt and the interest rate remains at 1 7/8.

I will now turn the call over to the Iconix Chairman and CEO, Neil Cole.

Neil Cole

Thank you, Warren. Good morning, everybody. I am pleased with our performance in the third quarter and believe that our model has demonstrated its resilience in this difficult environment, as we continue to generate substantial revenue and sustainable earnings with even stronger cash flows.

Further, we believe that Iconix is one of the few consumer-driven companies, well positioned in this economic environment to deliver strong organic growth in 2009. First, I will take you through some of the highlights from the quarter.

Overall, it was a challenging quarter for retail, but with our diversification among brands, retailers and licensees our business has performed well. Starting with our direct to retail apparel brands, Candie’s was a little soft, reflecting lean inventory management at Kohl’s.

Accessories and intimates were the standout categories for Candie’s as consumers chose to update their wardrobe with lower-ticket items rather than investing in new outfits. Mossimo has been impacted by the weak retail environment, but still remains a fixture within Target and will represent close to $2 billion in retail sales this year.

Joe Boxer sales at Kmart continued to perform well and the new women’s intimate product is gaining good traction. However, the slow rollout at Sears has been disappointing. The big upside for our three brands in Wal-Mart; OP, Danskin Now and Starter will come in 2009 with additional doors and categories. We are excited to say that the repositioned Danskin Now product is already receiving a great response.

In looking at our traditional wholesale brands, the results were mixed. The two biggest standouts in the quarter were Rocawear and London Fog. As the urban market consolidates, Rocawear has maintained its position as a dominant player. Jay-Z’s commitment to the brand has been a critical component of our recent success that we are seeing in his role as a spokesperson in the most recent ad campaign has driven a lot of excitement.

Our London Fog business continues to see growth driven by its strong core outerwear business and the introduction of new categories. In the third quarter, we launched London Fog footwear in 400 Macy doors, and we currently have one of the best-selling footwear boots. The London Fog e-commerce website also launched in the third quarter and is receiving great traction.

Badgley Mischka sales were down slightly, reflecting the over all slowdown in the luxury retail segment. We recently signed a new sportswear license with ECI for Rampage and are excited about their ability to grow the business. ECI will deliver its first collection for spring in ‘09. We are also working on new strategies for our junior denim brands, Bongo and Mudd, and hope to make an announcement for at least one of them in the very near future.

As for our home brands, the initial launch of Cannon at Sears is off to a very strong start. Royal Velvet’s Bed Bath & Beyond business has been off slightly, reflecting increased competition as Linens N Things liquidate their stores. However, Bed Bath & Beyond is a great partner for us.

Fieldcrest is on plan at Target and they are excited about the potential for the brand in 2009. Charisma, our smallest home brand, has been weak. We are looking to reposition it for next year.

For our full 2008 results, we are on track to achieve revenue guidance of $215 million to $220 million and earnings of $1.15 to $1.20 a share, but are now guiding towards the low end of these ranges.

We are expecting to maintain strong EBITDA margins for the year of approximately 70%, and our model continues to generate strong free cash flow, which we expect to be in excess of $120 million for the year or approximately $2 a share.

I would now like to discuss our Waverly acquisition which was closed at the beginning of the fourth quarter, despite the challenging economic and credit markets. Waverly was a great bolt-on acquisition for Iconix, as it adds $7 million in incremental revenue with minimal incremental expense. We paid $26 million with our existing cash at a multiple of 3.7 revenue, and have over 80% of that guaranteed back to us over the lives of the existing contracts.

We believe this acquisition demonstrates the power of cash on hand in this environment, as it provided us with the ability to be opportunistic and execute an acquisition at an extremely attractive valuation.

In addition to the favorable economics of the deal, there are also strategic benefits. Through Waverly, we gain access to new retail relationships with Lowe’s and Jo-Ann’s and also enter some new categories including paint and window treatments.

Looking forward to the full year 2009, we believe retail will continue to be extremely difficult, and we expect retailers to remain focused on tightly managing inventory. That being said, we are still projecting strong top-line growth for ‘09, driven entirely by our organic revenue.

Our largest and most exciting opportunity is with our three brands at Wal-Mart; OP, Starter and Danskin Now. We believe Wal-Mart is a strong partner, well positioned for this current environment and are thrilled with their enthusiasm for our brands. The plan for next year is to take OP from 1,000 doors today to all doors in Spring ‘09 and to transition Starter and Danskin Now to become the anchor brands for athletic apparel within Wal-Mart, as referenced at Wal-Mart’s investor conference last week.

As we execute our strategy and gain traction within Wal-Mart, we believe sales at retail will more than double to exceed $2 billion and reach $3 billion over the next few years. Through Wal-Mart’s global branded strategy, we will also have the opportunity to leverage their international platform. OP has already launched in Canada and Mexico, and we are in discussions for the U.K., Brazil and Argentina.

We also expect growth from our home business next year as Cannon fully launches in all Kmart and Sears stores for spring ‘09. This is another exciting opportunity for us, as the Martha Stewart brand exits the store. To-date, sales of towels have been strong even outperforming the Martha Stewart collection.

In addition to the many opportunities we have for our brands in the U.S., we believe there is a big opportunity to take our brands worldwide. As we explore new markets, we are becoming more inclined to join with local partners who understand the marketplace and know the key players.

We remain excited about our China joint venture with Novel Fashions, which is run by Silas Chou. We anticipate having two equity deals in China signed by the end of this year and plan to have a total of four to five brands signed by the end of ‘09.

In addition, we are discussing a joint venture for Central and South America with a strong partner for that region. Based on the initiatives we just discussed and the visibility our model provides, we feel comfortable in issuing ‘09 guidance at this time. In 2009, we expect revenue to increase approximately 7% to a range of $225 million to $235 million. Approximately two-thirds of this is supported by guaranteed minimums.

As I discussed earlier, this growth will be driven by our Wal-Mart and our home initiatives, including the addition of the Waverly brand. For our other brands, we expect sales to be down slightly as retailers continue to plan inventories conservatively for the first half of the year.

Luckily they consider the direct to retail brands the best for them economically, which is an advantage we have going into ‘09. We plan to continue to support our brands with great marketing to gain market share, but we will remain focused on maintaining our 70% EBITDA margin that we have delivered over the last couple of years.

We are forecasting earnings growth of approximately 8% for next year. Therefore, excluding any impact from the accounting change for the convertible, we expect earnings per share to be in the range of $1.20 to $1.30, which includes approximately $0.08 of non-cash comp.

Due to the change in the convertible accounting that Warren discussed earlier, including the non-cash interest, earnings per share would then be put into the range of $1.06 to $1.16. We expect to continue to generate strong free cash flow and are forecasting free cash flow to be in the range of $114 million to $118 million next year, which translate to a free cash flow per share of approximately $1.90.

While our guidance does not include any revenue for future acquisition, we are and will continue to assess potential acquisitions. The apparel and retail industry is going through a transformation and we believe there will be tremendous consolidations in the industry over the next couple of years. As brand owners with the ability to create value, we should see opportunities arise over the next 12 months that allow us to continue to broaden our portfolio.

In addition, as the consumer returns, we will be incredibly well positioned to prosper, as we have created strong relationships with best-in-class retailers like Wal-Mart, Target, Kohl’s, Bed Bath Beyond, and strong wholesalers including Li & Fung, Elizabeth Arden, and Kids Headquarters.

In closing, like a lot of you we are very frustrated with our current stock price. When we look at all that we have accomplished, and the opportunities that we know that our current valuation is not indicative of our fundamentals. To the contrary, our company is stronger today than any other time in our history.

Recently, Crain’s New York ranked Iconix as the second fastest-growing company in the New York region, based on a three-year annualized growth rate of 130% and a three-year annualized net income rate of over 100%. Fortune Magazine also included Iconix as number 47 in 2008’s list of America’s fastest-growing companies.

As we look into the future, we continue to see tremendous growth opportunities for our brands and are now projecting our 17 brands to generate approximately $8 billion in sales in 2009.

Four years ago, when we began transforming our business, we never anticipated an environment like this and it is encouraging to see how well our model is holding up in this environment. We are energized with the strength and resilience we have shown over the past year and we are excited about our organic growth plans for the future. We have a great company that is prepared for the short-term challenges ahead and will benefit from the consolidations we see happening in the future.

With that, I would like to thank all of you for listening this morning and to open it up for a question-and-answer.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Slater - Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

Your ‘09 revenue guidance, it assumes slight negatives across the board outside of Wal-Mart. I’m just wondering how that lines up with your performance currently and especially given what you saw in October?

Neil Cole

Some of the brands have been either up slightly or down slightly or a few of them are even. So we are projecting next year to be pretty much similar. We see this environment continuing. The retailers are playing inventories really tight, so even if the consumer does come back and buy, we believe that it is going to be a very tough ‘09 throughout and what we’ve seen in the third quarter; September, October, we see continuing; and that is how we planned our guidance going forward.

Todd Slater – Lazard Capital Markets

Secondly, when do you anticipate commencing any of the buyback and where do you see your cash position at the end of the year?

Warren Clamen

The cash position at the end of the year should be around $75 million of cash on the balance sheet. We put this buyback in place, our Board, because we wanted to be in a position from time to time to repurchase shares when they are undervalued. So we have no set predetermined parameters; but we want to again have the ability to buy back shares.

Todd Slater – Lazard Capital Markets

Lastly, you mentioned Central and South America as new international initiatives. When did you say that you’re going to be closing those deals and I’m just wondering if there is any news on the India opportunity? Thank you.

Neil Cole

We are hoping to announce a deal in South America this quarter. We have a wonderful partner that we are starting to work with and who is strong in the region and could help us monetize our brands there.

India has been taking a little more time. It seems to be a lot less developed than we thought in the opportunities and we are probably going to be doing more I’d say, one-off typical licensing deals there rather than a joint venture of some kind.

Operator

Your next question comes from Bob Drbul - Barclays Capital.

Bob Drbul – Barclays Capital

The question I have is on the Wal-Mart businesses Neil. Can you maybe peel it back a little bit more, in terms of when you look at the percentage of your business at the end of '08, where you think all the Wal-Mart brands will be for you in terms of the diversification and then I guess similarly, can you just maybe frame us around what your expectations are for ‘09 and maybe sort of the different scenarios that you see for the Wal-Mart businesses with the three brands that you have?

Neil Cole

Yes, the business is going to be somewhat dramatically increased, probably almost threefold of what happened in ‘08. OP was in a 1,000 doors and starting around April ‘09 it’s going to be going all doors. Starter and Danskin now were small components of the pad, probably let’s say out of 20 some odd racks we had a third of them and today we are going to become the core brands, take over most of the pads in the athletic area. So, we see the businesses dramatically increasing, and we see it as one of our big organic growth story going into ‘09. Especially being that Wal-Mart is so well positioned in this environment, we are pretty excited.

Bob Drbul – Barclays Capital

When you look overall, your top retailers, can you maybe just give us an idea how the top three retail partners you are going to have and how it will shake out for you at the end of this year and at the end of next year?

Neil Cole

Well today, Wal-Mart we have three DTR deals and Target we have three DTR deals with Mossimo, Fieldcrest and Waverly and we are also pretty excited about Kohl's, with Candie's and we are working on some new opportunities with them. So, those are probably the three biggest growth areas, but also within Sears Holding, in both Sears and Kmart, we have Joe Boxer which is really performing well and we are pretty excited about the over all launch of Cannon.

Overall, the DTR business continues to be an important growth factor for the company. We believe in ‘09 it will be more than half of our revenues. We have over 12 DTR deals today. We like DTR because it really makes us a partner with a store, giving us the best real estate in the store, giving us circular coverage, usually on the covers and really great positioning and We think in this environment, because it is better economics for the store, these are the brands that are going to be fine and hopefully prosper.

Bob Drbul – Barclays Capital

One last question that I have is when you look at the overall model, what do you think it will take for you to start to get some leverage on the SG&A line over the next few quarters?

Neil Cole

I think it is just continued growth. One of the decisions we made for ‘09 is to continue to increase our marketing. We felt this is a time not to pull back and we are going to be doing some pretty interesting and exciting marketing on especially the Wal-Mart brands. You're going to see a big new initiative on Starter, Danskin and OP.

We felt this is a time to get share and we are not going to be pulling back there and actually the marketing budget is increased almost 30% in '09. So we are pretty excited about that and we thought this was a time not to pull back but to continue to maintain the 70% EBITDA.

Warren Clamen

Right, I was going to add that Bob, that although we are spending more, the revenue is increasing, but our EBITDA margins are forecasted to be the same at about 70%.

Operator

Your next question comes from Robby Ohmes - Merrill Lynch.

Robby Ohmes – Merrill Lynch

A couple of quick questions, one is just a follow-up on Bob's question there. The Wal-Mart business, I think you guys at one point said that you thought those three businesses; OP, Danskin Now and Starter would be up about 50% in ‘09 versus ‘08. I just wanted to get a sense if that is still the case.

Then the other question related to that is in terms of the Wal-Mart business and the strength you are looking for there. How should we think about that playing out into '09? Is it weighted more towards the first half, that growth, or is it a back-half driver? Any sort of color on that.

Then third thing, I just wanted to clarify maybe with Warren that the guidance you are giving for ‘09, does that include a certain level of share repurchase in that? Thanks.

Neil Cole

Wal-Mart, we see it pretty level, maybe a little heavier in Q1 and Q2 because of the way the deals are structured. We see the business, believe it or not, going almost threefold, but because of the minimums that were in '08, it will probably be not that high, because of some of the minimums that we had from the purchase of Nike with Starter and OP with Warnaco.

So the actual effect is 3 times more at the register, but the royalties will probably be up somewhere around two fold based on the minimums and we see them continuing to get stronger. We see as we get -- the more racks that we have within Wal-Mart, we believe the business gets stronger as we go forward.

Warren Clamen

And to answer your question, the ‘09 does not include any assumptions for the share repurchase, Robby.

Neil Cole

Nor acquisition.

Warren Clamen

Nor acquisitions.

Robby Ohmes – Merrill Lynch

And then just one last quick follow-up, Neil; when you’re looking at your acquisition outlook in the US, in this environment, is there a difference in the receptiveness or desire to do a direct-to-retail deal versus a wholesale deal, which is looking easier to line up at this point in terms of getting the payoff you guys want to get?

Neil Cole

Yes, the acquisition environment has been slow, just meeting the price points of buyers and sellers, but we believe that it’s going to really pick up.

I think the reality of the new world is really starting to kick in, and we are seeing a lot of really interesting brands that are coming our way in the last couple of weeks that we are pretty excited about.

As far as DTR versus traditional wholesale, we are pretty in favor of DTR deals. We think it’s been a big driver of our success over the last couple of years, and we prefer that business. However, we have amazing wholesale deals like our Rocawear deal and some of the others. So the key is the quality of the partner and the credit, and making sure that the partner is committing to the brand and growing the brand and we’ve seen that a lot in working directly with the retailers.

Operator

Your next question comes from Eric Beder - Brean Murray.

Eric Beder – Brean Murray, Carret & Co.

Just a quick question here about the guidance and the free cash flow. What is going on in 2009? Your revenues are obsolete, EPS is increasing, but the free cash flow is decreasing. What is the delta here in terms of that?

Warren Clamen

The driver is the NOL that we used in 2008. It was about $13 million in 2008. So, that is why the decrease; you won’t have any more NOLs in 2009, but again the ongoing non-cash taxes are $25 million and the ongoing non-cash expenses are another $25 million; so that’s about $50 million on an annualized basis going forward, but ‘08 had the benefit of the NOLs.

Eric Beder – Brean Murray, Carret & Co.

What is your availability right now in terms of borrowing capacity?

Neil Cole

Well, as Warren said, at the end of the year we are projected to have about $75 million in cash. We also have a revolver of about $33 million from the term loan which we have access to.

Warren Clamen

Right; and we’ll generate, as you had said, about $114 million to $188 million in free cash flow. So we are talking to a lot of people, traditional, non-traditional investors and lenders and we are confidence that with the right acquisition the money will be there.

Eric Beder – Brean Murray, Carret & Co.

In terms of Kmart, you mentioned positives with the towel products but the slowness in Sears and Joe Boxer. Now we’ve heard this I think for a while. What do you think needs to be done there, or what can be done, to jumpstart that part of the business?

Neil Cole

We are on I think our fourth merchant at Sears over the last three or four years. The new gentleman, his name’s Craig Israel is. We are pretty encouraged, h e comes out of the department store, out of may company. I think it’s just the commitment and while the Joe Boxer business is up over I think we were up 6% year to date, Sears has just been very slow in the rollout. So we are hoping with a new commitment of Craig and his team that Joe Boxer can really start ringing up some sales at Sears.

Eric Beder – Brean Murray, Carret & Co.

Okay another thing but with Rampage. I know you went to a new licensee. How is that going to affect the second half of this year and Q3 sales of the sportswear piece?

Neil Cole

It is definitely off a little bit as we transition from one into the other, but the minimums are commensurate with the last licensee to the new licensee and we have a really great company who we think has access to really grow the brand a lot bigger, a little more capital and a bigger kind of company. So there’s a little shortfall, as you start, you go from one to the other, into fourth quarter, which we have planned for.

Operator

Your next question comes from Ronald Bookbinder - Global Hunter.

Ronald Bookbinder – Global Hunter Securities

The Q4 revenue guidance is below what Q3 was. Is that just the environment or he contracts set up such that there isn't as much guaranteed revenue in Q4?

Neil Cole

It’s really the environment. We are being conservative and we do have a transition with Rampage, and it’s going to hit as you all know, we all know, it is crazy out there and the consumer is being very conservative and we are not shopping as much. So we’re just being a little bit more conservative as we go into Q4.

Ronald Bookbinder – Global Hunter Securities

As we look at 2009, the quarterly revenues, is there any sort of seasonality with the contracts that would cause maybe Q1 and Q4 to be higher revenue or how does that flow?

Neil Cole

I think if you look at the last couple of years you will get a good parameter of how it flows. A lot of our DTRs have higher revenue in the beginning shipments, which makes Q1 higher, but I think looking at the last couple of years you will get a good feeling for the revenue flow.

Ronald Bookbinder – Global Hunter Securities

Lastly, the deal that you are working on in South America, is that going to be an equity deal like the way China is set up or would it be more just traditional licensing business that you would just have a partner for?

Neil Cole

It will be more traditional licensing. We found that part of the region there’s a lot of good licensees and we have a nice business down there today; I think we have about 15 licensees in Central and South America. We just feel the ability to have a partner will give us the ability to grow that business and hopefully also get a fair count.

Operator

Your next question comes from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter – Piper Jaffray

Guys, just a couple last questions here; Neil, could you just clarify Q3 results and then Q4 guidance? What was true organic growth or non-2008 acquisitions? As you went through a good mix of business trends between Candie’s, Mossimo, Joe Boxer and some other wholesale businesses, but can you give us a kind of view of underlying trends in Q3 and projected for Q4 of those sort of true legacy or organic growth?

Neil Cole

Jeff, when we look at the full year, the way we are projecting it today, we don’t see a lot of organic growth in ‘08. We think it is going to come out pretty close to flat. We had some increases. The increase is based on the Starter business which we didn’t have in last year’s Q3; Waverly is going to be minimal in Q4 of this year, but pretty much ‘08 has been a very difficult year, as we all know and we haven’t seen the growth that we were anticipating, as the retailers have been playing inventories pretty lean.

Jeff Klinefelter – Piper Jaffray

So would you characterize that the first half of 2008 there was modest organic growth; second half you’d have modest contractions and that is about flat; would that be right?

Neil Cole

I think that’s fair.

Jeff Klinefelter – Piper Jaffray

Okay. Going into 2009 as the way you project that business, again thinking about 2008 organic or 2007 and then ‘08 businesses with the weakening in the second half of this year and really market weakening now in the final quarter of the year, are you projecting, do you think, that core organic business conservatively enough in the first half of the year or are we assuming that Wal-Mart will be enough of an offset to get to these numbers?

Neil Cole

I think we are doing it conservatively. We’ve been through it many times. One of the big benefits we have is our minimum guarantees and the fact that more than two-thirds of our revenue is guaranteed and we’ve gone through it, each of our deals, in looking at where the licensee is. The big benefit I think having the DTRs is the retailer really pushes that business. It’s not as far off as the rest of the business with the licensee because they get better margins. So I think we’ve been conservative and we have taken a good look at it many, many times in making sure that the numbers are on track.

Jeff Klinefelter – Piper Jaffray

SG&A, you said you want to make sure that you are stepping up marketing at this time to make sure you’re protecting or even going after incremental share. As I understand it, that would be your position on SG&A. What are your opportunities to control or cut back on that if ‘09 deteriorates further? What flexibility do you have or are you willing to put into the model?

Neil Cole

We do have a lot of flexibility. One of the wonderful things about marketing is you can commit really 60, 90 days out. So there is a lot of flexibility on the marketing side. We’ve been very careful with every nickel we have and have been very careful. The two major expenditures we have is the marketing and our headcount and as I said, we’re very careful with the headcount. It’s definitely gone down about 10% in the last 120 days. So we’re going to continue to watch it and await the consumer to come back.

Jeff Klinefelter – Piper Jaffray

So your marketing plan, your budget year-over-year in ‘09, give a sense for percentage-wise what you are planning.

Neil Cole

It’s up about 30% and we really believe we need to support our brands, and with the growth of what we are doing with Wal-Mart and working with them, they are making some big commitments and we’ve made some small commitments to really go after these brands. It’s a tremendous amount of sales, so we really feel we need to support them.

Warren Clamen

But Jeff, I’ll add that the increased marketing budget is offset by the increased revenue; that’s the reason the EBITDA margins are staying at 70 points.

Jeff Klinefelter – Piper Jaffray

Just one last point. The Candie’s contract is up at the end of ‘09, I believe. When would you be renegotiating that or when would you expect that update to come through?

Neil Cole

Now, the Candie’s deals are not up until ‘11. I think we have three more years.

Jeff Klinefelter – Piper Jaffray

Oh, I'm sorry. Which -- '09 is the -- is it the Mossimo?

Neil Cole

We have no agreements that are not up until the end of ’10 and those are Mossimo and Joe Boxer.

Operator

Your next question comes from the line of Jim Chartier – Monness, Crespi and Hardt.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

I just want to get back to Robby’s question. Are you still projecting the Wal-Mart brand royalties to be up about 50% next year?

Neil Cole

Yes, we are, but the only difference what I was clarifying is sales are probably up a lot more than that, but we had minimums on those brands in ‘08, so it’s only going to look like half.

I want to step back. Someone just handed me a note. The Mossimo contract is up in January ‘10, not the end of ’10, but we are pretty confident to renew. It has already been renewed, I believe three times and Cherokee has been renewed eight times or something. So with the success of Mossimo, we are pretty confident that it is not an issue.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Okay. Now in my estimate, assuming the 50% revenue growth for Wal-Mart, plus the incremental revenue from Waverly, the other brands I estimate will be down kind of mid-single digits for next year.

Neil Cole

I think we are closer to zero than I’d say mid-single-digits. More like flat, but I think that would be conservative. We’ve built in a little cushion. You're probably looking at the high side of our guidance rather than the low side. But definitely flat to mid. Low single digits there.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Okay. Then outside of Wal-Mart on the marketing side are you planning to increase marketing for other brands as well?

Neil Cole

Some, but also some we are decreasing. I would say on the average we are probably going to be about the same on the marketing side as in ‘08.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Okay and then can you just talk about if you do multiyear planning with any of your licensees; specifically with the direct to retailers, in terms of kind of revenue growth over maybe a two, three-year time period?

Neil Cole

Quite honestly, no. We are very lucky when they give us one year. However, we have these long-term contracts with minimums. So we interpret based on trends and based on what the agreement says, but most of our retail partners give us 12 months out, which are always subject to quarterly revisions and discussions, because it is definitely a changing, challenge world out there.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Then, the structure for the joint venture you are exploring for Central and South America is going to be similar to China, or a more traditional venture where you we’d recognize the revenue and income assets I guess earned?

Neil Cole

Yes, more traditional with revenues coming in, in the near term rather than the long term.

Operator

Your next question comes from Mark Kaufman - MLK.

Mark Kaufman – MLK

I had a question about timing on your direct-to-retail partners; timing on their orders. Do they have an advantage to say on the off chance that sales are a little bit better than they originally planned for, to order goods and get them delivered more quickly than a traditional vendor would be able to supply them?

Neil Cole

Not sure. I think a lot of them are pretty powerful and have big systems and organizations around the world. So they do move pretty quick and that’s a common theme with retailers today; is speed to market. They are all hoping to be able to react in 60 days from overseas when things happen, but I would say similar to the wholesale. You take a link out there where the wholesaler first has to go make the sale to the retailer. When things are happening, the retailer can move quick and there is no medium person who has to first go out there and get the order. So it definitely moves quicker because they can make decisions quicker.

Mark Kaufman – MLK

So you would see the impact in short order in that case.

Neil Cole

Yes, but not so much, maybe a week or two in the ability to respond.

Operator

Your next question comes from Mimi Bartow - Telsey Advisory Group.

Mimi Bartow – Telsey Advisory Group

One quick question; the guaranteed revenues, you said about two-thirds for 2009?

Neil Cole

Yes.

Mimi Bartow – Telsey Advisory Group

So still for 2008 looking at that 70%, is that just the timing in terms of the minimums?

Neil Cole

Yes, yes.

Mimi Bartow – Telsey Advisory Group

Okay and then just thinking about the Wal-Mart business and the three brands there, could you just maybe use a baseball analogy or thinking somewhere like; where are you in terms of innings, if you think about OP versus Danskin and Starter?

Neil Cole

I think that Danskin and Starter are pretty much taking over developed businesses and that OP is kind of a new brand that’s starting to evolve, and it’s in a bigger pad. So OP is new to the store, where Danskin and Starter are not, but there’s really new businesses with new manufacturers and the fact that they are now DTRs. Starter wasn't the DTR in the past, and Wal-Mart had to buy everything through Nike, so it really wasn’t working very well as far as them hitting the right price structure and the business wasn’t growing.

Now they’ve made a commitment to make it the only brand as far as the pad goes in their athletic side rather than the Athletic Works brand. So we see a big excitement as far as the growth there. While OP is kind of getting new territory, but I think that is also eating into some of the private label businesses that Wal-Mart did.

The new team there is really focused on brands and where Wal-Mart in the past had a lot of private label businesses, the new team is trying to make it similar to other parts of the store where it’s great brands for great prices and I really think they are doing a good job.

Operator

At this time there are no further questions. I will turn the conference back over to Mr. Neil Cole.

Neil Cole

Thank you very much. Just want to thank everyone for listening today and we’re going to be continuing to work hard and developing our business in this very difficult environment and we will talk to you again I guess in about three months. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Iconix Brand Group Inc. Q3 2008 Earnings Call Transcript
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