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Iconix Brand Group, Inc. (NASDAQ:ICON)

Q2 2012 Earnings Call

July 25, 2012 10:00 am ET

Executives

Neil Cole - President & CEO

Yehuda Shmidman - COO

Warren Clamen - EVP & CFO

Analysts

Susan Anderson - Citi

Jessica Schoen - Barclays

Eric Beder - Brean Murray, Carret

Jim Chartier - Monness, Crespi, Hardt

Diana Katz - Lazard Capital Markets

Steve Marotta - CL King

Ronald Bookbinder - The Benchmark Company

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2012 Iconix Brand Group, earnings conference call. My name is Ann and I’ll be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

Our speakers for today will be Mr. Neil Cole, Chief Executive Officer, Mr. Yehuda Shmidman, Chief Operating Officer and Mr. Warren Clamen, Chief Financial Officer.

Before we begin, the company has asked me to read the 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.

And now I would like to turn the call over to Mr. Warren Clamen.

Warren Clamen

Good morning everyone and welcome to the Iconix Brand Group second quarter 2012 earnings conference call. On today’s call, we will review our second quarter financial results, provide an update on brand initiatives and discuss our overall outlook for the company.

Reviewing results for the second quarter ended June 30, 2012. Revenue was $93.6 million, up 5% increase as compared to $89.3 million in the second quarter of 2011. The anticipated transition of the Royal Velvet license and the year-over-year declines in our Men’s businesses were offset by the strengths across the remainder of our portfolio and the completion of our new joint venture in India, which contributed approximately $5.6 million to the topline.

In the second quarter, we generated $51.9 million of free cash flow or $0.72 per diluted share, a 16% increase over the prior year quarter. We have a reoccurring annual tax benefit of approximately $30 million, which combined with our non-cash compensation and depreciation and amortization, create a reoccurring annual delta of approximately $50 million to $60 million between our non-GAAP net income and our free cash flow.

EBITDA in the first quarter was approximately $58.4 million as compared to approximately $58.1 million in the prior year quarter. Our EBITDA margin in the second quarter was approximately 62%. The margin decline versus the prior year quarter primarily reflects a stronger PEANUTS business this year, which have lower margin. Although expenses are slightly up year-to-date, we are still on-track to be down approximately $9 million to $10 million for the full-year.

Non-GAAP net income which excludes non-cash interest related to our convertible notes was $32.4 million compared to $32.3 million in the prior year quarter and diluted non-GAAP earnings per share was $0.45 compared to $0.43 in the prior year quarter.

GAAP net income and diluted EPS in the second quarter of 2011 included a non-cash, non-re-occurring gain of approximately $21.5 million related to the company’s acquisition of the global master license of the Ed Hardy brand in April 2011.

GAAP net income in the second quarter was approximately $28.6 million as compared to $41.5 million in the prior year quarter and GAAP diluted EPS was $0.40 compared to $0.55 in the prior year quarter.

Reviewing our results for the six months ended June 30, 2012, our revenue increased to approximately $182.1 million. We generated free cash flow of $99.4 million. Our EBITDA was approximately $115.2 million. Our non-GAAP net income, as previously defined, was approximately $64.4 million and our diluted non-GAAP earnings per share was $0.88.

In terms of seasonality, we expect revenue and earnings in the second half to be lower than the first half reflecting the royalty structures for our larger direct to retail licenses and the completion of the India joint venture in this second quarter which contributed approximately $0.05 to the diluted EPS.

EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted EPS are all non-GAAP metrics and reconciliation tables for each can be found in the press release sent out this morning or on our website iconixbrand.com.

Moving on to our balance sheet, we believe that we continue to be in an extremely strong position with our net debt to EBITDA under two times and the majority of our portfolio essentially unencumbered, we have significant borrowing capacity. We believe there are a variety of financial options available to the company including always a securitization and the term loan market which will allow us to continue to execute against our acquisition strategy as well as share repurchases.

At the end of the second quarter, we paid off our $287.5 million convertible notes through a combination of existing cash and borrowings under our $150 million revolving credit facility. Following this payment, we ended the quarter with approximately $50 million in cash and $490 million in long-term debt.

We have continued to buyback our stock under our $200 million share repurchase program and since initiating the program in October 2011, we have bought back a total of approximately $107 million or approximately 10% of our shares outstanding as of today.

In the second quarter, we repurchased approximately $50 million worth of stock at a weighted average price of $15.58. Today, we have approximately $93 million remaining under the current program and we plan to continue to be opportunistic and evaluate share repurchases as an effective use of our cash.

With that, I will turn the call over to Yehuda Shmidman, our Chief Operating Officer who will provide you with an update of our business.

Yehuda Shmidman

Thank you Warren and good morning everyone. And looking at our overall brand portfolio there have been strengths as well as some expected weaknesses. However, the majority of our brands remain healthy and we are excited about several growth initiatives including the debut of Truth or Dare fragrance and footwear; Candie’s category expansion into beauty products; Material Girl direct to retail launch in Europe and our newly formed joint venture in India.

The new joint venture in India was formed in the second quarter with Reliance Brands Limited marking our fourth international joint venture for our portfolio of brands, adding to our existing partnerships in China, Europe and Latin America. The India joint venture is based in Mumbai and we will follow the core business model of Iconix, focusing on growing royalty revenue through existing and new licensing agreements with both manufacturers and retailers.

On the international front, we are also gaining momentum in Europe as we recently launched two direct retail partnerships, Material Girl with Auto and Ocean Pacific with UK based SportsDirect. In addition, we are excited to announce that we assigned our third DTR in Europe. This one for our Danskin brand and we plan to announce the retail partner in conjunction with same launch in the next few months.

In total, international revenue represented 22% of our business last year and our goal is to continue growing that base to a third of our revenue in the next few years. As for our US business, we remain well positioned in the retail landscape with partnerships across the major Big Box Retailers.

Some of our strongest performing brands in the quarter were the Mudd, Bongo, Charisma and London Fog. Peanuts was also one of our top performing brands in the quarter. Some highlights include the success of our recently launched fashion DTR with Uniqlo, the continued success of our social gaming app with Capcom which surpassed more than 5 million downloads since its launch in the past year, and the grand reopening of Kiddy Land's flagship Harajuku store this past quarter, one of Japan’s most popular toy stores with an entire floor dedicated to Peanuts.

We also have a new DTR launch planned for spring 2013 with LPP and Eastern European fast fashion retailer with 900 stores across multiple countries including Russia. For Sharper Image the beginning of our relaunch is underway with a fresh new marketing campaign featuring actress Megan Fox.

We are preparing for an entire revamp of the brand in terms of product, packaging and image that we plan to unveil in early 2013. As anticipated, the two large declines in the past quarter were Royal Velvet, due to the short-term impact of the license transition and our men’s division.

Looking ahead, we see our men’s division beginning to stabilize. Iraq, where our core licensee is moving forward with the free standing store strategy and they are planning to open stores by the end of this year. Our Ed Hardy business in the US remains tough but we expect the fragrance business to remain strong as Elizabeth Arden recently acquired our licensees’ company.

We have also made improvements in the Ed Hardy international business by signing new agreements directly with operators in several countries including China, Brazil, Thailand and Japan and we are also in contract in the Middle East. In total, we have approximately 50 Ed Hardy stores internationally including 22 in China alone and with that I will now turn the call over to Neil Cole, our Chairman and Chief Executive Officer.

Neil Cole

Thank you Warren and Yehuda, good morning to everyone. We are pleased with our overall performance in the second quarter and are encouraged about the progress we are making in building our brands worldwide.

Our specialized business model remains strong and continues to prove its relevance across industries and geographies as we entered new categories such as entertainment and electronics and new markets such as India.

We continue to generate significant free cash flow which we plan to use to create additional shareholder value through additional acquisitions and additional share buybacks. And looking at the future, we see opportunities to organically grow the portfolio both domestically and internationally through our existing partners, new categories and importantly global expansion.

We believe our portfolio can achieve low single digit organic growth on a long-term basis and with acquisitions, we would expect to be able to achieve the type of growth we have seen in the past years.

In terms of acquisitions, we’re extremely well positioned to execute. Our strong balance sheet, predictable free cash flow and aggregate guaranteed minimum royalties of approximately $700 million only in the first terms of the agreements give us significant borrowing power. With total debt capacity of approximately of $1 billion, we have the ability to focus on medium and large size acquisitions.

We are currently evaluating a number of opportunities in both fashion and new industries that have strong iconic brands as well as numerous international properties. However, as always, we will remain disciplined and only execute on those acquisitions that we believe are in the best long-term interest of our shareholders and our company.

Moving forward to our guidance, we're reaffirming our 2012 revenue guidance of $340 million to $350 million, our 2012 non-GAAP diluted EPS guidance of a $1.65 to $1.74 and our 2012 free cash flow guidance of $174 million to $181 million. The completion of our India joint-venture with Reliance does not change our outlook as it was previously planned in our full year estimates.

In closing, we have built a unique brand management platform that today consists of 28 iconic brands that are sold across more than 40 different countries and generate approximately $12 billion in annual retail sales.

Once again, License Global Magazine has ranked Iconix as a number two licensor of consumer products in the world second to only Disney. With the portfolio of brands that has an average age over 50 years old our brands have proven their sustainability.

Our US business remains strong and stable and we hope to emulate that success around the world to our existing joint-venture partnerships in new territories. I would like to thank all of you for listening this morning and your continued support and now I will turn it over to question and answer.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Susan Anderson [Citi]. Please proceed.

Susan Anderson - Citi

I was wondering if you can give some color on the Rocawear brand in the quarter and if you have seen any impact from the new JV marketing?

Neil Cole

Yeah, actually our business has been pretty good in the last couple of months better than last year on lower inventories, and we really believe we stabilized it and starting to grow. We are excited about hopefully we are going to be opening up our first stores in the next 60 days. When I say first stores I mean [Roca apparel] the company Jay Z owns is opening up 10 stores this year and generally I have pretty good feeling that we have hit the bottom and we are back on our layout.

Susan Anderson - Citi

And then if you can may be just give a little bit more color on the performance by brand, I think you mentioned some of the stronger brands that may be if you could also comment on some of the brands underperformed and you now kind of the reasoning behind that?

Neil Cole

The underperformance are the kind of the ones that we spoke about in the last two calls, the big hit is the transition from Royal Velvet where we used to be [Bed, Bath & Beyond] and now we just recently relaunched at JCPenny, a significant impact in the quarter and over the next two quarters.

You know the overall men's business, the combination as you mentioned Rocawear softness and some Ed Hardy and a little softness and that going on footwear side. But basically what's encouraging to us is you know over 20 of our brands are moving in the right direction and you know really strong most of the DTRs are I think over I think close to 4% for the year so far, and we are feeling good about where we are going, going forward.

Operator

And our next question comes from the line of Robert Drbul [Barclays]. Please proceed.

Jessica Schoen - Barclays

Hi this is Jessica Schoen on for Bob I had a question regarding your businesses in the international regions. I was just wondering if you could give us any color on how things are going in those in the macro economic environment of those geographic regions.

Warren Clamen

Sure, I mean in terms of the macro environment as it relates to us, we are feeling pretty good. And our business was over 20% last year growing and third we've got to strengthen our JVs, but not just strengthen our JVs but sort of a cross geography. We have a number of DTRs globally now we've got a partnership from Material Girl, with [Auto] in Europe, H&M with Peanuts.

For example Suburbia in Mexico and Mossimo and the list goes on. So we are feeling pretty good, we are also looking from a macro perspective at new markets. We are looking to do better in Brazil and Russia; we are looking to open up in the Middle East and Southeast Asia. So we are pretty excited about it and of course there's China as well and in China today we've got about 400 stores for our seven brands that have launched in the region and we are expecting our plant to have about 500 or more by the end of this year.

Jessica Schoen - Barclays

And then on the initiatives you were talking about for the men’s wear businesses last time. You mentioned the TV commercial and the free-standing stores, would you say you are starting to see that impact in your business or do you think there's a general stabilization you know from other trends?

Neil Cole

I think just, once again it's just good product, general stabilization and we are starting to see an uptick, so I think it's going to be a slow rebuild, but we are pretty encouraged about the progress we've made.

Operator

And our next question comes from the line of Eric Beder [Brean Murray, Carret]. Please proceed.

Eric Beder - Brean Murray, Carret

Could you talk about how should we look about and what is embedded in your projections in terms of share counts going forward and I'm assuming that at these levels you are still aggressively buying back stock?

Yehuda Shmidman

We say that we are going to be very opportunistic in buying back stock at certain levels for sure. Again we bought back about $107 million to date. I think what you can assume is since there's a range that the fully diluted number for the full year will be somewhere between $71 million and $72 million.

Eric Beder - Brean Murray, Carret

Okay, and could you just kind of update on Royal Velvet at JCPenny, how that is shaping up? I know we are getting pretty close I think to the rollout. How is that looking?

Neil Cole

Looking very good. We’ve actually started the roll-out. We do believe we’re positioned at the core home brand at JCPenny. We’ve been featured regularly in the Penny's direct mail pieces, which look really, really great. It's absolutely, full lifestyle presentation. You are seeing multiple categories. We’re no longer just the towel. As we always believed, Royal Velvet is a lifestyle brand. And we also see new products rolling out towards the backend of this year and into spring of next year and beyond.

Eric Beder - Brean Murray, Carret

Are you going to have a shop in shop for that brand?

Neil Cole

We’re getting in our own area as far I don’t know if it can be called a full shop in shop, but it’s the key focus of their home area.

Eric Beder - Brean Murray, Carret

Okay. And in terms of some of the Wal-Mart brands, how is OP and Danskin doing there?

Neil Cole

OP, we had a really strong first six months of the year, ahead of last year. Although Wal-Mart is focusing it more as a spring summer lifestyle brand. So, back half we plan to be similar to last year off and Danskin and Starter are both pretty strong you know and pretty much equal to last year and selling a lot of the basics, you know hosiery and T-Shirts and all the key programs, so continue to keep our real estate.

Operator

And our next question comes from the line of Jim Chartier [Monness, Crespi, Hardt]. Please proceed.

Jim Chartier - Monness, Crespi, Hardt

Can you just give us a little more color on the SG&A growth in the quarter; it was up 9.5% versus down 3.5% in first quarter.

Warren Clamen

Yeah Jim, the expenses were (inaudible). The main driver of the expense increase was the mix of Peanuts revenue in Q2 versus Peanuts revenue in Q2 last year and Peanuts has margins. But again we’re forecasting that SG&A year-over-year, full-year will be down about $9 million to $10 million as we had planned. So you will see it reversed in Q3 and Q4.

Neil Cole

You know, over the last few months, when we saw the back half, where it was coming out, when we made our expense initiatives, most of them hit in Q3 and Q4.

Jim Chartier - Monness, Crespi, Hardt

And where are the SG&A reductions coming from?

Warren Clamen

Just general, the Peanuts integration that we took some expenses in Q3, Q4 last year obviously will repeat. We have some compensation decreases, general SG&A. We just went through a whole cost-cutting initiative that kicks in the second half of this year.

Jim Chartier - Monness, Crespi, Hardt

Were there any one-time expenses related to that cost-cutting initiative in the second quarter?

Warren Clamen

No.

Jim Chartier - Monness, Crespi, Hardt

Okay. And then can you just tell us how much did peanuts increase as a percentage of the mix this year versus last year?

Warren Clamen

We actually don’t give specific guidance on brands.

Jim Chartier - Monness, Crespi, Hardt

Okay, it just seems like a lot of SG&A increases related to (inaudible)

Warren Clamen

Right, it's one of the primary drivers. There is a couple of other smaller ones in it and that's here and there across the board, but that was the biggest one, it wasn’t the only one?

Neil Cole

And we’ve also kept marketing pretty strong. A lot of worldwide initiatives with Madonna and a few other which we think is important, which will level out throughout the year.

Jim Chartier - Monness, Crespi, Hardt

And then how is Royal Velvet going to be positioned relative to Martha Stewart at JCPenny?

Neil Cole

I think you know Royal Velvet is going to have hopefully the core business on the soft side of the towels and sheets and we also have furniture and I think more of the hopefully, the volume contemporary business. We have, quite honestly I have not seen Martha nor you know like no one it's actually coming, but we have if you going in the stores today, Royal Velvet really looks great. And it’s taking the big part of these type of brand called Chris Madden which has been converted and it’s really contemporary and looks fabulous.

Operator

And our next question comes from the line Diana Katz [Lazard Capital Markets]. Please proceed.

Diana Katz - Lazard Capital Markets

I wanted to talk about Mudd, as Kohl’s definitely continues to call out Mudd as its best performing junior's line. I was surprised to see they took some space away from Mudd and Candie's for a junior line with Vera Wang. Is that concerning in your eyes for the future performance of Mudd and Candie's there or do you view it as a positive for the overall floor?

Neil Cole

What we have seen and been told by the people at Kohl's is that it's really not a significant share and they think our business has continued to grow. So we are not really concerned about it and hopefully we want Kohl’s to be successful, so the more interest and excitement and we pretty much have a big majority of the junior business. So the better they do overall I think will be better for our business in both Candie's and Mudd.

Diana Katz - Lazard Capital Markets

Okay, great. And in the past few quarters you have highlighted, both Bongo and Charisma and London Fog as top performers, can you talk about some of the strengths within those brands and what you see in the back half?

Neil Cole

I see that continuing, with Bongo. You know Kmart is doing really a spectacular job with Bongo. And the business is almost double this year over 50% and Charisma pretty excited of what's at Cosco is also double-digit games and we are growing share there and London Fog we are pretty excited to come into our key period. We had a good second quarter in Hudson's Bay and other parts around the world. So you know all three brands continue to have good momentum and continue to do good in the back half which will help us a little bit offsetting the planning down at Men's and also the Royal Velvet transition.

Operator

Our next question comes from the line of Steve Marotta [CL King]. Please proceed

Steve Marotta - CL King

Talking about Europe, you signed three new license there. The OP, Danskin DTR, I missed the third. I would like to review that. Also can you talk a little bit about, is there a shift in the European business. I know that's been one of the softer spots for Iconix and can you talk about opportunities to continue to rollout branch there and how that JV is doing over all?

Neil Cole

Sure, sure and it is a shift. You are absolutely right. We are coming off of the string of sort of old licensees who are now really out of the picture and coming in to the picture are these new launches that we are really every excited about. You know as you mentioned the three DTRs we have in place today. The [Auto] Material Girl launch has launched.

You can see it on their website, it was featured on their home page during that first week and it was really pushed out there to also be in their catalog and might have a brick and mortar piece as well. What you got with Sports Direct, we are in store with OP and that is looking very good. And then with Danskin our retail partner has asked us not to mention their name yet as they want to mention it, kind of closer to the actual, but we are signed and we are sort of locked and loaded on product development, so it's very exciting. But beyond that, we do think there are more DTRs and we are still pursuing the large volume big-box retailers across Europe, whether it's Tesco, whether it's (inaudible), whether it's Asda and the like. So we think with Europe, this momentum is a good signal for the future.

Steve Marotta - CL King

Great and also Warren, can you quantify the impact of India on future earnings at all, I mean either later this year or next year, is it quantifiable, I know it's recently signed.

Warren Clamen

Yeah, I mean that business failed, so I think it would impact, the material impact is going to be in 2013.

Steve Marotta - CL King

Can you quantify it at all or?

Neil Cole

No, we are still working with Reliance to do the plan and I would even push it back a little even for more and say the real material impact is probably 2014-2015. India is going to be a slow build and it’s a developing nation as we all know and they are building a lot of malls and a lot of stores and we think it's going to be three to five years to really be substantial to our P&L. But we are excited about, Reliance has some incredible plans and great new partnerships and we do think it will be really great for our company over the next three to five years.

Steve Marotta - CL King

Lastly just a housekeeping issue, tax rate assumed for the year please?

Yehuda Shmidman

It's about 35.5 to 36, between that.

Operator

And our next question comes from the line of Ronald Bookbinder [The Benchmark Company]. Please proceed.

Ronald Bookbinder - The Benchmark Company

The expansion of the brands Material Girl and OP into Europe, how much did that contribute in Q2 because aren’t those licenses kind of front-end loaded for the first 18 months?

Neil Cole

No actually the opposite, I think those will contribute a lot in 2013. We, as Yehuda mention, we ended a lot of deals last year just to do these new deals and most of them in the minimums are usually over 18 months, first year is to get going. So we are going to see a lot of impact, Europe will be little closer than India but we are thinking ’13 through ’15 you are really going to see a nice build happening in Europe.

Ronald Bookbinder - The Benchmark Company

Okay and you mentioned Royal Velvet product extensions that you feel it could be a lifestyle brand, are you talking about expanding I don’t know sweat suits and stuffs like that or how do you see it progressing out of home goods.

Neil Cole

Actually JCPenny has extended into a lot of new categories like window treatments and furniture, but ironically we've opened up London Royal Velvet stores in China and they do have a whole line of apparel, mostly pajamas and robes and slippers which look really fabulous so we are studying that to look at what we could do in other parts of the world but basically when we talked about expansion we were talking outside of the core towels and sheets into more furniture and window treatments and other things that would be in the JCPenny home area.

Ronald Bookbinder - The Benchmark Company

And on Rocawear, you mentioned 10 stores this year, is that in 2012 or is that over the next 12 months?

Neil Cole

2012.

Operator

And we have no further questions at this time.

Neil Cole

Okay, well, thank you everybody for listening this morning and your interest. As always our team will be available for most of the day for questions and answers and discussions but we will talk to you soon, thanks again.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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