Neil Cole - President & Chief Executive Officer
Warren Clamen - Executive Vice President and Chief Financial Officer
Yehuda Shmidman - Chief Operating Officer
Iconix Brand Group, Inc. (ICON) Goldman Sachs 2012 Global Retailing Conference September 6, 2012 10:45 AM ET
All right. We're going to continue here at Goldman Sachs Retail Conference. I'm (Inaudible). I'll be covering the consumer small and mid-cap stocks at Goldman, and we're pleased to have Iconix with us at the conference today. We have, Neil Cole, CEO, with us, Yehuda Shmidman, COO; and also, Warren Clamen, CFO; and Jaime Sheinheit here with IR in the front row.
With that, I'm going to turn it over to Neil, and we're going to go through some of the presentation. After that, we'll breakout into Q&A.
Thank you. Good morning, everybody. I'm going to do, hopefully, a 10 to 15-minute just quick overview slide presentation, and then hopefully we have plenty of time for question and answers. On the cover you see here a lot of our brands and our latest campaigns with those brands.
For those of you that don't know us, we have a business model that's certainly unique. We believe it's a business model specialization, which one needs nowadays in this very competitive market.
On the left side is a tradition operating company that handles all aspects of marketing, licensing trend. We also have to do sales, sourcing, retail. Iconix is a very unique business model. In that, we handle the fun side of the business, which I call the fun part, the marketing, advertising, licensing and business development and we leave, what I call the heavy lifting, to our retail partners and we believe, as I tell you more, that we have the best-in-class in the world as far as operating retail partners.
What this business model does for us? It gives us transparency in earnings. As far as today, we have $700 million guaranteed royalties over the initial term of our agreements without renewals, which we've shown a pretty high record of renewal. The company has no operational risk or inventory risk, we've generated a very strong cash flow and we have minimal working and CapEx needs.
Diversification has been an important part of our strategy over the last few years. We look at diversification in three ways. Ones in the middle, you see a pyramid of all different types of retailers. Our brands are placed throughout the supply chain, we have a lot more business in the value chain, which is where more business is actually done, in the Walmart, Kmart, Target arena. We have pretty strong brands in the mid-tier, our Kohl's and other various partners in there and a big group of our brands are in the better area, our Macy's, Dillard's, Nordstroms and a few in the high end in the luxury side, but we are pretty diversified in who we do deals with and where our brands are distributed.
Also, very important to specify in that we are not just in "fashion business.". Even under the fashion headline a lot of those businesses are basics. We sell a whole lot of socks and a whole lot of white T-shirts and lot of towels. We also have a nice home business with five brands and our character business that's driven by the Snoopy is also an important, and we believe we will continue to diversify all three of these areas are an important part of our portfolio strategy.
A big impetus of our growth over the last few years is what we call our DTR model. DTR is direct-to-retail, and here we have made agreements directly with Walmart has three agreements, directly with Target has two agreements, Kohl's, and vice versa throughout this list of the best retailers in America, and hopefully soon around the world. What this relationship does? It gives the retailer a brand that people know that's very strong and kind of cutting out the middleman, who is usually charging 40% to 50% for these brands. Most of our partners have sourcing setups around the world, so now they have a powerful national brand without having to buy from someone in the middle with higher prices.
It also is so important in this new world of transparency of price, where consumers are shopping, whether it be with the iPhones or the iPads, et cetera, and looking, popping in the price and seeing where it's cheaper in the mall. Here, when we have exclusive branding, the retailer gets to control price, gets to control the markdown cadence and doesn't have to worry about where the price of that product is so we believe that this model continues to flourish.
Today, I believe, we have over 60 direct-to-retail deals around the world and growing. Roughly somewhere around $5.5 billion to $6 billion of our business is done through this type of relationship as it continues to grow. Iconix's big value-add is the marketing side. We have an ad agency that we are very proud of. That does a lot of great advertising and marketing for the retailers, where the retailer is focused on things like save money with better bull's eyes. We're focused on the individual brands in the stores to make them exciting and make people drive to the box.
Over the last seven years, this has been our track record, over 52% CAGR growth on both, revenue and income. One chart that's not here is cash flow which is even a lot more impressive. This year, we will generate close to $180 million of free cash flow, because we have some wonderful tax benefits the way we buy trademarks and assets and we see our business, although this year we are not projected to grow, we do see nice growth in the future and I'll take you through where we see growth coming from. The growth is going to, obviously, come from two areas. One is acquisition and one is through our organic business.
Today, acquisition has been a huge driver of the business. In the next chart you'll see, we bought over 25 different powerful intellectual property brands around the world that do over $12 billion retail sales and we see acquisition when I take you through the strength of our balance sheet, and we see acquisition continue to be an important driver of our top line and earnings going forward. Also very important, organic; organic is important that we take our brands and continue to grow them. We'll talk about growth that’s happening throughout America, but we're also excited about growth around the world. We own great, powerful intellectual property that we are now monetizing through our joint ventures throughout China, India, South America and Europe, and we are energized by growth opportunities that will happen from our organic portfolio.
First jumping a little into the acquisition side, our balance sheet today is pretty strong. Our debt-to-EBITDA today is at its lowest point ever. Company last year made EBITDA of roughly $230 million, and our net debt is roughly around $450 million?
Little bit higher.
A little bit higher? Okay. Under $500 million, so our debt-to-EBITDA is low. We have an incredibly strong balance sheet. By end of this year, 98% of our brands are unencumbered, so we truly believe, we have the ability to borrow over $1 billion for future acquisitions that will continue to drive, hopefully, the type of growth that we've been accustomed to in the last seven years.
Our acquisitions, as most of you know or some of you know in this room, are all accretive because we usually buy assets, we get royalty and we have a very scalable business platform. We will not spec on acquisitions. It has to have a strong royalty flow, or we will not buy the brands and we will continue to be very acquisitive over the next couple of years as we continue to build out our business.
Here is a quick track record of our acquisitions over the last seven years and you see we've spent approximately $1.5 billion buying these powerful iconic brands. I'm very proud that we've already recouped [$1.3 billion] in revenue, and by the end of the year we'll be have recouped close to the $1.5 billion on the revenue side, about $800 million on the EBITDA side, so we are showing that these brands have stood the test of time even through our acquisitions and still performing, where this year we’re projecting roughly $350 million of revenue. This is against these businesses that we spent $1.5 billion, and we've already recouped all almost all of the $1.5 billion, or will have done so by the end of the year.
I think it also goes back, when we've been buying brands, we’ve been talking about our metrics of roughly five times royalty. This shows that we're still on track and we are doing better than that, because we are going to bring in $350 million and we spent $1.5 billion in purchasing these brands.
On the organic side, our business has been pretty solid throughout this year. A couple of new initiatives in the back half that are going to help drive it, we have a beauty launch at Kohl's, which is going to help continue to drive the Candie's business going forward. We have growth in our Madonna businesses, the strength of Material Girl at Macy's, and we launched our second brand called Truth or Dare, and Madonna is on a worldwide tour of 80 cities, tonight in the Yankee Stadium, in our city and big excitement of the performance of Truth or Dare both, footwear with Aldo, Aldo's first venture into the wholesale side of the business and also, Coty's performance worldwide.
Big entry to us in bringing businesses around the world, Madonna's a calling card in everywhere we go, South America, et cetera, and we’re starting to expand this business, recent deals in Australia with Mayer, and we also have a deal with Otto, the largest Internet company in Europe, for Material Girl, so we're pretty excited about the growth of the MG Icon portfolio.
Recent acquisition was Sharper Image. We're in the process of remarketing and branding, which we'll be launching at CES for 2013. A solid business; we've also announced our new spokesperson, Megan Fox, to help promote electronics, because she's so electronically profound or we think guys will look at her to think she is electronically profound.
Peanuts has been a great growth story for our company, solid, distributed in over 40 countries, powerful in Japan and China. In America, we're working on new technologies to educate the next generation, who is Peanuts or who is Snoopy. All of the people my age and a little younger know it from the specials are still powerful in this country and lucky to partner with MetLife and Hallmark and ABC, a wonderful group of licensees, but this business continues to get stronger, and we have all sorts of new digital strategies, including last year we won App of the Year, we had a nook of the year, all sorts of new technologies to educate the next generation and we are also working on some exciting new media opportunities with Peanuts, which we hope to announce in the near-future.
One thing we've been very vocal about is our men's businesses in our portfolio have been a little difficult over the last 12 months. We believe that we have solidified the bottoms and are starting to see progress in making this business go back up.
In working with Jay-Z on Rocawear, we have a new commercial which has been well-received, and our business is up this year and we see essentially our business is up, our sales are up across the board, although inventories were planned down but we are seeing Rocawear starting to take a good foothold and starting to head back in the right direction.
Also, the licensee company that Jay owns is opening up 10 Rocawear stores in the back half of the year, including at the Barclays Arena, where Jay is going to be opening in a few weeks. We have a good group of strong licensees at Rocawear, and we are excited about the turnaround there.
Ecko continues to perform well. Marc Ecko brand is gaining market share there. Ed Hardy, we are attacking a few different ways. We just transitioned the fragrance business to Elizabeth Arden, a pretty powerful worldwide fragrance business, and we also have over 50 international stores with Ed Hardy over, I believe, there's 30 stores in China, or else there will be in the next 60 days, also strong businesses in India and other parts of the world that's growing. As I mentioned, a really important part of our growth story on the organic side is international.
We decided a few years ago it was best to have partners. We did not believe we had "boots on the ground," or the right ability of access to retail like we do in America, so we believe we've gotten the best partners in the regions to work with us, and Iconix has five different partners around the world that are starting to get foothold and we believe will be an important part of our growth strategy and profit strategy going forward.
Last year we brought in, I believe, was $87 million out of our $370 million came from outside the world, roughly 22%. Our belief over the next two to three years it will be at least a third. Hopefully, as we grow top line well over $400 million, we will be able to take our international business to $130 million, $140 million, growing $50 million of market share in royalty over the next couple of years.
Our recent accomplishments is, we made our joint venture with Reliance, largest private company, strong retailer in India, which we started to do a couple of new deals. We're excited about, and we've also announced starting to get a foothold in Europe with three new deals over the last couple of months. Also, we see big opportunity with our relationship with Walmart, taking our three Walmart brands around the world, starting to gain traction in lot of South American Walmart businesses. And also Peanuts is a calling card for us, and I mentioned our MG Icon is also helping us worldwide.
A belief that we believe in our company and our security, that the board and management has been very aggressive in purchasing back our stock. We bought back over 10% of the outstanding shares over the last seven months. We will continue to be opportunistic and we have left about $93 million under this buyback before we announce a new one, but we will continue to be very active in buying shares back at the right prices.
That's a real quick overview of our company. It leaves us plenty of time for question and answer, and why don't we go from there?
Great. Thank you. I'll start with the three standard questions that we are asking all the companies here at the conference throughout these two days. The first being, we're about, call it, little bit more than half way through the year. What's your view as you kind of look out throughout the rest of 2012 and into 2013? Preliminarily, how are you thinking about the environment vis-à-vis the first of the year, better, worse, or about the same?
The way I look at the environment, and once again, this is personal, and also tracking our sales. We're looking up to do business with everyone, from Saks and Neiman through all areas of the chains we get to see. On Monday morning, we get to see sales. Since over the last three years, it’s a long slow recovery, and it just continues to get better. It's not getting better rapidly, but it is getting better and we see it continuing.
I'm not saying across our board all 1,000 licensees are doing better, but the stores that are performing well are doing well and there are few outliers who have lost share, but I see the back half continuing to pick up, but nothing dramatic as pretty much we've seen over the last year or two.
Okay. Great. The next question would be just capital allocation prioritization, buybacks, debt reduction, dividends, investments in the business, et cetera. How do you prioritize cash use?
I think, I just kind of spoke to it. We're going to be very active in acquisitions and we built our business in acquiring 28 brands or 25 brands that we've acquired, and we will continue to be active and hopefully acquire another 25 brands which will be very expensive, because we are going to buy great iconic brands.
That being said, because we do have strong free cash flow and we have a balance sheet that we can lever and is not levered at the moment, we also believe that our stock is very attractive and we'll continue to be opportunistic on the stock buyback along with being very aggressive in buying great iconic brands.
Excellent. Then the final question would be just consequences around the consumer in relation to the upcoming election in a couple of months, and also, pending fiscal cliff as well. Any ways, if at all, you’re changing in a way that you’re looking at your business?
No. We're not changing. As I mentioned, long slow recovery, just battling, making our brands better, working with our retailers. I think the less uncertainty, the better, and there will be more certainty on December 1st on the direction of this country, so I think after the election, hopefully, things will continue to progress but we don’t see anything dramatic either way, either party either way.
We have a personal opinion who I think would be better, but that's irrelevant, and I think irrelevant to Iconix's business, so it’s business as usual for us and whatever the American people decide will not be dramatic. I still think we have a lot. It's a long, slow recovery and if you give them great brands, at great values and great prices, we will continue to win.
Great. At this point, we'll open it up to the audience for Q&A. If you have a question, please raise your hand. There is a microphone circulating throughout the room.
In the meantime, I'll start with the first question. Just kind of like philosophically your business is very kind of capital-unintensive, high returns, high margins. A lot of more vertical players out there try to become, there seems to be a trend of becoming more and more vertical, so the brand is like your most valuable asset, and a lot of people like to have greater control nowadays. Talk us through how you kind of balance that with your retailers with the operators of your brands.
I think that this model, the reason for our success over the last five, seven years is going back to the specialization retailer. There's so many things you could be very good at. You can’t be a great sourcer, a great retailer, a great wholesaler, great marketer and do it within multi-brands. I think we're pretty focused on what we do well. We have great partners who are focused on what they do well, and I think if you try to be vertical in all aspects of it, it's very difficult.
I think the retailer wants to focus on their brand, whether it'd be Walmart, Target, Kohl's, Penney's, et cetera, and we bring great value to the table making all brands within their boxes exciting, new and great profitable with high margins.
Great. M&A is, obviously, a big part of the story here and you mentioned that there is a very strong vetting process when you look at potential targets. Can you walk us through kind of what kind of criteria you’re looking for? How you think about M&A when you actually look at targets?
A good question. We look for brands that are "iconic", and we do a lot of research in understanding the reach and the knowledge and what makes them a brand, and not a "label." We have certain financial matrices that we are pretty disciplined, that we try to buy at a certain percent of how much royalty there is. We're not going to spec on the brand, we're going to have solidified the royalty flow before we purchase the brand, and we also look really closely what we bring to the table. How are we going to be different than the past company, which usually is not doing a great job, which is why it’s for sale or usually there is "issues", so we look at what we bring to the table, and how we’re going to make the brand exciting, relevant, and most important, where we see future monetization to drive future revenue.
Then, along the lines of M&A, can you just walk us through your kind of long-term operating model, kind of top line, kind of how you see over the next three to five years sales growing, earnings growing, and how much of that is really dependent on M&A versus organic growth?
These are tough questions. I think the best, when I interview somebody or look at a company or look at people, I look at where they’ve been. I think looking at where we are going is the best place to look at where we've been. We think the model is incredibly more relevant than it ever was. We see the ability to continue to grow both, through acquisition and organic. We have not issued future numbers that you're asking for, but we see, traditionally over the last seven years, we’ve grown organic in the single-digits, and we've been very acquisitive, so without giving you specifics, I think I danced around the question nicely.
Great. Thank you. Internationally, so talk us through kind of the growth strategy there, and also if you can talk about kind of key regions? How those are trending as well.
Yehuda, why don’t you take this?
I think, amplifying on what Neil said in the presentation, we have a multi-product strategy, international, we have a combination of number one our joint venture partner. I think we have four joint ventures.
On the joint venture side, we currently have four joint ventures, One in India with a company called Reliance. Number two, in Europe with TLC. Number three, in China with Silas Chou and family, and number four, with the [Power Group], and really in all four, we've seen momentum, even recently in Europe, where that had been sort of off to a slow start. Today, we have now three DTRs in place that we are excited about that are just beginning to ramp up.
China's been very exciting. We have seven brands fully launched there with several hundred stores, fully active with many more hundred stores on the way. In India, brand new partnership, but as Neil pointed out in the presentation, I don’t think we could have a better partner than Reliance, the largest private company in India, extremely connected, smart people. We now have fully functional office opened in Mumbai, and Latin America as well where we've had a successful run. We see growth ahead, so that's one prong of the International strategy.
The other prong is our Peanuts business, which Neil spoke about, is just incredibly well-placed around the world, but yet still especially with new initiatives that we have in the pipeline, whether they are digital media or otherwise, we see growth there. Then just our general overall retail strategy, partnering with big box retailers, we've seen that business as well in the other regions start to take fruit and we see growth there ahead.
Great. I'll give Warren a chance to chime in here on the financial side, so you talked about your balance sheet historically. We saw the slide, debt-to-EBITDA now at about 1.8, some capacity to take on more debt.
Just help us think about how you think about capital structure and what do you think kind of an optimal or an ideal kind of a debt-to-EBITDA ratio could be down the road?
Yes. Sure. I do think we're different than a traditional operating company and people have to keep that in mind. Neil had mentioned it at the beginning of the presentation that we have $700 million of minimum guarantees as of the beginning of this year, excluding contract renewals from great credit. A lot of that $700 million comes from DTRs, investment grade companies, retailers, so I do think we have a little bit more comfort to lever up.
I certainly agree with Neil that we are under levered now at 1.8 times. We've been around four or above four. We haven't specifically said what our sort of ceiling is, but we've been comfortable at those levels, so we definitely have the capacity to lever up and execute against the acquisitions that Neil was talking about.
Great. Again, if you have a question, feel free to raise your hand and I’ll get you miked-up. The next question would be just around, you obviously have a very branded portfolio. It seems like content brands, or long-term winners. You hear Walmart talking about brands, national brands outperforming, as well as other retailers. Just talk us through kind of the historic nature from what you've seen of your market share versus private label. How you see that evolving down the road?
Well, we continue to take. What Iconix does is somewhat of a hybrid between the private label and a national brand, because we give the retailer a national brand at private label economic, so I believe I just heard Kevin speak down below, and also Walmart, and people want brands and much rather buy something that they know and true and test it, and they'd much rather drink Coca-Cola than necessarily the RC Cola, or the made up cola, so we see it continuing to grow, because if you walk into some of these retailers, these big boxes, they have seas of what we call names, and their goal is to create as much brand recognition.
I believe since a lot of them have built up these wonderful vertical sourcing structures, a lot more of them are going to come from the Iconix model that we've built over the last few years, but we see this "branded" private label continuing to grow, DTR an important part of our future and retail in America, and also around the world.
Then another question I have is, one of the first questions that I asked you was the environment. It sounded like you're a little bit more optimistic than some other companies as far as the next 12-month period goes. You have commitments at hand, you're de-levering your balance sheet, you’ve got a very diversified portfolio. What are you paranoid about? What keeps you up at night? What can go wrong? Internally, if you kind of exclude the environment for a second?
As far as up at night, I got this dog, and these dogs, they won’t shut up. Being serious, where I'm personally driven and focused is acquisition and getting deals done, because we like to take that top line and double it over the next few years.
Although organic is nice, what’s going to move the needle of this company is deploying this – our balance sheet and buying other great iconic brands, so, we're working on a lot of really exciting deals, so getting a couple of them done in the next few months is my focus and what I think about late at night.
Just standard M&A, what's your view on valuations right now? Do you feel like deals are lucrative? Do you feel like things are expensive?
Yes. I don't really opine on that, because I think each one is one person on the other side and when you get into auctions with private equity, sometimes it gets expensive, but Iconix has been unique in buying these great brands that we figure out how to monetize uniquely than the company that's usually doing them today, so we’ve managed to find our space without overpaying or dealing in too much of a competition.
Great. If there are no other questions, we're going to leave it at that. I want to thank the Iconix team for their time today. Thank you very much.
No other questions out there?
I think we have a question here in the middle.
We have a few brands in, not necessary the men's, I won't call it the men's business, but for lack of better term people call it the urban business, and the urban business had this incredible run over the last 10 years, where it went from nothing to a huge part of the business. It's somewhat corrected over the last couple years, and it’s gone the other way.
Luckily for us, we own two of the strongest in Rocawear and Ecko, so we do believe we have a long-term place and we've adjusted to it, but some of the frenzy that was happening in the urban space has definitely gone the other way and stores have downplayed their force on some of these brands.
Well, thank you all. Any other questions? All right. Thank you. Appreciate it.