Iconix Brand Group, Inc. (NASDAQ:ICON) Q3 2018 Earnings Conference Call November 9, 2018 10:00 AM ET
Cristina Cosentino - Director of Financial Reporting
Bob Galvin - President and CEO
Jeffrey Wood - CFO
Good day, ladies and gentlemen, and welcome to the Iconix Brand Group Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. In today's conference call we will not be conducting a Q&A session. [Operator Instructions] As a reminder, this call will be recorded.
I would now like to introduce your host for today's conference, Cristina Cosentino, Senior Director of Financial Reporting. You may begin.
Good morning and welcome to the Iconix Brand Group's third quarter 2018 earnings conference call. On today's call, we have with us, Bob Galvin, our President and Chief Executive Officer and Jeff Wood, our Interim Chief Financial Officer. During today's call, we will be making some forward-looking statements within the meaning of the Federal Securities laws. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors all of which are difficult or impossible to predict and many of which are beyond the control of the company. This may cause actual results performance or achievements of the company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements.
The words believe, anticipate, expect, confident and similar expressions identify as forward-looking statement. Listeners are cautioned to not to place undue reliance on these forward-looking statements which speak only as of the date statement was made.
I would now like to turn the call over to Bob Galvin.
Good morning. I'm Bob Galvin Iconix’s new Chief Executive Officer, having joined Iconix less than 30 days ago. I'm very excited to be here at this point in the company's lifecycle. One of our competitors began this industry in the 90s and we became the industry leader in the 2000s. It is now time for Iconix to adapt to the changes that have taken place in the market in retail space. I believe that we have opportunities both domestically and internationally with our 29 brands that have yet to be maximized.
I have begun the process of meeting with our licensing and retail partners and prospective licensees. To-date over 50 meetings have occurred or are scheduled to occur over the next few weeks. Later in November, will be my first trip abroad to visit our largest market in Europe.
My experience in managing global brands is diverse, having been responsible for brand and territory licenses for such brands as Nine West, Fila, Elie Tahari, Jessica Simpson and Vince Komodo in Europe, Asia, South and Latin America, as well as the U.S. I have determined that successful partnerships at their foundation have strong relationships in a business model that benefits all parties. If either of us or our retail channel partner are not successful none of us will be.
Product and marketing support are critical factors in reaching mutual goals and building a strong brand that will endure time. Each brand needs to function with one global not local voice, with effective marketing initiatives amplifying that voice.
As a company, we need to continue to align ourselves with the partners, who can produce the best product with the best value for our retail partners and consumers. We need to take advantage of a global supply chain, and network to strengthen our brands and product offerings. One of the pleasant surprises I have had encountered has been the international partner network currently in place that we need to build upon. Our best product offerings should not be limited to just one market or one territory, but should be available to each market to reduce cost for everyone and improve sales for the brands.
There needs to be more global brand collaboration. While we have had challenges jumpstarting some of the brands that were previously in the DTR business model, I am here to develop options and alternatives to successfully return these brands in a meaningful way to their loyal consumers. The brands have tremendous consumer awareness and followers, and they now need to be more accessible to those customers. They currently have more mindshare than closet share.
As I noted, I am currently meeting with our existing and prospective partners in order to develop and flesh out a sustainable go forward strategy for Iconix, which I will speak to on our year-end earnings call. We are also in the process of further critically evaluating our cost structure to ensure it is aligned with our current level of business and near-term plans. We will look to take advantage of synergies between our international and domestic businesses, so that we are not duplicating efforts.
We will be looking to fill in category holes with the appropriate partners for our brands. We will continue to evaluate the best channels for each of our brands. While the challenges are many I am optimistic about the future for Iconix.
Now Jeff will cover the financial overview for the third quarter.
Thank you, Bob. Let's start with revenue in the Women’s segment. As expected, revenue in the Women’s segment was down 28% and 37% for the three and nine months ended September 30th. As previously discussed, the decline was principally the result of the transition of our Danskin, OP and Mossimo DTR's.
In the Men’s segment, revenue was down 36% for the quarter and 12% year-to-date. The quarter revenue was mainly impacted by the Buffalo brand and the transition of Starter from Walmart to Amazon. This is partially offset by the success coming from our multiyear Umbro distribution agreement with Target. Since its launch in February of this year, performance has been strong.
The Home segment was down 6% year-over-year for the quarter and down 9% year-to-date. As we have mentioned previously, the growth of our Home business has been negatively impacted by the terms of the renewal of the Waverly Inspirations contract of Walmart. Helping to offset some of impact of this change, we have signed a direct retail license with Christmas Tree Shops, with delivery scheduled for early 2019.
Our International division continues to be a strong contributor to our business. In Q3 our International business grew 26% over last year, and is up 13% year-to-date. The International business is driven by six key brands, anchored by Umbro and Lee Cooper, who have perform very well especially in Europe, India and China.
During the third quarter we purchased an additional 5% of our Iconix Australia JV for approximately $700,000. This transaction resulted in the company's ability to consolidate Australia's operations starting July 1st. This also resulted in a non-cash gain of approximately $8.4 million in the quarter. Excluding currency translation fluctuations, we expect the international business to continue to perform very well in the fourth quarter.
Our SG&A expense in the third quarter was $30.2 million, a 40% increase compared to $21.5 million in the third quarter of 2017. However, the third quarter 2018, includes an $8.2 million bad debt expense associated with the Sears Holding's bankruptcy filing in October. Including this charge, SG&A -- excluding this charge, SG&A expense was up only 2% in the quarter compared to 2017.
As a result of a trigger event occurred in the third quarter, the company performed an impairment analysis of our three brands with Sears Holding; Joe Boxer, Cannon and Bongo. This analysis resulted in an impairment charge of approximately $4.4 million on our Joe Boxer Brand; there was no impairment on our Cannon or Bongo brands. As part of our annual impairment test process all Iconix brands will be tested for impairment in the fourth quarter.
Our 2018 and 2017 income statements for the quarter and nine months include a number of onetime items, including costs associated with terminating licensees, litigation settlements, impairment charges, gains on sale of trademarks and non-cash gain on investment joint venture. Our earnings release today has details and reconciliations related to all such items.
Turning to the balance sheet, we had $87.6 million on cash on hand at the end of the quarter, $52 million of which was in the U.S. and unrestricted. It should be noted that during the second quarter of this year due impart to the new U.S. tax regulations, we elected to treat of foreign operations as branches of the U.S. As a result we will be able to utilize foreign cash in the U.S. with minimal tax cost. Our face value debt balances have declined approximately $40 million from $827 million at the end of 2017 to $778 million at the end of the third quarter.
Of the $778 million outstanding, $476 million relates of our securitization facility, which has a weighted average interest rate of approximately 4.6% and includes an anticipated repayment date of January 2020. Our 5.75% convertible notes represents approximately $111 million of the balance as compared to $125 million as inception in Q1. These notes unless otherwise converted will mature in January 2023.
Finally, our senior secured term loan, which is approximately $190 million of the total bears interest at LIBOR plus 7% and matures in 2023.
Shareholders approved a reverse stock split on September 27. We have initiated the process to implement the split. We are currently in compliance with the financial covenants related to our indebtedness and our current three year projections show us to be in compliance through 2021. Due to a decrease in our debt service coverage ratio within the securitization facility, in the second quarter we had a 25% residual royalty collections that were restricted, and that percentage went to 50% for the third quarter reporting period.
Through nine months of 2018, the company generated $38 million of free cash flow and we now expect to generate between $40 million and $50 million of free cash flow for the full year. Free cash is driven by many factors including working capital changes. A reconciliation of cash provided by operating activities is included in our earnings release.
As detailed in our earnings press release earlier today, we have revised our previous GAAP 2018 net income guidance, primarily due to the trademark impairments as well as the Sears bankruptcy. We are currently anticipating full year revenue to be between $185 million and $195 million and non-GAAP net income to be between $5 million and $15 million. This includes the bad debt charge related to the Sears bankruptcy taken in Q3.
I will now turn the call over to Bob for closing remarks.
Thank you, Jeff. We have a lot of work in front of us, but I believe we are a team up to the task. The goal is to finalize our review of business and operational goals and objectives and immediately begin to implement the strategy. As I mentioned, we plan to provide an update during the fourth quarter earnings release. As a company we know we can do better and we are committed to improving our performance for our shareholders, partners and our employees. We’d like to thank you for your interest in Iconix.
Thank you. Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.
End of Q&A