U.S. Markets closed

Edited Transcript of ICON earnings conference call or presentation 8-Aug-19 9:00pm GMT

Q2 2019 Iconix Brand Group Inc Earnings Call

NEW YORK Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Iconix Brand Group Inc earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cristina Cosentino

Iconix Brand Group, Inc. - Senior Director of Financial Reporting

* John T. McClain

Iconix Brand Group, Inc. - Executive VP & CFO

* Robert C. Galvin

Iconix Brand Group, Inc. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Eric Martin Beder

Small Cap Consumer Research, LLC - CEO & Consumer Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to Iconix Brand Group Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Cristina Cosentino. You may begin.

--------------------------------------------------------------------------------

Cristina Cosentino, Iconix Brand Group, Inc. - Senior Director of Financial Reporting [2]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the Iconix Brand Group's second quarter 2019 earnings conference call. On today's call, we have with us Bob Galvin, our President and Chief Executive Officer; and John McClain, our Chief Financial Officer.

During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company. This may cause actual results, performance or achievements of the company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident and similar expressions identify as forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

I would now like to turn the call over to Bob Galvin.

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Cristina. Good afternoon, everyone. It's been around 12 weeks since we last reported results to you, and we continue to deliver on our plan. We are pleased to report that our second quarter results are in line with our expectations and guidance. Our cost savings that we put in place at the end of 2018 continue to pay dividends and remain focused on the business. We reduced expenses by approximately $12 million or 43% in the second quarter when compared to last year and $28 million or 45% through the first 6 months. John will provide details later in the call.

While second quarter revenue for 2019 was down when compared with the second quarter of 2018, as expected, more than half of that decline was due to the loss of the DTRs for Mossimo, Danskin and Royal Velvet and the impact of the Sears bankruptcy on Joe Boxer, Cannon and Bongo.

On the positive front, we have recently signed contracts with the new Sears for Joe Boxer and Cannon. And while these new agreements are at lower GMR levels than the prior agreements, these new contracts will favorably impact results in the back half of the year. These new agreements are nonexclusive and give us the opportunity to expand distribution, which has already begun in Cannon.

During the quarter, we also finalized significant new agreements for Rampage women's footwear in the U.S. and major renewals for Lee Cooper in the U.K. and Ireland, for Umbro in several Eastern European countries, for Mudd in the U.S. and for London Fog footwear in the U.S. We have also added to the FILA Korea brand roster with the addition of Zoo York for apparel and footwear product categories.

Overall, we have signed a total of 111 new or renewed license agreements in fiscal 2019, which total aggregate GMRs of approximately $79 million. We were slightly up year-over-year in our international business when excluding the nearly $600,000 of business we saw last year related to the World Cup.

We're also pleased that we have resolved several of the outstanding lawsuits during the first half of 2019 that have plagued Iconix for a number of years.

I will now turn the call over to John.

--------------------------------------------------------------------------------

John T. McClain, Iconix Brand Group, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Bob. On a total company basis, first quarter revenue was down 31%, principally as a result of the previously announced transition of our Danskin and Mossimo DTRs in our women's segment, Royal Velvet in our home segment and the impact of the Sears bankruptcy on our Joe Boxer, Cannon and Bongo brands. Additionally, in the quarter, our Buffalo brand had lower sales than last year.

Our operating income was $18.5 million this quarter versus an operating loss of $95 million last year as the prior year quarter included a few onetime items, with impairment charges related to the Mossimo brands. The earnings release we filed today has details and reconciliations related to such items.

Total company adjusted EBITDA decreased 17% for the quarter, while our adjusted EBITDA margin improved to 59% from 49% as our expense decrease outpaced our revenue decline.

On a segment basis, as expected, revenue in the women's segment was down 52% for the 3 months. As previously discussed, the decline was principally the result of the transition of our Danskin and Mossimo DTRs and the impact of the Sears bankruptcy on Joe Boxer and Bongo.

In the men's segment, revenue was down 37% for the quarter. The decline was principally due to lower sales in Buffalo, PONY and Umbro.

The home segment was down 38% for the quarter, which is principally the impact of the Sears bankruptcy in our Cannon brand and the transition of our Royal Velvet DTR. In the international segment, revenue was down 3%, with the decline being the absence of the World Cup business that we had in 2018 and softness in China.

Our SG&A expense in the second quarter was $16.4 million, a 43% decrease compared with $28.6 million in the second quarter of 2018. The expense reduction plan that we began in the fourth quarter 2018 has continued to yield expense savings in all major categories with the most significant reductions in personnel-related costs, professional fees and advertising.

Additionally, we collected some accounts receivable, which have been previously written off, totaling almost $1.3 million, which also had the effect of lowering SG&A. The expense savings and the collection of the bad debt drove the improvement in EBITDA margin for the quarter, which I mentioned went to 59% from 49% last year.

Bob had mentioned that we signed 111 agreements this year for $79 million in GMRs. I wanted to add that the 111 represents an 18% increase in the number of deals signed versus last year, and the $79 million represents a 29% increase in the dollar amount of GMRs compared to last year. The number of renewals we have signed this year is flat year-over-year, while the number of new deals increased 38% as we have been focused on finding those new opportunities.

Now turning to the balance sheet. We had $67.1 million of cash on hand at the end of the quarter with $43.5 million of which was in wholly owned subsidiaries and is unrestricted. Our face-value debt balances declined approximately $17 million over the quarter from $752 million at the end of the first quarter to $735 million at the end of this quarter. With the $735 million outstanding, our 5.75% convertible notes represent approximately $95 million of the balance as compared with $106 million at prior quarter end. These notes, unless otherwise converted, will mature in August 2023.

Our senior secured term loan, which is approximately $187 million, bears interest at LIBOR plus 7% and matures on August 2022. The balance of $453 million relates to our securitization facility, which has a weighted average interest rate of approximately 4.7% at quarter end. This facility has a legal maturity date of 2043 and an anticipated repayment date of January 2020. As we discussed during our prior calls, if the debt is not refinanced by 2020, then the interest rate goes up, and the additional interest, which is on top of current interest isn't payable until 2043 and is not compounded.

We are currently in compliance with the total leverage ratio and asset coverage ratio financial covenants under our credit agreement as well as our interest-only debt service coverage ratio under our securitization facility.

Additionally, our current 3-year projection shows to be in compliance through 2021. Due to a decrease in our debt service coverage ratio within the securitization facility, we are now in rapid amortization status. In rapid amortization status, Iconix will continue to receive its management fee, and all collections in excess of our management fees and certain other fees will go directly towards debt service.

As a reminder on the securitization, this facility is secured by certain brands. Generally, the collections from the licensing of these brands is received into the facility. These collections go to pay our management fee, followed by interest and then principal. Under normal operations, if there's any residual, it comes back to Iconix. When we're in a rapid amortization status, the residual would immediately be used to pay down principal. Iconix will continue to receive its management fee from the securitization, and we do not believe the loss of our residual, if any, will have a significant impact on our operations.

And finally, as we look to guidance for the remainder of 2019, we remain on plan. For adjusted EBITDA, we have raised the lower end of our range and now anticipate adjusted EBITDA to be between $74 million and $78 million.

For revenue, it's a little more complicated. With the new accounting guidance, standard number 606, certain advertising that we do for the brands is recorded net against revenue rather than as an SG&A cost. It's very difficult to estimate those type of costs at the beginning of the year, and we need to refine our estimate now and increase such cost by about $2 million. This simply represents a reclass from an SG&A expense to a contra revenue with no adjusted EBITDA impact.

In making this reclass, we dropped the lower end of the revenue range by $2 million, but it obviously did not impact adjusted EBITDA as we have raised those estimates. Our new range for revenue is now $145 million to $150 million.

And with that, I'll turn the call back over to Bob. Bob?

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thank you, John. We are pleased with the progress that we are making and will continue to work hard at executing our plan throughout the remainder of this year.

With that, operator, I will now open the line for question.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Eric Beder with SCC Research.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [2]

--------------------------------------------------------------------------------

Congratulations on some solid EBITDA. When you look at the landscape out there for some of your brands like OP and some of the ones that have kind of gone a little bit dormant, what are you seeing? And what are you seeing internationally with some of the disruptions we've seen in terms of politically and other pieces for some of the brands affecting you?

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Eric, we didn't get that last part of the question.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [4]

--------------------------------------------------------------------------------

Internationally, what are you seeing in terms of demand for U.S. licenses, given some of the people have been talking about Brexit and some of the other intermediation occurring internationally?

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Sure. I'll take the second part of that question. Eric, we're seeing continued demand. Since approximately thanksgiving, I've made 4 trips over to Europe. I've been to Japan, Korea and China, and the demands and [biddings] Interest has not waned at all in any of those discussions as we're presenting our portfolio. So we're positive and optimistic on the brand structure overseas and the growth that our brands present themselves.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [6]

--------------------------------------------------------------------------------

When you look at domestically, what do you think -- I'm sorry.

--------------------------------------------------------------------------------

John T. McClain, Iconix Brand Group, Inc. - Executive VP & CFO [7]

--------------------------------------------------------------------------------

And to say -- if you could circle back at the first part of the question again.

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [8]

--------------------------------------------------------------------------------

With OP and some of the other DTRs, we continue to have positive meetings in multiple categories across a number of different channels of distribution, Eric. What we haven't had success in is doing anything on a large-scale DTR basis, but the interest in product categories is there. It's now striking those deals and continue to fuel that pipeline for '20 and '21.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [9]

--------------------------------------------------------------------------------

Great. And that's my next question. Basically now, I saw you just did the Danskin deal, and that does have some Danskin shoe deal, which does have some impact in this year. But how should we be thinking about the impact of all these deals you signed, any impact -- how do we think about them for 2019, and how should we be thinking about them for 2020?

--------------------------------------------------------------------------------

John T. McClain, Iconix Brand Group, Inc. - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Yes. Eric, generally, the deals that we sign average generally around 3 years, maybe a little bit more than 3 years, all right? So as we sign deals at the end of the second quarter, for instance, right, it's 3 years, but we'd have 6 months of that deal revenue recorded in the current year.

So as you look at it in the back part of the year, obviously you'd be talking less than, call it, 6 out of 36 months. So while there is a positive impact, the majority of it is after in '20 and '21. But all these deals that we signed now will benefit '20 for a full year's worth of revenue.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [11]

--------------------------------------------------------------------------------

Housekeeping question. So the interest on the convertible, it's due, I believe, this month. Do you plan on paying that in cash or in stock?

--------------------------------------------------------------------------------

John T. McClain, Iconix Brand Group, Inc. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

We are paying that in cash, and we had announced, I think it needs to be paid within the next -- I think, before the 15 so -- but we are paying that in cash.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [13]

--------------------------------------------------------------------------------

Okay. And when you look -- final question when you look at the price cutting -- excuse me, the cost cutting, you've done an incredible job in cleaning up the SG&A side of the balance sheet -- excuse me, the income statement. Are we pretty much near the end of that? And is this -- how much leverage can you now do on your base that you reestablished for SG&A?

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Again, Eric, I think that we continue to look at opportunities to take cost out of the organization that don't add value, and we will continue to optimize those. I think we've got a good run rate at this point in time, but we continue to look at the business. And if there are opportunities to streamline what we do, we will continue to take advantage of that.

And again, for us, that EBITDA as a percentage of revenue is something that we focus on, and we look to continuously to improve that leverage. Some quarters, based upon some of the spending and some of the way the revenues flow, we'll have some ups and downs, but we continue to look to see the type of improvement that we had for this quarter and want to see how we can strive to continue with that.

--------------------------------------------------------------------------------

John T. McClain, Iconix Brand Group, Inc. - Executive VP & CFO [15]

--------------------------------------------------------------------------------

And Eric, I would say that if you look at where the platform sits now and as we're structured, we have the ability to lever greatly this platform. We could add an awful lot at the top line without having to add a significant amount incrementally in cost. And we will continue to do that.

So the opportunity is there to do it, and we're out there looking for these new agreements and we'll continue to work hard at it.

--------------------------------------------------------------------------------

Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [16]

--------------------------------------------------------------------------------

Okay. Let me just sneak one more in here. The Sears properties that are now -- so now 2 parts with the Sears properties. Are the Sears properties now in the new post-bankruptcy vehicle?

And secondly, I know you said they're gone nonexclusive. Now how excited are you by the potential to take those 2 potentially other places?

--------------------------------------------------------------------------------

Robert C. Galvin, Iconix Brand Group, Inc. - CEO, President & Director [17]

--------------------------------------------------------------------------------

Yes. Again, having them nonexclusive, I think is important for us because not only do we have a customer who is used to seeing those in Sears, but we're already having traction for people who want the brand outside. Cannon has been the first one that we've gone after in a meaningful way. And we're looking to do a couple of things a little bit creatively with Joe Boxer to be announced.

--------------------------------------------------------------------------------

John T. McClain, Iconix Brand Group, Inc. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

And yes, the first part of your question was, does this pertain to the new Sears and the continuing stores? Yes, the deal we signed is with the new transformed co, which is the continuing stores that they have.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

I'm showing no further questions in the queue. Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.