Iconix Brand Group, Inc. (NASDAQ:ICON) Q4 2015 Results Earnings Conference Call March 28, 2016 5:00 PM ET
Peter Cuneo - Chairman of the Board and Interim CEO
John Haugh - President
David Jones - CFO and EVP
Willy Burkhardt - President, International
Jaime Sheinheit - VP, IR
Steve Marotta - CL King & Associates
Dave King - ROTH Capital Partners
Eric Beder - Wunderlich Securities, Inc.
John Kernan - Cowen and Company
Liz Pierce - Brean Capital, LLC
Jim Chartier - Monness, Crespi, Hardt
Good day, ladies and gentlemen, and welcome to the Iconix Brand Group Fourth Quarter 2015 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. Please note today's conference is being recorded.
Before we begin I'll read the following 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 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 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 will now turn the conference over to Mr. Peter Cuneo, Chairman and Interim CEO for Iconix. Please go ahead sir.
Thank you very much, Karen and good afternoon everyone and welcome to the Iconix Brand Group fourth quarter and full year 2015 earnings conference call. On today's call, we have with us John Haugh, who is our new President and who will be taking over the role of CEO on April 1, 2016. We also have here at Iconix Dave Jones, our Chief Financial Officer; Willy Burkhardt our President of International and Jaime Sheinheit, was is our VP of Investor Relations.
The agenda for today's call include some brief comments from John then an update on our balance sheet and recent financing. This will be followed by financial perspective on the fourth quarter and full year 2015 results, then we will have highlights on our core licensing business and finally we will update our outlook for 2016.
Let me start by welcoming John Haugh to the Iconix team. I believe this is a very exciting period of transition for our company. John joins Iconix with more than 30 years of experience and he has had particular success in branding, marketing and retailing.
We believe John's acumen and leadership will help drive and accelerate organic growth for our portfolio brands both domestically and internationally. As well as improve our relation with current and new partners and with our shareholders.
When I took over as Interim CEO about 8 months ago there were three key areas of immediate concern. These were the need to refinance the $300 million convertible bond issue that we had due in June of this year. The need for the company to reach conclusions on the continuing dialogue with the staff of the U.S. Securities and Exchange Commission regarding historical accounting matters. And finally, the requirement to bring a new CEO into the company with the right experience and leadership qualities to take us into the future.
We have met each of these challenges. We signed a new $300 million term loan without giving up any equity in order to address the company's convertible notes that come due this year. The company reached conclusions on the accounting treatment of certain of the matters that were the subject of our Comment Letter Process with the staff of the SEC and we brought John Haugh to the company.
I would really be remiss, if I didn't personally acknowledge the tremendous effort that our finance, legal and strategic development teams have extended to meet these issues. We've made significant progress against these challenges during my tenure that these individuals deserve the lion’s share the credit.
Looking forward we hope that investors will turn their focus back to our core licensing business which continues to generate significant free cash flow as demonstrated by our 2015 results and 2016 projections.
Before we go into more detail about our business, I'd like to turn the call over to John Haugh our President and next CEO with some brief remarks.
Thank you, Peter and good afternoon everyone. I'm thrilled to be here today. We would like to thank all of our employees and partners for the good work they have done in building Iconix Brand Group into the preeminent global brand management company that it is today.
Iconix Brand Group has been a leader in the licensing business and my expectation is that we will continue to own the space. I've only been with the company for a few weeks so it would be premature to present a vision for the future for what I'm confidence in today is that Iconix Brand Group has a talented team of people, a strong portfolio of brands and a dominant licensing platform from which I believe we can grow both in the U.S. and internationally.
With that said, I understand the need to create a balance between driving growth and improving the balance sheet, which will be the focus for me and for the Iconix Brand Group management team in the years to come.
Before I turn the call to Dave, I would like to thank Peter for stepping in as Active Interim CEO. His commitment and dedication to moving the company forward has allowed me to start with Iconix Brand Group the more stable place and hit the ground running and focus on driving our core business.
I will now turn the call over to Dave Jones our Chief Financial Officer.
Thank you, John. As Peter mentioned, we’re pleased to be able to discuss the resolution of certain overhangs that have been weighing on the company. The first one I would like to talk about is recent financing. We're very pleased to announce we have successfully secured a new $300 million term loan credit facility with Fortress, which we expect to be funded sometime next week.
The capital raised from this term loan will provide us with the ability to repay our convertible notes that come due in June of this year. This should alleviate a great amount of investor concern that has been mounting over the past several months regarding our ability to refinance this debt.
Following a lengthy process in the phase of credit markets that were not in our favor, we are satisfied with the outcome in particular our ability to raise this capital without an equity component.
After deducting financing, investment banking and legal fees, the net proceeds from the term loan will be about $270 million and the new loan will bear interest at a rate of LIBOR plus 10% with 150 basis points lower on LIBOR.
Going forward, we will be focused on de-levering the balance sheet including the indebtedness represented by our 2018 convertible notes. As John said, we're also working to find the right balance between optimizing our balance sheet and are making investments to drive future growth.
The company ended the year with approximately $220 million of cash on its balance sheet of which approximately $80 million is domestic unrestricted cash and approximately $90 million is unrestricted cash held internationally.
Now let me talk about our financial results which incorporate the conclusions that we reached as a result of the comment letter process with the staff of the SEC. The restatement which was announced in February relates to the consolidation of certain joint ventures that were previously accounted for as equity method investments, the elimination of the gains associated with those joint venture transactions, the recalculation of the cost basis of trademarks contributed to other joint ventures that continue to be accounted for on the equity method and certain other non-cash investments primarily related to historical licensing revenue.
With this restatement, we believe that all significant historical transactions has been reviewed and will be and are properly accounted for. As previously disclosed, the company has responded to this step with the confirming letter on all question that the staff raise.
The fourth quarter and full year of 2015 results includes some items that we are excluding from our non-GAAP metrics. As we previously anticipated in the fourth quarter we recorded a non-cash impairment charge of approximately $438 million related to certain of the company's trademarks and goodwill. Over 90% of the impairment charge was related to the men's fashion brands including Rocawear, Ecko and Ed Hardy.
The balance was related primarily to the Royal Velvet brand which continues to have a healthy business at JCPenney but has not regained the royalty revenue it lost, since transitioning licenses in 2012.
The company's adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share also exclude professional fees associated with the previously disclosed correspondence with the staff of the SEC and special committee review, as well as costs related to the transition of the Iconix management team.
These fees totaled approximately $11.1 million for the full year 2015 and $1.6 million in the fourth quarter of 2015. Reviewing results for the fourth quarter of 2015, the company generated $94.7 million of licensing revenue, a 1% decline as compared to $96 million in the prior year quarter.
Licensing revenue in the fourth quarter of 2015 included approximately $2 million of revenue related to new acquisitions and had a $1.4 million negative impact related to foreign currency exchange rates. Excluding these two items licensing revenue declined approximately 2% in the fourth quarter.
Adjusted EBITDA attributable to Iconix for the fourth quarter of '15 was approximately $38 million a 14% decline as compared to $44.3 million in the prior year quarter. EBITDA margin in the fourth quarter was approximately 40% as compared to 46% in the prior year quarter.
The EBITDA margin decline was partially related to the Peanuts business which was a larger percentage of the mix in the fourth quarter of '15 as a result of the launch of Peanuts Movie and which has a substantially lower margin as compared to the rest of our portfolio.
In addition, in the fourth quarter the company took a charge of approximately $3.8 million included in SG&A related to the buyout of our partner from our Scion joint venture and the sale of the BBC and Ice Cream brands.
On a non-GAAP basis, as defined in today's press release net income attributable to Iconix was approximately $12.3 million, a 46% decrease as compared to the prior year quarter of approximately $22.7 million. Non-GAAP diluted earnings per share for the fourth quarter of '15 was $0.25, a 45% decrease as compared to $0.45 in the prior year quarter.
Turning to the full year of 2015, the company generated $379.2 million of licensing revenue, a 3% decline compared to $391.5 million in 2014. 2015 licensing revenue included approximately $11.9 million attributable to the company’s 2015 acquisitions which included Strawberry Shortcake and PONY. We also had a $10.1 million negative impact related to foreign currency.
2014 included approximately $17.1 million of revenue related to ABCs renewal of its license for Peanuts programming. Excluding these three items, licensing revenue for our portfolio produced overall organic growth of approximately 1% for the year.
Adjusted EBITDA attributable to Iconix for the full year of 2015 was approximately $172.7 million, an 18% decline as compared to approximately $211.1 million in the prior year. In 2015, the company incurred approximately $16 million of incremental expenses related to accounts receivable reserves and write-offs as a result of the company’s comprehensive review of its license agreements and relationships with its licensees which is included in the company’s non-GAAP metrics.
In addition, in 2015 the company did not have any gains on sale of trademarks as compared to approximately $6.4 million in 2014. The $6.4 million related to the sale of the Sharper Image e-commerce and U.S. catalog rights in the second quarter of ’14. Adjusting for the incremental write-off in '15 and the gain on sale of trademark in '14 EBITDA declined approximately 8%.
On a non-GAAP basis, net income attributable to Iconix for ‘15 was approximately $66.4 million, a 36% decline as compared to approximately $103.6 million in the prior year and non-GAAP diluted earnings per share was approximately $1.33, 33% decline versus about a 98% for the prior year.
Free cash flow attributable to Iconix for 2015 was approximately $188.9 million, a 14% increase over the prior year of approximately $165.4 million. In 2015, the company received the tax refund of approximately $15.5 million which is included in the total cash flow of $188.9 million.
I will now turn the call back over to Peter to provide some highlights on the core licensing business.
Thank you, Dave. Despite a challenging year in 2015 as Dave just highlighted, we continue to generate significant free cash flow which I believe speaks to the overall resilience of our business model and to the ongoing strength of a diversified portfolio of over 30 consumer brands that are licensed best-in-class partners around the world.
Strengthen the portfolio it's come from our global businesses which include Peanuts, Umbro and Lee Cooper. Our international platform also includes our international joint ventures plus China and Latin America which we fully own. As we think about organic growth, America has been the most difficult area reflecting challenges across the apparel marketplace.
However we believe we can outperform the market by building deeper relationships with our partners and by enhancing our marketing support. In the U.S. direct to retail relationships, our relationship remains strong as demonstrated by the six large DTR renewals we signed in 2015 with retailers including Walmart, Target, Kohl's and Kmart/Sears.
Most recently, Walmart renewed its license for Starter. Between our Starter and Danskin brands, we continue to be well represented in both core basic and core fashion athletic products at Walmart. In total, we now have four DTR licenses with Walmart and have over 50 DTRs globally. We look forward to continuing to work closely with Walmart and our other retail partners and remain focused on actively supporting all of our brands through our brand management and marketing expertise.
Revitalizing our relationships, Big Box apparel retailers in America is a key focus for us this year. We have been enhancing our marketing efforts in social and digital media, as well as in traditional advertising. We are currently in dialog with our licensees to explore how we can provide further support.
For example, for certain brands we're working to improve the overall ecommerce experience while driving traffic to our licensees' product websites of digital and socially driven campaigns.
Let’s now talk about our business segments as we report them. In the fourth quarter, our entertainment business was up 42% and for the full year it was up 4%. This growth was driven by the successful launch of The Peanuts Movie in the fourth quarter of 2015 and the acquisition of Strawberry Shortcake in the first quarter of 2015.
When excluding approximately $17 million in 2014 related to ABC’s renewal of its license for Peanuts specials, the Peanuts business achieved double-digit growth in 2015 with the U.S. business up over 50%.
The Peanuts Movie generated $215 million in global box office sales and was supported by 25 national promotional and marketing partnerships, also by eight payroll collaborations with fashion, lifestyle and sports brands and by multiple national retail partnerships.
We expect to see a continued lift from the movie in 2016 and feel The Peanuts brand can sustain this level of royalty income reflecting increased brand exposure and awareness.
Performance of our Strawberry Shortcake brand has been below our expectations as we are having some issues with inherited licensees. Longer term we're very excited about revitalizing this brand and we are currently working on new content for most of production and distribution arrangement that should provide this brand with the boost that it needs.
Revenue in our women’s, men’s and home segments were down in the fourth quarter and for the full year. In the women’s segment the largest component of the decline was in the wholesale business with some pressure on the rampage brand. In general, the majority of our DTR businesses remains stable and we feel confident in our relationships with retailers.
Over the changing retail landscape and shifting consumer spending habits, we believe providing that next level of marketing and brand support will be critical to driving these businesses forward.
In the men's segment consistent with our previous disclosures and as evidenced by the impairment charge that Dave just discussed, there was continued weakness across the overall men's portfolio in 2015.
However having restructured the licensing program and with new licensees in place for two of our most challenged brands, Ecko and Rocawear we are projecting some growth from our men’s business in 2016.
In the home segment, our overall business remains healthy and we are excited about our recently launched DTR with Walmart for the Waverly brand which should post a growth in 2016. The decline in 2015 which primarily relates to the Sharper Image brand which stabilized in the fourth quarter with new distribution.
As previously discussed, we are increasing investments in marketing and advertising for most of our brands. Specifically we are focused on targeting digital and social audiences with global campaigns that leverage our current spokes people and we are already seeing positive results at both wholesale and retail.
As I also mentioned earlier, international is a large growth opportunity for Iconix and in 2015 on a constant currency basis, our international business grew 8%. For 2016 we are projecting high single digit to low double digit revenue gains for our international business. We believe as we driven by both maximizing existing partnerships and by new business potential.
In the first quarter of 2015, we bought back our JV partners interest in Iconix China and we are very excited about the opportunities in that market. With this shift in our China strategy and the team on the ground that is now focused on building our licensing business, we have found a new partner the Umbro brand in China. We recently signed a long term license that will bring in a minimum $30 million over the next 10 years.
With the company focused on supporting our key DTR and licensee relationships and on driving international expansion, we have made the strategic decision to divest certain non-core smaller brands. This included the Badgley Mischka brand and our 50% ownership in BBC and Ice Cream brands both of which were sold back to the original founders and their partners.
The time and resources required to properly support these brands were not in line with the rest of the Iconix portfolio. Looking ahead, I’m much more optimistic about organic growth than what I was when I stepped in the role and with John leading the team my confidence has grown even stronger.
As we stated on our last conference call, 2016 will be a year of restaging the business. As such, we are projecting our base business to be approximately flat for the year. However with the investments we are making in our marketing and in our organization and with the time we are spending working with our licensees and partners to identify where we can provide additional support to drive sales, we believe we are creating new long term value and growth for our portfolio brands.
With that I'd like to turn the call back over to Dave to talk about our 2016 guidance.
Thanks Peter. We are maintaining our licensing revenue guidance of $370 million to $390 million. This accounts for a consolidation of certain joint ventures and loss of Badgley Mischka royalties, as well as the current trends in our portfolio and the timing and the development as discussed by Peter of the recently acquired Strawberry Shortcake and PONY brands.
We’re revising down our non-GAAP EPS guidance for 2016 by $0.20 to $1.15 to $1.30. This is due primarily to higher expenses associated with the new term loan, transition cost related to our hiring of our new CEO, adjustments related to certain licensed revenue recognition identified in this restatement and the net impact of the sale of this Badgley Mischka brand.
In the first quarter of 2016, we expect to record a gain on the sale of trademarks of approximately $10 million related to the sale of Badgley. We are revising down our 2016 free cash flow guidance by $15 million to $155 to $170 million through a flat with cash impact of the adjustments I just discussed.
Our 2016 free cash flow includes both positive and negative onetime items including the cash received from the sale of Badgley Mischka, as well as special charges anticipated for professional fees and management transition costs.
As we look beyond 2016, we believe free cash flow base of approximately $160 million annually is sustainable with the expectation that we will drive organic growth for our portfolio brands in the future.
I'll now turn the call back over to Peter for some closing remarks.
Just to wrap up, 2015 was a challenging year for our company but many of the key issues were non-operational and we believe are not indicative of the health of our underlying business. We had significant turnover in our senior management team which I believe has ultimately led to a positive change for the company from an operational, cultural and shareholder perspective.
We were in lengthy comment letter process with the SEC and we had an upcoming debt maturity in a tough credit market environment for which we have signed a new term loan agreement to successfully address.
Going forward, we can clearly focus on strengthening our revenues and free cash flow by investing in our brands and our organization on sustaining and supporting large core licensing relationships, on expanding our international business platform and on regaining our reputation as the world's preeminent brand management platforms.
With that, I'd like to thank you all for participating today. We will now open the call for questions. Operator?
[Operator Instructions] Our first question comes from the line of Steve Marotta from C.L. King & Associates.
Good evening, everybody. Thank you for taking my question. The first question is, as it pertains specifically to the guidance, you mentioned a couple of items, and one of them that it reflects the current trends in the portfolio. Have there been any changes in the current trends in the portfolio, since the last time you updated guidance?
Yes, there have been some very small adjustments on some of our brands. The overall impact is that we're quite small on that - on the recalculation of our 2016 guidance but there have been some small changes that represents very small percentage of our overall revenue budget.
Okay. And then, from a marketing spend standpoint, you intimated that that would be increasing in 2016. Can you disclose from what to what?
We don't normally do that. I can tell you that the budget calls for a double-digit increase in advertising and marketing expense versus 2015.
Okay. And David, you mentioned that there is expected to be a $10 million gain on the sale of Badgley Mischka in first quarter. Would that be non-GAAP when you call out non-GAAP EPS?
Yes, we typically include the gains on sales of trademarks and brands in our results. But it's certainly something that we will disclose and you will be easily able to figure it out.
Okay. But not, well, I guess, my question would be non-GAAP EPS guidance that's been provided for fiscal '16, does or does not include that $10 million?
Sorry, yes it does include the $10 million.
Okay that's fine. And you broke up a little bit on what you mentioned - what you felt was sustainable free cash flow beyond 2016.
We think the base of $160 million annually is a good place to start sustainable free cash flow.
Great. My last question is based on the write-down primarily in the menswear brands, what does then the carrying book value of those aggregate brands go from and to, based again on the charge you disclosed today?
You know what Steve, I don't have it separated by segment, it's certainly something I can get to you though.
Okay. That's all I had. Thank you.
Thank you. And our next question comes from the line of Dave King from ROTH Capital Partners.
Thanks. Good evening, everyone. Maybe just starting out, following up on Steve's question. In terms of the $0.20 to $0.33 of EPS guidance reduction, how much of that was interest expense? I think it was probably $0.12 or so if I did my math correctly. But how much was interest expense versus changes in - based on current trends in the portfolio? I think something you called out was transition of management, just looking for what are the different pieces, are you able to quantify those for us?
Yes, I can give you some of that and you are right on the interest as we've got $0.11 calculated the - I would say the net Badgley Mischka is about $0.10, we had the restatements that we talked about that was about $0.05 and we’ve got transition cost related to the management team of about $0.03.
Okay, that helps. Thank you. And then in terms of the revenue guidance for 2016, in terms of the moving parts, I think you guys sort of called out how you're thinking about the various businesses. But in summary, I guess, how should we be thinking about entertainment versus men's versus women's, versus home? I think if I heard you correctly, it was entertainment kind of flattish to down, maybe Peanuts flat, with Strawberry Shortcake et cetera down. But maybe you can just talk about the other segments to make sure I'm thinking about this correctly?
Well, I think very, very broadly, this is very broad I think that - consider is that in the U.S. basically we're projecting right now flat organic growth in total and we’re projecting growth internationally, organic growth of around 10%. And broadly speaking I would tell you that we think and I've always said this before that our men's business is finally - if you will bottomed out - we are basically re-stepped the whole licensing community for the men's business.
We have all new players and we have some new distribution which we're very excited about actually. So, we actually think we have turned the corner on men's and we may actually see some growth - some modest growth in 2016.
Broadly speaking on entertainment, I think the Peanuts will be roughly flat. For last year we had a very big year because of the movie as we probably know with licensing in particular and Strawberry Shortcake will continue to be a challenge for us. Now this is a very small brand for us but Strawberry Shortcake basically needs new content. And we are on the verge of that - we hope announcing a major new reduction and distribution agreement with the best new class partner for new television content with Strawberry.
Okay, that helps. And then, so then taking that all into account, then does it sound like the women's business will be down a little bit as well, if I'm understanding that right?
If I was going to model it, its flat.
Okay. And then switching gears in terms of the free cash flow sort of sustainable level on the $160 million or so, in terms of what I think you alluded too little already in your comments but may be you can talk about what gives you that comfort of 160 being the sustainable level, it sounds like may be some of men's business in terms of some of the new relationships you have there but I guess just what can you give us in terms of - to give us comfort to be thinking about $160 million sort of that right, run rate as we look out to 2017 and beyond 160 or better, frankly.
Yes, as you can imagine we went through the process, we really broke it down, we've got included in the 2015 free cash flow is about $24 million of JV installment payments. That number goes to that $17.5 million in 2016.
Another big piece of it too is rather the one time item that we’ve had over the past 12 months or more go way, so that helps us a lot with the continuing free cash flow. We've got some assumptions in there for you know we’ve got some continuing transition issues and professional fees related to the SEC review and things like that and so we thought about that in the free cash flow.
Generally I think we've - there is real positive attitude that we can drive some organic growth and we saw very comfortable with $160 million going forward.
Great, that's good color. And then I guess lastly from me in terms of the new debt it looks like the premium amortization there is tied to an asset coverage ratio, where does that ratio stand currently and then how should we be thinking about the amount of premium amortization for this year and over the next couple of years? Thank you.
Yes, we are about two times today on that. The default floor is about 1.25 - not about its 1.25. So we’ve got some room there, there is some in between there obviously as we get closer to the 1.25, there is provisions for some additional amortization which is kind of a normal feature in an event that we got a declining ratio but today we’re about 2. So we’re pretty comfortable with that.
Yes, that's great. Thanks for all the color and taking on my questions and good luck with 2016.
Thank you. And our next question comes from the line of Eric Beder from Wunderlich.
Good afternoon. Could you talk a little bit about what you do as some of your best opportunities for organic growth going forward in terms of the plan?
Sure. So I think the first and maybe biggest area for us at least domestically is our DTR relationships. We are actually very pleased with the relationships that we have with our partners there getting better by the moment. I think one of the reasons for that is we are really showing them much greater attention and support both financially and with creative ideas than we have in the past. This is actually a cultural change for us.
In the past, we tended to be a little more passive, we did do some advertising but we really haven't in all cases kept up with current trends. This is the reason that we’re putting a great deal of emphasis this year on digital networks, digital promotion and so on.
We are actually very pleased with the reaction we’re getting from these big retailers initially. So I think I have been looking for this for a while from both us and other people they deal with. So I don't have specifics to give you today to really feel renewed sense of kinship, if you will with our DTRs and we are looking forward to enhancing DNA of our brands through these efforts.
I think internationally maybe the five big brands that we would look to for growth would be Umbro, Lee Cooper, Ecko, Danskin and Starter. I'm going to ask Willy Burkhardt who is here to comment on these.
Yes, so those five are areas that's for base growth as we see over the course of next 12 to 18 months but overall actually as I think we said a couple of times both on this call and last, really the international growth is across the full portfolio. We have opportunities to expand our footprint pretty much possible but the big five that Peter just said certainly contribute the highest dollar amount year-on-year change.
Great. And I want to be clear, do the SEC, where are really the SEC investigation, is that completed or is that still ongoing?
Eric, it’s Dave Jones. You got to remember this, there is two pieces to the SEC review, the first one was basically the normal comment letter process that we had on our 2014 10-K. We have – we believe we’ve addressed all of the SEC's concerns with this restatement that we recently announced and that's included in the results that we gave you today. We have sent a confirming letter to the SEC which they didn’t object to and acknowledged.
My presumption is that they will review this restatement and then I’m hopeful that will give us the official sign off but we think the relationship with the SEC is good, we've had good dialogue with them in the past and again we think we've addressed all their concerns.
The other piece of I - the legal piece of it, we still have the open letter order from the SEC send that one is still open, so we’ll have to wait to see what happens with that.
Okay. And finally is - you have all that cash overseas, is there any thought to bringing that back in the U.S. and I guess the other question I thought you, you talked about significant increase in marketing spend is that going to be ongoing past 2015 in terms of that being incremental spend into '16 and '17 also.
Eric, I'll take the first piece, it's Dave. No, we don’t have any plans to repatriate any of that cash. It would be expensive, it would be tax inefficient, and it would cause us some accounting issues, and you'd have to accrue for U.S. taxes potentially on foreign earnings if you make a habit or repatriate in cash.
The other piece to know is, that’s really what we consider the fuel for international acquisitions. I mentioned earlier we’ve got about $90 million of unrestricted international cash. So, we’ve got some great opportunities there and Willy and David Blumberg and the team are pursuing those as always. The second half of the question on marketing I'll let Peter take.
Yes, I think that you can absolutely assume that there will be increases in each year going forward assuming we're getting a payoff for these spends. I think that these spends actually can drive our sales substantially and I think we have a lot of openings actually with our customers in terms of as I mentioned, wanting to hear from us new ideas and new concepts, the spokes people we're doing more with a non-celebrity spokes people particularly in within Women's Apparel.
So, for example with bloggers people who are well known as bloggers I think the consumers today particularly in something like apparel really actually trust bloggers - people who they view are just like them rather more so then they trust celebrities who they know are just getting a paycheck.
So we are planning to partner with a number of bloggers in near future. We're in discussions with quite a few now, as one of the new things that we're going to be doing to support our brands. But yes, so if you're modeling after the future I think you should project some amount of increased advertising year-over-year.
Great, good luck in 2016.
Thank you. And our next question comes from the line of John Kernan from Cowen & Company.
Good afternoon everybody. Thanks for taking my question. John, congrats on joining the organization. So just wanted to go back to the prior point on investments in marketing, you did talk in the press release about restaging the business and making more investments in the brands in the organization.
So, as you make these investments what do you think is sustainable operating margin structure for this and EBITDA margin structure for this licensed business is on balancing the needs to drive organic growth and investing in marketing and behind the brands? Do you think that there needs to be a meaningful step up in marketing beyond just what you're doing in 2016 but beyond that to really drive organic growth within your license brands?
John, it's Dave Jones. Our target is 50% margin and I’m just searching my papers to see what it is in the projection for 2016. I'll let you know if I find it. But we think that we can get there with the increase spend. There is -- we’ve historically been around that level and higher.
The good thing with this business too is you’ve got leverage to the extent we can add to the business, we've talked about the international growth before and we talked about the fact we’ve got cash available internationally for acquisitions.
It’s a leverage model, so those will typically come on at a much higher margin than the existing business because we’ve got the existing platform. So I think in the guidance we’re assuming about 49% and the target is 50% to 55% is where we’d love to be.
John its Peter. You’re asking John about the step up in advertise. I want to make a point that is sometimes missed on these calls. The increased organic growth of our business with regard to advertising is not only based on just pure dollars increasing the amount of money we spend, it’s really just as much, in fact I have to say more so dependent on the effectiveness of the advertising that we do.
You know that I’ve been involved in a number of turnarounds in the past, and many times we were actually able to reduce our marketing spend because the way we were spending the money was much more effective than before. And here we are really planning on a double what I mean.
We think that our dollars will be much better spent, much greater impact on consumers and on our licensee relations and their sales. We also think that the – additionally it's going to give us further boost.
So I will be very disappointed and I think, I don’t want to speak for John but I think he would say that he also would like to see that the advertising spend being more affected creatively and it has been, and we think by moving to the new approach particularly with regards to online promotions -
Okay. Thank you for that color. Just I guess that you talked about a sustainable level of free cash flow, what are your plans for that free cash flow? Is it going to be a focus on deleveraging the balance sheet, the prior Management Team obviously had a big focus on share repurchases but how will shareholders begin to see this free cash flow make its way back to shareholders rather than debtholders?
John, it’s Dave Jones. Yes absolutely, our domestic free cash flow, we are anticipating that we will use the majority of that to de-lever the balance sheet. In fact with the existing cash and still in the future cash flow we’re hopeful that we can take care of 40% to 50% of the 18 converts on our own and then with that balance to deal with, and we’ve got a couple of alternatives on that.
But no question, domestic cash flow we're dedicated to de-levering. We’ve said before, our target leverage is 5x, it'll take us a while to get there but that's still the target, that hasn’t changed and we'll be driving that in 2016.
Okay. And then just to go back to the international business one more time, what -- obviously this seems like a bigger growth opportunity than the domestic business. As you look several years out what do you think international can look like percent of the total mix and what will be the organic growth drivers in the international business? Thank you.
Yes, John its Willy. So yes, I mean we're looking to bring the percentage of international up from roughly where it is now 33%, 34%, 35% up to it to roughly 50:50 in the next say four, five years. But obviously will depend on what the growth rates that we achieve here organically domestically as well as obviously what we’re able to do internationally.
But right now we still have a lot of runway; it's not something you can sort of make happen in 12 months. We still have lot of runway, just basic expansion of our footprint internationally.
So there's a lot of growth there. We've already talked about the four or five brands that are likely to drive the largest dollar amount but on a percentage basis you're watching a pretty substantial leap year-after-year across the majority of our portfolio. So it’s a lot of small pieces that add up to pretty substantial business.
Okay. And then just -- that’s helpful. One final question on the international business, what percentage of your free cash flow is being driven by international at this point?
John, I don’t have that of the top of my head but I can certainly get it to you.
Okay. Thank you. Best of luck.
Thank you. And our next question comes from the line of Liz Pierce from Brean Capital.
Thanks, good afternoon. In terms of Peanuts, when you talk about it being flat for next year, what is going to be the drivers of that particularly since you obviously won’t have the film but I know you guys have talked in the past about perhaps some additional programming and then just the plan the retail and may be also related to that, if you could kind of break apart how the retail did both domestically and internationally and also just the movie, thanks.
Liz, let me try to talk to you about entertainment a little bit and you probably know a lot of this but basically if you are in the entertainment business, the way you drive royalties is by having content.
Content can be a motion picture, it can be television series, it can be digital content. In some businesses it could be print content but without a steady flow of those kinds of things brands typically have a difficult time growing.
So, we’ve just come through our Peanuts Movie. We had a tremendous growth in licensing because of the film in 2015. It is - this is a - if you will -- a peak in our revenue because of the film. I only wish we could have a film every year, I think everybody in the business would wish that between films and of course we would like to have a sequel at some point in the future.
Between films we need other forms of media to fill in to help the sustain licensing revenues from licensees and Peanuts we currently have about 1000 licenses around the world. So, we are heavily if you will invested in many, many countries around the world and it’s all about content going forward.
So we are working on a number of areas to expand Peanuts both in terms of the character expansion, as well as other forms of media besides film. But if we don’t think as we said we see Peanuts is flat year-to-year because of that big bubble that we had last year because of the film but over time of course we want to continually grow Peanuts on a global basis.
So, I guess in another way of asking it, so you really expect merchandizing another things to kick in kind of make up or compensate for the - you won't have the movie revenue?
Yes, we expect to - that the licensing from the film will decline as it would naturally after the film pays, that happens for everybody even the biggest franchises. But we do expect to fit in what we call classic licensing as more and more people around the world get to know the brand.
So while 2015 was very strong in movie related licensing, that movie related licensing declines we expect to make it up with new growth and what we call classic licensing.
Okay. And then switching over to the men's business, you mentioned that - I think you said you have all new partners - new licensees partners for the men’s business or is it particularly for the Ecko, Rocawear brands and then just how are these licensees thinking about that segments and that segment as a whole is not, is kind of over in terms of hip hop or whatever. Are they reinventing the brand?
Exactly Liz. So, what's happened is, we have new leadership in the men's area so, we feel very, very good about. And as those people have looked at the business basically they have reimagined the entire what I would call licensing community for our urban brands. And in fact they've gone out and not just reimagine but actually executed on that. So we have a number of new exciting licensees and the potential for some DTRs as well here in the U.S.
The urban business is - still exists by the way but it is very different in style from what you might remember it’s much more classical rather than any hip pop culture that you can - you might recall. So these brands have been completely restage and yes it comes down to design as well and having the proper product.
The initial sales in these new locations have been very good and we’re seeing from a very small base. So basically we are - we still have a way to go but we have new spokes people by the way for a number of our brands so on and we are feeling pretty good right now.
Okay. And then finally just to clarify you mentioned on the DTR renewals, so I presume that Mossimo was renewed with Target?
Mossimo? Yes Mossimo - Mossimo I think we read that out. Mossimo was renewed.
Okay. Great, thanks. Best of luck guys.
Yes I think we have time for one more question, operator.
Thank you. Our final question for today comes from the line of Jim Chartier from Monness, Crespi and Hardt.
Hi, good afternoon. Thanks for fitting me in. Just wanted to kind of go back to the guidance and then a 20% reduction to EPS for this year. You mentioned $0.11 for interest expense, $0.05 for restatement charges, $0.03 for the management transition and then net positive of $0.10 from the Badgley Mischka transaction. So that leaves $0.11 negative impact just from current business trends that have changed since November?
It's about $0.09 Jim for Badgley and then I think the $0.11 stands high but as Peter mentioned we do have – we factored in some assumptions for the current trends. In particular as I think we mentioned Strawberry and PONY have not performed as well as we had hoped and Peter had quite a bit of comment on Strawberry.
Okay, thanks. And then you talked a year ago about you had the option to monetize the Candie's investment in China and you guys had delayed that because you thought it would be more valuable today? So do you plan to monetize that this year and what would kind of be the expected cash benefit of that if you do?
Hi Jim this is Willy. We continue to evaluate that. I think as we discussed even on the last call, the Candie’s business in China is doing remarkably well, very strong growth. So right now, we don’t have any plans to speak monetization event but it’s something that we evaluate break out quarter-by-quarter basis. So we don’t have any expectation of that such an event.
But we’ll see how things go, I think given what has happened in China and what has happened in terms of equity multiples, it is probably prudent for us to wait, but we will just have to evaluate quarter-by-quarter.
Great. And then finally you guys sold some small brands in the last few months, are you considering selling other larger brands to help pay down additional debt?
Hi Jim, it’s Dave Jones. No certainly not to pay down additional debt, I think we continuously review the portfolio. There is no - we don’t have currently anything that we’re anticipated to getting rid of as the business matures and we implement lot of the initiatives we'll continue to relook at it every quarter but that is not part of the plan we are paying down debt now.
Okay. Thanks for taking my questions. Best of luck.
Well thank you all very much for calling in. We really appreciate it. We know that this has been a difficult time, we know that much of what we are reporting today is very complex and we appreciate very much your interest in figuring that all out. It's taken us quite a while as you might imagine, it's been very complex time for us.
But we are at this point very pleased that we’re through it. And looking very much forward to the future with John and with the little more clear sailing than we've had in the past year. So again thank you all very much and we will talk to you next quarter.
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.
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