Sequential Brands' (SQBG) CEO Yehuda Shmidman on Q4 2016 Results - Earnings Call Transcript

| About: Sequential Brands (SQBG)
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Sequential Brands Group, Inc. (NASDAQ:SQBG) Q4 2016 Earnings Conference Call March 2, 2017 8:30 AM ET

Executives

Gary Klein - CFO

Yehuda Schmidman - CEO

Andrew Cooper - President

Analysts

Camilo Lyon - Canaccord Genuity

Erinn Murphy - Piper Jeffrey

Steve Marotta - CL King and Associates

Bryan Caronia - Wunderlich Securities

Dave King - ROTH Capital Partners

David Buckley - Cowen and Company

Operator

Thank you and good morning. Before we begin I'd like to bring to your attention that statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors all of which are difficult or impossible to predict and many of which are beyond the control of the company.

This may cause the actual results, performance or achievements of the company to materially differ from the results, performance or achievements expressed or implied by such forward-looking statements. We refer you to our public filings and the press release we issued this morning for a summary of such factors. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identified forward-looking statements.

Listeners are cautioned to not place undue reliance on these forward-looking statements which may speak only as of the date the statement was made. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements whether as a result of information, future events, or otherwise.

Additionally, the terms adjusted EBITDA and non-GAAP net income are all non-GAAP metrics and reconciliation tables for each can be found in the press release distributed today in the Investor Relations portion of our website, www.sequentialbrandsgroup.com.

I'll now turn the conference call over to Gary Klein, Chief Financial Officer of Sequential Brands Group. Mr. Klein, you may begin when you're ready.

Gary Klein

Good morning and thank you for joining Sequential's fourth quarter and full year 2016 earnings conference call. I'm joined this morning CEO, Yehuda Schmidman and President, Andrew Cooper. I'll start by reviewing results for the fourth quarter and the full year 2016 and then turn the call over to Yehuda.

Total revenue for the fourth quarter increased 44% to $45.4 million compared to $31.4 million in the prior year's quarter. On a GAAP basis, net loss was $1 million for the fourth quarter of 2016, or $0.02 per diluted share compared to a loss of $5.7 million or $0.12 per diluted share from the prior year period.

On a non-GAAP basis, net income for the quarter was $7.3 million or $0.12 per diluted share compared to $11 million or $0.23 per diluted share in the prior year period, which included a non-cash benefit of $4.4 million or $0.09 per share related to taxes.

Adjusted EBITDA in the fourth quarter 2016 was $24.2 million compared $11.3 million in the prior year's quarter. Total revenue for the full year ended December 31, 2016 increased 76% to $155 million compared to $88.3 million in the prior year. On a GAAP basis, net loss was $0.8 million for the full year or $0.01 per diluted share compared to a loss of $2.9 million or $0.07 per dilutes share in the prior year.

On a non-GAAP basis, net income for the full year 2016 was $21 million or $0.33 per diluted share compared to a $20.6 million or $0.48 per diluted share in 2015. Adjusted EBITDA for 2016 was $83.1 million compared to $53.4 million in the prior year. We ended 2016, with approximately $640 million of net debt and we do not have any significant debt maturities over the next five years.

In addition, with interest rates are starting to rise we hedged $500 million of our debt by capping our LIBOR rate at 1.5%. We also ended the year with approximately $20.6 million of cash including restricted cash. Our cash flow from operating activities as reflected on the GAAP cash flow statement increased $43 million versus negative $5.9 million in the prior year period. Approximately $30 million of this year-on-year increase was driven by changes in balance sheet items, which improved from negative $21.8 million last year to positive $8 million this year.

Changes in the balance sheet items will fluctuate from year-to-year depending on our company's organic growth and acquisition related strategies. Given the year-on-year variability of those items, we focus on our adjusted free cash flow, which we believe more accurately reflect the cash profile of our underlying licensing business.

Adjusted free cash flow is calculated as, adjusted EBITDA minus cash interest, cash taxes and capital expenditures and excludes both changes in balance sheet items and acquisition related and other costs not related to our core licensing business. For 2016, our adjusted free cash flow was $34.3 million. Also of note, the average bad debt or the revenue that we have reported over the last four years is less than 1%.

For the full year 2017, we now expect revenue to be in the range of $170 million to $175 million and adjusted EBITDA to be in the range of $98 million to $102 million, which Yehuda will take you through in just a moment.

Our contractual guarantee minimum royalties for 2017 are approximately $120 million or approximately two-thirds of our projected revenue. Similar to our historical results, we expect for 2017 -- revenue for 2017 to be weighted to the back half of the year given the natural seasonality of our businesses and many of our licensees.

As a result, we expect our revenues in the first half of the year will closely be in line with our minimum guaranteed revenues with overages being recognized in the second half of the year. For the full year 2017, we continue to expect to generate $42 million to $46 million of adjusted free cash flow and expect to pay down $28 million of debt.

With that, I would like to turn the call over to Yehuda.

Yehuda Schmidman

Thank you, and good morning to everyone joining us for our fourth quarter and full year 2016 earnings call. Revenue for the full year 2016 was up 76% over the prior year. Organic growth was 5% and strength in the portfolio was most prominent with Avia, Gaiam, Jessica Simpson, Joe's, Heelys and Martha Stewart.

These results for full year 2016 were in line with the low-end of our guidance, but below our goal of high single-digit organic growth, reflecting the challenging retail landscape that our licensees operator in.

Overall 2016 was a productive year for our company. From an M&A standpoint, we completed the integration of one of the largest acquisitions in our industry, namely the Martha Stewart business. We acquired and integrated to GAIAM yoga and wellness business and most importantly we put into action the following organization growth initiatives.

We launched the Martha Stewart brand Staples, we launched the Martha Stewart brand in Canada at Hudson's Bay and we also launched a new Martha Stewart meal-kit business with Marley Spoon. We commenced distributing Martha Stewart products on Alibaba in China. We signed a new partnership for Martha Stewart in South Korea. We premiered a new TV show called Martha & Snoops Potluck Dinner on VH1, which has already been renewed for Season 2.

Martha Stewart featured in a T-Mobile commercial on Super Bowl and continues to be the cream of Facebook Live. We also premier the new show of Eat the World with Emeril Lagasse on Amazon. We expanded our AND1 brand internationally to Canada and we also expanded the AND1 brand to China.

We launched a new category of sporting goods for AND1. We launched the new category of active wear Jessica Simpson brand. We expanded the Joe's brand with the new launch of women's handbags, and we also expanded distribution of William Rast nationwide.

With 2016 behind us and as we look ahead to 2017, we believe that it is prudent to adjust our outlook for the year to $170 million to $175 million of revenue and $98 million to $102 million of adjusted EBITDA. Our updated projections for the full year reflect low to mid-single digit organization growth. These estimates are reflective of the disappointing results reported by a number of U.S. retailers and the current outlook for traditional brick and mortar in more retailers in general.

Nonetheless we continue to believe that our business model provides advantages that enable us to weather the macro challenges. Specifically we have the ability to drive positive growth by adding new licensees for our brand and by driving sales with high growth retailers and high growth ecommerce partners.

In this regard, we have a robust pipeline of new business opportunities and initiatives currently underway for 2017. And the roadmap that we have emplace to achieve our updated forecast, which we believe will position us for future growth.

Now diving in deeper into a few of those revenue initiatives already underway for 2017. First, we announced this morning a new multiyear direct retail partnership for the Martha Stewart brand with Michael, North America's largest arts and crafts company. As part of the partnership beginning this fall 2017. Martha Stewart Craft will be available through Michaels retail stores and online at michaels.com. Crafting is a growing industry in the U.S. and a core element of the Martha Stewart brand DNA, which we believe will develop overtime into a material business for the company.

We're also pleased to report that Macy's has renewed its license for the Martha Stewart brand for multiple years at substantially similar terms to our current agreement. Martha Stewart is one of the largest home brands at Macy's and we're excited to continue our long standing partnership, which provides a strong base for the brand in our core home business with sizable GMRs. It also provides us with an opportunity to continue to build around that base that other retailers in different categories.

Other notable highlights include the launch of a new category of Bath Vanities at the Home Depot for the Martha Stewart brand, which we believe will complement our successful kitchen program. And in addition we are currently working with the Home Depot on a number of other category expansions.

In our fashion division we unveiled a new ad campaign for our Joe's brand starting top model and social media influencer Taylor Hill. And we announced multiple new categories for the lifestyle brand including footwear and intimate apparels. For Jessica Simpson we are working on a new beauty initiative along with a number of other exciting initiatives throughout our portfolio, which we expect to be actionable this year.

In our active division, we are broadening the distribution of the Gaiam hard goods business further into the drug store channel and we are focused on expanding distribution across the board for our apparel business. Additionally our recent additions of core programs for Avia, such as underwear and socks continue to gain market share in Wal-Mart stores nationwide and we expect that to continue throughout the year in 2017.

Big picture as we think about our strategy going forward we are laser-focused on growing our core business through revenue initiatives. We are focused on optimizing our expense structure and we are focused on improving our balance sheet. For revenue initiatives our focus continues to be number one, gaining e-commerce market share and number two an international growth.

E-commerce is even more important today as U.S. consumers continue to shift from in-store to online. We want to be able to capture that share and have already made headway. Our total e-commerce business is up 13% from last year driven by Amazon business, which is up 60% year-on-year. We forged a relationship with Alibaba last year and we are very close to announcing another e-partnership as well.

And we have made significant developments as well internationally, with the Martha Stewart brand in South Korea, which launches this year and with AND1 in Canada and in China and we'll soon be announcing another partnership to bring AND1 into another new and growing geography outside the United States.

On the expense side, we are pleased to announce today that we recently signed a favorable multi-year lease extension for our corporate headquarters. Resolving this has been a top priority for our team as we discussed on our third quarter call. Under the agreement we have a reduced footprint, which result in approximately $4 million of annual savings for us beginning in 2018 based on the combination of direct lease savings and related cost reductions.

This is a long-term structural fix to our SG&A and a significant step in our broader ongoing efforts to further reduce expenses and improve our margins. Furthermore, we signed an agreement to sub-lease the portion of our headquarter space to our operating partner in the Martha & Marley Spoon meal-kit business.

And third as it relates to our balance sheet the primary use of our free cash flow this year will be towards debt pay down. As Gary mentioned in his remarks we're anticipating that $42 million to $46 million of free cash flow this year, and $28 million of that will go to principle repayment.

We have terrific lenders who have helped us complete our previous acquisitions, but when we think about the go forward balance sheet. We believe there is opportunity in early 2018 to significantly reduce that cost of debt, which could provide an additional $10 million to $15 million per annum of free cash flow.

All-in-all we're coming out of the productive 2016 and we're approaching this year 2017 with achievable growth projections in the face of strong headwinds from the retail landscape and tailwinds from our unique business model and strong brand portfolio. As we look ahead we're excited about the initiatives we have in the pipeline and have a laser focused strategy to execute going forward.

Thank you for all joining us today and thank you for your continued support. I'll now turn over the line to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Camilo Lyon of Canaccord Genuity. Please go ahead.

Camilo Lyon

Good morning everyone. How are you?

Yehuda Schmidman

Good morning.

Camilo Lyon

So Yehuda you talked about the challenges in retail and that's clear everyone is facing similar headwind. I was hoping you could delve into will you remind us what your online penetration is and what is expected for the online and in-store growth relative to the guidance that you've lead out.

Just what I want to dig into and understand how you were able to shift more of your business to the online channel seemingly getting a lot of the traffic and a lot of the growth relative to the bigger piece of the business that is exposed to doors and traffic. And understanding how the offset their work relative to being able to ramp up the online channel?

Yehuda Schmidman

Sure and that is Camilo a key focus for us because there's no question that that customer is shifting and we want to make sure to capture as much of that market share as possible. So to answer your question e-commerce today as a total percentage for 2016 ended the year just over 8% of total sales. That was about 13% year-over-year when comparing '16 to 2015.

Most notably though in those numbers our Amazon business was up 60%, so that was really the big driver of the growth within e-comm. And I think when you look at our total business we have a foundation of many different customers in terms of retail outlets of where our 200 licensees sell.

But when you think about clearly that department store channel, which is challenged and you think about store closures which are taking place now across the board. We have to shift that market share even faster into 2017 and 2018 and 2019. So we're now thinking about low to mid-single digit organic growth for this year versus our prior long term goals of high single-digits we're factoring that shift taking place. And the ability to sort of shift that even faster than that is what really we're hoping to accomplish.

Camilo Lyon

Is there something that you can do to -- with the brands to have a more of a direct presence online, is there something that prohibit you from the way that the model is structure there from doing that. Or can you start to elevate that the brand more directly with the consumers that's clearly a piece of the business that's gaining momentum for many brands?

Yehuda Schmidman

Yes no I think interestingly I think in our model it's sort of the opposite where we really have a -- rather than being prohibitive I think there is really the ability to really capture that market share faster because we're not weigh down by sort of legacy, anchored issues that a typical operating company might have in terms of dealing with leases in malls without traffic and items of that nature.

So more specifically we think about our business and if you think about those bleeding digital retailers, you think about of course Amazon, but you think about Wal-Mart digital presence which is growing rapidly and we have a strong Wal-Mart business with AND1 and Avia. You think about our other digital businesses whether that's homedepot.com with our market Martha Stewart business. If you think about our macys.com business, which is growing nicely.

So in the aggregate there is a lot of opportunity for us. It's really about how fast we can make sure to capture that, get our products out there, make sure we're promoting the products out there, driving content that we create here, content from our brands, to have that as part of the conversion process. And I think if we do all those things that e-commerce percentage will continue to grow and it will become an even larger part of our business.

Camilo Lyon

Okay. And then just finally how do we think about -- relative to your guidance how do we think about what the in-store component of what the assumptions are around the in-store component of your business? So if we're thinking low to mid-single digital organic growth with a piece of that comprising online are you thinking any growth within the bricks and mortar piece of your business or is there either a decline baked into that outlook?

Yehuda Schmidman

Yes so for the businesses that are -- I think as you're describing that are tied to in-store locations that are experiencing difficulties in their general store base. We're planning them accordingly whether that requires flat planning or even slight down planning if needed.

But what allows us to on a relative basis outperform the overall growth rates right to achieve 5% last year while that was not what we had hoped for, we had hoped for high single-digit last year. But even to achieve high single-digit last year, I look forward to achieve low to mid this year.

What we're baking in is the combination of e-commerce growth on top of the store assumptions. We're baking in new category growth many of which those new categories are already announced and underway. We're baking in new geographical growth in the International segment of our business. And so it's really be ability to leverage the brands. How far can you take the brand beyond the sort of four walls of any given store.

Camilo Lyon

Got it I'll turn it over to others in the queue. Thanks good luck, keep it up.

Yehuda Schmidman

Thank you.

Operator

Thank you. The next question is from Erinn Murphy of Piper Jeffrey. Please go ahead.

Erinn Murphy

Great Thanks. Good morning. I just wanted to focus first on the guidance, could you help me what the biggest changes either from a business momentum perspective as you got into fourth quarter the visibility that have led you to guide down I mean I recognize the challenges out there broadly. But are there one or two either brands that just started for you guys or just particular accounts that just weren't and what you anticipated that made the guidance change kind of this last quarter?

Yehuda Schmidman

Sure, so maybe it's easiest to start with 2016, as we think about how the year finally ended and when everything was fully tallied net-net, when we looked at the final sales analysis. The standouts we have called out earlier on the call, but the weak once we would point to would be Ellen Tracy and Revo, which ended up in a weaker sales place than we had anticipated.

And we think about that an as we head into 2017, we are thinking that 2017 will be anchored in strength by the core brands that include AND1 and Avia Wal-Mart, that includes Martha Stewart, that include Heelys, includes Gaiam, includes a number of other brand.

But when we are thinking about in general sort of exposure to especially that department store channel, but other just sort real based brick and mortar stores that maybe don't have as much online growth just yet, or are announcing store closures coming off of the '16 numbers and looking that in total, let us to say that we want to adjust for this year and just make sure that we're in a place where we're 100% comfortable.

I can say to that okay, we are coming off '16, here is what was strong, here is what was weak, now how do we continue to perform in '17. All the wild managing expenses to ensure that our margins are strong. And then at the end of the day coming out and putting those right growth initiative securely in place for the future.

Erinn Murphy

Okay, that's helpful. I guess that kind of lead to my next questions. So of that 5% growth brands above in line or below that 5% organic growth of last year. I mean obviously you just that Ellen Tracy and Revo clearly sounded like they were below, how you -- what are kind of the back performers, were there any that were meaningfully above that 5%?

Yehuda Schmidman

Yes. The once that really drove the organic overall and really the standouts for the entire year would be Avia, Heelys, Martha Stewart, the Gaiam business was terrific. And just looking at all those pieces coming together and you think about the account basis, the Wal-Mart business was very strong. There was a lot of strength in '16 and '16 was a productive and eventful year for us, completing the integration of Martha Stewart business, completing the acquisition of Gaiam. Many different new initiatives put in place in 2016, but I think if you are just speaking directly to the organic growth and the 5% those would be the brands that most stood out on top.

Erinn Murphy

Okay. And then on Avia and AND1 with their exposure Wal-Mart are you concerned at all or are you kind of risking the guidance for '17 with potential further destocking of apparel and just the top brands category in general in 2017, how are you thinking about that account?

Yehuda Schmidman

Yes, we participated in the Wal-Mart Annual Growth Summit just a couple of weeks ago with their top suppliers and I will tell you, we feel really energized about them in general and about our businesses there. I think , if you take a look at the floor space right now, you will see that we've introduced categories that have grown in market share space that we had talked about even a year ago.

So for example if you look at the AND1 business and you start to see the basics categories around underwear or around socks. Those have been standout performers. And you look on the Avia side and we see some of the apparel that's looking really good. So the new category of sporting goods into AND1 the basketballs and the like you could see. So we actually feel really energizes about Wal-Mart and they are terrific partner our brands are solid and we're excited about that account.

Erinn Murphy

Okay. And then just last question from me. Last quarter you talked about kind of an incremental $5 million of investment that you were going to be phasing in this year. Can you just remind us kind of where your outlook progress of some of these strategic investments. And then on your lower sales guidance, I recognize organic growth is now lower than you thought, but what are you assuming for the rich fern of some of these investments to the top line? Thanks.

Yehuda Schmidman

Sure, so the one I'll -- Erinn, I'll comment on most in that regard is international, because the additional investments and where we are focusing our resources in large part of course are around organic growth and that includes a big drive for e-commerce, which we have touched upon. But at this point maybe I'll comment on international to give you the full picture.

When it comes to international, our business where it's been strong today and continues to be has been predominantly from Heelys. We've talked about the addition of AND1 into Wal-Mart Canada, we've talked about Martha Stewart launching this year in South Korea. But we've also really just begun to see traction with people like Alibaba where we launched products on Singles Day in November 2016 and continued our products there. And we're looking to grow that.

We have a new partnership in AND1 with a new geography in Latin America that we haven't yet announced in terms of the specifics, but we will shortly. And we have other new international deal flow in the pipeline. So I think if you combining the international growth that we have in front of us, with the e-commerce growth in front of us that's where we're looking to see ROI from those investments. And a lot of ROI by the way we believe will continue to pay out ahead of -- outside of this year into 2018 and future years as those businesses grow.

Erinn Murphy

Got it, thank you guys. I'll let someone else jump in.

Operator

Thank you. The next question is from Steve Marotta of CL King. Please go ahead.

Steve Marotta

Good morning Yehuda, Gary and Andrew. Regarding where foot office reduction, could you talk about what the reduction is on a gross basis. What was it before and I think it's 68,000 square feet now. And the $4 million in savings I'm assuming that includes both that net reduction as well as the incremental associated with the subleasing.

Andrew Cooper

That's right, I think you said 68,000, the number 63,000 square foot in the… this is Andrew in the renewals and that's down from 150,000 on the main floor and the total of 170,000 in the building so significant decrease. What was the second part of the question?

Steve Marotta

That the $4 million in savings does not only from that reduction in square footage but also…

Andrew Cooper

Yes, so right. So our total expense if you look the direct lease plus related cost reduction is going to reduce from about $9 million to $5 million, starting in 2018 on an annualized basis. And that includes the sublease as well as the main lease.

Steve Marotta

And Yehuda you mentioned and just for a point of clarity e-commerce was 8% penetration in fiscal '16, that also includes traditional e-commerce channel like the maceys.com and the walmart.com not just e-com only.

Yehuda Schmidman

Yeah Steve you're completely correct. And the way we think about that is that for us e-commerce sales will come from three basic places. That will be the biggest, which is the large distribution channels that have our brands and have relatively strong traffic. The Amazon, the maceys.com. We have been starting with Marley Spoon for example with these direct commerce standalone businesses that would be the second area. And the third would be our branded sites, which are licensed where you could buy products directly from say Joe's Jeans.com.

Steve Marotta

And that was you just stole a little thunder, I was going to ask about Jessica Simpson I believe that launched last year. Could you give us an update on the progress there and where that is planned?

Yehuda Schmidman

Sure. So on the third bucket which includes Jessica Simpson that has been the slowest for us and has been the toughest. Joe's Jean is actually the best of the direct sites that we have. Jessica Simpson not as a direct site and not as strong. And the reason for that is not the brand. Because the brand overall was I should have called it out earlier and I believe I did in the prepared remarks was actually a standout for 2016 as a total organic growth driver.

But in the business model of getting licensees to operate standalone sites, we have not yet seen that be a material drive. And that I think relates to more who the partner is and what the exact business model and we have different partners that run jessicasimpson.com versus joesjeans.com. So we've got to sort that out in our site, but what I would say is there is a real opportunity for that jessicasimpson.com to be strong overtime just as we think for all of our brands actually.

So I think just sort of recapping it the number one priority in digital for us has got to be Amazon and all the digital sites of our big partners, that's number one. Number two is business is like Marley Spoon where it's pure play direct e-commerce. And then number three are other sites, such as the ones we were just describing.

Steve Marotta

That's great. My last question just pertains to China, can you talk a little bit where and I am sure it's very low, but where the penetration is now? Are there opportunities to sign exclusive agreement with Alibaba vis-à-vis some of your brands? And where you would expect talking a year from now should be with that particular geography?

Yehuda Shmidman

Yea, China is an enormous opportunity there is no question. The partner that we're working with GRN is name of the partner that we're working on. And one with is incredibly resourceful and has big plans for the brand, and we are excited about that we possibly may even look at other opportunities with them as a partnership. So, that's sort of one category of opportunity. And there other partners like GRN we are speaking with for other brands.

And then the Alibaba , as you touched on is a gigantic opportunity for anybody that works with them. I believe they say that they are in the middle of close to $0.5 trillion in retail transactions. We absolutely want to make sure our brands are featured there, we want to work with all the correct channels and partners that they have to make that happen successfully.

As I mentioned we had started with Martha Stewart products on Single's Day November and that was extremely successful even though it was small quantities everything we had put on did sell-out. And we continue to put new products on there.

So, I think Alibaba to us is an Amazon like opportunity as it relates to Asia. And it's about developing it and working with the right people over there to make that happen. But ultimately they have the conversion. So, it's a big one.

Steve Marotta

Very helpful, thank you.

Operator

Thank you. Our next question comes from the line of Dave King with ROTH Capital Partners. Please go ahead.

Dave King

Thanks. Good morning, everyone.

Yehuda Shmidman

Good morning.

Dave King

I guess, may be first off sticking with the Jessica Simpson brand. Yehuda, you mentioned beauty I think is a new category there I guess what else can you tell us about that, when you expect it to launch, how materially do you think it could be, I guess any other color would be helpful. Thank you.

Yehuda Shmidman

Yes sure. So, Dave the brand just for context of the brand overall has been a star for us since we acquired it which was in the beginning of I guess it was the very end of Q1 of '15. So we were approximately two years in let say. She has been a great partner the licensees are terrific and on overall the -- as we've always talked about with that brand it's about using our playbook.

So, beauty is one step of the playbook in terms of new category introduction, when we introduce the active wear category in the past year, which included the cover of women's health where Jessica featured with over a dozen page spread in there, Great retail placement, we've been of course thinking about the pipeline of new ideas.

So, there is a Jessica Simpson fragrance which exist. Complementing that we see beauty opportunities around that in other like categories. And of course the whole beauty world has seems to be exploding of late. So, if you can just imagine in the world of skin and wellness where that could go, that's sort of what we were thinking.

Dave King

Okay, that's helpful. Thanks for the color there. And then what can you tell us about the new agreement with Macy's, how does the royalty rate or minimum compared to the prior agreement. How long did you renew it for? And then I guess more importantly to be clear did that renewal have any effect on the guidance at all?

Yehuda Shmidman

No. So, it didn't have an effect as it has to do with the future. It's a favorable renewal for both parties. We are really excited about it. In terms of the terms they're all substantially the same as the prior. Macy's is a strong partner. The brand is a strong -- one of the largest in the entire Macy's in terms of home. What [indiscernible] came back to my [indiscernible] the entire executive team there is doing. We are excited about.

And in terms of the actual terms beyond that were subject to confidentiality around that. But the answer to your question in terms of what we can say it is a multiyear agreement substantially similar term. And we see market share growth potential within Macy's, obviously the door count is changing there that's old news. But what you will begin to see and have seen over the last year already with the introduction of home fragrance and other programs is an opportunity to continue to gain share within the box and within of course macys.com, which is growing steadily.

Dave King

Okay, fantastic. And then in terms of the interest rate cap you just put in place what does that mean for refinancing plans this year? Are you still planning to refinancing debt, some of your debt? How are you thinking about interest expense or interest cost for 2017 in particular I guess any color there would be helpful.

Gary Klein

Hey Dave it's Gary. So as far as we've put in interest rate capital of 1.5%, one reason we chose that instrument is because it is very easy to get out at the end of it's sort of hedged where you have to unwind anything. So that will not be a gating factor to us refinancing anything.

The interest rate for this year again is the weighted average of approximately 8% we are going to begin looking at strategies to refinance to hopefully bring down our rates I'd say approximately hopefully 2%. And that 2% again on $600 million of debt could yield about $10 million to $15 million of cash flow benefit.

Dave King

Okay, fantastic. And then maybe speaking of free cash flow the 42 to 46 that you guys are effectively guiding to at least probably $14 million to $18 million of delta versus the $28 million of principle amortization. I guess what keeps you from paying down that further than that are the prepayment penalties to owners are there other areas that you are planning to invest that that would make a lot of sense. What can you share about those other areas I guess I'm just curious why not pay down debt a little bit more significantly if you could. But what's keeping -- there are different things in place to keep you from doing that. So any color there would also help. Thanks.

Gary Klein

So you are correct Dave yes, on the more expensive second lien debt there are prepayment penalties we can't pay down debt to the second lien, but again it has to be from an equity offering that's not what those proceeds are. So yes we put on the balance sheet and we are constantly evaluating what's the best use for that debt.

Dave King

Okay, thanks for taking all my questions and good luck with 2017.

Yehuda Schmidman

Thank you, Dave.

Operator

Thank you. The next question is from Eric Beder of Wunderlich Securities. Please go ahead.

Bryan Caronia

Yes, good morning everyone this is Bryan Caronia on for Eric.

Gary Klein

Good morning.

Bryan Caronia

Good morning. So the first question we had is that given your updated guidance and the touch points you gave in terms of your 2017 outlook factoring in the low single-digits to mid-single digit organic growth compared to that. High single-digit we had certainly been talking about in the past, can you describe what you're thinking of in terms of your long-term organic growth opportunity?

Do you see that affectively with the weakness in the brick and mortar segment in the domestic retail market sort of mitigating or capping the organic growth potential across your brand portfolio or is there opportunity as you expand more into e-commerce. And certainly into additional regions and into additional product categories that the organic growth trend could restart and re-reach that level or just sort of how you look at it further from 2017?

Yehuda Schmidman

Yes it's a great question because these are very unique times that we're living through right now in terms of what is shifting within the retail landscape. And again as we've talked a lot about we think we're in a unique position around that. But to your point the question of what are the long-term growth rates versus the current growth rate is a very-very interesting question.

So while we can't put out long-term range numbers at this time, what I will tell you is our hope is that this a temporary effect of headwinds, which are happening in the macro environment. And as we get further placements into places that includes Amazon and others that are high growth and that are capturing share. We have an ability to continue to drive our brands in the high single-digit range that was always as you are correct our goal.

And so tempering that to be relative to market today where we still feel our rate is on the one hand exceeding the overall retail sales growth rate and many of the customers of our licensees. On the other hand it's still not what our goal was, our goal is to be single-digit and our hope is to return to that growth rate in the future.

Bryan Caronia

Great. And shifting gears you've spoken out and particularly this is an off shoot of the acquisition and integration of the Martha Stewart brand and their capabilities there. But certainly over the course of 2016 a core operational component data you had a sequential ways to offer more support frankly across the board to many of your licensee and retail partners.

We're just curious as to how that's been achieved is that something that your licensee partners are finding very attractive? Any shifting times in terms of stronger brand support and sort of how do you look to that in regards to the benefits of those incremental investments or perhaps those incremental initiatives and the flow through to your success?

Yehuda Schmidman

Yeah, again you are right on target, where the value preposition that we always aim to provide, and continue to aim to provide is to be different right. And we want to add more value for our licensees, which we approximately 200 today we want to add a lot of value to the retail channel partners. And I think one of the things that's most interesting especially around this e-commerce discussion is that one of the sort of tools to help drive e-commerce is real content.

And you think about the real content that that we are able to produce in house for our brands in that we're able to provide to our partners, and you think about the photography content, you think about the branded content. These are the differentiators for our partners that will help drive sales, e-commerce is amazing in that there is just so much selection and it's really consumer driven in that regard.

But to sort of corollary to that is, with so much selection you have to make sure that your products are getting noticed. So our brands are strong and that's important, the products that our licensees are manufacturing are strong and that's critical. But the overlaying the content as a value preposition in terms of what we're providing, we think is an important unique factor in today's age above the other services that we provide.

Bryan Caronia

Great, that's very helpful. And then if I could just add in one more. Looking back towards the longer term, could you potentially remind us what you are looking for internally in terms of your debt goals? Obviously you've spoken about a substantial amount of debt pay downs during 2017, but longer term what are you sort of looking for?

And then I guess perhaps dovetailing off of that in terms of your brand portfolios that currently stands you had mentioned a few brands that had been performing a little bit weaker in 2016. Any chance that you would potentially look to reshaping your brand portfolio in terms of looking towards you capital structure?

Yehuda Schmidman

Yes, so let me answer the second question first, then I'll turn to Gary to address the first question. In terms of the brands and how we think about it, we have pruned before, we sold a brand couple of years ago that was both immaterial and underperforming. We are not actively doing that at the moment, but we always would consider that as appropriate.

In terms of the specific brands and I called out earlier, we do have strategies in place with new investments to help those brands and help those particular brands rebound and get back to a growth path. But certainly we have done it before in terms of pruning and we would always evaluate that in the future, if it made sense for both the growth trajectory and the overall cap structure. But I'll turn to Gary for the first question.

Gary Klein

Yes, the short-term goal would be again at the end of this year to get to about 6 times net debt to EBITDA and I would tell you our long-term goal is still to get to something closer to four times. How you get there obviously there is numerous strategies, it can be through an acquisition, a little bit more challenging today with the stock price to do some sort of equity offering to get there. But that would be the long-term goal to figure out how to get to 4 times.

Bryan Caronia

Great, thank you.

Operator

Thank you. The next question is from John Kernan of Cowen and Company. Please go ahead.

David Buckley

Good morning, guys. This is David Buckley on for John, thanks for taking my questions.

Yehuda Schmidman

Good morning.

David Buckley

Could you guys just discuss your international versus domestic sales growth last year and just remind us what percentage of total sales are coming from international at this point?

Yehuda Schmidman

Sure, sure. So the international business today or as we closed out 2016 was approximately 8% of our business. The big drivers were Heelys, AND1, Martha Stewart is becoming more and more of a driver. What's happening, as we are growing that and our goal is to get that to 15% of our business at least. And what's happening is we're combining that new traction that we're seeing with places like Alibaba, our new launch in South Korea from the Martha Stewart brand this year. Our new launch with AND1 in China, and the new launch -- the signing and new launch of a new geography in Latin America for AND1 which we haven't yet announced in specific.

So the growth rate is solid, the sort of difference between the 8% and the 15% will be a combination of all these businesses getting not just off the ground, but really helping work with them and ensuring their success. And I think in large part, if you just sort of go take it up 10,000 feet really where the opportunities live for us are in Asia and Latin America and the Middle East.

David Buckley

Okay, that's helpful. Thank you. And then Gary, could you just provide an update on your outlook on M&A both this year and moving forward?

Yehuda Schmidman

So, maybe I'll take that, in terms of M&A, certainly we've been very acquisitive since our -- since the beginning of our formation and especially leading into let's say 2014-2015 highly acquisitive. Last year that pace slowed to where we acquired one brand in '16. And right now our focus in terms of capital allocation is really around debt pay down.

Our big focus in terms of where we're allocating our time is predominantly on organization growth activation upon expense management and then of course on long-term balance sheet opportunity. So, there are opportunities out there on M&A side, but I would tell you our focus right now especially from a capital allocation perspective is on debt pay down.

David Buckley

Okay, great. Thanks Yehuda. Best of luck, guys.

Yehuda Schmidman

Thank you.

Operator

Thank you. The next question is from Steve Marotta of CL King. Please go ahead.

Steve Marotta

Good morning everyone. Just one follow-up question, the revenue guidance for the first half includes basically the guaranteed minimum royalty streams and I just want to ask is the $120 million of GMRs in fiscal '17 straight lined across quarters or is there any waiting any individual agreement that would be material for the model?

Gary Klein

Yes, i's minimum are always straight line. We're always recognizing the greater of minimum overage.

Steve Marotta

Great, thank you.

Yehuda Schmidman

Thank you.

Operator

Thank you. We have no further questions at this time. I would like to turn the conference back to Schmidman for closing remarks.

Yehuda Schmidman

Great. Well thank you all for joining this morning. We appreciate your time, we appreciate your support and we look forward to speaking with you on the next call.

Operator

Thank you. Ladies and gentlemen this does concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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