Iconix Brand Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Iconix Brand Group’s Second Quarter 2017 Earnings Conference call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time. And as a reminder, this conference is being recorded. Now it’s my pleasure to turn the call to the Vice President of Investor Relations, Ms. Jaime Sheinheit. Please go ahead.

[Jaime Sheinheit:]

Good morning, and welcome to the Iconix Brand Group’s second quarter 2017 earnings conference call. On today’s call, we have with us John Haugh, our President and Chief Executive Officer, and Dave Jones, our Chief Financial Officer. During today’s call, we will be making some forward-looking statements within the meaning of the federal securities laws. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company. This may cause actual results, performance or achievements of the company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident and similar expressions identify 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. As mentioned in our press release this morning, we are finalizing the accounting necessary to deconsolidate our Southeast Asia joint venture, which has proven to be a time-intensive process. The deconsolidation will not impact revenue or SG&A expenses and will not materially impact free cash flow in the second quarter. However, among other items footnoted in our press release, the company’s GAAP net income and GAAP EPS will be adjusted to reflect the non-cash gains the company expects to recognize as a result of the deconsolidation. Any gains that the company will recognize will be excluded from our non-GAAP metrics. I would like to turn the call over to John Haugh.

[John Haugh:]

Thanks, Jamie. Good morning, everyone, and thank you for joining us today. For some time now, we have talked about our two primary goals

[David Jones:]

Thanks, John. Good morning, everybody. As mentioned in our press release this morning, in the course of finalizing the results for the second quarter of 2017, the company determined that the Southeast Asia joint venture should be deconsolidated. This deconsolidation was triggered by our joint venture partner’s payment of the final purchase price installment for its interest in the JV, which we received in late June. Following – flowing the deconsolidation through the company’s financial statements is a time-intensive process. And as a result, the company is reporting today its preliminary results excluding the effect of this deconsolidation, and our results will be subsequently adjusted as described in the press release. As a reminder, the sale of our entertainment business closed on June 30, and the following discussion is related to continuing operations only. Moving on to results. In the second quarter of 2017, revenue was $61.6 million, a 7% decline from the prior year quarter when excluding revenue from divested brands. SG&A was $26.8 million, a 9% decline as compared to $29.5 million in the prior year quarter, driven by lower compensation and bad debt expense. In the second quarter, we recorded a $23.2 million charge primarily related to licensee terminations associated with the transition of one of our brands to a new license. Excluding the license termination charge in 2017 and income from divested brands and a loss on the sale of trademarks in 2016, operating income was $35.3 million, a 6% decline as compared to $37.6 million in the prior year quarter. Operating margin adjusted for the onetime items was approximately 57%. We expect operating margin for the full year to be in the mid-50s. Interest expense in the second quarter of 2017 was $14.1 million, a 35% decline as compared to interest expense of $21.9 million in the second quarter of ‘16. The company’s reported interest expense includes non-cash interest related to its outstanding convertible notes of $4.3 million in the second quarter of 2017 and $6.8 million in the second quarter of ‘16. Excluding the non-cash interest related to the company’s outstanding convertible notes, interest expense was $9.8 million in the second quarter of 2017, a 35% decline as compared to $15.1 million in the first quarter of ‘16. The lower interest expense is related to the company’s significant reduction of debt over the past year. With our new term loan, the company expects non-GAAP interest expense to be approximately $47 million in 2017 as compared to $54 million in 2016. In the second quarter of 2017, the company recorded a $13.9 million expense related to the early extinguishment of a portion of our prior term loan, compared to a $4.3 million gain in the second quarter of last year related to the repurchase of the portion of our convertible notes which were purchased at a discount. These are both excluded from our non-GAAP income and non-GAAP earnings per share. GAAP net income for the second quarter of 2017 was a loss of $16.3 million as compared to income of $10.6 million in the second quarter of ‘16. However, when excluding certain non-operational onetime items, including the license termination charge and expenses related to the early extinguishment of debt, non-GAAP net income for the second quarter of 2017 was $15.2 million, an 18% increase as compared to $12.9 million in the second quarter of ‘16. GAAP diluted earnings per share for the second quarter of 2017 was a loss of $0.30 as compared to earnings of $0.21 in the second quarter of ‘16. And non-GAAP diluted earnings from continuing operations for the second quarter of 2017 was $0.26 as compared to $0.25 in the second quarter of ‘16. The benefit from the amortization of wholly owned U.S. intangible assets for tax purposes was approximately $0.13 in the second quarter of 2017 as compared to $0.15 in the second quarter of ‘16. Non-GAAP earnings per share, adjusted for the tax effects of deductions related to the amortization of wholly-owned intangible assets amortizable for U.S. income tax purposes, was approximately $0.39 in the second quarter of 2017 compared to $0.40 in the second quarter of ‘16. Over the last year, we have taken significant steps to strengthen our balance sheet and enhance our financial flexibility, and we are pleased with our progress. Following the sale of the entertainment segment and the subsequent repayment of $362 million of debt, which included the full extinguishment of a highly restrictive and expensive term loan, the company’s total debt balance was approximately $814 million, a $650 million reduction, which is down approximately 44% from less than a year ago. This balance, which does not reflect the recent closing of our new term loan, includes approximately $419 million of senior secured notes, $100 million variable funding note and approximately $295 million of the 2018 convertible notes. With this significant reduction of debt, the company reduced its net leverage ratio to under 6x, representing an improvement of approximately two turns from the beginning of 2016. Improving our balance sheet enabled us to secure new financing at more favorable terms than in the past, as demonstrated through the new 5-year $300 million senior secured term loan facility with Deutsche Bank that we announced last week. The interest rate on the new term loan is 300 basis points lower than our previous term loan and provides us with greater financial flexibility. The proceeds of the new term loan will be used to repay our $295 million of 2018 convertible notes. We believe this loan demonstrates the confidence the investment community has in Iconix and our go-forward strategy. Turning to guidance, as stated in our press release this morning, we are revising our 2017 revenue, earnings per share and free cash flow guidance. We expect 2017 revenue to be in the range of $225 million to $235 million as compared to our previous guidance of $235 million to $245 million. Our guidance still implies improving trends in the second half. The revision is primarily related to the timing of certain new initiatives, the transition of certain licensees, and, as John discussed earlier, approximately $2.6 million of the revenue revision is related to the deconsolidation of the Southeast Asia joint venture. We expect 2017 GAAP earnings per share to be a loss of $0.06 to a loss of $0.01 as compared to our previous guidance of $0.29 to $0.44. This revision is primarily related to the charge from the termination of licenses, the expense related to the early extinguishment of debt and the revenue recognition and will change once we have finalized the accounting gain for the deconsolidation of the Southeast Asia joint venture. We expect 2017 non-GAAP earnings per share to be in the range of $0.65 to $0.70 as compared to our previous guidance of $0.70 to $0.85 to reflect the revenue recognition – revision, sorry. We continue to estimate the tax savings in 2017 related to the amortization of intangible assets to be approximately $29 million for the year, which would equate to approximately $0.51 of earnings per share. Therefore, we expect non-GAAP earnings per share, adjusted for tax amortization, to be in the range of $1.16 to $1.21 per share. We expect 2017 free cash flow to be in the range of $65 million to $82 million as compared to our previous guidance of $105 million to $125 million. The revision is primarily related to the $23.3 million charge the company incurred in the second quarter as a result of terminating licensees, the downward revenue revision and a $10 million state tax audit settlement. We would also like to note that in June of 2017, we received $345 million of cash related to the sale of the entertainment segment. I’ll now turn the call back to John for some closing remarks.

[John Haugh:]

Thanks, Dave. I have just completed my 16th month in this role. We set out to achieve two initiatives, and we’ve achieved one. On growth, I’m disappointed we haven’t made faster progress, which I attribute to the time programs take to develop and challenging retail conditions, but the team and I believe we can get this done. We’re on the right track with the right strategies and teams and brands with more potential than we have unlocked heretofore. We are working on a number of new initiatives, some of which we expect to announce in the near term, that we believe will boost confidence in our company’s ability to drive new business. We expect to get this done. Thank you for listening this morning and your continued support. We will now open the call up for questions.

[Operator:]

Thank you very much. [Operator Instructions] Our first question comes from the line of David King with ROTH Capital. Your line is open.

[David King:]

Thanks. Good morning, John and Dave.

[John Haugh:]

Hi, Dave.

[David King:]

I guess, first off, on the revenue guidance, it looks like you’re still guiding to organic growth in the back half, or a little bit of organic growth, I guess, if we back out Sharper Image. I guess, what sort of visibility do you have, John, into that? How much – can you give us some context, how much GMR coverage do you have to get you there? What does that reflect in new deals versus existing ones versus existing runoff? Just some context, I think, would be helpful. Thank you.

[John Haugh:]

So Dave, two things. Let me just tell you I’m in New York, Dave Jones is remote. So if it’s a little wonky as we go back and forth, I just want you guys to know that. I think, Dave, actually, when you do the calculation – we said a few weeks ago at a conference that Q1 was down 11%. We’d make some improvement in Q2, some improvement in Q3, some improvement in Q4. We’re still on track to do that. I think when we finally get to Q4, we’re going to be flattish. There might be a little bit of growth there. We might be plus or minus a couple – a point or 2, one way or another. But net-net, everything is just taking a little bit longer to develop. So while we are making sequential improvement, we don’t see positive – we’re not 100% sure we’ll have positive in Q4. We think we’ll be up a little bit. So that’s if you do – if you run the model, that’s how you should really think of that. With respect to why we think we will have improvement over the back half, it’s something like a Danskin – so while Danskin will be down for the year, because of the tiered royalty rate that we talked about, once we get to the second half, we get into a flat year-over-year, so we don’t get kind of whacked on that one. A couple of the programs that we have yet to announce will start to bring revenue in, in the second half of the year. Some of them will go live and some will be positioning product for an early 2018 launch. We are still pursuing some other initiatives, many in the men’s business that are, frankly, we think, interesting, just taking us a little longer than we’d like them to be. We mentioned that PONY – while had – while PONY had a good Q2, we think we’ll continue to get some traction in the second half. So the message I want you to understand is sequential improvement quarter-over-quarter. Still not the positive we’re looking for. And that’s how you should think about your model.

[David King:]

Okay. And then what does that reflect at all in terms of the Target-Mossimo decision? I guess, what’s the timing of that? And then, are they phasing out women’s and – well, men’s, I think we knew about it. Is it women’s as well, then? And I guess, just how should we be thinking about that, the timing of that?

[John Haugh:]

Yes, I think the way to think about that is – I think Target has stated they have a strategic direction of a launch of a bunch of new private label brands. I think the CEO, Brian, has said that. Mossimo has enjoyed a many, many, many year relationship with Target. We have enjoyed an excellent relationship with Target, as I mentioned. We still have strong Fieldcrest. We will be announcing we have agreed to and we’re countersigning right now a new program that we’ll announce shortly. But Mossimo, we’re finalizing exactly the terms. But Mossimo will still have presence and the entire Mossimo line will still have presence in Target. You’ll be able to find it in 2018, although it starts to fade out toward the last part of the year. And then the sell off will be complete in early 2019 for the entire brand.

[David King:]

Okay. Oh the entire brand? Okay, perfect.

[John Haugh:]

Yes, entire brand.

[David King:]

That helps. And then, Dave, probably for you. Well, maybe a little bit for John. The – in terms of the $23 million license termination charge, can you talk about that a bit more?

[David Jones:]

Yes, Dave. It’s David Jones. The $23 million was a couple of charges to terminate licenses early with existing licensees as we transitioned a brand to a new licensee. That is not typical for us, and so that’s why we excluded it from the non-GAAP. We wouldn’t expect any of that to reoccur. It was a fairly significant event. And I think we’ll be able to talk more about the new deal in the coming weeks and months. The $2.5 million of special charges, as you know, we still have the SEC review open. We don’t have any further updates on that. So while the volume of charges has slowed, we still anticipate it to continue for some period of time. But some of the other stuff, we are making progress on. So hopefully, those charges will continue to slow as we go forward.

[David King:]

Thanks for taking my questions and good luck, looking forward.

[Operator:]

And our next question comes from the line of Andrew Roberge with Guggenheim. Your line is open.

[Andrew Roberge:]

Hi, good morning guys.

[John Haugh:]

Hi, Andrew.

[Andrew Roberge:]

So I guess my first question is, you’re about two quarters into the plan you laid out in November. There’s been a lot of change at the company. So how do you guys just sort of feel about the portfolio? Is there still more brands to go? Or are we sort of past that phase and into the acquisition phase?

[John Haugh:]

So I think, Andrew, you’re 100% correct. We’re two quarters into a 12-quarter plan. And remember, we were clear on the – with several initiatives, when we talked to people at Investor Day, we said we’ve got to work on the balance sheet, and again, we feel like we’re substantially there. The only outstanding piece at this point is the VFN, and we are basically – we’ve got terms agreed to. We’re not quite done, but we’re a week, 1.5 weeks away from having that done. So we feel like we’ve substantially shored that up. We also talked about really thinking about the portfolio differently and then we also talked about growth. I spent a bunch of time talking about growth, so I won’t stay on that path right now. With respect to the portfolio, if you remember, we put brands into three categories. We said there’s some driver opportunities. We are still focused primarily on those driver opportunities. Those are things like PONY, as we mentioned before. Those are things like Danskin. Starter was in there. Umbro was in there. We’ve got a bunch of good things happening with all those brands. We also talked about some of the incubate brands and said, are they the right business for us long term? Either make them big or, potentially, they make sense to have a better home. And then we talked about the maintained business. I think at this point, we are 28 brands. I think we have clear strategies on all of those. So I don’t think, at this point, we are actively looking to dispose of any other brands or sell any other brands at this point. We did sell both our entertainment business and our Sharper Image business. We got, I think, very attractive multiples, 13x-ish EBITDA. So we are always open to listen if somebody really thinks that they want to pay us a very aggressive price for one of our brands. But I think the ones we have today, we feel very good about them. We believe we’ve got good growth plans for all of those. With respect to acquisition, we did state at Investor Day, while it is not our primarily objective, we do want to look for good opportunities in the marketplace. We did say by the end of 2019, we’d have about $25 million of royalty coming from acquisitions. We’ve obviously had to use a lot of our cash to get out of some loans and pay down some debt. So we’re a little bit tighter on the cash, but for the right opportunity, we know that we can get funding. We feel very good about our new relationship with Deutsche Bank, who gave us a $300 million term loan. We are aligned with Deutsche Bank not just to fund the – to repay the 2018s, but rather to have a long-term banking relationship with them. So we think when the right opportunity presents itself, we will be able to go chase it. And we are actively looking for opportunities. We just haven’t found anything we like yet.

[Andrew Roberge:]

Okay, great. And then just a question about where you guys are as pure e-com players, your exposure there. Sort of what are you doing to increase penetration there? And then are you only looking in the U.S.? Or is that also an international growth opportunity for you guys as well?

[John Haugh:]

So I think two things. When we talk e-com, Andrew, I want to answer that two ways. The first is we have a very active e-com presence today because our brands sell through Walmart.com and through JCP.com and through Kohls.com. So we tend to support all of our partners. With Wal-Mart, as an example, not only do we work hard with Walmart.com, we work a lot with Jet.com to even add more brands onto their site. So we are aggressive in making sure our partners, our retail partners, can make sure our products help them drive their omni business. We do have a business with Wayfair right now. So in a pure play, we’ve got Waverly in there. We’re obviously looking at a couple of other pure-play e-com opportunities, domestic. Internationally, we were having this conversation the other day about Alibaba and where we can play based on some of the brands that are committed to in China and which ones are available. So we’re working on strategies with them as we speak. In Europe, we have, again, strong relationships. So if you think of something like Sports Direct, which is a big partner for us in the U.K. Sportsdirect.com is a big player, and we are part of their business there. And as an example, Lee Cooper Jeans and Ocean Pacific both performed well in their stores as well as through their e-com business. And then we have other relationships with some pure-plays over there, including Zalando – and I’m spacing, I apologize. But I know Willy’s got another one going over there as well. So we’re trying to be aggressive. We’re trying to, wherever possible, make sure our product gets good pure-play opportunity while maintaining our business of asset light not only in inventory, not only in our DCs, not only in our own order management system. So that’s how we’ll continue to approach it for the near future.

[Andrew Roberge:]

Okay, great. Thanks that most.

[Operator:]

Thank you. And our next question is from the line of Eric Beder with FBR. Your line is open.

[Eric Beder:]

Good morning.

[John Haugh:]

Eric, it’s good to hear your voice again.

[Eric Beder:]

Thank you. Could you talk about the strategic driver? And I’m going to apologize because I had some technical difficulties in the beginning, if I – this is repetitive. You made that Canada acquisition. What was the logic on that? And why did you want to take that back?

[John Haugh:]

I think – we entered into a relationship with the Bitton family 5-ish years ago where we bought half of Buffalo and sold half of Iconix Canada. I think the Buffalo business performed well for a while. And frankly, it’s accelerating now. And therefore, we want to stay in that. And we’re partnering closely with Gabby and Charles Bitton and our partners at GBG. And we think Buffalo, for the next several years, has a lot of opportunity. With respect to Canada, realistically, Gabby was – we were the minority partner there – or I should say, Gabby was driving the business day in, day out. And we didn’t feel like we were making as much traction as we needed to. And when we have gone in and taken – bought JVs back, think of Latin America, think of China, we’ve actually been able to accelerate the business. And we think that, that is the right way for us to capture a bigger source of our Canadian business. Canada, as a rule of thumb, tends to be about 10% of the U.S. when you think of opportunity up there. It probably won’t be quite that big for us because some brands don’t have – we don’t have the rights. For instance, we don’t own Joe Boxer in Canada. But we think it can be bigger than it is. And in conversations with Gabby, we all came to the conclusion that the best opportunity for us to kind of double the business up there, albeit off of a small base, was if we jumped in and managed it ourselves. So based on successfully doing this in Latin America and China, based on wanting Gabby and the Bitton family to really help us drive the Buffalo business and based on our ability to take many brands that we can have conversations in the U.S., think Wal-Mart Canada, think Costco Canada, think of some opportunities like that, our HBC contacts. We just thought we could take that and run it a little bit better.

[Eric Beder:]

Great. Do you see any other opportunities on the JV side for that?

[John Haugh:]

We contractually have three relationships with GBG, Europe, MENA Southeast Asia. And all in three of those, we have put call options coming down the road here, anywhere from a year to two years. So I think in all of those cases, we will actively talk to Dow and to Jason and figure out what the right answer is for those businesses and what’s the right way to continue to partner with GBG, with whom we do a lot of business and we consider to be a strategic ally. But in places like Europe and in Southeast Asia and the Middle East, North Africa, we do want to determine what’s right way for us to drive our business in those markets.

[Eric Beder:]

Great. You guys have done a great job with the debt. You’ve got one more note coming due, the $100 million variable. How do you – what do you – what’s the thought process there in taking that out?

[John Haugh:]

Eric, you might have, maybe during the technical difficulty. I did mention briefly. Jason’s sitting close to me, so I’ll make sure I don’t say anything I shouldn’t say. But basically, we’ve been working on this. We have our partners lined up. We think we’re a week or two away. We’ve essentially agreed to terms. And I think we’re literally 7, 10 days away from having that one done.

[Eric Beder:]

Well okay I think we’re good. Thank you.

[John Haugh:]

Thanks Eric.

[Operator:]

Thank you. And our next question is just from the line of Steven Marotta with C.L.K. and Associates. Your line is open.

[Steven Marotta:]

Good morning everyone thank you for taking my call. John, I believe that you said that a new deal for Mossimo is likely at some point in the relatively near future, and you’d be transitioning out of Target. Is it possible if that happens in the very near term, that the brand wouldn’t be in Target in 2018?

[John Haugh:]

No, no. We’ve – Target maintains exclusivity through, Steve – we’re not officially signed. But right now, where we believe we’re landing the plane is they have exclusivity through, I think we’re thinking the end of October. So essentially, that takes you into spring 2019. So our energy right now is finding a home – I said spring 2019. I don’t know what I said. I meant to say 2019. So ostensibly, our energy right now, and we’ve got plenty of runway in front of us, is to land the brand for spring of 2019. So that’s when I think you’d – when we’d expect to see it somewhere else. Again, when you look at our portfolio of 28 brands, we’re very proud of all of them, of course. But when you look at the Mossimo brand and the strength of the brand, the awareness of the brand, the favorability ratings, the appeal both dual gender as well as across various age groups as well as income, and then we’ve done – we’ve talked to consumers and said where might you expect to find this, where would you go look for it? And we get really, really good marks. So we have a partner lined up from a maker’s standpoint. So we are out – we will be out shortly in the market making presentations and believe that Mossimo will be firmly in place for spring of 2019. Now, nothing is done until it’s done, but we’re working like crazy toward that. And it’s a fashionable brand, great awareness. We think it can bring a lot to a couple of retailers out there.

[Steven Marotta:]

Thank you and as it relates to – you mentioned OP out of Wal-Mart soon and Starter out of Wal-Mart soon. Can you talk about the dislocation associated with putting those brands in new channels? And when that might occur? And if there’s a headwind associated with that, particularly in 2018?

[John Haugh:]

So I think I want to be careful not to talk about 2018 yet, we’re working on budget. We’re a couple of months away. So not ready to give you a directional 2018. I can tell you, Starter, we will be talking about in the very near future here, we think a very good new opportunity. We think it’s a chance to bring Starter back to the heritage of what it was. Starter really was the first logo strong athletic brand out there. We think there’s a chance to upgrade the product, upgrade the price point and appeal to a consumer that still is very, very aware of Starter. So you hear about that – you will hear about that relatively soon. Ocean Pacific. Ocean Pacific is a lifestyle brand with tremendous heritage that has had a very good partnership with Wal-Mart. But season after season, we got just a little bit narrower, and we got to a point where we were really just a swim brand in for the swim season. And it’s a lifestyle brand, and that was demonstrated this summer with the collaboration we had with Urban Outfitters that sold very well. And frankly, a bunch of the industry took note of what the brand really could be, the breadth of it and the brand more as a lifestyle brand versus a pure swim. And so as a result of that, we have it placed for next summer. Not at a point yet to share that partner, because that’s their decision, not ours. But we’re very excited about bringing Ocean Pacific back, not OP, Ocean Pacific back as a total lifestyle brand. And we think that will allow us to get back to a royalty rate that we were getting from our partners at Wal-Mart. That will take a little bit longer. Starter will happen pretty quickly. Ocean Pacific will take a little bit longer. But I think the fact that Urban Outfitters grabbed it, the fact that we’ve got a place for next summer, these are really good indications of where that brand can go and can be repositioned.

[Steven Marotta:]

Great. David, just one question. What is the annualized interest expense right now from a run rate standpoint?

[David Jones:]

We would expect 2017 interest expense to be about $47 million. And that compares to $54 million in ‘16.

[Steven Marotta:]

And so the back half of this year is essentially the run rate? Obviously, there shouldn’t be any – well, there shouldn’t be any notable deltas in 2018 to your expectation, assuming everything else is equal.

[John Haugh:]

Yes, the back half should be the run rate, I think.

[Steven Marotta:]

Excellent. Thank you, that’s great.

[Operator:]

Thank you. And our next question is from the line of James Chartier with Monnes, Crespi, and Hardt. Your line is open.

[James Chartier:]

Good morning. Thanks for taking my questions. Just wanted to kind of touch back on the brands – Mossimo exiting Target and the Wal-Mart brands. I mean, by my math, that’s somewhere close to $40 million of revenue, which is a significant part of your annual run rate. I mean, what’s your comfort level that you’ll be able to kind of maintain at least that level? And when do you think you’ll kind of be back to that kind of run rate for those brands?

[John Haugh:]

James, this is John. I’ll give you a comment. Dave might have a few, as well. You’re a little bit high on your number. But again, if you look at those three brands – I’ll just stick with those for a second. Mossimo will still have a business in 2018. And again, if we time this right, and this is what we’re working toward, if we can land for spring of 2019, we end up coming down a little bit in 2018 as we make the transition, but then we get ourselves back on the right track for 2019. Starter, we have been shrinking as Wal-Mart has taken some categories away and has made it a little bit more commodity-like. We think with the opportunity to reposition, we will have a pretty good 2018 on Starter. It’ll still make up, we’ll still be a little bit short of where we were in 2017 just because of the strength and breadth of Wal-Mart. But we feel good about that placement. Full stop. Ocean Pacific is going to take – as I mentioned a second ago, Ocean Pacific is one that, while it was narrow at Wal-Mart, they still sold a lot of swim, let’s be clear. As a lifestyle brand, we believe we can get ourselves back. That one will probably take an extra year versus the other 2. In many of those cases, when we can go back out to the market, potentially in a wholesale relationship, we will have an opportunity that – the brilliance of a relationship with someone like a Wal-Mart is they’re just – they’re great partners, but they can be really tough on a royalty rate. As we have a chance to reposition this, you don’t always have to get the same absolute volume back to get your royalty rate back. So that’s – as we look to reposition, as we look to think about where these brands can live and with whom we will partner, there are opportunities to get our royalty rate back without having to get an absolute retail market sales volume back. And so as we do our projections out for the next couple of years, we see ourselves being able to bridge these things probably a little easier than your model would say we could.

[James Chartier:]

Okay. And then, Dave, so the Southeast Asia, you’re losing some revenue there. Do you get some portion of that back in the equity earnings line? And if so, how much?

[David Jones:]

Yes, James. So we do lose the revenue and the expenses. So net, the earnings should be the same. And when we talked about it, I think we said – sorry, I can’t find it in my notes, but I think it’s about $4 million a year of revenue.

[James Chartier:]

Okay. And then can you talk about – you talked a lot about kind of the drags the first half of the year. Where are you seeing successes on some of the new initiatives since you took over, John?

[John Haugh:]

There are some drags. Some of the new initiatives mentioned before that we – we’re making – let me just kind of go segment by segment to help. I’m going to start with international. We have made some – I’m just going to talk about brand performance, Jim, I think that’s what you’re talking about?

[James Chartier:]

Yes.

[John Haugh:]

Okay. Because again, I’d start with – we’ve got a stronger balance sheet, and that makes everyone’s life better. But with brands, I think if you start internationally, we feel like we’re making some nice progress. Europe has been a bit of a struggle for us, and we’re starting to make some traction there. China continues to perform very well for us. Latin America performs very well for us. Frankly, except for a couple of small glitches, international would be up even more. So I feel like the team there, good strong team based throughout the world, but we drive a bunch of it out of the U.K. Strong players there, some new players there, some strong players in Latin America and in China, that’s making a difference for us. In Home, we’re fortunate we’ve got several just DTRs which are good, solid. But Waverly has been a business that has continued to grow for us. The team not only has a strong DTR with Wal-Mart, called Waverly Inspirations, which is up, but also several wholesale lines, partnerships in just the Waverly brand, and so we continue to make traction there. Men’s continues to be a challenge for us. When you think fashion, we have said – I said to someone the other day, I’ve done probably five earnings calls, and every single time, I feel like I’m saying fashion is just around the corner. We’re still saying that. Obviously it’s a very, very long corner because we have yet to get all the way around it. But we have changed out our approach on Rocawear, where we have a new licensee who understands this space. And we will present this at MAGIC in one week, I think next week we’re out there, with a whole new line, and we feel like we’ll finally start to turn that thing north again as we get into 2018. Ecko continues to show promise. We do have a fragrance that went away. Scion, the partnership is making progress. We’ve got some mega stores going into JCPenney, so we feel good about that. Buffalo was a decision we said that we decided to stay in. We thought about getting out of it. That team has done a nice job. And all of a sudden, we’re getting some good traction there. We mentioned PONY and then Starter. As I mentioned earlier, we’ve got a great story to tell you, but we’re just kind of a month early to tell you that. And we have one more opportunity within men’s that we will be sharing that’s probably two months out. Women’s is a primarily a DTR business. Strong partnership with Kohl’s and continue to do well. Just re-signed Sarah Hyland. We do have to fight like crazy to make sure we get Mossimo in the right spot for spring of 2019. Danskin, we feel like we’ve driven the upstairs market better. Strong relationship with our partner here in the neighborhood, and just reassigned and we feel like we’ve got a growth trajectory with that individual. And a couple of smaller brands, like Rampage, we have just historically relied on the footwear business for Rampage. We’ve signed a new ready-to-wear partner there who already has placement still in the fourth quarter this year, which is brand-new news for us, and then really into spring 2018. So a series of incremental gains that we need to now collectively harness into the right total organic growth number that we’re looking for. But I think a series of small wins and a couple of bigger wins that we’ll announce shortly.

[James Chartier:]

Great. Thanks and best of luck.

[John Haugh:]

Thank you.

[Operator:]

Thank you. And our final question is from the line of Patrick Marshall with Cowen and Company. Your line is now open. Patrick your line is now open.

[John Haugh:]

Patrick, are you there? He might be on mute.

[Operator:]

Mr. Patrick your line is open.

[John Haugh:]

We can’t hear you.

[Patrick Marshall:]

Can you hear me?

[John Haugh:]

We can now Patrick.

[Patrick Marshall:]

Okay, sorry about that, tough reception here. But I think that you guys obviously addressed the bet and everything. And I think with that last question, you might have addressed my question on where you are with your growth initiatives on brands like PONY and some of the other smaller guys. Do you have any other brands that you could point to that might be – you think there’s potential for real growth within the brand?

[John Haugh:]

The short answer is yes. The long answer is some of it’s a little premature to talk about today. But we, like most companies, do 3-year planning. We’ve been working on that with our board recently, and it projected out what we think 2018, 2019 and 2020 will look like. And we think PONY, as you mentioned and we mentioned, has a pretty good future. We think Starter actually has a very good future. So we’ve got a handful of brands. The trick in this, Patrick, is always you need a – it’s like a portfolio, you need your brands to kind of balance each other out, some good and some that come off a little bit, and you need one or two good hits a year. We’ve got several of those lined up. The question’s always sequencing and it always takes a little longer than you think it’s going to. We’ll have more to share in the next couple of months, and we’ll have more when we talk to you at the end of Q3. But we do, as we look down the road, see several brands that can be bigger and more than they have been heretofore.

[Patrick Marshall:]

Great, thanks.

[Operator:]

Thank you. And thank you. And now, I would like to turn the call back to John Haugh for his final remarks.

[John Haugh:]

All right. I just want to say thank you to everybody for your ongoing support. Your questions make us sharper every day. We’re very proud of what we’ve done on the balance sheet and on the debt side of things. We know we need to work harder, smarter, faster on the growth. And you have the entire management team’s commitment that we will continue to make progress on that. So thank you to everybody. Enjoy your day.

[Operator:]

Thank you. And ladies and gentlemen, with that, we conclude the conference. You may all disconnect. Have a wonderful day.