Iconix Brand Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Iconix Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Now I'd like to read a brief 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 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 the forward-looking statements, which speak only as of the date the statement was made. I would now like to introduce your host for today's conference call, Mr. Peter Cuneo, Chairman of the Board and Interim Chief Executive Officer. You may begin.

[Peter F. Cuneo:]

Good morning, everyone, and welcome to the Iconix Brand Group's second quarter 2015 earnings conference call. I'd like to start today by introducing myself as well as other members of the Iconix senior management team who are here with me today. My name is Peter Cuneo. As you've heard, I am the Chairman and Interim CEO for Iconix. Also in the room, we have David Jones. David is our newly appointed EVP and Chief Financial Officer. David has joined Iconix with great proven experience as the CFO of a multi-billion dollar global public company. David has very strong technical, financial and strategic skills, and we are quite privileged to have him on our team. Also in the room today is David Blumberg. David is our Head of Strategic Development and he recently served as our Interim Chief Financial Officer. David, again, is a highly experienced executive. He's been with Iconix for many years and knows our business very well, and we greatly appreciated his stepping up in that interim role to support the company. David did an outstanding job. Also we have Willy Burkhardt, who is our Executive Vice President and Managing Director for International business, which is growing very rapidly. And finally, but not the least of people in the room, we have Jaime Sheinheit, who is our VP of Investor Relations. I know that a lot of you know her and although I've only been on the job for five days, including the weekend, I've come to appreciate Jaime's professionalism and energy very much. As we announced on Thursday, I have taken on the role of Chairman and Interim CEO for the company following Neil Cole's resignation. I want you to know that I plan to be an active interim CEO and I think that my past significant experience leading a number of entertainment and licensing companies some of which were public will be very helpful. I've served on the Iconix board for almost nine years. But please make no mistake I don't view this job as a job for me to put my finger in the dike, so to speak. I will not be deferring any important decisions till the arrival of the new CEO. I'm really very energized about the opportunity to work with the board, and the company's leadership team to achieve our next phase of growth for Iconix. We realize that we've issued a considerable amount of news recently about Iconix. So let me note for you upfront that notwithstanding all of this news, I am very optimistic about the future of this company. And I believe that the issues disclosed by the company can and will be resolved. As we begin the search for a new permanent CEO, I would like to thank Neil Cole for his vision, dedication and many contributions that he made to Iconix over the years. And we really wish Neil the very best in the future. On today's call I'm planning to walk you through our revised outlook for the full year 2015 and talk about highlights of our core licensing businesses. Dave Jones will then discuss our second quarter and first six months 2015 financial results. Dave is also going to talk about an ongoing periodic review of the company's Form 10-K for the year ended last year, December 31, 2014, that is going on with the staff of the Securities and Exchange Commission. After that we will open up our call for Q&A. The board and I are fully focused on maximizing Iconix's full business potential and growth. Without question, Iconix continues to have significant strengths around which we can build our business going forward. These strengths include an unrivaled global portfolio of 35 diversified consumer brands. We have also a very profitable business model and our free cash flow continues to be very, very strong. I believe that we're going to restore our growth trajectory and reach the high aspirations that we've always had for the business. However, as we undertake these efforts, we believe is the right time to reevaluate our outlook for the full year and to reset our 2015 guidance is now. In this regard, starting today, we're going to provide separate revenue guidance in two components, licensing revenue and Other revenue. So let's talk a little bit about our outlook as we see it for the full year 2015. We expect licensing revenue to achieve low single-digit growth from the prior year, 2014, and we're projecting that revenue to be in the range $410 million to $425 million. Approximately 60% of this is minimum guaranteed royalty income. We think that this revised guidance reflects the current run rate of our business and includes some of the weaknesses we're experiencing in our men's and home brands. We've also adopted a more conservative strategy estimate for our entertainment businesses, given the natural variability in revenue and cash flows from the Peanuts movie. I had a lot of experience in the motion picture business, and sometimes, the timing of cash flows and revenues from films could change from quarter-to-quarter. In addition, we have removed from our guidance any potential joint venture consolidation assumptions in the second half of the year. So please note that our guidance relates to only the portfolio of existing brands and does not assume any additional acquisitions. We're of course going to continue to look for strategic opportunities to form new ventures with best-in-class partners, both here in the United States and abroad. Although to date we have not completed any transactions of this type, we are forecasting approximately $5 million to $15 million of Other revenue for the rest of 2015. Based on our revised revenue guidance and the current rate of our operating expenses, we expect our non-GAAP EPS to be in the range of $2 to $2.15. Please note that this does not include expenses that the company has incurred and will incur as a result of the ongoing periodic review by the SEC staff and the review being conducted by the board-appointed Special Committee. With this reset of our guidance, the company still expects to achieve significant free cash flow for the full year. Our revised 2015 guidance for free cash flow is in the range of $170 million to $190 million, and this compares to $174 million for the full year 2014. I would like to stress that our overall strategy has not changed, but of course we are taking a fresh look to see how our strategy can be enhanced and strengthened. Think it is premature to discuss any details. I do believe that the company's strategy will evolve over time. And we're very confident that our new leadership team – with our new leadership team, the company is well positioned to resume its growth trajectory, and this is based on our view of both organic revenue growth and new acquisitions. Separately, we are working absolutely tirelessly to resolve as quickly as possible the comments from the SEC staff's review process that we disclosed in our press release earlier this morning, and we'll have a few more remarks about this later this morning. Turning to our second quarter results, talking about our business segments, you should know that overall licensing revenue was up about 1% over the prior-year quarter, and our core licensing business remains solid. Entertainment is our strongest and fastest growing division, and we continue to see great progress with the Peanuts franchise in particular and we are very excited about the opportunities around the global release of the Peanuts movie, which is currently timed for the fourth quarter. The movie is generating great momentum, as the marketing efforts begin operating in full force as they started in the second quarter. We have dynamic in-theater 3D signage that allows audiences to take selfies with the Peanuts gang. In addition, the movie trailer has been attached to films such as Inside Out and Minions. The overall campaign for the film will be supplemented by a large array of promotional partners, and these include people such as Nestle's, All laundry detergent, Horizon Milk, RED BARON Pizza, Little Debbie, UNICEF, Hallmark, MetLife, and a global partnership with a major fast food company. And our merchandising efforts around the film include retail partnerships with many major mass and specialty chains in the United States, Japan, Europe, Asia, and some of these partners include Target, Barnes & Noble, Build-A-Bear, Toys"R"Us, Safeway, Albertson's and Walmart. Turning to our women's business, this business was flat in the second quarter, and the health of this business has largely been tied to our strong direct-to-retail partnerships and we are pleased to announce that we have successfully renewed a number of those, including the Candie's license with Kohl's for an additional five years and our Ocean Pacific OP license with Walmart for an additional two years. Danskin Now, which is at Walmart, remains one of our top performing brands and we've been working closely with Walmart on e-commerce initiatives to expand the online assortment, and this includes a new studio collection which features higher-end more fashion-forward products. We've also launched a Material Girl Active collection at Macy's, and this has been performing well. This is a launch that capitalizes on the athleisure trend by incorporating function into our fashion offerings. At Kmart and Sears, our Bongo business has been negatively impacted, of course, by store closures. In our men's division, our overall men's fashion business has been a challenge in recent years, and we are working towards new strategies for each of these brands. But as we do that, we sacrificed overall volume in the short term. Our Ecko brand is quickly becoming the best-in-class brand in the young men's department at JCPenney, and we have found new partners in Marc Ecko Cut & Sew, Men's Apparel, Ecko Kids, and Accessories and Footwear. These will begin shipping product in the spring of 2016. Rocawear continues to sell in select major department stores, but the specialty store market remains difficult for us. In our home division, the overall decline in revenue was related primarily to our Sharper Image brand, and this is in large part due to a transition in the core licensee as well as the sale of our e-commerce and domain name in the second quarter 2014. However, the rest of the home business remains healthy. This past week, Waverly Inspirations officially launched in all Walmart stores. Fieldcrest is benefiting from new product introductions at Target, Royal Velvet is on plan at JCPenney, and Charisma continues to perform very well at Costco. Internationally, we continue to make solid strides as we execute our strategy. In the second quarter, our overall international business was up 8%, including our non-consolidated joint ventures. If you exclude the effect of foreign exchange rates, our international business actually increased 18%. Our Latin American business had a strong quarter, growing double-digits, driven in part by our three DTRs with Walmart Mexico. These three DTRs include Starter, Ocean Pacific, and Danskin Now. Iconix Southeast Asia also continues to perform well with particular strength coming from Mossimo and we'll soon begin to roll out across the region the Mossimo brand as well as our ongoing Peanuts business. Although our business footprints in India, Korea and China are still small, our brands have achieved solid growth across each of these markets including the launch of new licenses for Ed Hardy, Rocawear and Starter in Japan. I'd now like to turn the mic over to Dave Jones who's going to take us through our financial results and then we'll come back and start Q&A.

[David K. Jones:]

Thank you, Peter. And good morning, everybody. I just would like to say first that I'm really genuinely excited about the opportunity in front of us. I've enjoyed working with the Iconix team over the past month and have realized that the team is very seasoned and tenuous group of people that are very passionate about the business and they're excited about the company's future opportunities. In particular, we have a strong accounting and finance team led by our Controller and our Senior Vice President of Finance, both of which have been with Iconix since the early stages. I am excited to be working with them to build a world-class organization. Moving on to results for the second quarter ended June 30, 2015, as Peter mentioned, licensing revenue was approximately $98.5 million, a 1% increase as compared to approximately $97.5 million in the second quarter of 2014. As an additional data point, licensing revenue in the second quarter of 2015 had a $3.7 million negative impact from foreign currency exchange related to the Peanuts, Umbro and Lee Cooper brands. Excluding the effect of foreign exchange rates, licensing revenue increased 5%. In the second quarter of 2015, the company did not have any Other revenue related to the formation of joint ventures or the sale of trademarks as compared to approximately $21.4 million in the prior-year quarter related to the sale of the Sharper Image e-commerce business and the transaction related to our Southeast Asia joint venture. With no Other revenue initiatives executed in the second quarter of 2015 as compared to two transactions in the second quarter of 2014, net income, earnings per share, and EBITDA in the second quarter were all down on a year-over-year basis. However, as expected and discussed on our first quarter conference call, our free cash flow in the second quarter of 2015 was up significantly, increasing 117% to approximately $75.4 million as compared to approximately $34.7 million in the prior-year quarter. Free cash flow per share increased 131% to $1.52 as compared to $0.66 in the prior-year quarter. Please note free cash flow for the second quarter 2015 included a $15.5 million tax refund, of which there was no comparable refund in the prior-year quarter. And additionally, the second quarter of 2015 benefited from the timing of approximately $11.4 million of tax withholding payment that will be paid in the third quarter. Excluding these items, free cash flow still increased $13.8 million, or 40%, from the prior-year quarter. Keeping in mind that the second quarter of 2014 included $21.4 million of Other revenue, non-GAAP net income in the second quarter of 2015 was approximately $22.3 million, which is a 44% decline as compared to approximately $39.6 million in the prior year. Diluted non-GAAP earnings per share was $0.45, which was a 40% decline as compared to $0.75 in the prior-year quarter, and adjusted EBITDA was approximately $51.2 million, a 34% decline as compared to $78.2 million in the prior year. When looking solely at the core licensing business, our adjusted EBITDA margin in the second quarter of 2015 was approximately 52% as compared to 58% in the prior-year quarter, excluding Other revenue. The decline reflects increased investments in the marketing of our brands as well as the Peanuts business becoming a larger percentage of the overall mix. In our non-GAAP metrics, we have excluded approximately $2 million of professional fees associated with the comment letter process with the staff of the SEC and the Special Committee review. Now looking at year-to-date and reviewing results for the six months ended June 30 of 2015, licensing revenue was approximately $193.8 million, which was an 8% decline as compared to approximately $209.7 million in the prior-year period. It's important to note, though, that licensing revenue in the prior year benefited from $17.1 million that was recognized from the five-year renewal of the Peanuts specials with ABC. In addition, 2015 licensing revenue was negatively affected by approximately $6.5 million due to foreign exchange rates. Excluding the effect of foreign exchange rates and the revenue related to the ABC renewal in 2014, licensing revenue increased 4% year-over-year including acquisitions. In the first half of 2015 the company did not have any Other revenue related to the formation of joint ventures or the sale of trademarks as compared to approximately $25.4 million in the prior period, which, again, related to the sale of the Sharper Image e-commerce business, a transaction related to our Southeast Asia joint venture, and the formation of our Lee Cooper joint venture in the U.S. In the six months ended June 30, 2015, the company generated free cash flow of approximately $105.4 million, a 25% increase as compared to approximately $84.1 million in the prior-year period, and free cash flow per diluted share of $2.13, a 34% increase as compared to $1.59 in the prior-year period. Adjusted EBITDA was approximately $104 million, a 30% decline as compared to approximately $147.9 million in the prior-year period. Non-GAAP net income was $49.3 million, 38% decline as compared to $78.9 million in the prior period, and our diluted non-GAAP earnings per share was $0.99, which was a 33% decline from $1.49 in the prior-year period. Adjusted EBITDA, free cash flow, non-GAAP net income and non-GAAP diluted earnings per share are all non-GAAP measures and are reconciled in tables, each of which can be found in our press release sent earlier this morning, and on our website at iconixbrand.com. Moving on to our balance sheet, we continue to be in a very strong position. We ended the quarter with $183 million of total cash and cash equivalents and we are confident in our ability to continue to drive strong free cash flow. As disclosed in our press release, we're currently in a comment letter process with the staff of the Securities and Exchange Commission relating to an ongoing periodic review of the company's Form 10-K for the year ended December 31, 2014. The current correspondence relates to the accounting treatment for the formation of the company's international joint ventures under U.S. Generally Accepted Accounting Principles and whether such joint ventures should potentially have been consolidated in the company's historical results. The company's board of directors also formed a Special Committee consisting of independent directors to review the accounting treatment related to certain of the company's international joint venture transactions. The material terms of the joint venture agreements have been fully disclosed in the company's prior filings and obviously the company's independent auditors have audited and reviewed such filings. In the past three years, the gains the company recognized related to the formation of joint ventures were approximately $46.5 million in 2014, $24.6 million in 2013 and $5.6 million in 2012. If consolidation of the joint ventures is required, these gains would be reversed and treated as non-controlling interests. We continue to believe that the structure of our joint venture transactions should not result in consolidation, and we have presented our views and supporting accounting literature to the staff. While the ultimate outcome of the staff's comment letter process is unknown and may have a material effect on the company's historical financial statements, the company believes that the results of the comment letter process will not have a material impact on historical free cash flow, will not impact the company's reported results for the first half of 2015, and will not impact the company's overall business strategy of forming joint ventures with large, well-capitalized partners that have local market expertise to organically grow the existing portfolio of brands globally. The company will continue to work closely with the staff to resolve any remaining open comments. The company does not expect to comment further on the Special Committee's review until it deems disclosure necessary or appropriate. I'll now turn the call back over to Peter.

[Peter F. Cuneo:]

Thanks, Dave. Before we start Q&A I just want to again re-emphasize how optimistic we are about the company's future, and there are a number of reasons to this. The first certainly again goes back to our global brand portfolio. As mentioned, these are very, very strong brands in the world of intellectual property. Our strategy has been consistent and will I think overall be consistent in the future. We have a great global platform. As most of you know, our international business has grown very rapidly as a percent of our total business over the recent years. We have great partners, both retailers, wholesalers, and best-in-class international partners as well. We are going to continue to be opportunistic – I'm talking too much today. I'm dried out – in terms of acquisitions and share buybacks and I think we're very excited about the opportunity to look at our long-term value through various investments. I think most interesting is the fact that if there is any changes in our statements, there would be no material change to our free cash flow projections, both historical and in the future. So thanks very much for your time and the floor is now open to questions.

[Operator:]

Our first question comes from Steve Marotta with C.L. King & Associates.

[Steven L. Marotta:]

Good morning, everybody. I have a couple of questions. The first is when do you expect a resolution to the SEC inquiry roughly? I know that there's no way to give a specific projection there, but is there a rough estimate as to when this could draw a conclusion?

[David K. Jones:]

Steve, hi. It's Dave Jones. Obviously that's a difficult question. We're in a comment letter process with the SEC staff. Determining when that's going to conclude is difficult. The details of each transaction are disclosed in our filings. Obviously the auditors have reviewed and/or audited those. We do generally believe our position is correct. We've presented all of our views to the staff; we've given them what we think is the appropriate supporting literature, and I think that's really all we can say about it at this point.

[Steven L. Marotta:]

Okay. As it pertains specifically to the reduction and expectations for entertainment revenue in fiscal 2015, is this simply timing or have you lowered your expectations on what the Peanuts movie will generate and the concurrent merchandising associated with the movie?

[Peter F. Cuneo:]

Hi, Steve. This is Peter. It's very common for studios to alter the timing of when they will introduce a film into a particular area of the world, and this is always changing a little bit because the studios want to basically take advantage of best possible for local conditions. China would be a particular interesting situation as well in this case because the potential for revenue out of China is quite great. So these are always moving around a little bit and what we have gotten from Fox in the past may change a little bit, and so we have to change our revenue expectations, in this case, slightly downward. However, our overall feeling for this project and for the film continues to be very bright, and if anything we're, in our minds, just moving a little bit of revenue out of 2015 into 2016.

[Steven L. Marotta:]

That's very helpful. Can you talk about the primary delta in free cash flow expectations in fiscal 2015 from what it was previously in the $208 million to $218 million range to where it is now at $170 million to $190 million? Is that largely related to the timing issues, Peter, that you just mentioned, or are there other factors?

[Peter F. Cuneo:]

Dave, do you want to answer? It's not primarily related to films.

[David K. Jones:]

Yeah. No, in total, our new projection of $410 million to $425 million – as we have an, obviously, a new CEO and a new CFO taking a fresh look at it. We looked at 2014 results from the core business, and based on current trends, I think that the reset is appropriate. There's a challenging U.S. retail environment. U.S. men's business is tough. We hope to grow the base organically globally through continued expansion. The international business is growing swiftly, but mitigated a bit by the U.S. dollar in terms of FX and to Peter's point, timing of the Peanuts movie around the globe. In terms of Other revenue, we haven't assumed any consolidation of joint ventures in the back half, which was in our original assumptions. And so that certainly makes a difference. And just sticking with Other revenue, Steve, we're actively working on a couple of strategic opportunities. For example, JVs with best-in-class partners in the U.S. and globally, we believe we still have the opportunity to form one or more strategic partnerships in this year, and so our estimates of Other revenue of $5 million to $15 million we think is realistic.

[Steven L. Marotta:]

Okay. Just one other question. The guidance for licensing revenue this year is $410 million to $425 million. Can you give what the actual was last year? And really what I'm asking there is, do you consider that ABC contract that was signed in the first quarter of last year to be licensing revenue or a one-time?

[David K. Jones:]

Yeah. The actual last year was $407 million and the $17 million is included in that $407 million.

[Steven L. Marotta:]

Okay. Thank you.

[Operator:]

Our next question comes from Eric Beder with Wunderlich.

[Eric M. Beder:]

Good morning. Hello?

[Peter F. Cuneo:]

Yeah. Good morning, Eric.

[David K. Jones:]

Good morning, Eric.

[Eric M. Beder:]

Okay. A housekeeping question. What is the debt level now in Q2?

[David K. Jones:]

I'm sorry, debt level? Yeah. In Q2, it's about $1.5 billion, Eric, and that would be, there's $100 million outstanding on the variable funding notes or the revolver. We've got about $743 million of securitization and then obviously the two convertible notes. One is about $350 million, the Other is about $286 million. The thing to remember is those accrete up as they mature. Ultimately, the face value is $400 million on the 1.5% notes and $300 million on the 2.5% notes. So the total is just shy of $1.5 billion.

[Eric M. Beder:]

And what was the revenue in Q2 from the acquisitions from Strawberry Shortcake and PONY?

[David M. Blumberg:]

It's David Blumberg. We haven't broken out the revenue by acquisitions. We're pretty much on target with what we said originally.

[Eric M. Beder:]

When you look at the portfolio, you look at your debt coming due in the next two years. Would you consider or contemplate selling some of the brands? I know Neil was not really very high on diversifying or getting rid of any of the brands. What's your thought process on that?

[Peter F. Cuneo:]

Well, generally speaking – this is Peter. We're in the business to own brands and to monetize them. There are certain circumstances where the brands have no value in particular areas of the world and to the extent people approach us to sell the brands because they can do more with them than we can, we would consider that. But as a general rule, we are not interested in selling our brands.

[Eric M. Beder:]

Okay. And in terms of buying back the joint ventures, I understand that you are not putting that in your assumptions, but does it make economic sense and do you think it still makes sense to eventually consolidate most of the joint ventures like has been done under prior management?

[David M. Blumberg:]

Hi, it's David. I think we're going to look at each joint venture, each geography, and decide how its growth with our partner is versus if we think they've built a base and we can build off of that business. So I don't think we can give a general overview. The goal would be at some point to have a global Iconix business that is owned by us, but I don't think we can pinpoint when would be the appropriate time to buy any of the joint ventures back. We feel very good about China and ILA, that whether it's a timing that they had built a good platform that we have good businesses there, we have good people and really we'll touch on it. There is more questions, but we're able to now grow off those platforms successfully. So again, it's, I think, joint venture by joint venture, geography by geography, but obviously the long term goal would be to have one Iconix, global Iconix, where we would have ownership of all those.

[Eric M. Beder:]

Great. Thank you and good luck.

[Operator:]

The next question comes from Liz Pierce with Brean Capital.

[Liz O. Pierce:]

Good morning and welcome to, I guess, Peter and to David. So Peter, I just wanted to verify, you said on the renewals, the direct, the DTRs that you have renewed OP and Candie's, but did you say anything about Starter, because I think that expires at the end of this year and Danskin at the end of next year?

[David M. Blumberg:]

It's David, I'm sorry. Starter and Joe Boxer are at the end of this year, Bongo is the end of January.

[Liz O. Pierce:]

Right. So where – I guess my question is, where are you in terms of renewals on those?

[Peter F. Cuneo:]

Well, they're obviously, Liz, under discussion, they're obviously important.

[Liz O. Pierce:]

Okay.

[Peter F. Cuneo:]

So there's back and forth going on.

[Liz O. Pierce:]

Okay. And just to circle back on the men's business and the Home business, clearly down a little bit more than I expected. What are the major pressure points that you're seeing? You would think with Home and what's happening with housing that that would be a catalyst for that business to grow.

[David M. Blumberg:]

I think if we look at macro trends as well as micro, the Home brands of these Iconix brands that we think resonate well with the value propositions that the retailers have. So, JCPenney with our brands grow well, Walmart now with Waverly Inspirations, we think – I'm sorry, Royal Velvet at JCPenney, we think that this is the value proposition of the DTRs and the value propositions that we present where they can have national brands at private label economics. And so we're excited on the Home side. I can't really speak to the macro and I apologize about that, but obviously if there's a increase in Homes, it probably is rising tide lifts all. On the men's, I think that we've continued to see a challenge, as Peter said. We see international that these brands seem to have a really good lift almost across most of the geographies. Sports have a really good lift, which is part of the men's group as well on a global basis. And domestically, it's just finding, again, the right product, the right brand and the right value proposition.

[Liz O. Pierce:]

And do you think in terms of – I mean the SG&A on a dollar basis was up considerably. So $2 million, that special charge, was in the $48 million. Is that correct?

[David K. Jones:]

That's correct.

[Liz O. Pierce:]

So I mean I guess the other thought that I had is, is it a matter of you guys spending more on the marketing to kind of help get the men's business and the Home business back in more of a growth mode?

[David M. Blumberg:]

I think it's a few things. I think one is, yes, we are spending more on the brands. I'll get to margin in a second. I think we're also agreed to take down our revenue estimates through the end of the year. But on a dollar basis, the other thing that's happening is, is Peanuts, because remember, we have talent fees that go to the family. We have a bigger cost structure that's associated with Peanuts, which as it's growing with the movie and growing as a percentage of the overall, would show more of the SG&A.

[Liz O. Pierce:]

Got it. Got it. And then any update on -- with taking back China and your ability to monetize, how we should think about that as we think of through the end of this year and into next year?

[Willy Burkhardt:]

Yeah, sure. This is Willy Burkhardt. Hi, Liz.

[Liz O. Pierce:]

Hi.

[Willy Burkhardt:]

So, yeah. So the transition is going quite well since we made the full acquisition back in March. We're actually moving to contract on our first two new licenses, one for Joe Boxer, another one for Badgley Mischka. We're seeing lots of interest and good opportunities for us to expand our overall licensing business. Meanwhile, the joint venture businesses that we've had for several years are actually sustaining solid growth despite some real economic headwinds in that country.

[Liz O. Pierce:]

Great. And then just one last question

[David K. Jones:]

Liz, it's Dave Jones. We're thinking about a tax rate of 34%, 35% for the rest of the year. Something to keep in – and that's kind of up from historical -- but something to keep in mind there as a lot of the larger gains that we had historically were at a lower tax rate because they were in the Luxco (40

[Liz O. Pierce:]

Great. Thank you. Best of luck, guys.

[Peter F. Cuneo:]

Thank you.

[Operator:]

Our next question comes from Bob Drbul with Nomura.

[Bob S. Drbul:]

Hi. Good morning. Just got a couple of questions, I guess the first one is, can you elaborate a little bit on Neil's decision to step down and the process around his departure? Just give us a little bit more color in terms of what led to it and what was the ultimate factor in terms of this move.

[Peter F. Cuneo:]

Well, Neil, as you know, resigned to pursue other business opportunities. There isn't really anything more in terms of detail that we can provide on that. That's really his decision and the company will move forward.

[Bob S. Drbul:]

Got it. And can you just talk a little bit about the discussions with any of your major retailing partners around a lot of the management transition over the last several months?

[David M. Blumberg:]

It's David. What I'd say is it's just more discussions about the brands. We have these tremendous iconic brands. We have long-term relationships with the big box retailers, and they're the ones who really are driving the growth there. We continue to have conversations with them, weekly basis with the merchants, with the senior management, and hope that they continue to feel the same way we do about the brands and more importantly the consumers feel about those brands inside the retailer stores.

[Bob S. Drbul:]

Got it. And David, I guess one month into it, can you maybe give us your top one or two surprises so far?

[David K. Jones:]

Well, I think the top one is obvious, right.

[Bob S. Drbul:]

Yeah.

[David K. Jones:]

But no. I'll tell you, it's been a good experience. I think the company and the discussions leading up to my arrival was very transparent, so I was familiar with the topics that the company was talking about with the SEC. As I said in my opening statements, I think the team here is great, both on the accounting and finance side and the business side. They're very, very passionate people. I was surprised that some of the tenured people have been around for a long time, and people want to be around for a long time and genuinely believe in the model. So I think the company is still growing and I'm hopeful that I can add to the – building a world-class organization, in particular on the finance and accounting side, but I've been really happy with the team and I think we're all working very well together.

[Bob S. Drbul:]

Great. And I just had one more question. So when you look at the balance sheet and I think the liquidity around the next 12 months in terms of – if the convert (43

[David K. Jones:]

Bob, the balance sheet is really strong. As I mentioned we ended Q2 with $183 million of cash. About – a little over $100 million of that is in the U.S. We continue to expect -- continue to generate strong free cash flow and we're looking at all the options. We believe we have the ability to upsize our securitization if we had some additional brands, which we have. The cash flow on the securitized brands has been consistent, and I would say even more consistent, it's been stronger currently than it has been in the past. We don't have any covenant issues. Our ratios are in line and we're comfortable with them, and so I think we have access to capital markets and we'll continue to evaluate all of the opportunities that we have.

[Bob S. Drbul:]

Great. Thank you very much.

[Peter F. Cuneo:]

We'll take one more question.

[Operator:]

Okay. Our next question comes from Dave King with ROTH Capital Partners.

[Nick Meyers:]

Hello, guys. This is Nick Meyers. I'll be on for Dave today. How are you guys doing?

[Peter F. Cuneo:]

Good, Nick.

[David K. Jones:]

Good, Nick.

[Nick Meyers:]

All right. First on Peanuts, can you talk a little bit about the royalty rates both on box office sales and movie-related products? If we can remember correctly, I think your rates have typically been in the low to mid single-digit range, but from our understanding from entertainment property, sometimes they command a little bit higher rates. Is there anything you could help me on there? Thank you.

[Peter F. Cuneo:]

Well, I can draw on my experience in the past in the motion picture business and licensing, there's a very wide range in royalty rates depending on what particular category you're dealing with. As an example, if you're dealing with say confectionary, the royalty rates are very low because the margins for people in the confectionary business are very low and businesses where the margins are much greater, you're going to get a bigger royalty rate. So actually a very wide range, we have I believe it's now 1,500 licensees and they're all around the globe. So it's very hard to generalize about this particular area. The licensing rates generally whether they are movie or non-movie depending on the category tend to be roughly the same for that category. Hopefully that – is that helpful?

[Nick Meyers:]

No. That helps. Thank you. And then – okay – so also on Peanuts, can you talk about the effects on – sorry, the contribution on full year guidance from Peanuts? How much is that embedded in box office versus the movie-related products? Is there any way you could comment on that?

[Peter F. Cuneo:]

Well, we hope that we've been very realistic in our forecasting for box office. If anything we're trying to be a little more conservative. As you might imagine Fox who was doing the film is reticent to give us or anyone, I think their internal forecasts on what they think the film will do, which makes perfect sense for an entertainment company, particularly one that's public. And I think that so we have to do kind of our own forecasting and we hope that we've been very realistic here.

[Nick Meyers:]

Okay. Perfect. And then, all right, one more question and then I'll let you guys go. About China, what effect did your recent JV consolidation have on the full year guidance? And also, do you guys have any thoughts these days on China in general, both from a macro perspective and a stock market perspective?

[David M. Blumberg:]

So let me take the first question and then I might have to ask you to ask the second one. So in terms of consolidation for the full year, since our business model previously had been not a licensing-based strategy, the consolidation really does not lead to very much of an impact for this year. Certainly as we go forward, we're expecting licensing royalty out of China to grow and to grow significantly, but not in terms of this year based on the consolidation back in March. And I'm sorry, your second question? Could you repeat that again?

[Nick Meyers:]

Oh, yeah. Just thoughts on China in general, both from a macro perspective and a stock market perspective and maybe whether that has any effect on your strategy towards monetizing your stake in Candie's in China?

[David M. Blumberg:]

Yeah. Let me take the last question first because...

[Nick Meyers:]

Sorry.

[David M. Blumberg:]

(48

[Nick Meyers:]

All right. Perfect. That helps a lot. All right, guys. Thank you very much and good luck.

[Peter F. Cuneo:]

Thank you all very much for your questions. We appreciate it. Again, we remain very optimistic about this business. The management team here is free to talk to anyone who would like to talk to us about the business. There are a lot of moving parts here, as you know, but once again we think we're very much excited about the future and what's going on. I'll just mention again, as I have during this last time that we've been talking, I think we have a great brand portfolio of brands. I think we're resetting, at this point to focus on the long-term value creation for that portfolio. I think our strategy will be consistent in the future. We are global in nature, international is very strong and growing. We have great partners, as I mentioned, retailers, wholesalers, international partners. We can be opportunistic with acquisitions and share buybacks. So then – and again, our free cash flow continues to be in our estimation very strong. So thank you all again very much for your participation. Appreciate it, and have a good day. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.