Sequential Brands Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[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. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identify 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 us on our first quarter 2016 earnings conference call. I’ll start by reviewing the Company’s results and then turn the call over to our CEO to provide an overall update on the business. For the first quarter 2016, Sequential earned revenue of 34 million, representing an increase of approximately 150% from the prior year’s revenue of 13.6 million. Adjusted EBITDA for the first quarter increased 108% to 16.7 million compared to 8 million in the prior year quarter. In addition to our strong financial results, our balance sheet and increasing free cash flow keeps us well positioned for additional growth as we ended the quarter with more than $41 million in cash. Our strong free cash flow outlook is filled by both the positive results of our asset-light business model and the significant annual balance and other tax benefits that collectively are expected to offset over 500 million in aggregate future taxable income. As such, we do not anticipate paying any material taxes in the foreseeable future. In addition, we have more than 360 million of guaranteed minimum royalty on the contract, providing the Company with unique downside protection and security against our leverage. Furthermore, a majority of our debt is scheduled to mature after the next five years. For the full year 2016, we are reiterating our guidance of 145 million to 150 million of revenue and adjusted EBITDA of 83 million to 87 million. Similar to our historical results, we expect revenue for 2016 to be weighted towards the back half of the year given the natural seasonality of the businesses of our licensees. Following the completion of the MSLO merger integration, which is fully on track, we expect our 12-month run rate to be 150 million to 155 million of revenue and 92.5 million to 95 million of adjusted EBITDA. I’d now like to turn the call over to our CEO, Yehuda Shmidman.

[Yehuda Shmidman:]

Thank you, Gary, and good morning, everyone. Q1 proved to be a strong start to the year with revenue up 150% from the prior year, driven by a combination of contributions from the brands acquired in 2015 and contributions from increased revenues of the balance of the portfolio. Most notably, as we head further into the second quarter, we feel confident that we are on track to achieve our previously-stated goal of high-single digit organic growth for the full year 2016, which would mark our third consecutive year of delivering at least high-single digit organic growth for our brands. Looking back at the quarter, the best performers from our legacy brands acquired before 2015 were Avia, AND1, Heelys and Ellen Tracy, and the newly-acquired brands in 2015, including Martha Stewart, Emeril Lagasse, Joe’s Jeans and Jessica Simpson, were all on or above plan. For Avia and AND1, the growth continues to stem from our business at Walmart in core categories. And with this past quarter’s expansion into the sporting goods category for AND1, and our recent expansion of AND1 into Walmart Canada, we believe we will see continued incremental growth for the balance of the year and into 2017. Of note, Walmart Canada operates approximately 400 stores, equivalent to adding roughly 10% on top of the total door count of our U.S. business. For Ellen Tracy, the increased performance year-over-year was primarily from the new market share gains of our core sportswear business in Nordstrom’s, in Dillard’s and House of Fraser in the UK. And for Heelys, the continued outperformance following last year’s momentum is coming from a combination of footwear sales growth in the U.S. and internationally and across the board through e-commerce sales channels. For Jessica Simpson, the above plan results were anchored in sportswear, in swimwear and our recently added athleisure collection. We are anticipating another strong overall year for the brand and in addition to current categories, a completely new business of active footwear will be launching for the first time later this year. And for Joe’s Jeans, which we’ve now owned for just over two quarters, we can report that we are fully on track to expand the core area of denim into related sportswear and we are ramping up new incremental growth for the balance of 2016 and 2017 through our newly-signed handbag licensee. Finally, this past quarter was the first full-quarter of Sequential’s ownership of the Martha Stewart and Emeril Lagasse brands. For the Emeril brand, we are focused on building upon the pre-existing relationship with QVC to expand the business which has historically performed well, but was limited in categories and SKU count. In addition, we believe there is an opportunity to expand outside of QVC in 2017 in digital and other channels. For the Martha Stewart brand, we are nearing the completion of the integration which was projected to take six to nine months and our team is knee-deep on brand growth with existing core partners and new partners. In fact, we’ve already signed two new partnerships, which we intend to announce as we get closer to actual launch dates. In addition to our overall focus on driving organic growth, we are continuing to review potential acquisition candidates as we seek consumer brands with high potential for growth and strong brand awareness. In closing, we are pleased with the strong start to the year and we are confident that we are on track to achieve our goals. Thank you all for joining us this morning and thank you for your continued support.

[Operator:]

Ladies and gentlemen, at this time we will be conducting the question-and-answer session. [Operator Instructions] Our first question is coming from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

[Erinn Murphy:]

I guess, Yehuda, I was hoping you could talk a little bit more about the brands that truly outperformed the most in the quarter versus some of your expectations. And then, how many of the brands are really above that high-single digit threshold, if you continue to expand into kind of categories and geographies at some of your core ones?

[Yehuda Shmidman:]

Sure. So, the big standouts for the quarter were certainly Avia and AND1 as they are related to their Walmart businesses. We’re really excited not just about this past quarter for those brands but really the future as well. The core categories demonstrated strength and now in this past quarter, we launched sporting goods in AND1. We expanded the AND1 to Walmart Canada. And when you think about where Walmart International is as a total pie, and you think about what sporting goods could become, we’ve only started with really one item, with a basketball, we think both of those will give us a lot of runway for the future. And then, separately, outside of our active vertical, our Ellen Tracy brand had a great quarter and Heelys, after a great year last year, continued this first quarter with another great quarter, especially through digital sales.

[Erinn Murphy:]

Okay, that’s helpful. Is it fair to assume, I know AND1 and Avia are some of your larger brands, but is it fair to assume they continue to grow in excess of high-single on top of what was I believe, a double-digit kind of low-teens or mid-teens last year?

[Yehuda Shmidman:]

Yes.

[Erinn Murphy:]

That’s helpful for contacts. And then, maybe just circling back to some of the earlier comments that Gary made in terms of free cash flow, can you just remind us, and I am sorry if I missed it, where should free cash flow kind of be at the run rate this year? And then, I think you did pay down some debt in the first quarter. So, is that a pattern, and I know you’re still weighing acquisitions as well, but is that a pattern that you would anticipate to continue in terms of debt pay-down?

[Yehuda Shmidman:]

So, Erinn, I’ll comment to the pattern and then it turn to Gary to sort of walkthrough how we think about free cash flow going forward. But in terms of the pattern, we absolutely view our capital allocation strategy as having two components; one is certainly a continuation to look at great brands that we feel we can grow and so the ability to acquire brands over time, the right brands at the right, of course metrics is still very much a part of our playbook. At the same time, to the extent that we’re not sort of executing acquisitions throughout the time periods. We believe that as our free cash flow continues to just get better and better, we have this incredible optionality to delever as we go, and we think we can take out about a turn-and-a-half over the next three years in our three-year plan without acquisitions. So, we kind of like that optionality but Gary maybe just comment on how we think about free cash flow.

[Gary Klein:]

No problem. So, to think about free cash, I’ll just use the post-integration guidance just to help walk you through. So adjusted EBITDA for the post-integration guidance is about 95 million, less cash interest of about 40 million gets you to about 55 million, maybe about 1 million or 2 million between taxes and CapEx gets you to about 53 million. That’s how the way to think about it, going forward. And then, as Yehuda said, 53 million of cash flow going forward for next couple of years, we should be able to reduce net debt by about turn-and-a-half over the next couple of years.

[Erinn Murphy:]

And then, just last question for me, you guys mentioned that the Martha Stewart integration is nearing completion. I guess, what at this point is left to complete? I know you said you had some deals or some new agreements kind of inked that will be announced and is there anything more structural that’s left to be completed? And then, last on Martha Stewart, if you think about some of those merchandising opportunities that you have, can you maybe just flush out some of the key categories that you’re working on or what you’re kind of pitching or dealing with retailers on to try to extend that line even further?

[Gary Klein:]

Sure, absolutely. So, the integration is fully on track, if not, even slightly ahead. And as you know, when we completed the MSLO acquisition in December of last year, we anticipated a six to nine month integration period. So I guess we’re four, five months in, and we’ve just made incredible headway as we perceive it internally to get to the end of that. And what’s left is really just the completion of what we’ve started, which is the full off loading, if you will, or licensing of the publishing business to our partner, Meredith, who has been a terrific partner, and we believe will continue to be a terrific partner, and then internally just working through all the cost synergies and savings. And then of course, at the same time, with the segue to your other question, a needy focus on what those activations are, and we’re so excited about that. We think about the historical run rates of the Martha Stewart business, and then more importantly, we think about what we could do even better with her, and we’ve been truly encouraged by her in terms of her vision, her aspirations, what the brand stands for, and what the customers are telling us, what the retailers are telling us. So, there are a number of categories that we are working on with the core partners, as well as new categories and you could imagine we’re itching to tell everybody about, in particular, the two new deals which are done, but we know it the best plan is to announce those as we get closer to the actual consumer launch dates.

[Operator:]

Thank you. Our next question is coming from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.

[Camilo Lyon:]

Yehuda, I was hoping if you could talk a little bit more about just the department store channel, the callouts with Ellen Tracy and Jessica Simpson in particular, the strength of those two brands in a channel that’s seemingly facing a lot of structural challenges with traffic and disintermediation, could you just talk to us about what the conversations are with your wholesale partners in the department store channel and what the outlook there is relative to what we’re seeing for pretty much everyone else in retail that’s facing a more cautious kind of buying environment.

[Yehuda Shmidman:]

Yes, absolutely. So, what I could tell you is, in terms of the brands that we have, I mean you call that, two of the certainly the bigger ones that have department store channel distribution, I could tell you, we’ve been fairly pleased with the results. I think it’s a combination of market share gains and just brand importance. So, what I would also add to that Camilo is that the advantage, of course, of being a brand owner rather than a retail operator, which is what we are, of course, is that we can sort of go after market share wherever it exists. And so, what we’re starting to see are increases in our digital space, we’re seeing increases in new category growth that might take place outside of the U.S. going forward in sort of more ways than it’s been in the past, and we combine the digital growth with the sort of international growth combined with that core, sort of brick-and-mortar business. When you combine all together, I think what you see is that we have an ability to win. So, that’s really what we’ve seen, and to your point, as you mentioned, and we mentioned in the earlier remarks, Jessica Simpson had terrific quarter, Ellen Tracy had a terrific quarter as the Joe’s Jeans. And so, we’re really committed to all channels going forward and we’re thrilled to be in the brand owners chair to be able to maximize that market share gain.

[Camilo Lyon:]

To dovetail off of that comment, how do you balance your growth opportunities with respect to digital, I’m talking more third party digital players as you look out over the next three to five year period. Is there a shift that you see that you’re going to force the hand-off in terms of the channel mix? Is that something you’re working towards today to include more of the digital players, integrate away today as clearly that’s where lot of demand seems to be going?

[Yehuda Shmidman:]

Yes, I mean, I guess I would point to two statistics that we’ve been honing in on here internally. One is that if you look at our total business last year, our sort of digital market share for the total brand portfolio doubled year-over-year and while that’s terrific, we still have a lot of runway ahead of us because we’re still not even 10% digital sales for our total Company. So, we look at digital and then combine that stat so you sort of see that heavy growth rate in digital in our business and combine that with another stat which is that, when we look in the sort of research out there and we look at lists of the Top 10 e-commerce retailers in America or probably North America, we’re doing business actively with eight of the Top 10. So, our job as we see it is to get more market share from those great providers of digital sales channels. We want to make sure to put it simply that our brands are available where people are shopping, and if we do that right, we’ll be able to continue delivering high-single digit or better organic growth year after year.

[Camilo Lyon:]

And then, just you said something interesting on the commentary on Jessica. The new active footwear launch slated for later this year. Could you just talk about channels that are going to be launching that, and what’s that going to entail? Is that more of an athletic kind of athleisure sort of category entry or just a little bit more color on that would be interesting.

[Yehuda Shmidman:]

You know what it is. It’s a more athletic line in collection but what it really is Camilo is an entire new dimension to the brand. When we started after we bought the brand just over a year ago, I guess it was the beginning of April 2015 when we bought the Jessica Simpson brand and became her partner, we identified a number of areas of growth, one of which was activewear and athleisure. We started with the apparel which launched towards the end of last year. This year will be our first full year of athleisure activewear apparel. And in tandem with that, what we’re now adding to that is the related footwear, which we think will get us into new doors, new channels, and completely sort of incrementally adds to the existing footwear collection, which has been such a success for Jessica Simpson and the brand long before we ever got into the picture.

[Camilo Lyon:]

That’s great. The last thing I’ll just touch on, and I think you started talking about this before but it bears mentioning again -- you’re clearly in a position where you can continue to generate very significant cash flow to use to pay down the balance sheet debt. But you are presented, sounds like you continue to be presented with opportunities for future growth via acquisition. Can you just articulate how you’re prioritizing growth versus debt pay-down and what really is here the main objective over the next couple of year period, it seems like you could be going in one of two directions and I am not entirely showing this to what your priorities are relative to the balance sheet.

[Yehuda Shmidman:]

Sure. So, I think the easiest way to think about our priority is to point towards our three-year plan, which calls for us to grow to 250 million of topline revenue and 175 million of adjusted EBITDA. If you look at that plan over three years, it includes continued high-single digit organic growth and it includes acquisitions at a pace that frankly is less than what we’ve been able to achieve in our prior few years. So, when we think about balancing the capital allocation strategy of having this optionality between deleveraging and/or acquiring great brands, our view is that the two go hand-in-hand over time. And the difference will be based on the opportunities that we have and our ability to execute to deliver great shareholder value, buying brands that we know we can grow, that we believe we can grow over time through our platform and buying brands at the right metrics. So, I guess to answer your question, Camilo, we have both in mind, but as you know, we don’t have acquisitions in our current numbers. And so there is no pressure to do anything that’s out of sequence and over time, we want to hit that three-year plan.

[Camilo Lyon:]

Sounds great. Thanks, Yehuda. All the best.

[Yehuda Shmidman:]

Thank you.

[Operator:]

Thank you. Our next question is coming from the line of Dave King with ROTH Capital Partners. please proceed with your question.

[Dave King:]

I guess, first of on the quarter and the revenue contributions of $34 million, I guess, as I think about that I’m curious, how much of that was overages versus minimums and the reason I ask is sort of implied in your guidance is it feels like a material sort of decline in revenue from first quarter to second quarter since it’s going to remain back-end loaded. And if that’s indeed the case, something about that correctly, I’m wondering that didn’t mean a decline in those overages and what would be driving that or am I just not thinking about this sort of correct way?

[Yehuda Shmidman:]

So, Dave, I’ll start off, and then, Gary’s here and he could chime in as well. I don’t know if I would think about it that way as you mentioned in terms of the quarter sequentially, but what I would say is, we’re fully on track this year to hit high-single digit organic growth. It was a great quarter. There were definitely overages in there that came in. When we look at the quarter and we sort of looked at both sides of the aisle, right, we looked at both the brands, which we didn’t know in last year in this quarter, right. And looked at those brands were they on plan, were they above plan and then we also looked at the balance of the portfolio, which we did own in the prior year’s quarter. And both sides of the aisle gave us strong results. So, I think in terms of how we think about the year-and as you know and we don’t provide quarterly guidance, but when we think about the full year, what we’re really focused on is delivering that track record of continued organic growth and it absolutely is on track. So good year on track, yes, and how we think about it, but also was it was a strong quarter.

[Gary Klein:]

The only thing I would add is we still do believe that the third and fourth quarter will be the highest quarters of the year, and Q2 maybe slightly below Q1 if you are modeling it, but not much.

[Dave King:]

Okay, so then, maybe asking the question -- the right way to think about this is and it’s still sort of -- there is no reason to think that this growth rate you’re having right now organically should subside for any material reason.

[Yehuda Shmidman:]

No. I said we’re on track with the high-single digit growth for the full year.

[Dave King:]

And then switching gears a bit, in terms of the 80.5 million or so of expenses that you had in the quarter, how much did Martha contribute to that? And I guess, what I’m wondering is, what’s the right way to be thinking about the contribution from Martha from an expense perspective over the course of the year? Assuming kind of following up on Erinn’s question, just how much is left in terms of structural, I guess or cost reduction type changes as opposed to new license revenue contribution in terms of getting to your post-integration run rate?

[Yehuda Shmidman:]

So really exactly on plan as we thought. So, when we think about the full year getting to about, when you look at the numbers about 57% margins for the year, and then you look at our pro forma run rate once the integration is totally complete, getting to about 61% EBITDA margin that’s fully our plan still. Yes, the margins are lower in the first quarter and a lot of that has to do with just the seasonality of the actual revenue side, which will be bigger in the third and fourth quarter. But most importantly, when we think about the year and the forecast, with how we think about the margin, totally on track to where we’ve been, as we laid it out previously.

[Dave King:]

And then, lastly from me, and forgive me if I missed it, did you say how much you generated free cash in the quarter, and then, in that framework, Gary, that you outlined what should we be thinking in terms of restructuring and merger costs in that adjustments to get to the EBITDA number of $95 million or what have you? What sort of the right number, of course, absent future acquisitions, of course, since assuming we can kind of model that in?

[Gary Klein:]

So, I would say we haven’t given anything for quarterly guidance on free cash flow. So, that is the way that I described it Erinn walking through on a full year basis, adjusted EBITDA, less cash interest, tax and CapEx, which gets you to about around 50 million to 55 million of free cash flow that’s probably the best way to think about it.

[Dave King:]

And so then assumed in that is not much in the way any merger charges or continued restructuring charges, that’s the right way… ?

[Yehuda Shmidman:]

Correct.

[Gary Klein:]

Right, I’m not including those. And for the most part, I would say the restructuring expenses and the deal costs related to past acquisitions are in the past now.

[Operator:]

Thank you. Our next question is coming from the line of Eric Beder with Wunderlich Securities. Please proceed with your question.

[Eric Beder:]

Could you talk about how the merger environment is looking like right now? We’ve seen licensing space at least little bit of cooling in the last few months in terms of deal flow. What are you guys seeing and how is valuations coming in?

[Yehuda Shmidman:]

Yes, so, what we would say Eric is that, there hasn’t been a cooling of opportunity. We have certainly seen the pipeline as full as it has been in the past, opportunity is coming through really frankly for each of the verticals that we think about in fashion, active, lifestyle and home. What I would add to that is, of course, we want to stay incredibly disciplined to make sure that as we’re executing on acquisitions over time in our three-year plan, we want to make sure that they are the right brands, we want to make sure that we can contribute growth, we want to make sure that the metrics are as strong as possible. So, I guess the commentary I am giving you is really just that the pipeline itself has not changed and the fact that acquisitions is part of our playbook has not changed either.

[Eric Beder:]

In terms of the International, I know that, that is on the radar and it is gaining an importance kind of with Walmart Canada, potential expand that further out and Ellen Tracy and House of Fraser, where do you see that going in your three year plan, like where should think about our longer term as a percentage of business, and kind of where it is right now?

[Yehuda Shmidman:]

So, it’s a great point because it will be one of the longer tail opportunities for us. I guess it is kind of anecdotally tell you, we had one of our sales team members out in South Korea this past week. Another few members of our team at the UK also led this past week and in addition to announcing in this past quarter both the expansion as you referenced of AND1 to Walmart Canada, but also Martha Stewart into Hudson’s Bay in Canada, what I would say is as we think about the balance of the year and into 2017, ‘18, we’ve got a lot cooking, opportunities cooking in Asia and Mid East, more opportunities in Europe. So over time, could international become 30% of our business? Absolutely. Today, it’s still low double digits, and right now it’s just pairing our brands with the right partnerships in the right context to make it all happen.

[Operator:]

Thank you. Our next question is coming from Steve Marotta with C.L. King. Please proceed with your question.

[Steve Marotta:]

Just a follow-up on the International, what brand do you believe currently offers the most opportunity internationally in the shortest time frame?

[Yehuda Shmidman:]

Yeah, I would say if you just put us on the spot, although we’ve got so much between the Walmart opportunity internationally with AND1 and Avia and between what we’re seeing with Jessica Simpson international in terms of interest and Martha Stewart, but I guess if we had to choose, it would probably be long-term Martha Stewart and Jessica Simpson and in the near term what we are doing with Walmart internationally or embarking on AND1 and Avia.

[Steve Marotta:]

That’s helpful. And just one other question, the first quarter obviously was better than expected, my congratulations there, as well. If you look at the balance of the year, if you were to perform at the high end of the range or above, where do you think that outperformance would come from a brand perspective?

[Yehuda Shmidman:]

So, I think when you look at the full year, even last year, in comparing our ‘15 to our ‘14 numbers, and you think about the momentum heading into ‘16, in each of the verticals, the anchor brands have been leading the charge for us. So, in active, of course, as we’ve been talking about, it certainly has been Avia and AND1, in lifestyle, it has been what’s been going on with Revo and Heelys, we think about the fashion components, we think about the Jessica Simpson business and Ellen Tracy, which had a great quarter and has really put on a lot of new door counts, especially in sportswear. And then, of course, as we -- this is our first full year of being partners with Martha Stewart and working with both the Emeril and Martha Stewart brands; I think it all combines, but we’re looking to drive across the board to make sure that we hit that high-single digit number, which we are fully on track as far as we can see in the early signs would support that.

[Operator:]

Thank you. Our nest question is coming from the line of John Kernan with Cowen. Please proceed with your question.

[John Kernan:]

You hinted a little bit about this, but just wanted to kind of get your thoughts on what you’re most excited about in terms of the opportunities for acquisitions by category, geography, channel? Can you just give us a thought in terms of how you are thinking about deploying some of the cash?

[Yehuda Shmidman:]

Yes, sure, absolutely. And as we had mentioned before, the pipeline has been full and the opportunities we’ve been looking at are certainly across the different verticals, definitely bolt-on opportunities are in front of us in each of the verticals. Again, whether that’s fashion, lifestyle, active or home, it’s really an incredible time in that way. We think about sort of the team that we’ve been able to build here, and the resource kit we’ve been able to build here, and we think about how do we apply that into future brand to ensure that we’re able to really maximize the growth and deliver that value. And so, we’re constantly looking at these opportunities trying to identify places where the brands are in effect worth more than the operations so that we can find that opportunity. So, in terms of geography, I guess to try to answer some of the nuances of the question. Certainly, our preference is to acquire brands that have global appeal. Certainly, our preference is to look in the four verticals in which we trade today and if you think about size and scale, we are really looking towards the historicals, I’d say similar ranges to where we’ve been in the past, if you look in the past few years.

[John Kernan:]

That’s interesting. Can you talk about how you can extend some of these brands internationally? I know there’s different strategies among some of the licensing companies and some of your peers have used JV structures. How do you plan on extending this intellectual property into other international channels?

[Yehuda Shmidman:]

We are not pursuing the joint venture strategy internationally. We are focused, John, on executing licensing agreements the way we have them in the US.

[John Kernan:]

And then [just back at the labor], the cash flow point, but just on the EBITDA, I know there was a big drag on cash outside of EBITDA, just from that moving pieces on the balance sheet last year. So, EBITDA didn’t really equate to what cash flow from operations was. I’m assuming some of that was from the many moving pieces from the acquisitions but is there any type of drag or benefit we should assume from working capital this year?

[Gary Klein:]

Hey John, it’s Gary. So, I wouldn’t say there is a drag, I mean each time that the company grows at the end of the year, AR builds up and then we collect it the following quarter, so if I would have looked at this quarter I would have expected it to be a little bit higher. In the quarter we also paid a good part of the restructuring. I think we’ve accrued about $10 million or $11 million of structuring expenses in the last two quarters. A lot of that cash was paid out this quarter. As well, we also paid down $4 million of debt this quarter. So, in a normal status quo quarter for Q1, we would have been up, but again, I think we have been paying down debt and paying down from the restructuring is what happened at this quarter.

[John Kernan:]

I guess what I’m trying to get out is just any type of help in modeling cash flow from operations, because that’s how we end up modeling future debt pay-down and cash in your balance sheet.

[Gary Klein:]

So, I would say free cash flow the way I described it earlier is probably the way to do it and sometimes all these one-time event such as the restructuring pay-downs or paying for some deal costs associated with past acquisitions that sometimes just glory the pitch a little bit but I do think that in a perfect world, starting off with EBITDA, less the interest, less the cash, will get you there.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. So, I’d now like to turn the floor back over to Mr. Shmidman for any additional concluding comments.

[Yehuda Shmidman:]

Great, thank you very much. And just want to thank everybody for joining us this morning and look forward to speak with you all very soon.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.