Sequential Brands Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Good morning and welcome to the Sequential Brands Group 2015 first quarter earnings conference call. Please note that this conference call will be available for the next 30 days on our website, www.sequentialbrandsgroup.com. Before we begin, I would 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 be materially different 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 not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Other than as required by law we undertake no obligation to update or revise such 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 and on our website, www.sequentialbrandsgroup.com. I will now turn the conference call over to our host for today, Yehuda Shmidman, Chief Executive Officer; and Gary Klein, Chief Financial Officer. Mr. Klein, please proceed.

[Gary Klein:]

Good morning and thank you for joining Sequential's first quarter earnings conference call. On today's call, I will review our first quarter results for 2015, and then turn the call over to our CEO to provide an overall update on our business. For the first quarter ended March 31, 2015, the company earned revenue of $13.6 million, representing an increase of 117% to our prior-year quarter revenue of $6.3 million. Adjusted EBITDA for the first quarter increased 156% to $8 million compared to $3.1 million in the prior-year quarter. Subsequent to this quarter, we announced the acquisition of a majority interest in the Jessica Simpson brand and related intellectual properties. And in connection with this acquisition, we increased our forward-looking 12-month projection to a range of $88 million to $90 million of revenue and $50 million to $55 million of adjusted EBITDA. In addition, our in-year guidance for 2015, inclusive of this acquisition, was increased to a range of $78 million to $81 million of revenue and a range of $48.5 million to $50.5 million of adjusted EBITDA. Similar to the company's historical quarterly results, we expect revenue for 2015 to be weighted to the third and fourth quarters, due to seasonality in the businesses of many of our company's licensees. Therefore, revenue for the first half of this year will be close to minimum guaranteed revenues, with most overages being recognized in the second half of this year. Also of note, we currently have approximately $215 million of guaranteed minimum royalties, excluding renewals due to the company from current licensing contract with approximately 100 licensees, many of which we consider to be best-in-class. On a separate note, as we are making the determination on People's Liberation, a legacy brands with no value on our balance sheet was not in a position to make a material impact on a go-forward basis, but saw organic growth. We successfully negotiated and closed a transaction this past quarter to sell the entire brand to a third-party entity. As a result of this sale, we recognized a modest gain for GAAP accounting purposes. However, as this is not reflective of our ongoing business, you will see in our published results today that we have excluded the gain from our non-GAAP results. I would now like to turn the call over to our Chief Executive Officer, Mr. Yehuda Shmidman.

[Yehuda Shmidman:]

Thank you, Gary, and good morning, everyone. Q1 was another strong quarter for Sequential, as we continued to deliver strong year-over-year financial results, driven by our efforts on following the playbook of achieving both organic and acquisition growth. Here are some key business highlights. First, this past quarter we activated our multi-channel marketing campaign for Ellen Tracy, featuring movie star Paula Patton. This included among other initiatives a print and digital ad campaign, the production and release of a documentary together with Yahoo!, and a segment with Paula inclusive of a many fashion show on Good Morning America, all celebrating Ellen Tracy's 65th anniversary and women's work in the world. As our marketing initiatives were executed, market reception to our licensees' new collections was strong. And as a result, Ellen Tracy sportswear is confirmed to expand into several new national retailers in United States and abroad this fall holiday 2015 season. This follows a successful debut of sportswear [ph] inoxum.com, which began this quarter. This past quarter we also saw a strong performance from our active athletic brands, Avia and And1, both brands are performing well at Walmart, and we continue to see additional expansion opportunities for these two brands in new channels and new geographies. In addition to these highlights, we are continuing to develop and activate several new and exciting growth initiatives for our other key brands, which we expect to announce later this year and beyond. Just after the quarter ended, we signed and subsequently closed on the acquisition of a majority interest in the Jessica Simpson brand and related intellectual property rights. We are thrilled with this new acquisition, as the brand is definitively one of the most successful fashion and lifestyle brands in the market, driving approximately $1 billion in annual retail sales from over 30 product categories. And market share and consistent growth achieved by the brand would not have been possible without the A-list licensees and best-in-class retail partners, who have supported Jessica throughout this past decade. Since the closing less than 30 days ago, we have been able to integrate Jessica's team into our platform, and we are already working on several incremental growth strategies here and abroad, many of which we expect to come to fruition by yearend and into next year as well. In addition, this fall marks the 10th anniversary of the Jessica Simpson collection. And in anticipation of this we will be unveiling several cross-platform marketing initiatives in the coming month to commemorate and promote this achievement. Looking ahead to the balance of 2015 and beyond, we remain encouraged by the M&A environment. Our most recent acquisitions of Avia, And1 and Jessica Simpson have validated our ability to execute on our acquisition strategy and has further improved the inbound deal flow that we are seeing. We will continue to focus on acquiring brands with global awareness and global appeal that we believe we can add value to through our unique platform. We remained confident that we are well-positioned to execute on this strategy with our strong balance sheet and supportive financing partners. In closing, today Sequential Brands Group platform includes a portfolio of brand in the fashion, active and lifestyle verticals, generating approximately $3 billion in annual retail equivalent sales, and a leading activation team focused on driving continued growth from each of the brands around the world. We believe strongly that we are well in our way, and in fact ahead of plan, to achieve our three-year goal established just last spring of reaching $3.5 billion in annual retail equivalent sales equating to at least $100 million in royalty revenue and adjusted EBITDA of $70 million. We look forward to updating you on our progress in the quarters ahead. Thank you all for listening today and thank you for your continued support. Operator, we will now open up the call to question-and-answers.

[Operator:]

[Operator Instructions] Our first question comes from the line of Camilo Lyon with Canaccord Genuity.

[Camilo Lyon:]

I wanted to ask you guys about the Jessica Simpson deal, which is a great addition to the portfolio, and I'm sure it was a competitive bidding process. And I'm curious to get your thoughts as to why is it that you think that you guys won the deal over, well, probably there was many competing bids in the marketplace. What do you think made her chose sequential over others in the market?

[Yehuda Shmidman:]

It's a great question, and your premise is entirely correct. Jessica was incredibly fortunate in building a successful brand over the last 10 years, widely successful in fact. And so she had a million of options, of who to partner with, as she went ahead and thought about who the next partnership be for her for the future. And as she went through that process, and while we don't know exactly the details of who she spoke with, but we do know she spoke with multiple parties. What I can tell you is what transpired, as it relates to Jessica and Sequential, is that her choice of selecting us was really twofold. First, of course, it was critical that she find a partner who can help with her go hand-in-hand and work with her to take her $1 billion business and take it to the next level through substantial growth. And I believe that we have the right platform and certainly have the conviction and she believe that as well, so that brought us together. That was part one. But, Camilo, I would say, part two, which is probably even more significant than part one, is that building the bond with her and a relationship with her, and getting her trust that we would in fact be able to actualize that plan long-term as a complete management team behind her, was really important for the commitment to not only preserve and protect what she has already built. I meant, we actually kept her entire team. We have an office in L.A. today, which is doing a great job and has been doing a great job for years. And so the commitment to brand building alongside her, the commitment to being true of what the Jessica Simpson brand is all about, and a commitment to investing in that brand into new initiatives for long-term growth and having that trust together was really important. I think when you put those two factors together, we were fortunate to be selected, and we're very excited about the acquisition and the future of the Jessica Simpson brand.

[Camilo Lyon:]

I think you guys alluded to it in your prepared remarks that this has resulted in an increasing inbound call volume with perspective partners. Can you elaborate a little bit on that?

[Yehuda Shmidman:]

I think in general as Sequential has grown, and of course we have grown up a lot, although at the same time we're very much still in the very early stages. This company and its current form and it's just shy of three years of age. So we're certainly at the very, very beginning stages. And as we commented on the deal flow in the earlier remarks to your point, that comment related to sort of new acquisitions that we're evaluating. And as we've grown, our deal flow has grown in time. And I think when you think about our stakeholders that support us and are part of our entity, be it Tengram Capital, original founding private equity group behind this company; when you think about the Carlyle Group, who is now an equity stakeholder; when you think about our leverage finance partners in Blackstone and BofA, I mean, in our broader stakeholder base. As we continue to grow, our inbound deal flow has continued to grow in time. So we're really excited. As you know, we're committed to two very distinct chapters in our playbook, the first being consistent organic growth and the second consistent acquisition growth each year. And so we're very much focused on both chapters, and excited that the deal flow has picked up relative to that second chapter.

[Camilo Lyon:]

And then my last question is on that organic piece. I guess, now that Avia has been in the portfolio for a couple of quarters. Can you just talk about the opportunity, because it seems like it's very levered to what's working very well in the athletic trend? How you see the relationship with Walmart unfolding? And more specifically what is happening at the store level that gives you comfort that this is a brand I can really drive the organic piece for years to come?

[Yehuda Shmidman:]

The Avia brand, what you called out, is definitely one of the fastest pace growth brands in our portfolio. Number of reasons for that. One, is just the overall athletic, active, growth trends that are happening in the marketplace, which are very strong and definitely giving us a great tailwind. Two, the brand itself, and the value proposition that it provide to the Walmart customer is amazing. And what we're seeing on the floor and what we're seeing with Walmart has been terrific. Of course, core to our strategy, as we grow organically with the brand Avia, not only are we looking to continually add categories, and so right now on the floor you could see certain accessory categories that have started to hit, and some new ones that are coming in the back half of this year. So that's a key point for us. The international growth for us with Avia is going to Walmart's international stores the world. It's very important to us. And then the idea of Avia even outside of Walmart, because we are not exclusive to Walmart is also been a good piece of business for us. So Avia in total is actually one of a key organic growth drivers for us this year.

[Operator:]

Our next question comes from line of Erinn Murphy with Piper Jaffray.

[Erinn Murphy:]

I guess, Yehuda, for you, on the Jessica Simpson brand, I mean, it's clearly been a very strong brand over the last 10 years. Could you just maybe reflect somewhat the organic growth has been in the last two to three years in the market?

[Yehuda Shmidman:]

Sure, absolutely. And again, what you said is absolutely correct, and the brand is 10 years of legacy. And in fact, we'll be celebrating the 10th anniversary this fall. With a lot of fans there, both together with our core licenses as well as our retail partners. The last few years have been consistent growth as well. We have strong distribution at Dillard's, at Nordstrom, at Lord & Taylor, Macy's and other leading retailers across United States. And what I would say, Erinn, is as we think about organic growth for Jessica Simpson and the brand itself going forward is there are several key initiatives for us that are well under way already. We've just closed on the acquisition 90 to 30 days ago. And the first of those three prongs would be, the digital side. Jessica has a strong and growing social media platform. And yes, jessicasimpson.com has not yet have an e-commerce capability to it. So we see upside there. And second, around the world, international growth is very exciting to us. And so the brand's development has been very strong in the U.S. and has begun overseas, and we see opportunity there. And then third, there are still some key categories, which get us very excited. For example, Jessica Simpson Activewear, we think could be amazing, and that has not yet launched.

[Erinn Murphy:]

So I guess, just a question maybe on the international side. I mean, if you look at the kind of $1 billion in retail sales that Jessica Simpson does today, what percent would be international? And then if you kind of embark some other strategies, maybe a compare in contrast, but when you went into the European market with William Rast last year in a number of kind of distribution channels there. I mean how are you thinking about approaching kind of the Jessica Simpson kind of incremental international strategy today?

[Yehuda Shmidman:]

So to answer your first question, the percentage of business of the Jessica Simpson brand that is today international is probably low single-digit. It's very small. And so it gives us an opportunity to expand. And in terms of where that will be, to your second point, to your point, we had a big ones for William Rast in Europe last year, and several of our brands have already begun to get traction overseas in general. William Rast being one, Ellen Tracy being a second, and Heelys. But when you think about Jessica Simpson's future around the world, where we are focusing is actually in places such as Latin America, Asia and the Mid-East, more of the emerging markets, where receptivity to her and her brand, we've seen already, has been very strong. So actually right now we have two teams from Sequential overseas, one happens to be in the U.K. and another team happens to be in China working on different projects. But for Jessica, to your question, we're very excited about those international growth prospects, and as I mentioned especially in the emerging markets.

[Erinn Murphy:]

And then I guess just on the digital site for jessicasimpson.com. When would you anticipate to have kind of an actual e-commerce site up and running in following?

[Yehuda Shmidman:]

When we spoke about the three prongs of growth for Jessica, one being that digital e-commerce growth, the second being international, and the third being certain categories. All of these initiatives are very much underway. What we'd like to do is complete progress by yearend. So we'll give you more update as we go, but we actually want to hit the ground running, and we are hitting the ground running to make sure that we get those new initiatives up and running as quickly as possible.

[Erinn Murphy:]

And then just the last question maybe just following up on one of Camilo's questions on M&A environment. I mean how comfortable are you from a balance sheet perspective that's going to take that leverage point even higher, if the right acquisition comes along? I guess how are you thinking about that now in terms of the financing up at the next potential deal, given the mechanics of how you just closed on Jessica Simpson?

[Yehuda Shmidman:]

We feel really good about our balance sheet, and our financing partners. Of course, as we've demonstrated over the last few years and we will continue to sort of keep this philosophy on being opportunistic and flexible. And so we've use the combination of debt and equity over the years with a focus on making sure our acquisitions are accretive, making sure we have brands that have monetization streams that are clear and focused, and of course making sure that our brand that we're acquiring can grow with our platforms. So as we think about balance sheet today, we have over $250 million of contractually guaranteed minimum royalties due to the company from existing contracts, excluding renewals. And that gives us a lot of comfort around our leveraged finance that we have today, which is approximately $275 million of net debt, and that gives us very comfort. And then long-term as we acquire future brands, we are looking to be opportunistic as we continue to go similar to our path.

[Erinn Murphy:]

And then just, I'm sorry, just have one more kind of housekeeping, just want to make sure I heard you correctly. On the Avia and And1 brand, if you kind of expand internationally, did you say that you've already kind of started to pave the runway with Walmart international, as you think about the back half opportunities for those brands?

[Yehuda Shmidman:]

Very much underway. So nothing specific that has been announced, but absolutely focused. And I believe, and I could be wrong, but I'll go for it anyway. I believe Walmart international has over 6,000 units outside of America and probably many more, so a big opportunity there. And with the success and tailwind of what's happening with both And1 and Avia in Walmart today, we get really excited about what that could be as it rolls out into various new geographies with Walmart around the world.

[Operator:]

Our next question comes from line of Eric Beder with Wunderlich Securities.

[Eric Beder:]

Could you talk a little bit about Revo and the sunglasses? I know that that license kicked off in September and now we're entering the sunglass season. How do you see that brand developing?

[Yehuda Shmidman:]

Revo is doing very well, and actually we have something sort of in work that's not yet ready to talk about today, but hopefully by yearend we'll have that out there. We're still one of the best-selling brands in sunglass side. And we are absolutely continuing to grow not only the sunglass distribution, but also very much to our plan on working on several new categories that fits that Revo lifestyle and what that represents. Product is doing well, sales are doing well. We introduced all sorts of new products lately, even some lifestyle products around the more sort of outdoor styling. So stay tuned on Revo and hopefully we'd be able to talk about that as we develop further in the year, but definitely a good brand and an anchor brand within our lifestyle vertical.

[Eric Beder:]

So in People's Liberation, so you sold the brand. What was the thought process behind that? And as you evolve this company, is that something that you would see as one of your tools to sell some of your brands that just are not as big one or as crucial as to pry going forward.

[Yehuda Shmidman:]

Yes, to your last question, is that the tool? The toolkit it is. People's Liberation was not only an immaterial part of our business, but it also was not something that we felt that would be a part of our material go forward business. And so the ability to exit, divest that asset, so that we can continue to focus on growth assets is very important to us and we feel really excited about. When you think about that playbook, which we always talk about, having those two chapters, and of course yet, one chapter is acquisitions and acquisitive growth, but the first chapter is consistent organic growth. And we want to make sure that we and our teams are all focused on those material organic leverage. Today, we have three strong verticals in our business

[Eric Beder:]

And in terms of the Jessica Simpson design team how do you want to lever them going forward? I know they've done a great job and got a very integrated collection. Are there further opportunities to lever that team going forward?

[Yehuda Shmidman:]

The team that, as I mentioned before, is based on LA, which we 100% preserved and feel really good about. It's a terrific team, and they are working really well on the Jessica Simpson business. And I think when you think about leverage, it might sort of hear you a different way and perhaps think about the licensee size. When it comes to licensees in the Jessica Simpson business, their top-tier companies across the board, whether it's Camuto Group in the footwear; whether it's Parlux in the fragrance; whether it's G-III, and so on, the list continues, strong partners across the board. So for us I think when you think about leverage, I would call your attention to sort of a fact that Sequential today is approximately 100 licensees and we value those relationships so deeply and we always want to work with our licenses on new project that makes sense for them, where they commit to right resources. And hopefully, we're delivering different brands to them, to help grow with them and that's where we get really excited, if you will, on the leverage side of the Jessica Simpson business.

[Operator:]

Our next question comes from the line of Dave King with ROTH Capital Partners.

[Dave King:]

I guess, as a follow-up to on of Erinn's question. So I was just curious on the international approach for Jessica Simpson. So it sounds like Latin America is where you'll be targeting. I guess, I'm just curious, are there any existing relationships there that you can leverage? If there are plan to go to somewhat of a DTR strategies, is there plan to do wholesale as it's typical I think for a lot of your brands? I guess just some more color there would be helpful?

[Yehuda Shmidman:]

And yes, you're actually right. When it comes to places of interest for the Jessica Simpson brand, as we have mentioned Latin America is defiantly a key area for us. We think about Latin American licensing very much including the ingredients what you called out. So it could be a combination of licensing the wholesalers to distribute on the combination of licensing to people who may open Jessica Simpson stores, there maybe a combination of licensing to actual retailers in the region. Whatever the case and whatever the tool and whichever the option, the key denominator will be a licensing strategy consistent with our core business that we have in United States. Latin America, of course, is a big place, and so it depends a little bit specifically on where you are in Latin America; Mexico could be one strategy; Central America second strategy, for example; and Brazil the third. But nevertheless, the strategy is absolutely to grow that Jessica Simpson brand and business with core partners in the region.

[Dave King:]

And then just more generally, Yehuda, in terms of thinking about the merits of doing DTRs wholesale, what are kind of the trade-offs just generally, of course, not just talking about Jessica Simpson in Latin America. I guess, you guys typically have done more wholesale type deals obviously. Can you just talk about the trade-offs versus both? And what are the advantages, maybe can you help remind us some of the advantages of doing it through a wholesale?

[Yehuda Shmidman:]

Yes, sure, absolutely, Dave. I think both models have merit, and there are different merits to your point. And you're correct, the overwhelming majority of our business today happens to be the model where we've licensed our brand to leading best-in-class wholesalers to then in turn sell retailers, but we could in the future embark in direct-to-retail relationships as well. I guess if you were to call the merits of each from our perspectives, Sequential's perspective, in the model of direct-to-retail, of course often times, retailers feel as if those brands become almost a private label, and so they often market those brands with additional resources from time-to-time and it may give better placement in the stores, that's possible. So that is helpful. And on the flip side, if you look at our business, which again is predominantly the other model, what you get is sort of a broader diversification in many ways. A diversification in terms of the legacy pool and the risk profile, but as well a diversification and distribution. And so very sort of little of our business is exclusive, and that gives us a range and a way to grow our business into new doors. So for example, when we spoke about Ellen Tracy, I'm expanding its sportswear distribution into Nordstrom, that gets us very excited and that's a function of not being exclusive, as an example. And there are many other examples. So both models have merits and we may endeavor both models, but again, to your point at the moment we're mostly in the wholesale model.

[Dave King:]

And then, Gary, don't want to leave you out. In terms of updated thoughts on capitalization, and maybe you can comment on this as well, while you could have, but I think Erinn asked about it a little bit, but in his thoughts on obviously leverage is up there, but debt to equity ratios, is there a good way to think about that on a go forward basis? And any plans to change that?

[Gary Klein:]

Yes, Dave, long term again we remain committed to 4x net debt to EBIDTA. Today we are slightly ahead of that. Again, we feel very comfortable as we have about $250 million of guaranteed minimums going forward. And as we go forward, we're going to be opportunistic and flexible, that you just said, whereas as each acquisition comes up, we'll see what's the best go-forward cash structure for the deal, and beyond

[Yehuda Shmidman:]

One of things to say about, to add to Gary, if I could is that -- sorry, didn't mean to cut you off, but just to add to Gary's, financing has gotten better for us over time and so we do not see financing as a hurdle to completing deals and as we get a function of having supportive partnerships, supportive capital markets.

[Dave King:]

And then so then it sounds like it's going to be more of a wait for the deals and events as opposed to doing anything for authentic purposes in advance?

[Yehuda Shmidman:]

I wouldn't necessarily conclude that, in other words, we'll always be opportunistic and our Board is always evaluating the best cash structure, but the good news is we do have options and most importantly, want to make sure, we're maximizing shareholder values and shareholder returns and how we approach that.

[Operator:]

Our next question comes from line of Steve Marotta with C.L. King.

[Steve Marotta:]

Gary what's the fair estimates for the steady states operating expenses on a quarterly basis?

[Gary Klein:]

So Steve, this quarter I think we did about 59.5% EBIT margins, and now for the year I think we're projecting about 52%. So there's not a whole lot of fluctuation. I do think at some point maybe a little bit higher in the back half of the year and revenues a bit, so that's kind of why I feel its leveled off. But, yes, probably the best way to think about it, again in terms of EBIT margins.

[Steve Marotta:]

And also from a tax rate standpoint, did your assumption changed there from 25% to 35%?

[Gary Klein:]

So when you look at the GAAP P&L, again, it's going to fluctuate just based on some just accounting, that's what I really call it. And what we do is we kind of give you a pro forma 35% when you look at the non-GAAP results to maybe consistent quarter-on-quarter and year-on-year. Just to add one thing to that, Steve, although we are proving that, we're giving you that 35% statutory rate, a lot of our taxes are non-cash going forward. And again, that's two pieces, if NOL that we have helping us out this year and next year they do level off as we go forward, but again there is also the second prong, which is we do get amortized many of our intangibles for tax purposes over '15, as this gives us a tax benefit.

[Steve Marotta:]

And did you spoke to Jessica Simpson pertaining to the international strategy when you think, and you sort of gently Avia as well. When you think of priorities and opportunities internationally by brand, how would you range to top say four to five?

[Yehuda Shmidman:]

So I think the way we would characterize it is that we may made traction with Heelys, Ellen Tracy, and William Rast, and that some of those initiatives were discussed, of course, last year and those are continuing. And when we think of our priorities if we had to rank them this year, we would call out Avia, AND1, Revo, and Jessica Simpson. So those four or five to task for from international perspective, and it's not to say that other opportunities don't exist, they do, but there is a time where you will see the more material outcomes for this year.

[Operator:]

Our next question comes from John Kernan with Cowen and Company.

[John Kernan:]

Yehuda, you constantly talk about organic trends. Can you just embed and help us understand what is embedded in your guidance this year for organic growth? Are we seeing some more pressure on the organic growth line, on some of your licensed business competitors? So what can you do differently over time to offset that?

[Yehuda Shmidman:]

Yes, John, the way we have planned and guided for organic growth for this year 2015 is consistent high single-digit organic growth, which is consistent to our three year plan, which we put out last spring, that what we believe is achievable on a consistent basis. The levers of our organic growth are very straightforward and very simple. And it's comprised of really a lot of elements from today's call, be it international growth, channel growth, specifically digital growth and e-commerce. And then third, of course, key categories. And when we think about our anchor brands, when we talked about our verticals, so the same fashion led by Jessica Simpson, and we've covered some of those levers today. And we've talked about our active athletic vertical with AND1 and Avia, some of those specific levers. And then on the lifestyle side the Revo and Heelys as well, just back to Ellen Tracy, which we covered as well. So I think when we think about our organic growth, we feel really good about it. It's a very important chapter of our playbook and something we're completely committed to and the focus on those material impacts is what's so important and what we focus on day and day out.

[John Kernan:]

And I don't mean, in this case, but if I look at Galaxy Brands revenue from Q1 of last year and your licensing and other revenue from last year, it looks like it tipped down slightly in this first quarter. Is there some moving parts there to the portfolio that caused that. Can you help us understand what would cause that decline?

[Yehuda Shmidman:]

No, I don't think it declined. I mean, I think the way our first half typically run, as we commented during in the past and we continue to do is, our licensees sales due to the seasonality of their businesses is mostly weighted towards the back half and specifically Q4. And so the first half for us is typically just an amortization of the minimum guaranteed revenue that we're accruing really for businesses with occasional timing of overages depending on where they come. And so we had some standout this quarter, I mean particularly, as I mentioned, Ellen Tracey, and as well as in Avia. And so when we look at the total portfolio, the key for us is how does the timing happened, what have the results occur for the full year? It's very hard to look at sort of the month-to-month or quarter-to-quarter basis in our business, because of both the minimums and because of how our businesses sort of flow. And so the key for us is are we growing year-over-year, and we believe we are, and we have been, and we want to continue to post those results every year in the future.

[John Kernan:]

And then just, Gary, you're guiding to a big inflection in GAAP net income, which is nice to see for this year. Can you help us understand what your cash flow from operations specifically should look like this year?

[Gary Klein:]

So this year we're projecting about $50.5 million of EBITDA, okay, and that's cash basis. And as we take out the net interest expense of about $20 million, most that is cash interest. Is that safe way that what you're looking about $30 million of free cash flow, the income tax for the year, as the NOLs and amortization and the intangibles is for the most part going to be non-cash. So that's the best way to think about free cash flow adjusted EBITDA less the cash interest.

[Operator:]

Our next question is a follow up question from Camilo Lyon with Canaccord.

[Camilo Lyon:]

Just two quick follow-ups. Just in the context of international growth, could you just remind us if you have any international JVs? And if you don't, do you plan on having any in the future?

[Yehuda Shmidman:]

We do not have any international joint ventures, and we do not plan to have any in the future. It's interesting when a prior question from Dave came up about Latin America strategy for Jessica Simpson. Dave interestingly provided a number of possibilities of having the license in Latin America, license to wholesalers or retailers, and of course, as we commented at that time, those were all possibilities. But we're not pursuing joint ventures internationally. What we are pursuing is a consistent expansion of our business, which is working very well here in the states, which is simply identifying best-in-class manufactures, operators, distributors, retailers, people who really can brand build with us side by side, and people who are committed to dedicating the right resources side by side with us, and people who together with our retail relationships and their retail relationships can affect material market share outcomes or growth outcomes by working together with the right brands and the right opportunities. So for us when we think about international, just like when we think about here in the states, it's very much a long-term goal and initiative and we want to keep to the same business model that we have to affect that.

[Camilo Lyon:]

And then just a second follow-up is, maybe, Gary or Yehuda, if you chime in on this. So you talked in the press release about your GMR is being $62 million for this year. Typically, I think in your model guaranteed minimums royalties equates to about two-thirds of the overall revenue stream, so that imputes to about $94 million for the year, yet the guidance for '15 is, call it, $80 million in licensing revenues. Could you just help bridge the differential between the two? Is it timing differences or why wouldn't the number get closer to that imputed $90-plus million?

[Gary Klein:]

Two ways to think about that, Camilo. The first is, it's true, historically we found that the sort of ratio of minimum guarantees to actual tends to be in this two-third range, but there is sort of many part to it, maybe even more so than a science where there's no sort of exact formula there, and it could be a little bit higher, it could be a little bit lower. We always feel good, of course, the higher it is in a sense that it gives us tremendous comfort and tremendous safetyness, really downside protection, and as well gives a lot of comfort to our lenders and our leverage financed capacity, and so it's sort of a great fact, but that's certainly one way to think about it. And of course, the other way to think about it is you could look in and say, are we being too conservative. And what I would say to you is, we're certainly onboarding a new business in Jessica Simpson, and so overtime, of course as we live with the business and hope to affect it and grow it, our numbers will hopefully do better. But of course, we want to be as responsible as possible when we give guidance, having just onboarded that business less than 30 days ago.

[Camilo Lyon:]

Just to be clear, there is no future acquisitions embedded in the current guidance?

[Gary Klein:]

That is correct.

[Operator:]

Our last question comes from the line of Liz Pierce with Brean Capital.

[Liz Pierce:]

You know what I think most of my questions have been asked, but I will just quickly ask on Heelys. I'm curious about to listening it as a lifestyle brand and what might we expect? I know you added some categories for back-to-school last year. Do we have more about in the pipeline?

[Yehuda Shmidman:]

Yes, you're absolutely right that Heelys is a definitely a lifestyle brand and not a shoe, as it would sort of one perceives perhaps. And Heelys is doing great. Of course, footwear partner has done very well. We have been able to layer on some additional categories such as the backpack. And we've been able to launch the e-commerce. And heelys.com is looking pretty good. One of the new things, Liz, that I would call to you is, we've recently actually launched a Heelys app, a game for kids, which probably might seven-year old is playing and seems to love it, so seems to be doing well, but we absolutely want to style in with Heelys to that whole lifestyle for kids and what that's all about boys and girls. And so there could be in the future, there could be toys, there could be more paddle out there. But broadly speaking Heelys is doing well and we're excited about that brand.

[Liz Pierce:]

So Yehuda, is that something that we should think that we'll see more or so back-to-school or is this just more big picture longer-term for the brand?

[Yehuda Shmidman:]

Looking about a big picture longer-term, as we sort of layer on new initiatives, we'll definitely talk about them as they come onboard. But it's definitely a long-term approach. Overall, since we acquired Heelys, which was Q1 of '13, it's definitely been sort of on a multiple basis, on an actualization basis. It's definitely panned out to be a great investment for us and great return for us. We bought it for a net purchase price of just about $9 million. And it's certainly, on a multiple basis, I think one of our best purchases. So it's doing very well. And we've invested in marketing initiatives against this. We completely revamp sort of the branding and what its outlook is to consumers. So yes, when I'm speaking, it's sort of not about jamming the next season as much as it is about sort of long-term brand building for the Heelys brand overall.

[Liz Pierce:]

And any comments on William Rast just in terms of, particularly, as you think about leveraging some of the international relationships you've developed with them. And are you gaining some increased kind of share of market globally with it?

[Yehuda Shmidman:]

Yes, William Rast is good. And we're coming off of our exclusive with Lord & Taylor, which started in the fall of last year and continued into right now spring of '15. And so by fall holidays this year, our hope is to be in some new accounts with the brand. As we've layered on new licensees over the last year, year-and-a-half, we have been fortunate to work with some standout such as Peerless, which is a private company, but a great company, a company that makes all Ralph Lauren's suits, and now makes our suits for William Rast, as an example, and they've done well. So between sort of putting on some new categories over time, and then as well think beyond the Lord & Taylor exclusive, we think there could be some continued growth for that brand in years ahead.

[Liz Pierce:]

So the Lord & Taylor is over. This is the last delivery or is it for the spring?

[Yehuda Shmidman:]

I'm sorry, just to clarify, just the exclusivity is ending, not that Lord & Taylor is over.

[Operator:]

Thank you. We have reached the end of the question-and-answer session. Mr. Shmidman, I would now like to turn the floor back over to you for closing comments. End of Q&A

[Yehuda Shmidman:]

Great. Just want to thank everybody for their continued support. And we appreciate your time this morning. And look forward to speaking with you next quarter.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.