Sequential Brands Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

Greetings and welcome to the Sequential Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Today’s presentation will include forward-looking statements, which are based on current expectations and beliefs of management. Investors and security holders are cautioned not to rely upon such statements as they do not constitute or guarantee of future performance or results. The company is under no obligation to and expressly disclaims any obligation to update or alter as forward-looking statements, whether as a result of new information, future events or otherwise. In addition, we note that the information in this communication is for informational purposes only and is neither an offer to purchase, nor a solicitation of an offer to sell, subscribe for or buy any securities or the solicitation of any vote or approval. The company intends to cause or has caused the filing with the SEC of a registration statement on Form S-4, which will include a prospectus with respect to the shares to be insured and the transaction with MSLO as well as a proxy statement for MSLO stockholders and an information statement for Sequential stockholders. The company urges investors and security holders to read the Form S-4 and other documents filed with the SEC as they contain important information. It is now my pleasure to introduce your host Gary Klein, Chief Financial Officer for Sequential Brands Group. Thank you, Mr. Klein, you may begin.

[Gary Klein:]

Good morning and thank you for joining Sequential’s second quarter earnings conference call. On today’s call, I will review our second quarter results for 2015 and then turn the call over to our CEO, Yehuda Shmidman, to provide an overall update on our business. For the second quarter that ended June 30, 2015, the company earned revenue of $20.2 million, representing an increase of 189% to our prior year quarter revenue of $7 million. Adjusted EBITDA for the second quarter increased 236% to $12.4 million compared to $3.7 million in the prior year quarter. Non-GAAP net income for the second quarter was $3.3 million or $0.08 per share compared to $1.1 million or $0.04 per share in the prior year quarter. For the six months that ended June 30, 2015, the company earned revenue of $33.9 million, representing an increase of 155% to a prior year period revenue of $13.3 million. Adjusted EBITDA for the six-month period increased 199% to $20.4 million compared to $6.8 million in the prior year period. Non-GAAP net income for the six-month period was $4.6 million or $0.11 per share compared to $1.9 million or $0.07 per share in the prior year period. Our balance sheet remains strong and cash on hand at the end of the second quarter was $25.3 million. 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. We are pleased with our second quarter performance as we delivered another quarter of strong financial results, continued to position our brands for future organic growth, fully integrated the Jessica Simpson brand into our platform and entered into a definitive agreement to acquire Martha Stewart Living Omnimedia. Although we are still limited on how much we can comment on the Martha Stewart transaction, I will be providing some high level thoughts in just a few minutes. But first, let’s begin with an update on our existing portfolio of brands. Starting with Jessica Simpson, we are pleased to report that the business has been fully integrated into our platform and we are hard at work on a number of new initiatives to expand the business both in the U.S. and internationally. In the quarter, this Jessica Simpson business experienced strong sales growth compared to the prior year, with increases reported across nearly all of the brands licensees. The standout growth categories for the quarter included footwear, licensed by Camuto Group; Denim, licensed by ONE Jeanswear and maternity wear through our direct-to-retail partnership with Destination Maternity. We have also made significant progress in identifying new partners for active wear and e-commerce, which we expect to announce later this year. Also in the second quarter, we once again saw a strong performance from our active brands, Avia and AND1. Both brands continue to perform well at Walmart and we continue to see additional expansion opportunities for these brands in both new channels and new geographies. The standouts for these two brands were our AND1 apparel and AND1 sneakers and the launch of Avia wearables. Our Ellen Tracy brand continues to gain momentum following its 65th year anniversary with distribution for our sportswear category expanding into new doors, including Nordstrom’s, Lord & Taylor, House of Fraser, Von Maur and Dillard’s with in-store launch date scheduled throughout the upcoming fall and holiday seasons. We are also pleased to report that our core sportswear licensee with Li & Fung, Global Brands Group has been renewed for an additional 3-year period extending through January 2019. And last, but certainly not least, just last week, we announced an exciting new multi-year partnership with U2 lead singer Bono for our brand Revo. The partnership will be focused on preventing vision impairment and blindness throughout the world with the goal of helping more than 5 million people by 2020. To help raise awareness for the cause, Bono will be featured in key marketing efforts and advertising campaigns for the Revo brand, which will promote the initiatives we are calling Buy Vision, Give Sight. And Bono said, when we announced the partnership, the cause is a very personal one for him. Bono was diagnosed with glaucoma years ago and thanks to strong medical care, his eyesight is fined. But literally tens and millions of people around the world suffer from serious vision problems and don’t have access to glasses or even a basic eye test. With this new partnership Bono and Revo together will be donating and raising funds to help those in need through the Brien Holden Institute based out of Sydney, Australia. We are proud to be part of such a worthy cause and invite everyone to learn more about this global partnership by visiting revo.com. Turning to our acquisition news, this past quarter, we announced a definitive agreement to acquire Martha Stewart Living Omnimedia. Upon closing, we expect the acquisition to provide for a number of exciting developments, including the addition of one of the most well-known and respected consumer brands in the home lifestyle world, the launch of Sequential’s fourth category vertical, the addition of new A-list retail partners to our active distribution network, including Home Depot, PetSmart and Staples, the opportunity to further our existing relationships with Macy’s and Michaels, and the addition of the Emeril Lagasse culinary brand of food and kitchen products. As we look at the long-term future of the Martha Stewart and Emeril brands, we see exciting opportunities in new categories and new geographies. We are looking forward to working closely with Martha and her team on developing and executing on these initiatives following the closing of the transaction. As we move closer to completing this acquisition, we will be in a position to provide you with further insight related to our plans for the brand and its anticipated financial impact for 2016 and beyond. We expect the acquisition to close by year end. Even with this transaction pending, we plan to continue to remain active on the M&A front and will continue to evaluate and consider additional brand acquisitions. In this unique time, where multiple brands are in play and capital is readily available to Sequential, we remain excited and committed to the acquisition growth chapter of our playbook. In closing, this is a very exciting time for our company. We are proud of what our team has accomplished in just under 3 years and truly believe there is much more ahead. As we are now in the cusp of surpassing our 3-year plan established last spring of achieving an annual run-rate of $3.5 billion in retail sales, $100 million of royalty revenue and $70 million of adjusted EBITDA, we anticipate announcing a new 3-year plan in the coming months. 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. I will now turn the call back to the operator for questions and answers.

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.

[Camilo Lyon:]

Thank you. Good morning, guys.

[Yehuda Shmidman:]

Good morning.

[Camilo Lyon:]

I think I will start out with questions on Martha to the extent that you can comment, just maybe high-level stuff or high-level direction on what you think are the most prevalent opportunities that you see, that you can start to execute on day one, as you see this is a very well-known brand, but I think there have been some missteps with how the business has been managed, what do you see the easiest route to go after?

[Yehuda Shmidman:]

Sure. So, Camilo I am sure you will appreciate that we are somewhat limited in what we can comment on at the moment. We did file yesterday the S-4 registration statement and there are a number of details there. And of course we do plan to further detail our strategies as we get closer to and of course after the closing which we anticipate to happen by year end. But broadly speaking as I guess what I mentioned earlier in the remarks, we are of course very excited about MSLO and we are very excited about the business prospects ahead. We think this is an incredible brand and some exciting time to add a fourth vertical to Sequential’s company.

[Camilo Lyon:]

Okay. Maybe I will ask in a different way, if you looked at the business before you got – when you were looking at the business before you signed the definitive agreement to buy it, what holes did you see in their business plan that you felt that you could sell with the combination?

[Yehuda Shmidman:]

Sure. Camilo I don’t – of course, believe me we analyze the business in that way and you are right to think that way. But you will have to forgive me we are in a quiet period because of the S-4 filing. So we will have to defer the strategy reveal until we get closer to the closing and post-closing. But again, we are very excited about MSLO and of course the way we do think as you know and our shareholders know is of course, we believe in the power of brands and we believe in analyzing category gross retail growth and international growth. And we will be focused on all those things with the MSLO company once the transaction closes.

[Camilo Lyon:]

Okay, fair enough. We will change to different brands. Maybe Jessica, I think is probably a good one. There is a really nice acceleration in the revenue line that you experienced here. Obviously, Jessica contributing to that, I think it’s the first full quarter that they are in, that the brand is in the reported results. What do you think – you mentioned footwear, denim and maternity, are those relatively – are those categories that she has been engaged before over the news of those, I know she has been in footwear and denim, but there are more of these new categories that you are springing to market right now or is it just a continuation of the growth that she has been experiencing and the acceleration on the growth that you will be able to provide is still forthcoming?

[Yehuda Shmidman:]

Sure. So with Jessica Simpson we got combination of both, which is really giving us a lot of encouragement. We actually closed the Jessica Simpson acquisition at the sort of at very beginning of Q2. We were able to hit the ground running, integrate the teams virtually immediately. And we got that combination of the legacy business which we invested in, which includes the denim and the footwear and the maternity, but also we have been able to put into high gear some of those new categories, most notably the activewear and the e-commerce, which we see happening in short order. So there really is sort of parallel pass here in motion and both sides are very compelling for us.

[Camilo Lyon:]

Can you talk about your distribution for the activewear I mean that’s definitely a market that’s getting a lot of attention from a lot of different brands and I mean certainly that’s the part of apparel that is continuing to exhibit accelerated growth rates, I would love to understand a little bit more of where the Jessica line is going to fit – who it’s going to compete with and how you are looking at the pricing relative to the competition?

[Yehuda Shmidman:]

Yes. So that’s clearly an explosive category and one that we think makes a lot of sense for the Jessica Simpson brand and we couldn’t be more excited. In terms of the specifics certainly you could think about it in terms of where our brand normally trades. Think about those channels of distribution, think about that competitive set. But also, think about new channels that this will open up for the brand in light of the category. So we are thinking about it both ways. We are hoping to get that sort of the details of the activewear out once we can announce the partner. And once – at that point we will able to see the product and hear about the specific retailers that are on board. But we are – we think that will be a real material growth for the brand.

[Camilo Lyon:]

Okay. And then just lastly going over to the comments that you made in your prepared remarks about being excited to continue to pursue further acquisitions even after the closing of Martha, you have been on the furious acquisition pace, clearly that’s a part of the growth strategy. How would you characterize your bandwidth to continue to do more deals or do you have the team in place or do you need to add more people to manage a very fast growing portfolio of brands that has a lot of opportunity that of itself?

[Yehuda Shmidman:]

Sure. What we feel great about it, two things I would point out. The first is as Martha Stewart Living Omnimedia comes on board. It will come on board as a fourth vertical. And in addition to that the other three verticals of fashion, of lifestyle and active athletic continue to not only proved out well in terms of operations, but also have great leadership in each of those verticals. So for us over the last few years in addition to both focusing on the first chapter of our playbook of organic growth, later on with our second chapter as you mentioned acquisition growth, we have made a conservative effort to increase our infrastructure within. And so we look at these vertical as having opportunities for sort of continued bolt-on acquisitions within each vertical and as well in the future we may even consider additional verticals as well.

[Camilo Lyon:]

Okay guys. Best of luck. It sounds like you guys are on a very strong path. Good luck with the back half.

[Yehuda Shmidman:]

Great. Thank you, Camilo.

[Operator:]

Thank you. Our next question is coming from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

[Erinn Murphy:]

Great. Thank you, guys. Good morning and congratulations on another solid quarter.

[Yehuda Shmidman:]

Thanks.

[Erinn Murphy:]

Yehuda, I was hoping if you can maybe speak to the extent that you can on the Martha Stewart acquisition, can you just talk a little bit about a couple of mechanics. I guess, one, kind of what happened during the go-shop period. And then, now it’s a definitive agreement signed, I mean just help us think about the mechanics that actually have to occur between now and when you close the deal, which I think you said would be before the end of the year?

[Yehuda Shmidman:]

Sure. And yes, you are correct. We anticipate the closing to occur by year end. Right now, we are going through a customary closing process, which includes most notably the filing of the S-4 registration statement, which was filed just yesterday. And then most notably as shareholder vote on the side of MSLO. Other than that, typical processes in place. To answer you, the first part of your question, we were advised that during the go-shop period, there were no other bids that surfaced. I mean, so that go-shop period did expire. And as I mentioned again, we have moved to the next step being the S-4 registration process. So I think, what we are experiencing is sort of your typical process – could it be quicker, could it be longer, it could be, we are trying to be conservative and we believe and expected to close by year end.

[Erinn Murphy:]

Got it. Okay, that’s helpful. And then again, if it’s something you can, I mean if you could look at the market towards business today, I mean very profitable merchandising segment for that business, obviously publishing is a bit of a drag from an EBITDA perspective, I mean how do you just big picture think about that publishing business?

[Yehuda Shmidman:]

Sure. In general and you can imagine there are lots of assets to the business in MSLO. I mean, all those things of course we do want to comment on. But for now, we have to keep those strategies quiet. We will be discussing our strategies in the future as we get to closing and beyond closing. And a lot of that is again just relates to us being in a sort of quiet period because of the S-4 filings. So, all good questions and one that we hope to address as we get closer to closing.

[Erinn Murphy:]

Got it. Just trying to think about it, okay. And then I guess moving maybe to the next kind of – one of the brands I want to focus on, I mean, obviously with Martha Stewart you will be kind of establishing yourselves as having a very strong home vertical, Linens 'N Things is something that kind of came to you guys through Galaxy Brand Holdings’ acquisitions kind of like a gift with the purchase, I mean any thoughts about reinvigorating that brand as you now kind of have a little bit more of a stronghold once if acquisition closes in the home category?

[Yehuda Shmidman:]

Absolutely. And I think the way you characterized it, Erinn was perfect, which was at the time when we acquired Galaxy and with the focus on And1 and Avia, the Linens 'N Things asset was in a way “almost a different purchase” if you will. And so we never assumed any revenue from it. And the ability to own it, we think is great and the optionality to monetize it now having a strong home vertical is very interesting and compelling. So absolutely, that could find a lift and that would be a nice pick up, if so.

[Erinn Murphy:]

Okay. And then I guess on Revo, really kind of unique announcement that you made or I guess it was last week, as it relates to Bono, I mean good brand ambassador. I mean I think if we kind of look at the agreement, it looks like kind of a key focus is to get that kind of $10 million of kind of contribution to the charity overtime with $10 a pair that would imply you are going to be looking to sell about 1 million pairs over time, I mean how does that compare to current run rate, just help us to think about the unit side of the equation and what are some of the new distribution that you need to kind of get that velocity or is it just kind of new style, or just kind of a halo potential impact from having Bono as kind of the ambassador, just help us think about the mechanics there?

[Yehuda Shmidman:]

Yes, absolutely. So we are extremely excited about this new partnership with Bono. I think just it’s so exciting on so many levels. And of course, brings a real core purpose to the Revo brand and listed in such an authentic and genuine way to both Revo’s heritage and to Bono specific sort of situation. In terms of your comment in terms of the how we should think about distribution and volumes, what I can tell you is that even just since last week from our announcement of the new partnership, we have been able to enlist a host of new retailers on board who are excited to join with us, and what we are looking to accomplish together with Revo and Bono and the communication of this partnership will be of course, primarily through Revo distribution and through Revo store distribution and through marketing in those retail accounts. So I think in terms of order of magnitude, in terms of the unit count and the size of the brand, I think basically I think about it is, we certainly see this on a global basis making a significant impact and our hope is to really raise money not just through us, because that $10 million commitment will come not just from us but from our partners, our licensee partners and others and we think it will be very successful. So I am very excited about that campaign.

[Erinn Murphy:]

Okay. And then just a last question for me on Avia, I think during the quarter you announced that you were launching or have launched wearables for that brand, can you just speak about how that’s tracking thus far and any kind of potential other kind of new categories you could be looking at for that brand?

[Yehuda Shmidman:]

Yes. That new category was – it wasn’t – is an exciting one for us. It’s opened us up to a whole different world. Of course, that holds the genre of wearables seems to be really picking up broadly, not just within our business of course, but our ability to deliver those products at almost the shopping value price point, I think is really resonating with consumers. So we have launched that in Walmart and other retailers and we are starting to see interest from other retailers in that channel as well. So that’s been interesting one for us to take us soft lines brand like Avia and bring it into hard lines category. It’s really brought us some nice incremental boost.

[Erinn Murphy:]

Okay, thank you. And best of luck as you go into the back half.

[Yehuda Shmidman:]

Thank you.

[Operator:]

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

[Eric Beder:]

Good morning, congrats on a great quarter. I am not going to have any margin questions, promise.

[Yehuda Shmidman:]

Thanks Eric.

[Eric Beder:]

So we talked about the general M&A environment, what are you seeing in terms of flow and in terms of financing, are the financing sources really strong, are you kind of seeing more and more things coming through the pipeline?

[Yehuda Shmidman:]

Yes. So very unique time and in all of the respects that you have mentioned, first in terms of the M&A pipeline we are seeing continued momentum. And I know we have been saying this and to a degree, we have been almost a broken record on this, but it certainly proven out to be true that there is a large deal flow, large being relative to sort of other times in the past where there are brands available to us. We are of course disciplined and we want to make sure we get the right brands, brands that we can add value to brands that we can grow through our platform, but we are seeing an active M&A environment. And then on the financing side as you brought up as well, we are seeing willingness from our lenders and just the general community – financial community to support this sequential platform. So when you put those factors together, I think when you come back to our strategy and as we sort of said coming when we establish our 3 year plan last spring, we said, hey we want to acquire two to three brands per year, we certainly feel like we have been on track and for the variables we are seeing in front of us, we believe we are going to be able to continue on that.

[Eric Beder:]

Very cool. In terms of going back to school, how is Heelys doing and how are some of the newer Heelys products going in there?

[Yehuda Shmidman:]

Yes, Heelys is doing great. Heelys continues to sell at a real solid price point, its people pay up for it and kids love it and I know this is personal anecdotal, but – and I have got kids in that age bracket and they love it, but of course it’s not just them, it’s the retailers and the consumer base in general. heelys.com and e-commerce site has been doing well. Some of the digital commerce around Heelys, whether it’s Amazon and the other places has been doing well. So I think for Heelys when you look ahead, there is still growth in the footwear and some of that will be global, some of that will be domestic and then some of those new categories that have started to hit such as the backpack and others have an ability to gain even more traction over time as well.

[Eric Beder:]

Great. And longer term, when you talked to international for Jessica Simpson, international for potential other acquisitions, how should we start thinking about longer term, what the percentage of your business can be international?

[Yehuda Shmidman:]

Yes, absolutely. So international is an area where long-term we definitely have an opportunity to do a lot better. We have got a great network overseas. We are starting to see heightened activity in terms of interest level and specific brands that we own, especially places like Asia, Middle East and Latin America. So if today, we call it roughly 10% international in terms of total revenue penetration. Over time, if you look at our peer set with some of our peers are closer to a third 40% or even in some cases as high as 50-50. And I think we have got a great long-term opportunity. By no means there are yet in terms of accomplishing that mission. And that’s something that we are focused on for the long-term.

[Eric Beder:]

And do you plan doing that, some of your competitors are doing joint ventures, some of them does direct, kind of what’s your thought on how you want to do kind of that expansion?

[Yehuda Shmidman:]

Yes, our thought is stick to the core model, which is licensing, finding great first rate operators, whether they would be store operators who can license our brands, whether they would be wholesalers who can license our brand, more direct to retail partnerships in sort of a traditional sense. So that is our core thought process is to keep to the – to down the fair way business model.

[Eric Beder:]

Great, sounds great and again congratulations on a great quarter.

[Yehuda Shmidman:]

Thank you.

[Operator:]

Thank you. Our next question is coming from the line Liz Pierce with Brean Capital. Please proceed with your question.

[Liz Pierce:]

Thanks. Good morning I will add my congratulations. So just a couple, I want to circle back on a couple of other big question that came up. In terms of Jessica, in active did you say that we are her brand normally trades or are you talking about where your other brands trade?

[Yehuda Shmidman:]

Yes. I apologize and thank you for giving me the chance to clarify. What I meant by that was, we are her brand trades. So Jessica Simpson today, of course is – has incredible distribution at the better department store, Dillard’s and Macy’s and Lord & Taylor and Nordstrom. And then as well, I think when you think about active, could there even be some new channels that make sense and that’s possible too.

[Liz Pierce:]

Okay. Alright, that’s helpful. I was kind of wondering if you meant Walmart. So we are trying to figure out how that would work with Avia. And then in terms of Revo, another kind of question on that did you say you heard that more retailers have come in post this announcement?

[Yehuda Shmidman:]

Yes.

[Liz Pierce:]

Okay. So is there any kind of limitation from what you have with Sunglass Hut and who you could partner with?

[Yehuda Shmidman:]

No, in fact we have a non-exclusive relationship with Sunglass Hut, thrilled with the partnership with them. Obviously, they are a dominant retailer, they are the dominant retailer in this sunglass space and we got a great presence with them and thrilled about that. But that is a non-exclusive relationship and so Revo sunglasses, we should all expect to see in the coming seasons to be in many other doors.

[Liz Pierce:]

Got it, okay. And then in terms of Ellen Tracy, if you could just go back you said sportswear was a standout and you are getting more interest from some of the – anybody else besides House of Fraser, internationally?

[Yehuda Shmidman:]

Yes. I mean sportswear is a standout. It’s, of course, a core product of the Ellen Tracy brand and we actually just renewed with our core licensee, Global Brands Group is doing a terrific job and the product looks terrific and the marketing has been great and the expansion this season, fall and into holiday into more accounts, including Nordstrom on floor for Ellen Tracy sportswear is very exciting. On the international front, we haven’t yet announced any other places other than House of Fraser, but we hope to in the future.

[Liz Pierce:]

Okay. And then perhaps maybe just on some of the other brands like William Rast, Franklin Mint, any kind of update, I guess I have been waiting to see something for Franklin Mint or are we gearing up for the holiday on Ellen’s?

[Yehuda Shmidman:]

Yes, gear up to the holiday and William Rast, of course, as you know is still going through a sort of two steps backward to go five steps forward plan as we reboot it, historically, from a prior retail partnership that we had and then launched exclusively with HBC and now has the ability to go into more accounts, each season has the ability to go to more and more. So, for the past quarter and for the year-to-date, we are certainly in a retrench mode on William Rast, all expected and all unplanned, but that’s the story with those two brands.

[Liz Pierce:]

Okay. And then Gary just a question for you on the interest expense, nearly $8 million, is the deferred financing in that $8 million?

[Gary Klein:]

Yes, so there was a $2.1 million write-off, that’s including our non-cash write-off for the quarter, because when we refinanced or we finance Jessica Simpson, we have refinanced the old debt. And as part of that, we had to write-off some of the interest expense.

[Liz Pierce:]

Okay. So, I just wanted to make sure that, that’s the reason for the elevation. And then when we look at what you are talking about for year end again the 19.6 would include that 2.119?

[Gary Klein:]

19.6, no, actually, I think I would add the $2 million to that amount, that’s why a net number.

[Liz Pierce:]

That’s the net, okay. And then Gary just – I am sorry, go ahead.

[Gary Klein:]

Of that $20 million of cash interest this year plus the $2 million of non-cash interest.

[Liz Pierce:]

Perfect, that’s helpful. Okay. And then how just – I mean as we think about then the core SG&A, it really kind of did level off, I mean obviously on a dollar basis up, granted that’s understandable, but on a percentage basis, it looks like that core really dropped down. What is kind of the rate that we should be looking at for the rest of the year?

[Gary Klein:]

So, on a full year basis, I think we have implied that we are at 60% to 62% adjusted EBITDA margin. I think this quarter was about 61%, the quarter before about 59%, surprisingly, slightly ahead of that. We do believe that revenue will be higher in the third and fourth quarters, expenses will be higher as well, but not – I guess on a non-ratio basis. We should still be about low 60s for EBITDA.

[Liz Pierce:]

Low 60s. Perfect, alright. Best of luck guys. Thank you.

[Gary Klein:]

Thank you.

[Operator:]

Thank you. The next question is coming from the line of Steve Marotta with C.L. King & Associates. Please proceed with your question.

[Steve Marotta:]

Good morning, everybody. Could you comment on organic growth in the second quarter as well as expectations for the entire year?

[Yehuda Shmidman:]

Absolutely. So, Steve fully on plan for this year to achieve high single-digit organic growth between all these different initiatives, Ellen Tracy sportswear expanding and with what’s happening with Revo and the continued momentum and several other initiatives, we feel really good about it. It’s amazing this business model where you get a whole lot of different levers, be it working with your core licensees, signing new licensees, new categories going to new geographies, we have got a number of levers to pull on and we feel good about the full year basis.

[Steve Marotta:]

Okay. And in the second quarter was it similar?

[Yehuda Shmidman:]

Yes, very much on plan. We don’t breakout the organic by quarter and a lot of that has to do with just the flow of our licenses, where typically as you know that those first two quarters are typically just minimum accumulation and then the overages typically hitting that third and especially that fourth quarter. So, on a quarter-to-quarter basis, it’s almost impossible to read, but definitely on a year-to-year basis as we are tracking very much on plan and feel good about it.

[Steve Marotta:]

Understandable. As it pertains specifically to AND1 and Avia, you mentioned potential new geographies and I know on a consolidated basis, you are only around 10% as you mentioned early on in the call. Could you target or express specifically which geographies, AND1 and Avia, are aimed for at the moment?

[Yehuda Shmidman:]

Sure. Yes, I think that AND1 and Avia as it relates to geographies, we have a very precise and immediate opportunity to take the success story of the United States Walmart business and go to Walmart International. I believe there are over 6,000 Walmart units outside of the U.S. I mean if I am wrong, it’s probably more than that even and of course growing. And we look at our businesses and we haven’t scratched the surface just yet even going to those areas, be it – whether it’s Walmart Canada, Walmart Mexico as in the UK and other places. So, that’s I think for you to think about and for us to think about is a clear path for those brands, in addition to areas where Walmart isn’t trading, where we see opportunities as well.

[Steve Marotta:]

Okay. And lastly, you mentioned one of the goals for Jessica Simpson was to have an integrated e-commerce platform. I am assuming that, that’s going to be a partnership. From the day you signed the partnership, when can a fully integrated platform be launched?

[Yehuda Shmidman:]

Yes. So, we are very excited about that. And the goal is to have full e-commerce launch by year end. Today, there is a jessicasimpson.com presence, which is of course a brand presence and a content presence. But as you mentioned through a partnership, specifically through a license in our case, we are absolutely gunning to have e-commerce full-blown launch by year end.

[Steve Marotta:]

That’s helpful. Best of luck. Thank you.

[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 questions.

[Dave King:]

Thanks. Good morning guys.

[Yehuda Shmidman:]

Good morning.

[Dave King:]

I also want to share my congratulations on a very good quarter. In terms of – along those lines, I guess the revenue was a lot higher than I had expected this quarter, so that was encouraging. And maybe following up on the last question on organic growth, you heard it – maybe you can just talk about, it looks like, if I look at, think about the minimums and the $63 million or so that you have that you guys have guided for the year, it looks like you are tracking still well ahead of that even on the first half. Can you maybe talk about where those overages are occurring, just to kind of which brand, it sounds like it might be Avia and AND1 to some extent, maybe just touch on that a little bit?

[Yehuda Shmidman:]

Yes, absolutely. And we are very excited about the trajectory of which we are on. We are trying to be somewhat cautious in our optimism and so we still very much are committed to delivering high single-digit organic for the full year. But in terms of the past quarter, I think you touched on some of them, but I will go a little bit deeper. Certainly, Avia and AND1, what’s happening with Revo, what’s happening with Ellen Tracy and some other brands. We talked a little bit about Heelys. It all sort of combines to give us that momentum. I mean in addition, of course, this quarter, I do need to factor in the Jessica Simpson business, which closed to sort of beginning of Q2. So, there is that element as well. But collectively, I very much feel that we are hitting on track. So, those overages as you referenced, Dave, they do – as you know, we typically believe and project them to come in Q4, in the larger sense, then followed by Q3 and then followed by that by Q2. So, some of that is hitting a little bit earlier than Q3, Q4, but we would rather, that’s a good time and we think that momentum is strong.

[Dave King:]

Great. And then on the sort of overages, it looks like – I know it’s fairly small, but it looks like you took that up by a $1 million or so. Is that Avia wearables or is that Revo? I guess how should we be thinking what drove that?

[Yehuda Shmidman:]

Yes, it’s a combination, right. I mean it’s a combination of AND1, Avia, Ellen Tracy, Heelys, I mean, the – really across the board, we saw a lot of strength, private, the notable exception, which again was planned and expected that we have talked about is, of course, William Rast, which is in a full sort of long-term relaunch plan, having exited one retailer in the past and now relaunched exclusively in a smaller way and seem to go broader, so by and large, strength across the board.

[Dave King:]

Okay. And then on Avia and AND1, can you remind me again I mean or I guess what’s the way to sort of think about that in terms of timing of renewals? I think with Jessica Simpson, for example, you signed a new agreement out of the gates with Camuto, if I remember correctly. In terms of the legacy agreements that Galaxy had, did you renew any of those when that occurred? And then, so when did those come up for renewal?

[Yehuda Shmidman:]

Yes, we actually did. And you are correct in what you said before, which was in tandem with closing the Jessica Simpson acquisition, we were able to work with the Camuto Group and partnership with them. They are a terrific company and preemptively renew that agreement for the long-term. So that when we closed the agreement, we knew we had a long runway together. As it happened with Galaxy, we are able to do the exact same thing. And so as we closed the Galaxy transaction in tandem, we extended for the long-term the core licensees for footwear and for apparel. That was significant. So, for us, I don’t believe we have any significant renewals that are coming in the short-term. Actually, we just announced one renewal on the call earlier about Ellen Tracy sportswear. But to your point, we were able for both Galaxy and Jessica to sort of preemptively extend the core licensees.

[Dave King:]

Great. And then maybe following up on that a little bit, but realizing you can’t comment on Martha Stewart financial impact, etcetera. I guess, just trying to think about that in your approach to the deal, did you take the same approach you took with these other deals in winding up potential licensees ahead of it? And then, how should we be thinking about the multiple you paid is that generally consistent with what the multiples you paid for other deals?

[Yehuda Shmidman:]

Yes, so two comments. One is of course broadly speaking, you certainly know our excitement for MSLO and you know that’s roughly how we look at all brands as we want to make sure that our platform can be additive and we are here to grow brands overall. I mean, we have got a combination of tools and a toolkit of how we look to do that. One of which is the one you mentioned, but of course there are others as well. And then in terms of sort of the models and the financing and all that, hopefully, you will give me a path that we have got to keep that under wraps and we will though give further detail of course as we get to the closing and beyond, but we are very excited about it. I think there is great opportunity there.

[Dave King:]

Fantastic figures. Good luck.

[Yehuda Shmidman:]

Okay, thank you Dave.

[Operator:]

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

[David Buckley:]

Good morning, guys. This is David Buckley on behalf of John Kernan. Thanks for taking our questions.

[Yehuda Shmidman:]

Good morning.

[David Buckley:]

Could you guys just discuss what your capital structures looks like right now, what it’s going to look like after the Martha Stewart closing and then how you see it evolving?

[Yehuda Shmidman:]

Yes, sure. So, for the capital structure, right now I will turn it to Gary Klein in a moment. For the future, David, we will have to give more detail as we get closer to the closing, which will then provide more insight, I mean, to the cap structure post closing. But for the cap structure right now, broadly speaking, I will turn it over to Gary.

[Gary Klein:]

Okay. So today, we have about $295 million of debt and that’s offset by about $25 million of cash on our balance sheet.

[David Buckley:]

Okay, thank you. And then Gary, just another follow-up, what are you guys targeting for cash flow from operations this year? And any updates how you see that evolving post Martha Stewart if you can talk on that at all?

[Gary Klein:]

So again, I can’t really speak to the – when Martha happened part, but today we are estimating about $50 million of adjusted EBITDA, okay, less about $20 million of cash interest, it’s about $30 million. And this year, because we have NOL coverage, we will not be paying – we will just be paying minimal cash taxes. So, I would say about $30 million of free cash flow.

[David Buckley:]

Great, that’s very helpful. Thanks, Gary.

[Gary Klein:]

No problem.

[Yehuda Shmidman:]

Thank you.

[Operator:]

Thank you. It appears we have no additional questions at this time. So, I would like to turn the floor back over to management for any additional or concluding comments.

[Yehuda Shmidman:]

No, I think we are all set. Thank you everybody for listening this morning. We appreciate your continued support.

[Operator:]

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