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Edited Transcript of ICON earnings conference call or presentation 10-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Iconix Brand Group Inc Earnings Call

NEW YORK May 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Iconix Brand Group Inc earnings conference call or presentation Wednesday, May 10, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David K. Jones

Iconix Brand Group, Inc. - CFO and EVP

* Jaime Sheinheit

Iconix Brand Group, Inc. - VP of IR

* John N. Haugh

Iconix Brand Group, Inc. - CEO, President and Director

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Conference Call Participants

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* David Michael King

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* James Andrew Chartier

Monness, Crespi, Hardt & Co., Inc., Research Division - Security Analyst

* Patrick Clement Marshall

Cowen and Company, LLC, Research Division - Associate

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - SVP of Equity Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Iconix Brand Group First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jaime Sheinheit, Vice President of Investor Relations. Please go ahead.

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Jaime Sheinheit, Iconix Brand Group, Inc. - VP of IR [2]

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Good morning, and welcome to the Iconix Brand Group first quarter 2017 conference call. On today's call, we have with us John Haugh, our President and Chief Executive Officer; and Dave Jones, our Chief Financial Officer.

During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws. The statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company.

This may cause actual results, performance or achievements of the company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words believe, anticipate, expect, confident and similar expressions identify forward-looking statements. Listeners are cautioned to not place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

I would now like turn the call to John Haugh.

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [3]

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Good morning, everyone, and thank you for joining us today. As you know, over the past year, we have been focused on 2 key priorities: one, improving the balance sheet; and two, driving organic growth. Today, we announced that we are selling the Peanuts and Strawberry Shortcake brands for $345 million in cash to DHX Media subject to a customary working capital adjustment. This strategic transaction enables us to continue to make significant progress on the first of these priorities. I would like to begin today's call by discussing this transaction and its effect to the balance sheet, then we will review our Q1 results.

Peanuts and Strawberry Shortcake are iconic brands, and we are proud of the contributions we have made to these businesses. However, we believe we can generate the most value and growth for our company with a portfolio that is more focused on the businesses where we have a leadership position, including fashion, active and home. With the significant resources required to stay competitive in the entertainment and a constant need for new content, generating incremental profit in entertainment would have been challenging for us, particularly in a segment which already runs at significantly lower margins as compared to the rest of our business.

The sale of these brands allows us to monetize the value we have created. With an original investment of $246 million, the valuation we received is compelling. In addition, with 100% of the net proceeds being used for debt reduction, this improves our leverage and positions us better to refinance upcoming maturities. With the proceeds from the sale plus additional cash on our balance sheet, we plan to reduce debt by $362 million, which includes paying down the entire balance of an expensive and highly restrictive term loan. Including previous payments on our convertible notes, term loan and securitization, we will have reduced our debt by approximately $650 million in the past year.

Following this transaction, we expect our gross leverage to be approximately 6.5x and our net leverage to be in the high 5s. This represents an improvement of approximately 2 turns from the beginning of 2016 and brings us closer to our target of net leverage of under 5x by 2019. We are making good progress on refinancing the 2018 convertible notes (inaudible), and Dave will provide an update later in the call. We are pleased with our progress on improving the balance sheet and believe our company is in a much stronger position today than a year ago.

Moving to our second priority, organic growth. There have been some challenges, but we are working on initiatives, including the rollout of 17 new licenses that we've signed this year that should drive improved revenue performance in the back half of the year.

Let me provide some specifics on our revenue performance. In the first quarter of 2017, total revenue, excluding divested brands, was down approximately 11%. However, the decline is not reflective of trends across the entire portfolio. While we expect similar revenue trends to continue in the second quarter, organic growth remains a top priority for our company, and we are confident in our full year outlook, which implies flat to down low single digits in revenue and EPS within previous guidance.

Now let me turn to the segments. Revenue in the women's segment was down 12% in the quarter. The largest drivers of the decline in women's were the Danskin, Mossimo and Ocean Pacific brands. For our Danskin brand, the decline was related to a recent contract renewal change in which Danskin Now, the brand at Walmart, switched to a flat rate versus the tiered structure, and Walmart's overall strategy to keep opening price point items in their house brands. With its 100-plus-year heritage, we continue to believe Danskin is one of the strongest brands in our portfolio and we are moving forward with our heritage upstairs business with key partners, including Lord & Taylor, Costco and T.J. Maxx. And we have launched a new loungewear license. We expect this to help counterbalance the declines in the Danskin Now business.

Our Ocean Pacific brand, which is known for its California lifestyle origin, has been nearly positioned as the swim brand at Walmart. We are working to transform OP back to the lifestyle brand it once was. We're having success with the capsule at Urban Outfitters featuring graphic tees, board shorts, women's tops and dresses. And Lorde, JLo and Channing Tatum have been spotted recently in this collection.

Mossimo, at Target as expected, was down in the quarter and is planned down for the year as Target shifted some of its young contemporary collection to Who What Wear. With a significant percentage of the women's segment tied to large brick-and-mortar retailers, we expect to see continued pressure in sales. However, we believe there are opportunities to capture incremental revenue through both new and improved services and partnerships.

For example, Material Girl beauty is in place for 2 national retailers and some beauty verticals and a Candie's kid line will have new distribution this fall as well.

Revenue in the men's section was down 20% in the quarter. The largest driver of the decline in the men's segment was the Starter business, which accounted for approximately half of the decline. As mentioned on previous calls, Starter has been downsized at Walmart, but we are working on new strategies outside of Walmart to offset declines. The Starter brand continues to show up on athletes and celebrities, and we expect the Starter Black business to double in sales this year.

Our men's fashion business continues to struggle. However, we have initiatives that should deliver a flat annual performance, including the PONY shoe relaunch, the launch of Ecko Function, a new active collection and approximately 30 mega Ecko stores going into JCPenney.

Revenue in the home section -- excuse me, segment was up 1% in the quarter. The home business remains healthy with Royal Velvet at JCPenney, Fieldcrest at Target and Charisma at Costco, all delivering on budget. And we continue to see opportunities to expand the Waverly brand, which is launching new categories, including storage, housewares, beach, kitchen linens and gifts.

Revenue in the international segment was down 8% in the quarter. The results were mixed across geographies. We generated double-digit revenue growth in the key regions of China, Brazil, Europe and India. However, this growth was more than offset by weakness in our joint venture businesses in Canada and Southeast Asia and top prior year comps in Umbro and the Diamond Icon business. We have several territories that are gaining momentum and we expect international revenue to be flat for the year.

I would now like to turn the call over to Dave Jones.

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [4]

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Thanks, John, and good morning, everybody. With today's results and the announced sale of our entertainment segment, we're updating our financial reporting and associated metrics and would like to note the following.

Beginning this quarter, we are now reporting results from the entertainment segment as a discontinued operation. With a planned reduction in debt, we expect to realize interest savings of approximately $30 million on an annualized basis. And today, we also introduced a new adjusted non-GAAP metric to account for the significant cash tax advantages of our business model.

Importantly, even with pressures from the retail environment and the elimination of approximately 30% of our revenue with the sale of the entertainment business, we've been able to hold our bottom line for the full year, and we reported Q1 earnings in line with our expectations.

The following discussion is related to continuing operations, unless otherwise noted. For the first quarter of 2017, revenue was $58.7 million, an 11% decline as compared to comparable revenue of $66.1 million in the prior year quarter. While comparable revenue was down 11% in the quarter, this was offset by SG&A, which was down 22%. The largest driver of the SG&A decline was related to lower compensation expense.

Special charges in the quarter were $2.2 million as compared to $5.5 million in the prior year quarter. Excluding special charges, SG&A expenses were $23.3 million, a 14% decline as compared to $27.1 million in the prior year.

Operating income was $33.6 million in the first quarter of '17 as compared to $46.3 million in the first quarter of '16. However, in the prior year, operating income included $11 million from gains on sale of trademarks and $1.3 million from income related to divested brands. Excluding these items, operating income was down 2% in the first quarter.

Based on these numbers, our operating margin in the first quarter of '17 was approximately 57%, a 5 percentage point improvement as compared to approximately 52% in the first quarter of '16. Non-GAAP earnings per share from continuing ops was approximately $0.21 in the first quarter of '17, and non-GAAP earnings per share from discontinued operations was approximately $0.02. This compares to non-GAAP earnings per share from continuing operations of approximately $0.47 in the first quarter of '16 and non-GAAP earnings per share from discontinued operations of approximately $0.07. Continuing operations in the first quarter of '16 includes approximately $0.14 from gains on sale of trademarks.

Going forward, as I mentioned, the company will also report non-GAAP net income and non-GAAP EPS adjusted for noncash taxes related to the amortization of wholly owned intangible assets that are amortizable for U.S. income tax purposes, obviously, a tax effected at 35%. So similar to adjusting for noncash interest expense, we will now also adjust for the most significant component of our noncash taxes.

In the first quarter of 2017, the cash benefit from the tax amortization was $7.3 million or $0.13 per diluted share as compared to $7.5 million or $0.15 per diluted share in the first quarter of '16. Including this tax adjustment, non-GAAP earnings per share for the first quarter of '17 was $0.34 compared to $0.62 in the first quarter of '16.

The cash benefit of amortizing our intangible assets for tax purposes is a unique attribute of our business model that we have found is often unknown or misunderstood. After presenting at multiple conferences and speaking with numerous investors this year, we've determined that highlighting this advantage will be useful for investors in evaluating the business. For the remainder of this year, we will report non-GAAP metrics both including and excluding the benefit.

Moving on to the balance sheet. Following the sale of the entertainment segment and the planned reduction of debt, we expect our debt balance to be approximately $840 million, a $650 million reduction from less than a year ago. We anticipate paying off our 11.5% term loan, eliminating a number of restrictions that we have on cash and transactions.

Following this transaction, as John mentioned, we expect our gross leverage to be approximately 6.5x and our net leverage to be in the high 5s. This represents a significant improvement of approximately 2 turns from the beginning of 2016, which brings us closer to our target net leverage of under 5x by 2019.

Historically, with significant restrictions on our cash, we have reported leverage on a gross basis. However, with the majority of our restrictions about to be lifted, we believe net leverage is a more appropriate metric.

As for the 2018 convertible notes, we are talking to multiple lenders and we have received indications of interest, including 1 preliminary offer that gives us confidence that we will have a reasonable solution for the refinancing.

Regarding the VFNs that mature in 2018, we have also received a great deal of interest from lenders. We have reached agreement in principle and are confident we can get this done shortly.

Turning to guidance. We are resetting guidance to reflect the entertainment segment as a discontinued operation and are providing guidance for an additional non-GAAP metric that I mentioned that accounts for significant cash tax benefit of our business model. The following guidance refers to continuing operations.

We expect 2017 revenue to be in the range of $235 million to $245 million as compared to $245 million in 2016 when adjusting for the divestitures of entertainment, Sharper Image and Badgley Mischka. For reference, in 2016, the entertainment segment generated $113 million of revenue. And in the first quarter of '17, revenue from the entertainment segment was running up 2%.

We are revising our '17 GAAP earnings per share guidance to $0.29 to $0.44 from $0.43 to $0.58 to reflect an additional anticipated loss related to the early extinguishment of debt with existing cash on the balance sheet.

We are maintaining our 2017 non-GAAP earnings per share guidance of $0.70 to $0.85. We expect that the elimination of earnings from the entertainment division will be offset by a reduction in interest expense. This compares to approximately $0.78 in 2016 when adjusted for the gain on sale of trademarks, the earnings associated with the entertainment segment and the Sharper Image brand and interest savings related to the portion of debt that was paid down with the proceeds from the asset sales.

We estimate the tax savings in 2017 related to the amortization of intangible assets to be approximately $28 million for the year, which would equate to approximately $0.51 of earnings per share. This compares to approximately $28 million in 2016 or about $0.53 of earnings per share. Therefore, we expect non-GAAP earnings per share adjusted for tax amortization to be in the range of $1.21 to $1.36. We are also maintaining our 2017 free cash flow guidance of $105 million to $125 million.

I'll now turn the call back to John for some closing remarks.

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [5]

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Thanks, Dave. We have stated many times that the most important objectives we have are to improve our balance sheet and drive organic growth. As we outlined today, I believe we have the balance sheet under control, and we are well on our way to our goal of under 5x net leverage by 2019.

With respect to organic growth, the environment is tough, but our team has been actively working to better manage our existing relationships with our partners and to execute new deals that will provide our company this growth. Our investors should know that although some of our growth initiatives are taking slightly longer than expected to gain traction, we have a disciplined approach to expense management which will allow us to deliver our profit commitments. Given the early progress we've made in the first quarter of our 3-year growth plan, we believe we are on the right track and remain confident in our ability to drive long-term value for our shareholders.

With that, I think we're open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Bob Drbul from Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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I guess, the 2 questions that I have, the first one is with a lot of the changes going on with Starter and Danskin at Walmart, when you look at the end of '16 versus the end of '17, where do you think Walmart will be as a percentage of your total business when it's all said and done? And then the second question that I have is, on the confidence level for the back half revenue initiatives to materialize, can you just highlight maybe a few of the drivers that -- the organic drivers that you do expect to get some traction, just sort of see a better organic revenue performance in the second half of the year?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [3]

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Yes. Let me go to the second part of your question first, Bob. It's John. In November Investor Day, we said to get growth, we identified some drivers, if you remember. One of them was active. Active for us is PONY, which we'll relaunch the shoe business in the back half of the year. We had very, very little PONY business in 2016. So as PONY relaunches kind of late Q2, that will be all upside for us in 2017 against 2016. We are making progress on the Danskin upstairs business. We have a strong partner in (inaudible), and they continue to unveil more opportunities for us. I think we mentioned before, when we called -- when we had our call last quarter, we were actually in Vegas, we showed Danskin and the new Danskin lounge business at PROJECT in Las Vegas and we had a lot of interest. Obviously, a lot of it shows up in '18, but we are getting some orders for '17, so we feel good about that. And Starter Black, our relationship with G-III, who manages Starter Black with us, has gotten stronger. And that business, as I mentioned earlier, should kind of 2x this year. We also said for drivers that we were after some new channels. We said we really didn't have presence in drug, dollar or pure-play e-comm. We've had meetings with most of the major players there. We've had successful meetings with most of the major players there. And we will have to think that we'll still hit in '17, so we feel good about that. B2C is frankly taking a little longer to develop than we thought. We thought we'd have a little more e-commerce business. We think we'll get some in the back half of the year, not quite as much as we hoped, but anything we get will be a positive comp against last year. And then finally, international, we said it had an opportunity. International, because of a couple of glitches, some resets in Q1, was off 8%, I think I said. And we just, again, reprojected the year and we're back to flat for the year, so we believe in some of the key markets like China, Brazil, we will pick up business and we'll be flat in international. So we think that will get us -- again, we told you minus 11% in Q1. We told you Q2 would kind of look the same. And so the logical question is, how do we -- what do we have to in the back half to get to kind of flat to low negative single-digit numbers. We know we have to be positive. And as we project, we think we'll get there. The first question I think was what percent of our business is Walmart, correct, Bob?

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [4]

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Yes. Just how it's going to shake out with a lot of the changes in the royalty rates in Starter business and the Danskin Now?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [5]

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I think the right way to think about is as we look at our overall business with Walmart and some of the shakeout, in the DTR side, there are about, I think, 19-ish percent of our DTR business. But then obviously, we have a lot of business that isn't DTR. We talked about Ocean Pacific before. We have a strong presence that I think, we're in May, hit stores a month or 2 ago. We think we'll have a good '17 with them. And we also think there's an opportunity to continue to build more Ocean Pacific overall, like we mentioned, with the Urban Outfitters collab. So while Walmart will always be one of our absolute strongest partners, we know full well that we have to continue to bring ideas to them. We brought some new brands ideas to them. We've seem to got -- we seem to have received some good reception. So -- and obviously, we also bring ideas on the Sam's Club side of the house. And by the way, we have a good Walmart business in Canada and Mexico and (inaudible) in the U.K. So we continue to be a very, very, I think, important player for Walmart and obviously, they're very important player for us. So I think there'll be some ebbs and flows. But we feel like we have a pretty strong relationship with these guys.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [6]

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Got it. And then I guess, just one last question is, with the moves in entertainment, can you update us on your thoughts around -- I think you had a 50% operating margin target, where that shakes out now with some of these changes?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [7]

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Yes. it's Dave. So we -- our GAAP reported for Q1 is about 57%. And actually, if you look at that on a non-GAAP basis where we add back our extra professional fees, we're at about 61%. So historically, we -- or I think we're projecting for '17 kind of high 40s. So it's pretty significant improvement in the margin, obviously. We would expect mid-50s, probably, for the full year.

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Operator [8]

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Our next question comes from Dave King from Roth Capital.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [9]

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I guess, first up, maybe following up on the line of questioning around the revenue outlook. So it sounds like some of the back half improvements have come a PONY relaunch. So I guess, do you have the licensee already lined up for that? And then I guess, just for that and then more broadly, what sort of visibility do you have into some of that revenue coming through that you're sort of guiding us to? Is there a significant amount of overages sort of embedded in that? Or is there a good amount of minimum coverage? I guess, what are sort of the thoughts around that?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [10]

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Sure. So on PONY, we have, in fact, we think a very strong licensee who has developed product. We were playing around a little bit with PONY last year. We had presence in Madewell. We had presence in Barneys. We had some presence in Urban Outfitters. But we weren't really doing any volume. That has now been all schooled together and that will -- frankly, we're sideways with them a little bit. Dave, we were -- we had a disagreement on the contract. It took us a while to get that settled. And then we became simpatico. And I think Q3 started putting things together, developed a line of product, have shown it to many people, most of the athletic guys that you would expect, and then some of the fashion retail. And we believe we will get -- we know which orders we already have lined up for the year. So we feel pretty confident in that. And in something like Danskin, that is more opportunistic. So we know the meetings we've had because oftentimes, we will attend with (inaudible) as an example. And we know where they are picking up new pieces of business. We've greenlighted -- today is Wednesday. On Monday, we greenlighted a new account for (inaudible) that will be delivering product in July, August, and then we'll be in a position to reorder for Q4. We are doing the same thing on Starter Black, where we're actually working hand in hand. We also had Starter Black in Las Vegas and sat down with Carl and the G-III guys. And we're continuing to build that business. It's a collegiate line that's coming. And then we have a couple more things up our sleeves. So we have, I think, pretty good visibility. We know where our revenue is. We know what extra dollars we're trying to chase still in the calendar year. And every Monday, we have a thermometer that shows exactly where we have landed and what we still have to land to make sure that we get to the number that we're talking about.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [11]

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Okay, that's great color. And then maybe a few modeling questions for Dave. In terms of -- so that 61 percent-ish, I think you said, core operating margins, you have what was in the sort of -- in the year-ago period, I guess, is first off on that front. And then, I guess, what was Peanuts contributing to EBITDA on a fully integrated basis? I think if I look at your 2016 results, I think it's something like $34 million plus in operating income from entertainment. But if I look at the DHX release out this morning, it looks like it was more like $28.5 million. I guess, how should we be thinking about that sort of falling off?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [12]

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Yes. So the -- on the entertainment business, you got to look at minority interests as well. So I think it's -- you know, under $30 million is probably the right number to think about. On the first -- on the first question, if I understood you correctly, I think you were asking about what were those margins like in '16. So on a GAAP basis, we were 57% in Q1 of '17. We were 52% in Q1 of '16. Obviously, the pullback on SG&A in '17 helps a little. And again, kind of mid-50s, we think, is a reasonable estimate for 2017. And that would have been the comparable number in 2016 on a continuing ops basis.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [13]

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Okay. So yes, what I was wondering is, I think, you said it was 61% of core operating margin in the first quarter of '17?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [14]

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Yes. No, I was saying the 61% is when you look at our non-GAAP metrics, we add back some professional fees, so it increases the margin. In the first quarter, it was 57% to 61%.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [15]

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Okay. And then I think it's a bit -- go ahead.

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [16]

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No, I was going to say that -- then the same numbers in 2016, were I think about, 50% to 58%.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [17]

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Okay. And then just to be clear then, in getting to the guidance to operating margin, is that a GAAP operating margin in the mid-50s? Or is that a non-GAAP operating margin?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [18]

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Mid-50s is non-GAAP.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [19]

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Okay. And then I guess one more for you and then I'll go back to the...

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [20]

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And just to be clear, the non-GAAP is always going to be a little bit higher than the GAAP because of the one add-back we have in SG&A.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [21]

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Right. Okay, understood. And then one more. In terms of the interest expense for '17, how should we be thinking about that now given the material savings? And forgive me if I missed it, but what should we be assuming on a GAAP -- I guess, GAAP and non-GAAP, I guess, basis?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [22]

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Yes. So we said about $30 million would come out in interest savings. That's an annualized number. Going forward, let's see, on a non-GAAP basis, I would say we're probably looking at about $50 million.

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Operator [23]

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Our next question comes from Steve Marotta from CL King & Associates.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - SVP of Equity Research and Senior Research Analyst [24]

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Just another question on the top line revenue guidance for the current year of, from an organic standpoint, of flat to down low single digits. How much of that is contingent upon licenses not yet signed?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [25]

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Yes. So I think -- it's John. So if you kind of pick the midpoint number, which we're saying is 2.35, 2.40, every point is $2.5 million, right? Pretty easy to calculate. We are chasing somewhere in the range of $5 million, $6 million. We think we have most of that identified, not all of it. But as I mentioned a minute ago, we know exactly which brands have some upside, we're in discussions with licensees right now, we're not sure everything will sign. But we do have a plan to bridge us back to that. And frankly, we hope we might have a little bit of good news in our pocket, but we don't want to be optimistic at this point. So I would tell you it's kind of 50-ish. From where we sit, we need to make up kind of $5 million, $6 million. And we think we have about half of that already banked. And now we got to find the extra $2 million or $3 million, and then we are right there.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - SVP of Equity Research and Senior Research Analyst [26]

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And just -- I wanted -- I'm sorry to beat a dead horse here. Of the half that's already banked, are you referring to licenses signed since the beginning of the year that will launch in the back half of the year? Or are you referring to licenses still yet to be signed?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [27]

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The half banked have been signed, are ready to go, have given us samples, know where the products is going to be placed. In the second half, I will call the second bucket, in discussion, looking for the right opportunities, feel like we'll get there, pretty sure we'll get there, not there yet. But the first half is written down, on the water, moving forward.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - SVP of Equity Research and Senior Research Analyst [28]

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Great, that's helpful. The second question is, what inning do you think you are in regarding portfolio divestitures?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [29]

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Yes. If you remember, when we talked at the Investor Day, we -- if you remember, we said we've got to maintain driver and then we talked about incubate. I think realistically, we are now at 28-ish brands, we think we can run 28. We think there are some good ones out there, we will continue to look at them. We have pursued some, they just haven't come through. I think there's still a handful, as we are really looking at the portfolio, where we're not entirely sure it can be meaningful and important to us. So if you said since the season has kicked off, if you said what inning are we in, I think we are probably short of the seventh inning stretch. We're probably in the third or fourth inning. But I think we suspected that the entertainment transaction disposition might happen. As you can imagine, we've been thinking about this and working on this for a little while. Sharper Image, as we told everybody at the end of the year, made sense because it's a brilliant business, but it's a gadget business. We're not kind of in that. At this point now, most, if not all of our brands, are within our fashion, our active, our home. So now it's a question of we've got -- we know what vertical we are in, we know we've got a good strong leadership in those verticals. And now we need to make sure that the brands that sit within those verticals are kind of earning their keep. And the ones that can't, we will move forward with. And we'll look for brands that will replace them or have more opportunity. So I would tell you, we're half-ish way through at this point.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - SVP of Equity Research and Senior Research Analyst [30]

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Okay. One more question that I suspect you'll be unlikely to answer, but it would put some investors, I think, at ease. As it relates to the one preliminary offer that you had received on the converts, did that include an equity component? Did it include an equity component?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [31]

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No. We've been pretty clear that in a term loan situation, we wouldn't be interested in an equity component. So that was not part of the offer.

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Operator [32]

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Our next question comes from Jim Chartier from Monness, Crespi and Hardt.

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James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division - Security Analyst [33]

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First, I was wondering if you could kind of walk through the cash flow reconciliation post the closing of the entertainment transaction? You've got $345 million coming in and you're paying down $365 million of debt, and then cash is going down by, I think, $100-something-plus million?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [34]

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It's Dave. I think on the free cash flow, it's -- if you think about it in very simple terms, we've said we'd probably eliminate about $30 million of EBITDA or operating income from the entertainment business. And we'd have interest savings of about $30 million. So that's why it makes sense that we're maintaining the free cash flow guidance. And then when you look at the quarter, we had operating cash flow of about $12 million versus $16 million in the prior year, again down mainly due to the incremental interest expense in 2017. But with the paydown of the term loan, we expect that this expense will decrease in the second half.

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James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division - Security Analyst [35]

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The question was on -- in the press release, you've provided a summary balance sheet. And then you kind of tell us that after the transaction closes, you'll have $105 million of cash, down from $208 million, I think, at the end of the quarter. And the debt balance will be $840 million, down $365 million. So cash is down over $100 million, debt is down $365 million. You've got $345 million of proceeds coming in. So why is cash down $100 million?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [36]

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Well, I think there's -- when you look at the term loan, there's a make-whole provision. So we've got a decent amount of cash that goes towards the make-whole. We also have -- we're funding the taxes. We assume there's some cash for taxes on the gain on the transaction and transaction expenses.

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James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division - Security Analyst [37]

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Okay, that's helpful. And then -- and again, kind of looking at the second half revenue assumptions from a different perspective. The drivers of the double-digit decline in organic revenues for the first half of the year, does any of that get better in the second half of the year from kind of the existing business? And if so, where do you see the improvement coming from?

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [38]

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It's John. So if you remember -- I'm going to go back to the script for a second. In women's, we said we had some challenges on Danskin, Mossimo. We said Danskin was a combination of a different royalty structure and Walmart moving a couple of their opening price point or OPP into the house brand. And we also said Mossimo was a shift of some of their racks to Who What Wear, young women's contemporary. We think that's constant for the rest of the year, we don't think that would blip one way or another at this point. We did though talk about some of the other men's brands that we think will make progress in the back half of the year. We think Ecko will make progress in the back half of the year. We talked about some mega stores going into JCP. We talked about the active brand going out the door. We talked about PONY, which, again, last year, was very, very modest, and so we think we'll pick a good amount in the back half of the year. So a couple of instances, we might have had a DTR. Because of the fact we're at calendar year January through December and most of our retail partners run a retail calendar of February through January. Did I say that right? Or January through December, retailers are February to January, I hope I said that right. There's always a true-up that happens in the month of January. We got nicked on a couple of brands slightly, a couple of the Kohl's brands, those will start to come -- those go back to their normal GMRs for the rest of the year. So we believe the DTRs are projected correctly through the rest of the year. And a couple of them that are down, we don't think are going to turn one way or another. And we think the business that will help us in the back half get to our guidance of kind of flat to down, low single digit will come from some of the newer initiatives, not necessarily the existing DTRs.

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Operator [39]

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And our next question comes from Patrick Marshall from Cowen and Company.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [40]

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So I just had a couple of questions on the deal. I guess, would you be willing to break out within the $345 million, how much of that was Peanuts, how much of that was Strawberry Shortcake?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [41]

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It's Dave. It's hard to tell, and we sold it as a group. So we'll have to do some allocations internally for tax purposes and things like that. But I think -- I don't think we would have any need or opportunity to break it out.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [42]

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Sure. Yes, I was just trying to think just -- it would be helpful for us to get a sense of the multiple in the event that you guys look for further asset sale divestitures perhaps and...

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [43]

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Well, I guess, what I would tell you is the entertainment may not be a great example, because the multiples in the entertainment business are pretty high right now. The gain that we will record on that transaction will be north of $100 million. And so I wouldn't expect those type of economics from nonentertainment brands going forward.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [44]

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Got it, okay. And then I guess, coming back to the prior question, I just want -- I was hoping to break out a couple of the items with it, bridging from the $208 million to the $105 million pro forma cash number. How much is that Fortress term loan make-whole? It's about -- by my math, it's $26 million or $27 million, does that sound about right?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [45]

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It's a little bit higher than that. It's about $30 million.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [46]

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$30 million, okay. And then in -- within that number, do you have also the April 25 amortization payments on the secured notes?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [47]

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No, we don't. We -- that was -- this is just focused on the transaction.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [48]

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Okay. So those are incremental.

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [49]

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But at the same time, I would tell you, I don't -- I also excluded operating cash inflows. So I took -- I didn't really look at any of the operating stuff, just wanted to show what the transaction results were.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [50]

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Okay, understood. And then on your intangible tax amortization disclosure, so the tax provision was $5.9 million, the amortization was $7.3 million. Does that imply a net benefit of $1.4 million on a cash basis? Or am I thinking about it the wrong way?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [51]

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No. I would say the cash benefit is the $7.3 million at the rate at 35%.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [52]

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Right. But would you net -- would that be netted against the $5.9 million provision?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [53]

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It's included in the 5% -- well, sorry, the provision on the income statement is our total tax provision. So there's a piece of that, that's current and a piece that's deferred. And the piece that's deferred, the biggest component of it is the tax amortization -- the intangible amortization.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [54]

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I guess, in other words, what I'm trying to get at is like in terms of thinking about what your net -- so you expect to be like a net cash recipient like -- you receive to -- you expect to receive a net cash benefit for the year if...

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [55]

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No. I think it's -- we would still be a cash taxpayer. It's just we're trying to show that we do have a pretty significant benefit from the amortization. So we're not -- it doesn't necessarily put us in an NOL position, it's a -- but it's a big help. So we do pay some tax.

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Patrick Clement Marshall, Cowen and Company, LLC, Research Division - Associate [56]

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Okay, some, but like would you say like lows or mid-single digit or is it like 10%?

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David K. Jones, Iconix Brand Group, Inc. - CFO and EVP [57]

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I don't know that number off the top of my head, but we'll get it for you.

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Operator [58]

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Thank you. And that does complete our question-and-answer session for today's conference. I would now like to turn the call over to John Haugh for any closing remarks.

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John N. Haugh, Iconix Brand Group, Inc. - CEO, President and Director [59]

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All right, thank you. What I'd like to do, if I can, I just want to reiterate, we have said we're trying to really focus on 2 priorities: the balance sheet and growth.

On the balance sheet, I suspect if we told you a year ago we would be talking today and telling you that we were in the high 5s on net leverage, you would wonder. So I think we should feel very, very good about that. And now with the balance sheet under control, we can get to the second priority, which I know is of interest to our investors, and that is to drive growth. And we believe we have many pieces in place for that. We gave you a 3-year plan, we are 1 quarter into a 3-year plan or probably the first or second inning, and we feel like we are making some great strides.

I also want to just take one moment if I can to thank our entertainment team. We are very, very proud of what Iconix has done in the time that we have owned Peanuts and Strawberry Shortcake. The team has been inspirational, passionate, has worked like crazy. And you can see what we have done with that business in the sale today. I also want to acknowledge the team inside here who has been working on this for a long, long time and put countless hours in. And they have been absolutely brilliant, we would not have been able to make this transaction with them. But I think it's certainly a great win for Iconix, and I think it's a great win for DHX Media.

And finally, recognize the Schulz family who has been as good a partner as anybody could ever ask for as we have developed this truly iconic business together.

And then finally, thanks to our investors and thanks to everybody who is listening to us and supporting us and giving us counsel. We believe we are on the right road, and we look forward to talking to you again in the quarter. Thanks.

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Operator [60]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.