Good day, ladies and gentlemen, and welcome to the Quarter Two 2018 Iconix Brand Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Cristina Cosentino. Please go ahead.

Good morning and welcome to the Iconix Brand Group's second quarter 2018 earnings conference call. On today's call, we have with us Peter Cuneo, our Interim Chief Executive Officer and Chairman, 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 to turn the call over to Peter Cuneo, Interim CEO and Chairman.

Thanks, Cristina, and good morning everyone. As we noted in our press release, our financial results for the second quarter met our expectations. Dave Jones will provide more details on our performance shortly. But first I would like to update everyone on several important communications that we have made during the second quarter. First, we recently announced a Cooperation Agreement with Sports Direct International. As a part of the agreement, we have immediately appointed Justin Barnes as a Director of Iconix and as a member of the Nominating and Governance Committee and a member of our CEO Search Committee. We will include Mr. Barnes on our slate of Director nominees at our 2018 Annual Meeting, which will be held on September 27. Additionally, Jim Marcum, a current member of our Board, will continue to serve on the Board as a Sports Direct designee. He will be included by the Company on its slate of Director nominees at the 2018 Annual Meeting. The Company also agreed to establish a Steering Committee consisting of Board and management members. The committee will undertake a further operational review of the Company's business. We are pleased that Sports Direct is engaging in our business and we believe the recent Cooperation Agreement is a positive step for the Company and its future. In other key developments this quarter, our Umbro business at Target continued to perform ahead of our expectations. Our Umbro Kids business continues to grow across all stores and online with new assortments in core soccer apparel as well as increased equipment offerings for the upcoming fall soccer season. We are also expanding our product assortment to include both men's and women's fashion apparel, which we'll be launching later this month. Starter at Amazon is also moving forward. As previously discussed, the setup of…

Thank you, Peter. Let's start with the women's segment. As expected, revenue in the women's segment was down 39% and 40% for the three and six months ended June 30 respectively. As previously discussed, the decline was principally the result of our transition of our Danskin, OP, and Mossimo DTRs or direct-to-retail relationships. We're working to build new businesses for these brands to offset the impact of the DTR transitions. Our new brand positioning for Danskin continues to be well received by licensees. As an example, one of our great licensees, United Legwear, recently signed up to license Danskin for the socks and headwear categories in department stores, specialty stores, and off-price. Importantly, we also recently secured an agreement with Walmart to continue the Danskin Now Girls' Dance business, both in-store and online. This is meaningful for the brand and shows the strength of Danskin's heritage in dance. Ocean Pacific has had some recent wins as we signed a new license agreement for footwear and accessories starting in the Spring '19 season with one of our Umbro and Danskin licensees. Ocean Pacific has also been successful in gaining focused surf distribution this year going into Spring '19, which is helping the brand to re-establish its authenticity and heritage. We are in conversations to develop an elevated collection at higher distribution and we are currently presenting home and beach concepts to some significant retailers. During the quarter, we changed our assumptions and strategy for relaunching Mossimo as it winds down at Target in 2018. As a result, we recorded an impairment charge of approximately $73 million on the Mossimo trademark, which in turn resulted in an almost $38 million goodwill charge in the women's segment. Despite the impairment charges, we believe we have significant opportunities for Mossimo which we hope to…

[Operator Instructions] Our first question comes from Eric Beder with Small Capital Consumer. Your line is now open.

It's Eric Beder from Small Cap Consumer Research. A few quick questions. So, the DTR world is changing and you guys seem to be doing a lot of different things. When you look at the longer-term, what is the future of DTRs in the domestic marketplace and how are you going to respond to that?

This is Peter. We think that there is a future for DTRs domestically, but the terms around them probably will change somewhat. These contracts will have more flexibility I think than those signed and could include situations where if the retailer is not recognizing their original projections for a particular brand, that there will be various outs or reductions in the contractual obligations. These contracts could also convert to a non-exclusive basis in the future. I don't think that we're going to see DTRs in arrangements at all the way they were in the past, for obvious reasons, for obvious changes in the industry.

Eric, it's Dave. I would say, while I think the deals that we look at currently today are structured a bit differently, as Peter mentioned, I think the question we generally get is, are retailers disengaging with brands, and I think the answer is, no. And the best example we have is Umbro at Target today. So, that's not a typical historical DTR relationship but the Umbro brand is exclusive to Target in the U.S. and early stages is looking like it's very successful. So, I think brands are definitely still important to retailers, in particular in the sports categories, but we've seen that across the board. We mentioned a couple of new DTRs in the prepared script today. So, I think if that's the question, I think the answer is, brands are still very important, and in the right situations I think big retailers are willing to make commitments to brands.

Okay. You mentioned that on the convertible debt you're going to be paying that out, the interest payment out in stock. What was the thought process over why you decided to do it that way?

I think, as we've said before, as we are in a transition period with some of these big brands, we're obviously looking to be responsible and conserve cash. We have the option under the convertible notes to pay in stock. And so, this is the first payment under the notes. And so, for those we have elected to pay stock this time around. I believe we can make that election at every interest payment, and at this point it is important for us to continue to invest in brands, and so it's a sensible approach for us to take. But we've got flexibility there going forward.

And finally on the International side, it seems like that's working out really well. What do you have left in terms of potential joint ventures that you could collapse if you want to? Could you remind us where you are completely direct internationally now?

So, we still have at least five, I think is the number, joint ventures out there. We don't have – while we talk to our joint venture partners all the time and consider different alternatives, I don't think there's any current plans to take any of those back. As you know, Global Brands Group is one of our partners in quite a few of those joint ventures, and we've got a great relationship there and work well with those guys. So, while in the past in certain territories we have found it beneficial to take control of the joint venture, I think we're comfortable with the way they are all operating now. We in many cases are managing the business day to day. So, it's a good arrangement.

Great. Congrats and good luck for the rest of the year.

Our next question comes from John Broderick with Permit Capital. Your line is now open.

First question would be about the free cash flow guidance for this year. Does that include the cash that's going to be restricted by the secured notes?

Sorry, John, just we didn't hear the first part of the question. Can you repeat that?

Sure. The free cash flow guidance for 2018, is that net or gross of the restricted cash – the cash that's being restricted by the secured notes?

That's the gross amount. And the number is small for 2018. But that is the gross amount. So it includes the cash that will be restricted within the securitization. I think in this current quarter, it's about $1 million of cash. And then just to remind you, the free cash flow number we give is before our debt service, which is about 11 – sorry, principal payments, which is about $11 million a quarter.

Okay. And second question, more of a strategic question, you got 30 somewhat brands, and I think this question has been asked before, what's the thought process now around maybe pruning the brand portfolio, getting it down to – you've got so many different initiatives in so many different brands and so many different geographies, pruning it down to something perhaps a little bit more manageable, sort of identifying what's non-core and what's core and raising cash through sales of properties?

This is Peter. As you know, we started shedding some brands last year. You may recall it, we sold, if you will, our entertainment silo which consisted of Peanuts and Strawberry Shortcake for $345 million. I think you probably know that virtually all of those funds went to pay down debt. We also sold Sharper Image last year for around $100 million. Also, all went to pay down debt. Both of those transactions were well above the prices that we had paid for those particular brands. And the entertainment business certainly has a completely different dynamic based on of course creative content, and so a very different dynamic from our other businesses. We continue to be open to proposals to buy other brands. But at this point, what we're seeing is that people are not willing to pay the kinds of multiples that we would like to get for those brands. Also, the brands that are getting a lot of attention are actually some of our best growing brands. Umbro would be a very good example. We are growing, of course we mentioned, at Target. We also are growing in China. And in general, we've got good growth in Europe as well. So, for us to offer a brand like Umbro for sale would be very difficult right now. We would not be recognizing the value we see in the brand in the future. So, while we are very open to entertaining offers, at this point there's certainly nothing available at a fire sale price.

John, it's Dave. Just a couple of things, one thing to add to that, the way we kind of organize the brands today is in, call it, two buckets, which is 'maintain' and 'reinvent'. So as you know, we've got a couple of brands like Mossimo and PONY and a few others that get a lot of attention and focus from the management team as we reinvent them, as they are transitioning out of their historical DTR homes. And then we've got a bunch of brands that we call 'maintain' that are good brands, that are stable, that generate solid results and provide royalty revenue for us. And typically, if and when we look at those as a potential sale candidate, we wind up saying, why would we sell them? They generate nice cash for us, they are good brands, we have a good fixed cost, a team both domestically and internationally that curate the brand. So, I would say, while we don't have any current plans, we'll look at sales opportunistically. But we're really focused on growth right now.

Okay, thank you.

Our next question comes from James Schainuck with Jewel Investments. Your line is now open.

A question on organic growth, if we hold aside the brands that are being repositioned, Mossimo, Danskin Now, Ocean Pacific, and we look forward a few years, do you think the business in terms of royalty dollars will be bigger then or smaller then?

No, we think that the business will be bigger. Our long-term projection is including overall increases in revenue. I was going to say that one of the things that is difficult I think for forecasting is simply that we have a number of larger brands, as you know, coming down very rapidly from very high levels, and it will take time to reposition those brands elsewhere. James, this is not a business where we can snap our fingers and find a new DTR or a new major licensee for big brands. But overall, all the time we do expect an increase in revenues for those brands.

So just to be clear, you're talking about or what I'm talking about is the existing business excluding the recapture of revenues from Mossimo, Danskin Now, and Ocean Pacific, in other words organic growth of the existing brands excluding the ones that you are inactive with right now in a sense? Do you think that there will be organic growth in the brands excluding Mossimo, Danskin Now, and Ocean Pacific?

Yes, we think we are capable of some organic growth, particularly in the International segment.

John, it's Dave. I think a good example, if you look, we have a portfolio of brands and you manage them, right, and some just naturally go up and some go down, and obviously there's a lot of effort behind that. A great example is London Fog. London Fog is a brand that's over 100 years old, but I would say over the last 24 months has gained a lot of traction and has become a very relevant brand – always was, but is organically growing – and we're finding that through category expansion and different colabs, there is a lot of buzz around the brand. So, when you look at it, you can take a 100 year old brand and make it exciting again and forecast organic growth for the next couple of years. That's what these brands have. That's why they are iconic brands. So that's one example. I think in the men's segment there has been a pretty significant decline over the last four or five years. So, those are, a couple of those are poised for growth. Again, Ed Hardy has been getting a lot of traction lately and is a buzz brand, as is PONY. Our PONY business over the last couple of years has been negligible, but it's a tremendous brand and really pass to the top of the list whenever people are interested in a brand to acquire. But we're also finding that there is a lot of consumer interest in PONY, and as I mentioned in the prepared notes, we signed three new licenses in the U.S. during the quarter and one nice new license in Mexico. So, I think these brands are iconic, and yes, we do definitely expect that overall we can grow these brands organically over the next couple of years.

Thank you. And just on the repositioning of the brands, if you took the year ago or so run rate revenue-wise of Mossimo, Danskin Now, and Ocean Pacific when they were integrated, what do you think as a percentage of 100% would they end up getting to a few years from now as you work your magic and get them reintegrated?

It's a difficult question right now. We've obviously got some projections and I would say over the next three years we probably wound numbers expect to get maybe 50% of that business bask. As I mentioned, we've changed the – our initial thoughts on Mossimo changed a bit over the last quarter. We still think that we've got some really cool opportunities with Mossimo and we're working on those. And so, it will depend a little bit on the direction they go in. But if you remember, they were very big businesses in big retailers but with a very small royalty rate. So, our thought process is that we don't need to get back those millions of dollars of retail revenue, but in fact if we get to hundreds of millions of retail revenue, which is not a small task, we can earn similar royalty revenue from that.

So just to be clear, I'm really talking about in a way to net royalty to the Company. Are you saying that you could be equivalent a few years out from now to your previous run rate? And let's call it EBITDA in a sense for those brands, do you think your EBITDA on those brands could be comparable?

No, I don't think so. They were very significant numbers. And so, like I said, I would think over the next three years I think the plan has about 50% replacement.

Okay, thank you. And then finally, the maturities in early 2020 in particular, can you comment on how you envision dealing with those?

I think we said in the last call, we were starting to look at it, and we certainly are with our bankers. We will after this quarter now begin a process of talking to actual investors. I think we have quite a few options. It's still early in the process. We have, obviously as all of the securitized brands come to maturity within the securitization facility, it makes a lot of sense to think about a new securitization facility. We've got international brands that potentially could be contributed to that. We've got a term loan and convertible note that have a second on all those assets. So, I think we need to think bigger picture and keep the whole balance sheet in mind as we look at the 2020 maturity. But again, I think it's early in the process but we are certainly starting the process. And we work with Guggenheim and they've done a great job for us in the past and have been very creative and I think all of that has resulted in a pretty solid balance sheet today. When you look at the rates that we're paying on the debt, we've got L plus 7, we've got 5.75 convert, and call it 4.5% securitization. So, very reasonable and I think the Company and our bankers have done a pretty good job so far.

Thank you. My hats off to you for navigating a difficult half. Thank you.

Great. Thanks John.