Icon Energy Corp (ICON) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Iconix Brand Group third quarter 2007 earnings conference call.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. 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 and impossible to predict and many of which are beyond the control of the company. This may cause the actual results, performance or achievements of the company to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. The words "believe," "anticipate," "expect," "confident," and similar expressions identify forward-looking statements. Readers are cautioned not to 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 Mr. Warren Clamen, Chief Financial Officer. Please proceed, sir.

Good morning, everyone, and welcome to the Iconix Brand Group third quarter 2007 earnings conference call. I will begin this morning by reviewing the highlights of our third quarter '07 financial results.

Revenue for the quarter was approximately $42.7 million, as compared to approximately $22.1 million in the prior year quarter. EBITDA for the quarter was approximately $30.8 million, as compared to approximately $16.1 million in the prior year quarter. And free cash flow was approximately $27.4 million, as compared to approximately $13.3 million in the prior year quarter.

Net income for the quarter was approximately $17 million versus approximately $7.9 million in the prior year quarter. And fully diluted earnings per share was approximately $0.28 versus approximately $0.18 in the prior year quarter. EBITDA and free cash flow are both non-GAAP metrics and reconciliation tables for each can be found in the press release distributed earlier this morning and on iconixbrand.com.

As we discussed in our second quarter conference call, we had planned for our EBITDA margins to be slightly lower in the third quarter due to the timing of certain advertising expenses and our EBITDA margins of 72% for the quarter reflect this. We are forecasting EBITDA margins in the high 70% range for the fourth quarter, driven by lower advertising expenses, and we are confident that we are on track for an annualized EBITDA margin of around 77%.

Also of note in the third quarter, is the absence of special charges related to our Unzipped litigation as that process is now moving into the collection phase.

For the nine months ended September 30, 2007, the company reported revenue of approximately $112.6 million, as compared to approximately $53.8 million in the prior nine month period. EBITDA for the nine months increased to approximately $85.4 million, as compared to approximately $35.9 million in the prior year nine month period. And free cash flow increased to approximately $74.5 million, as compared to approximately $28.7 million in the prior year nine month period.

Net income as reported on the company's income statement for the nine months was approximately $44.5 million, as compared to approximately $23.6 million in the prior year nine month period. And fully diluted earnings per share as reported on the company's income statement was $0.73 versus $0.54 in the prior year nine month period.

The company, however, recognized non-cash tax benefits in the prior year nine month period and therefore comparing net income and fully diluted EPS on a tax-effected basis, the company reported net income of approximately $44.5 million in this period, as compared to approximately $17.1 million, tax-effected. And fully diluted earnings per share of $0.73 for this period, versus $0.40, tax-effected, for the prior year nine month period.

Tax-effected net income is a non-GAAP metric and a reconciliation table for this can be found attached to our press release distributed earlier today or on our iconixbrand.com.

In looking at the company's September 30, 2007 balance sheet, Iconix had approximately $293 million in cash equivalents and marketable securities. Approximately $233 million of this cash was subsequently used after the period to pay for our most recent acquisition of the Pillowtex brands, which closed in October and was financed fully from cash on hand. With the Pillowtex acquisition now closed, our pro forma net debt to EBITDA ratio is under four times, which we feel is at a comfortable level and gives us flexibility to grow.

The company has over $500 million in aggregate contractual guaranteed revenues and this, combined with our strategy of only buying brands that are already monetized with royalty revenue streams when we close, gives us the ability to continue to finance our aggressive acquisition strategy, including potentially larger transactions.

I will now turn the call over to David Conn, Executive Vice President of Iconix. David?

Thanks, Warren, and good morning, everyone.

In what was a challenging quarter for retail in general, we're pleased with the way our portfolio performed. We did have a few areas of softness, but we had many more areas of strength and we're executing on several initiatives that we believe will provide for growth in the future.

Candie's apparel sales at Kohl's are up double digit percents year over year. However, we did see some softness in the quarter related to sales of Candie's footwear and based on this Candie's was below plan for the quarter.

Next year Kohl's will be implementing a propriety Candie's fixed stream program in every one of their stores and we believe this will have a material impact in driving incremental sales. Longer term, we're energized by Kohl's recent announcement to open almost 600 more stores over the next five years, and we're optimistic than ever about the future of Candie's at Kohl's.

In reviewing our other direct-to-retail brands, our Mossimo business at Target continues to grow and is up approximately 19% year over year and trending toward $2.1 billion in sales in 2007, up from approximately $1.8 billion last year. In addition, Mossimo continues to grow around the world as we signed a new license agreement in Japan in the quarter, and we also recently amended our agreement with the Mossimo Australian licensee where they will now be opening ten free standing Mossimo stores across Australia over the next few years.

Our Joe Boxer brand has rolled out to 400 Sears doors and will be in all the 900 plus Sears doors in 2008. We're currently working on fixed stream plans that will present an exciting branded environment for Joe Boxer and Sears to support this rollout.

We've been working closely with a new team of merchants at Wal-Mart to expand the Danskin Now business, and we're very pleased with the progress that has been made. The women's activewear and yoga market is very strong, and we believe Danskin Now can capitalize on this trend and is poised for growth in the year ahead. We believe the brand has a big opportunity for expansion within Wal-Mart longer term.

In September we announced a new direct-to-retail license agreement with Wal-Mart for our Ocean Pacific or OP brand. We're very excited by how quickly things have come together and the initial launch will begin with swimwear and T-shirts in spring of 2008 followed by the full launch in the summer of 2008, which will include men's, women's and kid's apparel, footwear and accessories.

In looking at our wholesale brands, we're continuing to see some weakness in denim sales with our junior brands Bongo and Mudd. This sector of our business is challenging, however, it is also a good example of how our minimum guarantees can insulate us from short-term weakness giving us a runway to address issues before they could potentially impact our financial results. We're working hard on several initiatives for both these brands and our 2008 guidance issued this morning includes assumptions for continued softness with the Mudd and Bongo denim businesses while we execute our long-term growth plans.

Our Badgley Mischka luxury brand is growing nicely and on track to have another great year. Our recent advertising campaign with actress Teri Hatcher has been very well received and has helped to significantly raise awareness for the brand. Next year we'll be launching a Badgley Mischka platinum fragrance, which will create a lot of excitement. And we're in the process of completing a licensed agreement for fine jewelry.

Our London Fog relaunch at better department stores this fall has been outstanding. In what has been a very difficult season for outerwear sales, London Fog's sales rates have been exceptional and our outerwear licensee has reorders on many key styles. Another standout category from London Fog has been luggage, where sell-through has been very strong, and the business in Canada at Hudson Bay has scaled much faster than we had anticipated.

Our celebrity driven ad campaign, featuring Kevin Bacon and other celebrities, has generated a lot of buzz and is helping us to reposition this brand in a more contemporary way.

Our Rampage brand is strong and doing well, and we believe the new denim license we signed in the quarter represents a nice growth opportunity for the brand. We will be using our Rampage spokesmodel, Petra Nemcova, to advertise the launch of the new jeans line next year.

And while the urban market has been soft, Rocawear continues to be one of the leaders and we're pleased with its performance year to date. We recently signed a new license agreement for men's outerwear, and we're at the final stages of completing a fragrance license with a major player in the space working on the launch of the first ever Rocawear fragrance for both men and women next fall.

I'll now turn the call over to Iconix Chairman and CEO, Neil Cole.

Thank you, Warren and David. Good morning to everyone.

I'd like to begin by discussing our most recent acquisition, Pillowtex. I'm excited about this acquisition as it not only provides our company with four additional powerful brands, but it also begins to extend our portfolio beyond the fashion business and moves us toward our long-term goal of becoming a diversified brand management company with properties that touch many different industries. We have given revenue guidance for Pillowtex for 2008 between $35 million and $37 million and long-term we believe this portfolio has the potential for substantial growth.

In looking at the brands individually, Fieldcrest is licensed direct-to-retail to Target and the brand is performing well in that channel with opportunities for growth. Cannon and Royal Velvet are licensed to Li & Fung and together represent approximately two-thirds of the total licensing revenue for the Pillowtex portfolio. Royal Velvet will be launching next spring with a major program at one of the leading home furnishings specialty retailers, and we've been working with them on an exciting marketing campaign to support that launch. Cannon is broadly distributed in regional department stores and national chains and our growth strategy for Cannon will revolve around working around our licensee, Li & Fung, to broaden its distribution and potentially add a large retail partner as an anchor, possibly even on an exclusive basis.

Charisma is the high-end designer brand in the group, is licensed to Westpoint Home and distributed today at Bloomingdales. But we see a number of opportunities to broaden that distribution and are currently exploring those.

We are in the process of completing the integration of Pillowtex, including assembling a team of executives that has a depth and diversity of experience in the home furnishings space to run these brands for Iconix.

I would like now to talk about our international growth strategy. We have worked hard this year to move this forward, and I am encouraged by the progress we have made. Recent agreements we have signed include Mossimo in Japan, OP for all of Europe and an expansion of our Mossimo license in Australia and a new agreement for Danskin in Mexico.

As part of our recent agreement for OP with Wal-Mart, we also licensed the rights to the brand to Wal-Mart International for Brazil, India and China and will be meeting with the Wal-Mart merchants in each of these countries in the next few months to discuss the opportunity that exists with OP and also our other Wal-Mart brand, Danskin Now.

In addition, other agreements that we have been working on that we anticipate closing shortly include our first agreement in China for London Fog with a company based in Beijing whose business plan is to roll out over 100 London Fog concept stores across China over the next three years.

We are also close to completing an agreement with our Rampage, OP and Joe Boxer brands for the Middle East with a company that will open over 30 stores for these brands across the region for the next four years.

Another part of our international strategy that we are actively exploring is setting up joint ventures with partners in emerging markets like China, India and Latin America where we would work with them to create Iconix-like companies in those regions.

Moving on to talk about our performance in the quarter, I believe our results highlight the fact that Iconix has a different risk profile than traditional operators or retailers. Our revenue base is diversified across a portfolio of 15 brands and a network of almost 200 licensees. Two-thirds of our revenue base in '07 is contractually guaranteed and we have none of the inventory or gross margin exposure with which traditional suppliers or retailers are normally faced.

In looking at the remainder of this year, we are confident about the continued strength of our business, but would also like to be cautious in the current retail environment. We are forecasting full year '07 revenue and fully diluted earnings per share to be at the high end of our current guidance, which is for revenue in the range of $150 million to $160 million and EPS in the range of $0.96 to $1.00.

In looking ahead to '08, I am very excited and optimistic about our business and the many opportunities we have to grow, both organically and through acquisition. Our initial guidance for '08 is revenue in the range of $240 million to $250 million of royalty revenue, an approximate 50% increase year over year, and a fully diluted earnings per share in the range of $1.35 to $1.40, an approximate 35% increase in earnings year over year.

Our guidance for next year assumes that the 15 brands owned in our portfolio on a pro forma basis for '07 equaled $200 million in royalty revenue, of which approximately 70% is guaranteed. The remaining $40 million to $50 million in our 2008 revenue guidance will come from a combination of both organic growth of the 15 brands and revenue from brands we acquire within the year.

As we have grown this year, I am pleased with the depth of our management team and the talent we have added across all areas of our company, which will total approximately 70 people by year's end. We have strengthened our senior management team with the addition of strong, new marketing and merchandising executives, as well as people focused on expanding our brands internationally. We will continue to talk to many prospective new hires and will continue to add talent to insure that we have the infrastructure in place to grow our brands and maximize our compelling growth opportunity.

As we wind down our third year as a brand management company, I am pleased with what we have accomplished, but also believe that we have only just begun to realize the vast opportunity in front of us. We are defining a new 21st Century way of doing business that is based on specialization and we believe will become more and more prevalent in a multitude of different industries. Iconix intends to be the leader in this new way of doing business and continue to deliver our shareholders compelling growth for many years to come as we assemble and nurture a world-class portfolio of brands.

With that I'd like to thank you all for listening this morning and turn it over to question and answers.

Thank you. (OPERATOR INSTRUCTIONS) And your first question comes from the line of Todd Slater with Lazard Capital Markets. Please proceed.

Thank you very much. Congratulations on all your accomplishments to date.

Thank you, Todd.

I have two questions, one on the acquisition side and one on the organic side. In terms of acquisitions, I'd love for you to talk about the environment out there. Obviously the supply side of the equation is robust, but how is the demand side shaping up? Do you think your sellers will accept lower multiples to get deals done? I'm assuming that the credit cost rising means that multiples have to contract a bit. So I'm just wondering if you could sort of address those issues and sort of what your pipeline -- how you feel about your pipeline.

Okay. Quite honestly, our pipeline today is really very interesting. It's definitely bigger than we've ever had because I think as we become more visible a lot more deals are coming to us, and we're also searching out new ideas and new industries. Our feeling is that this environment is only going to make things easier for us because I think there's going to be a lot less bidding possibly in the private equity side of the businesses, and I think we're starting to see it. I think we have a lot great opportunities, which we think are very actionable.

So do you think sellers are willing to accept lower evaluations in this environment given all the factors you're aware of?

I think time will tell, Todd. And, once again, it's an individual basis depending on great, great brands. I don't know if they're going to accept less, but it all depends. It's a very contracting marketplace, and there's only so many key spots and if you're not in one of them it's going to be very difficult out there. So we are seeing opportunities. We are negotiating hard and trying to get the best deals possible and we do believe there's a lot of really great opportunities that are actionable over the next few months.

And what are the impediments from your point of view in terms of getting deals, getting the financing necessary to do these deals?

We really don't see impediments. The company today has well over $500 million of guaranteed revenue and we have the ability to borrow more than we have today. We also have -- whenever we buy a company it's always securitized. I mean we have securitized revenue that we can borrow against, remembering we built this business over the last three years starting with very little capital. So I think we know how to do that. But we're pretty confident in the marketplace today, the strong balance sheet we have that financing deals will not be a problem.

Okay. And just kind of now on the other side the color maybe some on the organic growth that you now expect in your '08 guidance knowing everything you know now. And also if you look at the $240 million to $250 million guidance coupled with the EPS guidance of $1.35, $1.40, it appears to assume roughly flat margins. And I'm just wondering if you could talk about whether the model can still deliver further operating leverage from here.

We really believe it can, but it is an interesting marketplace right now. So we want to be conservative how we project, and we've had a history over the last three years of beating our number every year. Whatever we give in the beginning, if you go back and look we've over delivered and we plan on continuing to do that.

Generally we plan and believe that we can grow our organic business 10%, but there have been issues. Like last year we restructured the Joe Boxer agreement to get longevity, so we're not going to hit the ten. But the other brands we believe we will, the other organic brands that we have of the contracts that we have in place today. So as you diversity this business today, and today we have 15 brands and we're hoping in the near future to have between 30 and 40 brands, this will give us the diversity where if there are hiccups we do cover it.

We also see the acquisition revenue that we're projecting is somewhat conservative because last year we did close to $50 million in line and this year we have a lot more opportunity. So I think we feel that in balancing acquisition and organic that we have to look at both with some flexibility, as we have been over the last couple of years.

So it's safe to just interpret that -- or characterize your guidance in '08 as conservative of both, the organic side and the acquisition side.

I think that's for you to determine, Todd. We put down numbers that we continually feel comfortable with. But I think I hope in beating them and that's our plan. So how we deal with it, both organically and from the acquisition side, I think looking at our past history hopefully you agree that they're conservative.

Okay. Best of luck.

Thank you.

Your next question comes from the line of Bob Drbul with Lehman Brothers. Please proceed.

Hi. Good morning.

Morning, Bob.

First question I have is on the OP business. What sort of assumptions are in your '08 estimates on the revenue side for the OP business, and maybe if you could just talk about quickly the international side of that can ramp up?

Right. We've grown the OP business -- we did have business last year that we inherited that Warnaco was doing, and I believe our original estimate was around $10 million and it is scaled a little higher than that. We only do have a partial year with Wal-Mart where they're going to start shipping in the spring and it is a rollup as it builds. The particulars of the OP rollout we've agreed with our partner to not give details and that's how Wal-Mart would like us not to give too many details as we enact our plan.

All right. And on the denim businesses, what's happening with Rampage and why is it different from Mudd and Bongo and how is Rampage avoiding some of the challenges that we're hearing about?

Rampage, it's placed right now in Federated as its key vendor and Federated is Belk and Bon-Ton where Mudd and Bongo are more concentrated in the Kohl's and the Penney's and the Sears of the world.

What's happened is Macy's is trying to distinguish themselves and not carry similar brands as in those other stores. So they're looking for brands and Rampage is being their number one in the young contemporary areas and a natural in their denim area and they kind of asked us to do denim. So we're pretty excited. We think it's a big opportunity having a special brand that's focused only on that tier of distribution.

Okay. And then just one final question for you. As you look to 2008 and the need to add sort of personnel, where do you believe you need to add people and sort of how significant of investments are you thinking about around the SG&A line?

Maybe I'll talk generally and then maybe Warren will chime in if he wants to talk about specific dollars. We've pretty much added people across the board. Our agency we continue to build. We think the agency that we have today we think does just incredible work and is a leader, and I think one of the things that distinguishes Iconix is the marketing and advertising we do.

But across the board, from our legal department to our finance department. We've added a couple of really great merchants to the company. It's been a -- everyone needs more people as we've gone from two years ago we had five brands and today we have 15. So it's been a build up across. And from a dollar point of view --

Sorry, Neil. I would add that we're projecting seeing EBITDA margins for next year in the high 70s and with the increasing revenue that allows us to have the dollars to reinvest, which we think is ample to reinvest in both the brands and the infrastructure to grow the business.

Thank you very much.

Thank you.

Your next question comes from the line of John Rouleau with Wachovia Securities. Please proceed.

Hey guys. Good quarter.

Thank you, John.

So, with all of your other acquisitions you've done a really nice job of kind of levering into some additional product categories and laying on categories in businesses. Can you talk about your ability or how you look at Pillowtex on that same level? Do you have opportunities to get into some additional categories and maybe expand those brands out, like you're so good at doing?

Yeah, we really do. What's amazing is there's so many opportunities within the home business where you can go into the kitchen and the bathroom. Someone who's done a great job obviously in the area is Martha Stewart who's got everything from paint to obviously magazines and media. But there's so many opportunities for these brands that we identified where we believe we can grow the revenue. We've already done -- another big area is international. Cannon and Fieldcrest are powerful U.S. names. We've been working on a big deal for rugs that go in the bathroom. That could be a great deal. And just other categories. There are so many different opportunities within the home area to expand the brands.

And you touched on Martha Stewart, and the other thing that you've been very good at doing is getting a key spokesperson on the marketing side. I mean is it safe to assume that you might look to pursue a similar strategy and put a face to some of these names, cause they are strong brands, like you said, but they don't really have a face to them.

Right. Yeah, we definitely believe that. Our marketing team has been studying the home area really for the last six months or a year, been fully ventured in. And when you show a picture of just a room and a bed to us it's not that exciting. So we definitely plan on putting celebrities in the beds, and the sheets are going to be up to their necks. We definitely want to make it exciting and interesting and kind of shake it up a little.

Yeah, yeah. Good. And then Rocawear continues to perform relatively well in what's been a fairly tough urban market, although that's kind of evolving into more street versus urban. Can you talk about maybe the design changes there? Jay-Z has been more involved. I think you ran a recent ad campaign there. So any additional color on what's happening there and maybe why it's balking the trend?

Morning, John. It's David.

Hey, David.

From a design standpoint it had an incredible market in both August and October and it is evolving. It is, to your point, becoming a little bit closer to street. It's a little more cleaned up. But at the same time, Jay-Z and the team over there focuses on not taking their eye of the target customer and what's made the brand what it is and it's doing well. We're very excited about this fragrance license we're about to sign and we're working on a number of other things and really pleased with where Rocawear is.

And is there any one area -- I mean I know it's predominantly men's. I 'm assuming that that's really what's driving the business at this point, or is there another area that's really come on strong to really help the total.

It's men's, women's and kids. We have a big women's business and also a very big kids' business. And I think one of the most successful licensees we have today, which is growing very fast, is women's footwear. We have a company called Topline that does Rocawear women's footwear that is doing sensational and growing incredibly fast.

But also, Todd -- I'm sorry, John -- if you look at the pie, men's is 40 but kids is 30 and women's is 30. So it's a really healthy mix between all areas.

And juniors, there were quite a few changes on the junior side, correct? I mean are you seeing any early read on the sell-throughs or the changes in juniors, or women's?

Sell-throughs, despite what's been a tough environment for urban, sell-throughs has been pretty good. And we have a great licensee in place, and they just added a new designer to their staff and we feel really good about what's happening over there.

Okay. Fair enough. You've done -- you've signed several licenses on the international side out of the existing portfolio. Maybe I'm wondering if you could just kind of go through the list there and let us know where some of the holes or maybe where some of the larger opportunities may be, because it still seems like there's an opportunity to work with a Carrefour or a Tesco or something and do something multi-category, multi-license related on the international side.

The list, as Neil mentioned, is an OP deal, a Pan-European OP deal that we signed recently, a Danskin deal in Mexico, a new Mossimo deal in Japan. And the thing that we're really focused on and have a lot of dialogue with right now is we're in conversations with pretty interesting partners in China, in India regarding joint ventures. And the idea is setting up an Iconix-like company with them that our brands would go into and they would be our partner in the region building those brands. And we think if it's successful it's the kind of thing that maybe three to five years could be spun out as a public company in those different markets around the world.

Okay, terrific. Thanks very much, guys.

Okay. Thank you.

Your next question comes from the line of Virginia with Merrill Lynch. Please proceed.

Thank you. Neil, what about -- can you put a finer point on the sort of contribution from acquisitions of the 40 to 50? I was thinking it would be around 30, but maybe my organic growth as well.

Virginia, quite honestly, with the pipeline we have today it could be well over 100 and that's the funny thing about acquisitions. We're looking at some that are 100, 150. We are looking at a lot that are 10 or 20. It all depends on what they're actionable and what the board feels is the best way to do it and the types of area. I mean last year we did I think we did well over 40, close to 50.

So, as you say, it's very difficult to project acquisitions. There are so many great opportunities out there and we're going to be very smart and try to make sure that they hit all the matrices that we do and that they're great brands to add to the portfolio. So acquisitions definitely something to -- that's difficult to project and we found organics with all this diversity of the portfolio. So we put in 40 to 50 and hedging both. We think organic a good target is 10%, and acquisition we think a very, very conservative is $20 million to $30 million. We hope we can do substantially better.

Okay. Sort of half and half. That's helpful. Neil, are any -- it sounds like Mudd and Bongo could be flat to down next year. Are any other brands, may I ask, down in the portfolio do you expect for '08?

No. I think the only brand that we're planning down quite honestly is Mudd because we did have a nice minimum this year and next year it scales down. So that is the only -- we think Bongo is starting to build up and get a little traction the last couple of months. And I'm looking around the room at all our brands and I really don't see any other brands that don't have the momentum or the guarantees or the minimums and not in our '08 budgets.

That's great. And nothing likewise that could be renegotiated? I mean with all your big acquisitions that you've made recently, I think David those are locked in for all sort of three to five years. But nothing like that could be -- ?

No.

Right. Okay.

And the big opportunity, which we're excited about and unfortunately we can't talk too much about, is what OP could be. I mean that's the big -- it's been such a wonderful couple of months in dealing with the new team down there and everything that they're energizing. I think if you listen to the Wal-Mart conference you'll see how important OP is to them. And obviously working with the biggest retailer in the world the opportunities there could really just make our organic business, bring it to another level. So we're pretty excited about that.

Yeah that's great. They sound very excited. And then on the OP deal, a Pan-European deal, can you talk about the structure? Who is the licensee or licensees?

Yeah, hi, Virginia. The licensee is a company out of the U.K. called Mint Apparel and they do all the Fila business in Europe today and they're a great company. They've got a sales force -- you know Fila is a powerful brand in Europe and it's a brand that has kind of a Pan-European presence. And so they've got a sales force plugged in in each of those countries and we're excited. Their strategy is going to be to go to a lot of the mass retailers across Europe -- the Carrefours the Tescos, the Metros -- and I think it could be a big business in a few years.

But also hopefully they're going to maintain their position in all the better surf shops.

In specialty stores also, yes.

Okay. That's great. And did they replace, David, a licensee in Europe or is this entirely new? Was there any--?

There was a licensee in the U.K. previously but that was kind of winding down when the bought the brand and it was our intent all along to replace them.

Okay. Great. Thanks. And then lastly, Warren, maybe the interest expense and the tax rate came in both lower than we had forecast for the quarter. Can you talk about anything going on there and what should we expect on the go-forward for both of those items?

Sure, Virginia. We actually had a favorable adjustment in the taxes. We did a reconciliation. We filed our tax return this quarter and you do a reconciliation for the '06 provision both to the tax (inaudible). We did get a pick up. Going forward, I mean we're looking for the full year to be in the neighborhood of 34% and next year we're forecasting 35%.

And interest actually the two main drivers was we had favorable interest expense because of the Fed rate cut and we actually had favorable interest income in the quarter, just good investing. But going forward, since we used up a large portion of the cash right at the beginning of this quarter, Q4, I would say that the run rate for the interest expense is going to be around $8 million.

Okay.

Okay?

Thank you.

Sure.

Thanks, Virginia.

Your next question comes from the line of Jeff Klinefelter with Piper Jaffray. Please proceed.

Hey guys. Just a couple more questions. One on the fixed stream programs that you talked about in your prepared comments for Candie's, I guess, and Joe Boxer specifically. Can you share a little bit more on the economics of those programs? Are those shared between the retailer and you, or what are the payment plans for those?

The fixed stream for Kohl's is really exciting. I don't know if some of you got a chance to see some of their new prototype that they introduced in Indiana last month, but we built a little Candie's store -- actually not so little -- in every Kohl's store, which is going to be amazing I think for business. And it's going to be in all doors hopefully done by March. It's a shared expense. We co-opted with Kohl's and very reasonable and it's in our budget where we're going to be depreciating it over the next few years. But I think it's really going to do a lot for business. When you walk in the store you're going to see a really great looking Candie's shop in every Kohl's.

Sears, we're still in the works with them. We're meeting with their whole team in December finalizing it, but we've been back and forth on renderings and plans and costs and it's still negotiating with them. So but we're pretty -- that's also in our forecast for '08 because we think telling the people in Sears, calling it out I think is really important to bring some excitement and hopefully get people over from the washing machines and lawnmowers over to buys some underwear and pajamas and all the great things that Joe Boxer has to offer.

Okay. And is that -- would you consider that just sort of a transfer of funds from marketing into fixed stream, or is that incremental spending? Does that affect profitability at all?

No. That will come out of -- it will be interest between marketing and fixed stream will be interspaced between the two.

Okay. In terms of Q4 guidance, anything more specific that you could point to for the Pillowtex acquisition in terms of the contribution in Q4?

No. I think it's similar to the run rate that we projected. Quite honestly, we're still meeting with all the licensees. There's a big group of them and the specifics and learning more about it as we go. But I think we put in a conservative number that the minimum had and hopefully there's maybe a little bit of upside.

Okay. And then lastly, Neil, you have a very good view into a number of channels of distribution and there's a lot of concerns about retail. You commented about the conservative environment. But anything else you can share about the seasonality of the businesses? Are we seeing any kind of near-term improvement in the business now as weather moves across the country? Any other perspective as we move into the kind of key season?

What I see, Jeff, is I see it very spotty. I mean some of our customers -- and we do get reports every week from our DTR deals and today we have eight of them so we get to see on a weekly basis. And some of them are doing -- have started to pop in the last week or two and some of them aren't. So I think it's not a general -- we're not seeing a trend across the consumer, but we are seeing a couple of our retailers that are distinguishing themselves and I do think weather is going to help. Just hopefully the prices aren't cut too low by the time people start buying their coats and sweaters.

Okay. And I guess lastly on this Wal-Mart OP, I know you can't talk about the specifics, but in terms of when that royalty revenue starts flowing into the model, that's really going to be more of a Q2 of '08 with your initial launch and then kind of Q2, Q3 is where the bulk of it will start showing up?

Yeah. We do amortize the minimums when we get them, but I think the back-half of the year at the end of Q3, Q2 is when we'll be getting way above the minimums and where we believe it will have an impact.

Okay. Thank you.

Thanks, Jeff.

Your next question comes from the line of Todd Slater with Lazard Capital Markets. Please proceed.

Hey, guys. Just a real quick one. We heard some speculation recently on a smaller acquisition. I was wondering if you could just speak about or update us on your Sion joint venture? Has there been any activity of note in that area?

No. There was an article in the paper and that rumor made a big deal with it that we had done for Iconix, and although the press usually feels they got it right, they definitely got it wrong. And Iconix will not be the buyer of the company that was in the paper. If we do go forward it would be under the Sion entity. And quite similar to Iconix, Sion right now has a pretty good pipeline itself in areas that we've been working with Jay and John and the team over there. So we do feel that Sion will be doing some deals in the next few months, but that would be more of the rumor would fit more into that model where Jay I think would bring great value than it would under Iconix.

Right. But was the name that was rumored, are you saying that that particular name is not a target at Sion? Or just not a target at Iconix?

We have a policy where we don't comment on deals we're working on or rumors until they're done.

Okay. But you're not ruling this out?

I'm ruling it out for Iconix.

Got it. Okay. Perfect. Terrific. Okay, thank you.

Thank you.

Your next question comes from the line of Jim Chartier with Monness, Crespi.

Good morning.

Hey, Jim.

Congratulations on a good quarter and, Neil, great article in Business Week.

Thank you.

Most of my questions have been answered. On Mudd, if I remember correctly, the denim license was originally up to expire in March of '08. Is that right?

Yes. And we've done a deal with -- a transition with a new party that's going to be taking over that had an arrangement with the old party. And so we do have a new three year deal starting next April on a transition agreement.

Okay. Great. And then could you just comment on how Joe Boxer is going in K-Mart these days?

It's doing okay. It is copping up. It's not as much as we would have liked, but it's a single digit up and we're hoping it gets better with the weather. A lot of fleece activewear and pajamas we want to sell in the next couple of months.

I think everybody has a lot of those. All right, thanks a lot.

We don't. K-Mart does.

Your next question comes from the line of John Green with (inaudible). Please proceed.

Hi. First question was on the acquisition. You guys mentioned obviously you're looking at other things. Can you talk a little about how you would fun acquisitions going forward? In other words, is there the ability to fund those primarily with debt given the capital structure and what your thinking is there?

Yes. Hi, it's, Warren. Yes, we've said it a couple of times. We have these guaranteed revenue streams. I mean currently we have $500 million in guaranteed revenues going forward. And when we execute against acquisitions, they're always monetized so they actually have guaranteed revenue streams associated with them, which lends itself very well to securitizations. So we do feel we have (technical difficulty) to do financing going forward. And we actually think our leverage ratios pro forma net debt to EBITDA right now are under four times. So we have room even with the existing brands.

I see. So if you were to buy something for, just make up a number, $50 million tomorrow, it's possible you could finance that 100% with debt.

Or 100% with cash.

And I guess--?

We have cash on our balance sheet of more than $50 million.

That's great. I guess the other thing was just you mentioned that next year in terms of the EBITDA margin guidance that you've included some budget to basically reinvest in the business. Could you just elaborate a little bit more on that? I assume you're thinking in sort of reinvesting in terms of advertising to grow the brands? Is that it?

Yes. We carefully in putting together our new budget working with the board and our team over the last month or two, we worked real carefully and we are reinvesting, but pretty much just not in advertising, which our budget is growing. But it's really, as I mentioned before, it's across the whole company. We're investing a lot in human resources and people. Our staff has grown almost 50% over the last 12 months and we have a plan to continue to grow because to manage 15 brands is a lot different than managing five brands or ten. So we're continuing to add people and marketing and kind of doing all the good things that we've done over the last couple of years and building the infrastructure.

Got it. That's it. Thanks guys.

Your next question comes from the line of John Rouleau with Wachovia Securities. Please proceed.

Hey, guys. Just a couple of quick follow-ups. I know you're very excited about OP at Wal-Mart, but it seems like Danskin could be a real nice opportunity as well. Or they are the verge of -- can you give us some idea without giving us too much detail, but are they on the verge of expanding that? Could that be a much bigger number in '08 than it was in '07? Can you talk around that?

Yes. I do think Danskin, as David spoke about before, the activewear business and yoga business is growing. So we really do think Danskin has a great potential. The only thing that holds it back is men don't wear leotards, where OP has all three genders.

Right.

So, or at least most men don't wear leotards. Actually I've seen a few biking guys. So, OP just has such a broader constituent in the fact that there's so many more categories and Danskin is limited to a certain amount of racks being in the active department.

Right. But with active being so popular I mean they don't have another active brand. I mean this seems like this could serve as the anchor in activewear, at least on the women's side. Is that an accurate statement?

100% agree. And we think Danskin Now has a great potential, and also Danskin has a great potential. I mean we have a great company as a licensee and there's so many good -- Danskin is this incredible 125-year-old brand that is iconic as it gets. And we think we have so many great opportunities with Danskin and Danskin Now and we're pretty excited about it.

Okay. And then, Warren, one for you, I mean the proposed accounting change for the converts and that share of settled converts, can you just talk a little bit around that? I don't know a lot about it but I know they're talking about maybe changing some of the accounting in the way that you might report that into next year.

Sure. As of today there's not a final document. There's a document out there that had asked for comments. There's different proposals in terms of the treatment. Again, I just want to reiterate that no matter if and when anything is adopted, it wouldn't change the economics of our current deal. So we'd always pay cash interest at 1 7/8. We wouldn't actually issue any shares above the hedged up conversion price of $42.40. But they are talking about some kind accounting change, but don't look for us to comment cause nothing is proposed. We don't know if (technical difficulty) or when it's going to get adopted. We'll comment obviously when it is adopted, if it is.

Right. But it's entirely non-cash.

Absolutely. Like I said, it won't change the economics of the deal. We will always only pay cash interest of 1-7/8. That's correct.

Okay. Great. Thanks guys.

Sure.

Your next question comes from the line of [Mark Huffman] with MLP Investment Management. Please proceed.

Good morning everyone.

Good morning.

Nice job. I've got a question about or just a quick one about OP. Are you and Wal-Mart envisioning it as something seasonal -- spring, summer -- or is it really going to be a year-round type brand, and certainly in the southern parts of the country it would seem to make sense.

And then I had another question. What you've done basically in my mind is just went right down the line in retail in sense dominating or not dominating but controlling. Maybe not controlling. But really the junior space in retail landscape here in the U.S. And maybe that's the plan in a sense for home furnishings with the Pillowtex acquisition. Does that make sense? I mean is that part of your focus on what you're doing here?

Well, let me first answer the first question. We look at OP as a year-round business and so does Wal-Mart. We look at a brand like Hollister and what the Abercrombie people have done with that brand and it does better in the third quarter than it does in the second quarter. We do see OP jeans. We see OP big back to school business. And we see it as a lifestyle brand that has a California feel. Kind of one of the words we use is endless summer. So we definitely see it as a four quarter business and that was an important strategy that both us and Wal-Mart agreed on when we did the deal and we do think it will really help.

As far as our strategy, our strategy is to get the best iconic brands in the world and to assemble them. We're not focused on juniors. We're not focused on missy. We're not focused on luxury. We're not focused on mass. We're trying to, number one, we want to engage every major retailer in the world and we're on our way. I think we've got about 60 or 70% and we know we have work to do in doing deals around the world. So we're looking for great iconic brands that we could monetize. And we're not looking at certain categories. We look for great brands that we could do a lot of good things with and that's the plan for Iconix.

Thanks very much. Good luck in the future and keep it up.

Okay. Well, thank you.

I show no further questions in the queue.

Okay. Well, once again, I'd just like to thank everybody. I appreciate all the people that have -- investors and people that follow our company. As I mentioned before at the end, I really do believe it's just beginning. We have this what I feel is an amazing business model. And I think when you look at what's happened in the industry in the world in the last six months I think it just shows -- gives the validity of the model even more and the fact that we're able to continue to deliver strong profits, strong growth in a difficult environment. We believe that we're kind of a safe haven and as we continue to grow and as we continue to add brands we think everything will continue to get better. And we appreciate your interest. Thank you very much.