Icon Energy Corp (ICON) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iconix Brand Group First Quarter 2008 Earnings Conference Call. My name is Carissa and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

At this time, I will review the Safe Harbor Statement under the Private Security 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 or impossible to predict and many of which are beyond the control of the Company. This may cause the actual results, performances 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 not to place undue reliance on these forward-looking statements which speak only as of the date that the statement was made.

I would now like to turn the presentation over to your host for today's call, Mr. Neil Cole, Chief Executive Officer; David Conn, Executive Vice President; and Mr. Warren Clamen, Chief Financial Officer. Please proceed, Mr. Clamen.

Thank you. Good morning, everyone, and welcome to the Iconix Brand Group first quarter 2008 earnings conference call.

Reviewing our results for the first quarter ended March 31, 2008, revenue increased approximately 81% to approximately $55.7 million as compared to $30.8 million in the prior-year quarter.

EBITDA increased approximately 66% to approximately $38.8 million as compared to approximately $23.3 million in the prior-year quarter, and free cash flow increased to approximately $32.3 million as compared to $21.6 million in the prior-year quarter.

Net income increased over 43% to approximately $18.2 million as compared to approximately $12.7 million in the prior-year quarter, and diluted earnings per share increased to $0.30 as compared to $0.21 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 sent out earlier this morning or on our website, iconixbrand.com.

Our EBITDA margins were approximately 70% for the quarter. The Company recorded approximately $2.1 million in non-cash compensation expense in the quarter related primarily to the new employment agreement the Company entered into with our CEO.

In the quarter, we benefited slightly from lower interest expense on our term loan facility which was at a rate of approximately 7% for the quarter and is now set at approximately 5% for the next quarter. The Company's current weighted average cost for all debt outstanding now stands at approximately 4.4%. At the end of the quarter, we had approximately $56 million in cash on hand as well as the potential availability of an additional $37 million in funds from our term loan facility.

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

Thank you, Warren; and good morning, everyone.

In looking at the performance of our brands in the quarter, we are pleased with the overall results. The retail environment was challenging, which impacted the performance of some of our brands, however, there were also a number of growth stories in our portfolio that balanced our results and demonstrated the resilience of our business model and the benefits of our increasingly diverse portfolio and licensee base.

In looking at our direct-to-retail brands, sales of Mossimo at Target and Candie's at Kohl's were a little soft, and we attribute this to the weak sales both of those retailers experienced in the quarter. However, sales of Joe Boxer at Kmart have been strong, driven by the core women's products and our rollout at Sears is picking up momentum and they will now be launching Joe Boxer junior apparel for spring of 2009.

Sales of Danskin Now at Wal-Mart were down during a process of strategically repositioning the brand. But this process is now complete and holiday orders for Danskin Now are double what they were a year ago.

Our Starter brand is currently sold primarily to Wal-Mart through license agreements with a number of different wholesalers. However, we are working to convert this to a direct-to-retail license with Wal-Mart, which we believe will position it for growth similar to our OP model. Sales of Starter were up in the quarter, driven by the core men's active wear business.

Our OP brand is launched at Wal-Mart and the early results are very exciting. A collaborative effort between Wal-Mart, many third-party vendors and Iconix has delivered trend-right products at Wal-Mart low prices. And our multi-celebrity advertising campaign featuring six leading young stars including Corbin Bleu, Kristin Cavallari, and Rumer Willis, which we released last week, has generated tremendous excitement and publicity. The product is currently in over a thousand Wal-Mart stores.

In looking at our wholesale brands, London Fog continues to perform well in its core department store distribution at retailers like Macy's, Nordstrom, and Dillard's. The Rocawear men's business was a little soft in the quarter. However, the women's and kids' businesses are on track and the Rocawear footwear business is up significantly year to date. We are anticipating strong sales in the back half of the year for the Rocawear brand as we launched the first-ever Rocawear fragrance which is being supported by a significant advertising commitment from our licensee, Elizabeth Arden.

Our Rampage brand is on track for the year and our new denim licensee is continuing to gain greater penetration within the core department store base. Our Badgley Mischka brand continued to grow and had strong performance in the quarter in its core platinum dress business. We are currently working on new license agreements for Badgley Mischka in the India and the Middle East.

Our junior denim brands, Bongo and Mudd, continue to face challenging market conditions in their core denim businesses. However, the footwear businesses for both brands are very strong and growing.

We are pleased with the progress of our home brands. Royal Velvet is launching in Bed Bath & Beyond this month and will be quickly rolling out to all 800-plus Bed Bath & Beyond doors. We are supporting the launch with an exciting new advertising campaign featuring a major Hollywood celebrity that we are announcing next week.

Our new direct-to-retail license for the Cannon brand at Kmart and Sears is moving ahead faster than we had originally anticipated, with a soft launch this fall followed by the major launch next spring. Our Fieldcrest brand has been successfully repositioned by Target as Fieldcrest Luxury and the brand is now in all-major soft home categories and performing very well.

Our Charisma brand continues to perform well at Bloomingdale's. And as we develop a new Charisma couture line of more expensive products for them we are also exploring ways to increase sales and expand the distribution of the brand.

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

Thank you, David and Warren. Good morning, everybody.

While this has clearly been one of the most challenging retail and economic environments that I can remember, I am pleased with our performance in the quarter in that we were able to increase our revenue by 80% and earnings 40% year-over-year.

While we are not entirely immune to the deterioration in retail, I believe that we have continued to demonstrate the benefits of our business model where contractually guaranteed revenue, no inventory risk, and diversification mitigate our downside in difficult markets. Furthermore, we have been focused on developing and growing our brands organically, and I am pleased with the progress we have made on a number of different fronts which I would like to spend some time discussing.

A component of our organic growth strategy is expanding our brands around the world. And earlier this morning, we announced that we have entered into a definitive agreement to form an exciting joint venture in China with Novel Fashion Holdings. Novel is owned and run by Silas Chou who is a very well-known and respected entrepreneur in both China and the United States.

In the United States, he is best known for his ownership of the Tommy Hilfiger brand, and building that business from $25 million when he bought in 1989, to over $2 billion in sales. Today, he is the majority owner and co-chair of Michael Kors. In China, Novel is one of the largest vertically-integrated apparel manufacturers. Silas is an ideal partner for this venture based on his unique knowledge and contacts in both the domestic Chinese market as well as in the U.S. fashion industry.

Iconix China will be an equal joint venture that will be based in Hong Kong, with Iconix contributing the rights to its trademarks in China, and Novel capitalizing the company with an investment of $20 million. Iconix will also make an investment of $5 million. The strategy behind Iconix China will be to identify local operating partners that -- with the potential to go public and provide them with one of our brands and brand management and marketing support in exchange for an equity stake in their companies.

While there will be some royalty revenue, the primary focus of this venture will be on obtaining equity in strong Chinese companies that have the ability to go public in a short period of time. This is a different business model than we have employed in the United States. However, it is similar in that we will not be an operator and will focus entirely on marketing and brand management.

A large part of the success of Iconix in the U.S. has been driven by the fact that we have created an innovative new business model that was more efficient in this market. I believe that our business model in China is equally as innovative and ideally focused, and ideally tailored, to unique and very different dynamics of that rapidly emerging market. We have already identified several viable partners in the region with strong development plans for our brands. And I believe that over the next three to five years, this joint venture will deliver substantial returns to the Iconix shareholders.

Other international deals we are exploring include an emerging strategy for India which we hope to announce later this year. Our approach in India will likely be a joint venture. We are currently in discussions with three of the largest retail players in that country. We are also working on Pan-European licenses for London Fog, Danskin, and Starter. We have a Rocawear license that we are close to signing in Brazil and also Badgley Mischka license that we are working on in the Mid East.

While I am excited about all the above initiatives one of our most compelling organic growth opportunities remains with our three Wal-Mart brands -- OP, Danskin Now, and Starter. Our launch of OP at Wal-Mart has been extraordinary as both sides have worked together to create what I believe will become one of the largest apparel brands in the world.

We are in the process of completing a renewal for our Danskin Now brand with Wal-Mart, and that business which has been slow is now picking up momentum and is poised to grow. We are working to convert our Starter brand into a direct-to-retail license with Wal-Mart and we have several exciting growth strategies in the works, including major athletic endorsements and license team sports product.

If we execute and maximize this opportunity, it is my belief that these three brands could generate between $3 billion to $5 billion in annual retail sales within a few years' time. I would now like to discuss our current view on acquisitions and how it relates to our guidance for this year.

As you all are aware, acquisitions have been and will continue to be a key part of our growth strategy. There are currently a number of acquisition opportunities that we are evaluating. Based on the current external market conditions, we believe we have entered into an opportunistic time-period for the Company where we could be very selective in both timing and execution of these transactions as we have established ourselves as one of the few strategic buyers of great brands. While we are confident that we will be able to complete acquisitions this year, we will not force deals or do acquisitions that are not in our best long-term interest.

We are maintaining our current 2008 guidance of revenue between $250 million and $260 million and earnings per share of between $1.35 and $1.40. This guidance, however, is predicated on having approximately $30 million in new acquisition revenue that falls into the remainder of the year.

Long term, we are continuing to build what is a very unique and exciting company with vast growth potential. This is a company that in three years has assembled a portfolio of 16 different consumer brands that today control over $6 billion of market share with over 220 licensees worldwide including many of the world's largest retailers. I continue to believe that we are still in the very early stages of our evolution and that we have an opportunity to create a multibillion-dollar, highly-diversified global company that will continue to deliver profits and growth to our shareholders.

Thank you all very much for listening, and I'd like to now open it up to a question-and-answer.

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

Thanks very much, and congrats.

Neil, first to you -- you said that you're confident you can make acquisitions this year but that you won't force the deals, and the bear cases that you just can't get the financing due to the seizing up of the market. So I guess my question is, is it more an issue of not forcing a deal or is it more of an issue of getting adequate financing? I guess that's what sort of people would like to hear.

Right. Todd, first of all, the Company has, between our cash on hand of $56 million and our term facility another $37 million, on top of that, we're cash flowing at over $25 million free cash flow per quarter. So that's another -- so depending on the timing, the Company has access to well over between $100 million and $200 million of capital. And we have tested the financing market, and there is financing for the right deals. And we're very confident that with the right deals, financing is available.

Well, so, you've got to make -- just to hit the numbers you mentioned, the $30 million of acquisition revenues, it sounds to me like a $60 million or so annualized which sounds like $300 million, you've got about $100 million in liquidity, so maybe a little more than that with some of the free cash flow. But -- so it's looking a couple of hundred million, in that range. And is that -- you feel confident that you can get that kind of credit, if necessary?

Yes, very confident. We've been working on about two or three deals that were pretty far down the road and we're very confident that they're financeable.

Okay, great. And then my second question is if you can give us a little bit more sort of revenue direction with -- you have a major portfolio of brands, like 16, 17, 18, whatever the number of brands -- and just maybe give us a better sense, up or down -- revenues up or down at some of the major pieces. You mentioned some were soft or some were above or below, but not relative to [LY]. Maybe give us a sense of how the brands are doing versus LY.

Well, having a portfolio of 16 brands within Iconix and one within Scion, there's definitely a mixed bag being a portfolio approach. There's definitely excitement, as we mentioned in the call, around what's happening with OP and Starter and really how good business is starting to be at Wal-Mart with the new team there and how Iconix is engaged. Also excited about Royal Velvet and what's happening in the -- our big program with Bed Bath, hit all the stores in the last two weeks and is performing wonderfully.

And basically across the portfolio, it kind of goes with the store. I mean, with Target being a little off, Mossimo is a little off. With Kohl's having a little softness, Candie's has had a little softness.

So, looking at a portfolio approach, we're still confident that, organic, we'll be in this -- probably in the mid-single-digit this year from an organic point of view. But generally, there's a lot of shining stars in the portfolio, and there's definitely some weakness in this challenging retail environment.

So, was organic in that mid-single-digit range all in the first quarter?

Yes, roughly. It was -- there were a lot of programs that started in the middle of the quarter, et cetera, but we're on plan for the year and we're pretty confident that the organic business is strong.

Okay, thanks a lot, guys. Good luck.

Thanks, Todd.

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

Hi, good morning.

Good morning, Bob.

I guess question for either Neil or even Warren. When you look at the -- and we go back to the acquisition growth that you're incorporating in this guidance today. When you give the guidance of the $1.35 to $1.40, what sort of interest rate or interest expense are you planning for the year in that guidance? And just sort of following on that, can you maybe just let us know what the share count expectation is for the full-year guidance that you're giving us?

Yes, sure, Bob. I guess I'll take the second question first.

The share count, I mean, it obviously depends on how we would finance the acquisition, but currently we're looking at around 62 million, 63 million shares. The interest rate in there has fluctuated but -- because LIBOR has come down. We put it in, let's say, I would say the 6% to 8% range.

But it really depends. I mean, we're getting different pricing. It depends on what type of debt it is.

Right.

But also, Bob, if the question is the current financing with -- the all-in financing phase is around 4.5% to 5%. But our weighted average on today's financing is about 4.4%.

Okay.

And the term facility that we could still draw on the $37 million, is at [L plus-2.25%].

Got it. Okay.

And then, on the -- a couple on the Wal-Mart business. On the Ocean Pacific, I think David said in about a thousand stores. What's the game plan for the rest of the year in terms of the rollout both domestically, and you had mentioned some international opportunities with that business? Can you elaborate on that as well?

Yes. What's so exciting about it, today it's an apparel in a thousand doors, but where it's heading is now footwear is going on for a thousand doors, swimwear, and it's all starting to roll in. A lot of the other products are in -- somewhere between 300 to 500. But by the end of May, we should be in all of the key thousand doors. And we're hoping to expand that slowly over the next 12 months and hopefully get to 2,000 or 3,000 doors down the road.

As far as international, we're going to be starting up with Canada, is going to be the first rollout. And that's going to happen in the June-July period, getting ready for a full rollout in fall. Mexico is signed on for spring '09. And we're now working with the U.K. and other Wal-Mart subsidiaries. So we're pretty excited. It's going to be a worldwide initiative. Based on our initial successes, there seems to be a real energy happening with Wal-Mart across the world.

Okay. And then just -- the final question is on Starter. What really has to happen when you convert this to direct-to-retail, like are there obstacles to doing that, or what's the timing on when you think that can be sort of shown up?

It's going to happen over the next probably 30 days. But it's really not any -- it's business as usual because most of the same suppliers that were present licensees are going to be handling most of the supply goods. We are going to be adding a few more. However, it will be a seamless integration and will just give us a lot of growth and a lot of new categories like we've done with OP.

Great. Thank you very much. Good luck.

Thanks, Bob.

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

Thank you. So, Neil, how are OP sell-throughs doing, may I ask? Because there's been some question as to Wal-Mart's ability to do this stuff historically. How are sell-throughs?

Great, really great. And what's wonderful, it's Wal-Mart -- the new Wal-Mart team is really focused on the product, and I'd love everyone to go in the stores, the product is sensational, and the quality and the price value is really very impressive, and the sell-throughs have been extraordinary.

That's great. And then, sort of following on Bob's Starter question, what is the economic impact? I mean, I would guess that Starter, if it was sort of $18 million run rate, it's going to come in a little bit revenue-wise, Neil, to transition to retail, right --?

No, we're thinking we can grow it. We've got a good base. The brand does about $400 million today. And we really -- truly believe we have the opportunity to make it over $1 billion dollars.

I was down there this week with the whole Wal-Mart team and the Starter team, and it's really exciting what's happening there. To be the number one sports brand and the number one volume retailer in the world, we think the potential is definitely one of the biggest in our portfolio. And we're pretty excited about the ability to hopefully more than double what we have today.

Okay. So I guess -- I mean, I'm thinking that it's a business that you're -- is about -- is half the size of the Mossimo business and $18 isn't a lot less than what the Target guys are paying you. So, is there a different structure --?

Yes, it's a different royalty structure.

Okay. And then, Warren, maybe -- when you said -- I think you said that the weighted average interest expense on the debt is 4.4%, 4.5% right now. Did you -- is that what you said --?

Yes, for this quarter, going into Q2. The term facility in Q1, because it's variable, was about 7%, and going into Q2 it's about 5%.

Okay. You're including -- converting that. That's what's taking that down, right?

Absolutely, yes, correct.

Right, right. And so, what about the change in convert accounting? What's -- do you guys then have to, as you understand it, you have to sort of treat the debt component as straight debt? And is that -- should we expect sort of a GAAP EPS impact coming out of this year?

Well, it's not ratified yet, but if it would be ratified in the state that it's written now, it would only begin to affect our earnings starting in January 2009. And it would be -- we would have to treat it as straight debt but the difference would be non-cash interest. So it would -- the increased interest that we have to record would be non-cash. But it would only begin in January 2009.

Right. I mean, our understanding is FASB, that that's probably a pretty good likelihood. Right? Is that your all's --?

Not yet.

I just want to -- okay.

I mean, yes, it probably is a good likelihood, but you never know until it's ratified.

Right, right.

I'd say in the next quarter when we -- we usually put out year guidance, in our third quarter, we would -- if it was today, we would definitely put that number into our '09 plan.

Okay. Thank you, Neil, that's helpful.

Yes.

And there isn't any plan to refinance that convert? Because it's still, as you say, it's a great cash interest rate, right?

The economics don't change, exactly. No matter what happens to the FASB.

Okay. And I'm sorry, lastly, Neil, it sounds like -- you must feel confident enough about your ability to close these prospective acquisitions to maintain that in your outlook for the year.

Yes, exactly.

Okay. Thank you all. Good luck.

Thanks.

Thanks, Virginia.

Your next question comes from the line of Eric Beder of Brean Murray. Please proceed.

Good morning.

Good morning, Eric.

Could you talk a little bit about conceptually how and when we should start thinking about China and how it's going to -- in terms of hitting the income statement for, I don't know, late '08 or '09. How is this going to flow through the income statement?

Eric, this is David. It's a long-term opportunity and it's one that we are incredibly excited about. There will be royalty revenue flowing into it. We have a London Fog license agreement in China, OP is licensed to Wal-Mart, and then Royal Velvet and Cannon are licensed to Li & Fung. And there could be royalty revenue with other deals in the future, but that's not the focus.

The focus here and what's so exciting is equity. It's an emerging market with an incredible potential. And our partner, we have what we think is the perfect partner for the region. And you've what will be up to 700 million emerging middle class Chinese consumers and there's just not a lot of brands that are over there today for that consumer. And so we think this is an opportunity that down the road could be a billion-dollar company one day. And we're very, very excited about it.

Okay.

Also, Eric -- I'll add -- we definitely weighed the options of doing some traditional licensing in China. And in looking at it, we would have had to put a lot of people on the ground there and try to enforce trademarks which is not that easy unless you have a strong team over there and also to get paid. Here we have this investment, it's going to take -- it's definitely going to take a couple of years, but we think it could just be so phenomenal and so important.

And in looking at some of the people that have built billion-dollar brands over the last three to five years, it's people that have gone in inner China, and not just open up a couple of stores in Hong Kong to say they have a China strategy. We've aligned with we think one, if not the top, entrepreneur who understands both markets. And we believe we're going to have incredible equity stakes and great companies and a wonderful play for Iconix.

Great. I mean, let's talk a little bit about acquisition strategy. You, historically, you've talked before about going to home goods, doing sporting goods. You accomplished that last year. Now, as the -- now, as you've gotten kind of that kind of flow, is -- how is the acquisition strategy, just for best brands, or is there plan or focus that you're still putting on in terms of industries or product categories?

It's always been the best iconic brand with the most solid royalty flow that we know is there and that has good credit. And that's kind of how we look at it. We look at great iconic brands that have powerful royalty flows, that have growth potential, where Iconix could add value with its marketing and branding skills. Today we have a pretty diverse pipeline. And we're going to move on the ones that make sense or that we think are the best long term brands for the company to add on.

Okay. And finally, any updates on the Bongo lawsuit?

We are under appeal and we think it's moving a little quicker, and hopefully we'll have a decision where we can enforce our judgment by the end of the year.

Great. Congratulations on a good quarter.

Thank you, Eric.

Your next question comes from the line of Ronald Bookbinder of Global Hunter. Please proceed.

Good morning and congratulations on a good quarter in a tough environment.

Thanks, Ron.

Starting with acquisitions, you had commented that you have been moving to larger and larger deals. Could you give us a sense of the size of the deals that you're looking at?

We're looking at a couple of very large deals that have royalties that have -- some of them are well over $100 million. And there are some great opportunities out there and great prices. And we're also looking at a lot of them that have been in our sweet spot of $40 million to $50 million on our Rocawear and Pillowtex.

So it's a pretty diverse -- there are so many great opportunities right now that's happening. And we're seeing a pretty diverse group in the pipeline. But we are definitely -- it's taking a little longer as we are looking at larger deals going forward.

Now, on China, so the existing China licenses have been folded in to the joint venture. Is that going to affect the U.S. Iconix revenue stream?

No, it's going to flow in the JV, Ron. And as Neil mentioned, it's a different world over there and the team that we're going to have on the ground over there as far as their ability to make things happen, enforce our trademarks and build the brands in a very, very different part of the world is -- our belief is just that they're going to be much more successful than if we try to manage it out in New York.

But there was no royalty planned in the present projections for China. So we're not -- in giving away 50%, we weren't giving up any.

Okay. Now, how are you going to monetize these deals in China that the joint venture is going to have equity in?

Our belief is that we're going to -- the companies are going to go public. So we've already identified a few partners. There aren't any deals in place yet. But the criteria is going to be identifying very strong local Chinese operating companies that we believe could go public in a short period of time. And there'll be monetizations as the different companies go public. And down the road one day, Iconix China may be going public. And that's -- that could be the ultimate form of monetization.

The other thing --

Go ahead.

I'm sorry. In a lot of the early deals, we're in the middle of negotiating six of them right now, we're also going side by side into the deals with either private equity or venture capital. And therefore, there's someone there monitoring who's also looking at a time-period of roughly, let's say, two to four years, to monetize. And we have good finance people going in side by side with us who Silas has put together with his team.

So we're pretty -- part of the strategy is obviously monetization and making sure that we don't get minority stakes or how it works. So we are focused on making sure that they are monetized.

But if you sold you equity stake in one of these investments, they would still have the right to the brand, correct?

If someone buys our stake in each of the brands, definitely, we -- if we sold them. That's not our plan.

Okay. Moving on to Wal-Mart. Could you talk about how many categories OP is in and how many categories you believe it could expand to over the next two years, and then do the same with Starter?

It was a pretty aggressive launch across the whole store where you could find us today in men's, women's, kids', accessories, footwear. It was pretty much in all. I mean, some of the opportunities down the road which we don't have today are home, fragrance, and possibly some hard lines. So we pretty much got all the soft goods and there's other small expansion down the road in some of the other categories.

Starter today is pretty focused on mostly the men's sportswear area and the boys' active group. We do see a lot of expansion -- in our presentation down there this week, we -- actually we also have a big sock program and -- but we have a major footwear launch which we think along could be close to $100 million. And we also have -- looking at some hard goods like inflatables and other product categories and looking at intimate apparel or layering pieces.

So there's -- I think we're in -- in OP, we're probably penetrated about 90%; in Starter, we're probably about 50%, 60% with a lot of growth.

Okay, thank you. And congratulations once again.

Thanks, Ron.

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

I'm sorry, just a follow-up on the China structure. So, can you guys give me an example of, David, what would -- how -- what will be the structure with these partners that would go public? You would be trying to find, I don't know, companies like little, mini Iconixes, what --?

No. Operating companies like our licensees here in the U.S. So if it was for Rampage, we would look to find an incredible women's sports wear company over there that we thought had ability to go public in a short period of time, and as Neil said, we'd be taking equity alongside a private equity firm or venture capital firm over there. Iconix China would be the company that would be giving them the brand management and the marketing support to help them and with an expectation that they go public within a few years.

Okay. So the analogy would sort of you'd be getting equity stakes in your wholesale licensees kind of here?

Correct, yes.

Some of them are retailers. There's a huge amount of young retail chains at 100, 200 stores entrepreneurial chains that are starting to happen. And we will get equity stakes, whether it be in the wholesale or the retail of the Chinese companies.

Right. And then they take care of trademark enforcement, right, which --?

Actually we would. We -- Silas has put together a team in Hong Kong that will be working on trademark enforcement out of Iconix China.

Virginia, it's different in terms of -- it's a different model in terms of how we're going to actually monetize the brands, but our core competency is the same. We're going to be focusing not on operating, on brand management and marketing which is what we do.

Okay, okay. I think I get it. Sorry. Thanks.

Thank you.

Your next question comes from the line of Mark Kaufman of MLT Investment Management. Please proceed.

Thanks, guys. I guess, again I'm asking a similar question that was just asked about the nature of the Chinese venture. And so, specifically, these companies over there would be selling your brands or would it also entail their selling their own brands and you obviously investing in them?

Yes, it's a little bit of both. In some of the deals we're doing, it's going to be with very successful companies and we're going to set up new [co] with our brands, whether it be a Mossimo or a Candie's. And in another couple of deals we're looking at, we're going to own a piece of their current businesses that are doing well.

And so each deal probably of the 16 and hopefully 20 and 30 and 40 deals, we will be looking at differently in trying to get as much equity in what we think are the (inaudible) successful businesses.

What's happening over there today, there's an amazing amount of young entrepreneurs in their 30s and 40s that are starting to explode across the country. And we see just so many different good opportunities, and they're all looking for an American brand for legitimacy, and they all know that what Silas has done over the last 20 or 30 years or so. We're getting so many great companies that want to join Iconix China.

But the other strategy is we don't only see that with our 16 brands today and hopefully our 20, 30, 40 down the road, we've been approached by other brands that would want to join Iconix China and help us monetize their brands throughout China. So we see it as a big strategy and some that could be very exciting for us.

And, Mark, I would add, we might also look to acquire brands in the region, whether it was other Asian brands that we felt had a lot of opportunity in the Chinese market or if there were local Chinese brands. So as we've been acquisitive here, that's an opportunity for the JV as well.

That's what I was wondering, how broad it is. It sounds very interesting, thank you.

One other question as it relates to your other potential acquisitions. Would it be in lines that -- I think you sort of touched on this before -- lines that you're currently in, the juniors business or the sports wear business or the home, or are you thinking about broadening out to other potential lines?

We're looking at a lot of deals within our -- that we've done in the past and we've also looked in a few in other areas that are phenomenal iconic brands, that have great royalty flows, with great retailers. But it's a little of both or maybe more where we've been, but there's also a couple of really exciting brands outside in new territory.

Thank you.

Your next question comes from the line of Shawn Martin of Piper Jaffray. Please proceed.

Good morning. With the mention of challenging, that whole environment, kind of the Penneys and Kohl's and mentioning of Bongo and Mudd kind of suffering a little bit in that particular area, can you talk about what the kind of -- are there floor space losses that are happening as those particular brands move more towards private/exclusive labels? Or is it just weakness in the categories in terms of traffic?

I think it's generally weakness across the stores. What's happened with people like Kohl's and Target with Candie's and Mossimo, these are great, great retailers that are -- the consumer is difficult as we all read everyday ad nauseum. But we do believe it's going to come back, whether it be in for fall or whether it be after the election. These are great retailers that are really strong. And with their traffic will come back our businesses. And so we feel it's a temporary lull in base consumer products.

Okay. And then quick question on Mudd and Bongo, what -- can you -- do you know the percentage of your business that was Mudd and Bongo last year versus what it was the last trailing 12 months?

Yes. They're very small. I mean -- and we're pretty much even. We're not that far off. We've had some really good, strong footwear businesses in both brands that are both growing.

Okay. And then also on Rocawear, it sounds like Danskin Now is going to be a pretty big win, the orders up over double of last year. Can you talk about how Rocawear, because we're lapping kind of this year anniversary year and I think the initial goal was supposed to be close to $43 million a year. It's -- are we close to those targets? And we mentioned that it was soft, but I mean, what's the order of magnitude that we're looking at there?

Yes. Rocawear in year one was very, very close to our targets. It was just slightly shy. And overall, the business is good. I mean, the core men's business in the first quarter was a little bit weak. But as I mentioned on the call, the women's and the kids' businesses were fine, and our Rocawear footwear business is actually doing incredibly well.

And looking to the back half of the year, we've got this fragrance launch planned. And while that in and of itself isn't -- sales of the fragrances isn't so material, the amount that they're spending is. And so there's going to be a lot of marketing support for Rocawear this fall. And overall the, brand is in a good place. Jay-Z is more involved than ever before. He's been wearing the product on his tour. And it's exciting what's happening with the brand.

Okay. And then, stripping up the $2.1 million in non-cash for Q1 for EBITDA, I get something around 73%. Is that kind of the new kind of run rate or is 75% still the target for margins on that number?

No, we're going to have -- we're going to have that non-cash increased executive comp for the rest of the year. So our run rates will be in the low 70s. And obviously, as we do acquisitions, we should leverage -- we will leverage up EBITDA margins.

Sure, that makes sense. And then finally, last question, on some of the accounting rule changes outside of the convert but also having to recognize not being able to capitalize cost associated with acquisitions, what is the typical cost associated with doing one acquisition, or do you have any idea of what the impact of that might be?

We don't. I mean, it's the cost associated with professional fees, et cetera that will have to be capitalized and we'll just negotiate that and deal with that. It only begins in 2009. So again, it doesn't affect anything in '08 or anything we done. It will be grandfathered. So we'll obviously go with it as it comes.

Okay. But looking back historically, it's a percentage of the overall deals you've been doing, like what is the standard? Is that fair?

I think that's fair. But basically they vary to every deal, some -- like for instance when we bought a public company, Mossimo, it took six or seven months and the costs were a lot higher. Then when we bought a private company, it went very quickly.

So I think each of the cost will be different. And based on the new rule in '09 when we do acquisitions, we're just going to have to look at them differently and tap the professionals and do some other things to make sure that the costs are in line.

Okay, great. Thanks for the color.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of [Vanessa Miranda] of Stanfield Capital Partners.

Hi, this is Amy Bloom at Stanfield. To follow-up with your EBITDA margin question, your SG&A was up in the quarter. I'm assuming it's from the Starter acquisition. Did you expect it to be at that run rate for the remained of the year on a percentage of sales basis? Thank you.

Yes, pretty much, that should be at a percentage of sales basis. It should stay pretty constant. I mean, we did say we have slight favorability in Q2 and Q4 from an advertising. But it should stay basically the same.

And that assumes a fragrance launch in, I'm assuming, the third quarter?

Right. The fragrance launch is actually the licensee is doing the launching, so that's not -- that's specifically not our advertising cost. That's the Rocawear licensee that's actually going to incur those expenses.

Okay. Thank you.

Sure.

You have a follow-up question from the line of Todd Slater of Lazard Capital. Please proceed.

Thanks a lot. I just wanted to sort of button down the China structure again one last time. Is it fair to say that similar to the U.S., Iconix China will have full access to all the IP current and also anything in the future?

Yes. The future IP will come in -- the JV will have to pay for it based on some sort of formula and an allocation of the value of the IP in China when we do the acquisition.

Okay. And then -- so Iconix China then licenses the brands to retailers and wholesalers in an exchange --?

No, Todd, let me stop you.

Yes.

Iconix China sells the brands for an equity stake in companies that are we think exciting and growing in China, and therefore we have ownership and not royalty coming to us.

Okay. So they're only selling them for equity, there is no royalty stream associated with it. They can't -- they're not doing it in combination.

Some of the deals we've done already prior to this new strategy that we've developed with Silas and his team do have royalty. So there will be some royalty that's happening. And possibly the JV might decide to do some royalty, but basically the strategy today is to own equity in these companies that are growing so quickly over there and that are monetizing through the Hang Seng.

All right. So, Iconix China is going to be sort of a conglomerate, mini Warren Buffet, if you will, equity holdings of growth companies in the space in China, retail and wholesale in China.

That sounds great. Compare me -- compare us to Warren, we're there.

All right. And they could eventually monetize through some kind of a listing as well given their own -- given, you know --?

Yes, that would be our goal -- that would be our goal, is to, possibly, to monetize all of the holdings in the future.

Okay. And is that the same kind of structure you're considering for India, for example, or would that be a different model?

Yes, not necessarily, Todd. Right now we're in talks with three different people in India, and we just don't know the answer to that question yet. It could be something more traditional and licensing based, but it could also be similar to what we're doing in China.

Great. Thanks. And best of luck.

Your next question comes from the line of Barbara Miller of Federated Investors. Please proceed.

Thanks. I have one more China question as well, just to clarify. When you're talking about growth companies in China, are you talking about the kinds of companies that are developing brands, just as an example, like a Limeng, and then sell them to franchisees that operate stores and they operate their stores? Are you talking about companies that are the franchisees that are operating stores or spaces in China? Can you put any more context to the types of growth companies that you're actually talking about?

Yes, Barbara, I think Limeng is too big a company. We're looking at --

No, I was just using that as an example of --

They're, as Neil mentioned, they're operating companies, smaller than Limeng. A lot of them are already retailers with maybe 50, 100, 200 specialty stores or points of distribution. And that's really the sweet spot. Those are the types of companies we're looking at.

So, they have a brand and a space.

They may. They may have brands that they own. But Neil also mentioned earlier, there's a desire over there for American brands, western brands that have more cache and higher perceived value. So, approaching companies like that that may have their own brand but would clearly want a western brand and they have some infrastructure and can bring our brand to market quickly.

So their expertise is maybe the distribution of the brand. You have the brand and there's a partnership there which is what you're talking about.

Correct. They're the operators.

All right. Great. Thank you.

And there are no further questions at this time. I'd like to turn the call back over to Mr. Neil Cole for closing remarks.

Okay. Once again, thank you all for your interest. And management will be available today if there's any additional questions. We look forward to speaking to you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.