Good day and welcome to the Fossil Group Q2 2016 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Eric Cerny, Investor Relations. Please go ahead, sir

Thank you good afternoon everyone. Thank you for joining us and welcome to Fossil Group's second quarter 2016 earnings conference call. I'd like to remind you that information made available during this conference call contains forward-looking information and actual results could differ materially from those that will be projected during this call. Fossil Group's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in our Form 10-K and Form 10-Q reports filed with the SEC. In addition, the company assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. Please note that you may listen to a live webcast or replay of this call by visiting fossilgroup.com under the Investors section. Now I'd like to turn the call over the company's Chairman and CEO, Kosta Kartsotis Kosta N. Kartsotis - Chairman & Chief Executive Officer: Thanks Eric, and good afternoon everyone. I will begin with a few prepared remarks before turning the call over to Dennis Secor, our Chief Financial Officer. Following his prepared remarks, Greg McKelvey, our Chief Strategy and Digital Officer, will join us for the Q&A. Our financial results for the quarter while below last year were very much in line with our expectations from both the top and bottom line perspective. We're pleased that our sales trends although still challenging remained relatively stable considering the disruptive environment. In fact despite an overall decline in sales, there are several areas of the business that performed well though they are being masked by a continued weakness in the traditional watch category, particularly among the licensed brands. We believe those areas of the business performing…

Thanks, Kosta, and good afternoon, everyone. Our second quarter performance was generally in line with our overall expectations as we delivered on both our sales and earnings goals. Given the continued pressures facing the traditional watch category, we relied slightly more on promotions and off-price channels to achieve our sales plans, yielding a slightly lower gross margin. However, we managed to offset some of that with cost reductions and deferrals. Overall, second quarter reported net sales decreased 7% to $685 million and, on a constant currency basis, declined 6%. Constant dollars sales declined in the Americas and Europe, while Asia was flat. Fossil and Skagen continued to show strength with each brand increasing during the quarter, driven by growth in Europe and Asia. And constant currency also increased 2%, while Skagen grew 7%. Each brand delivered solid growth, particularly since we were anniversarying a strong second quarter in 2015 where Fossil increased 6% and Skagen grew 21%. For the quarter, diluted earnings per share were $0.12. This compares to $1.12 in last year's second quarter. The decline from last year was largely driven by lower sales given the pressures facing the traditional watch category. In addition to the ongoing currency headwinds affecting our gross margins, our margins were lower given outlet promotions to drive sales, and we also shipped more through our off-price channels as we manage our inventory levels. Non-operating gains were also much lower this year given a relatively more stable, though still challenging, currency environment and last year's large interest rate hedge gain. From a sales perspective, Fossil grew 2% compared to last year in constant dollars. Similar to the first quarter, our Leathers category, particularly women's handbags, drove the increase in the brand. Our Fossil Watch business also grew slightly while Jewelry declined. Sales growth in…

Thank you. Thank you. And we'll go to Omar Saad with Evercore.

Thanks. Good afternoon. I guess my one question is a lot of conversation around wearables coming this fall third quarter. I didn't hear you really talk a lot about Misfit and what's been happening with that acquisition in that business, not only as a standalone brand with products and services but also the opportunity to integrate that into some of the traditional watch brands that you guys are managing. Thanks. Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Yeah. Thanks, Omar. Our investment thesis and our goals for the Misfit acquisition are playing out pretty much exactly as we had hoped. We bet our internal integration goals, and we are on track now for pretty much all of our product delivery expectations over the next several months. The next three months are really going to amount to unprecedented launch in wearables. So we'll have eight brands across three product categories, 100 SKUs, 40 countries, 20 languages, all launching in the next three months. You'll see that in two waves. The first wave will be Fossil and Michael Kors smartwatches on Google's Android Wear platform. Those will hit the market at the very end of August and early September. Coming this Friday actually you'll be able to preorder Fossil's products on our website. There'll be nearly 30 SKUs across five different product platforms across those two brands which will – that will amount to the most fashion-forward smartwatches on the market today with the styling of those two brands, customized straps and a significant amount of customization in the style of the watch faces that are truly branded. So we're really excited about that. Our wave two comes later in September and in October, some early November. And what we'll see there is hybrid smartwatches…

Thank you. Thank you. And we'll take Oliver Chen with Cowen and Company.

Hi. Thanks a lot. We had a question about the status of the inventories. It sounded like you were relatively elevated just given that you had to use promotions in the off-price channel. How do they look? And as we do think about your new guidance, can you just help us dimensionalize for fourth quarter what percentage of the revs will be connected accessories, like what needs to happen in that business for the achievability of full year guidance? And it would be great to get your sense of how this manifests in the department store channel versus direct-to-consumer, given that this is one of the biggest launches maybe you've ever done, if that's correct in terms of sales training and what linear cabinets that occupies. Thanks.

Yeah. So I'll start with the inventory question. I mean the trends were fairly stable that we saw throughout the channel for the quarter, and so relative – sell-in pretty much was consistent with sell-through. So the inventories in the channel seem pretty healthy for us right now. I think the best way to think about wearables from the back half of the year is that, if you look at the first half of the year, that for the most part, you got to factor out currency, but that establishes roughly the overall trend of the traditional business. There's a little bit of wearables that helped the first quarter and second quarter, but that really establishes the trend. We've assumed that, that general trend runs through – if you think about the top end of our guidance, that general trend runs through for the rest of the year, where you see the impact of wearables is the delta between that and what we're guiding to. So it starts, as Greg said, we're starting with rollouts here late August and early September, and then that will accelerate across a total of those eight brands by the rest of the year. So that really represents the change in trajectory is the sell-in and the opportunity for additional sell-in and preorders in the fourth quarter on wearables.

Thank you. We will now go to Ike Boruchow with Wells Fargo.

Hi, everyone. Good afternoon. Just a quick question. I think you spoke about one large brand driving the decline in the license portfolio this quarter. So I mean you said that for a while, as you think about the right size of what that brand may be, are we getting close to that point? Or would you expect maybe another 12 months or 18 months of pressure from that brand on your license portfolio? Just trying to think about holistically when you take a look at it, are we near the rightsizing of that business? Or is it still going to take some more time? Thanks. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Well, obviously we're up against some very tough comparisons, just for the sheer size of that business. Obviously in the market we're in right now – or the Watch business in addition is very tough, and the traffic is challenged anyway. It's really hard to say except that we're coming up against easier comparisons. The other thing is, as we said, we're launching more innovation and change in the product and change in the point-of-sale than we've ever done before. A lot of that's happening in the next couple months. We think that's going to be a lot of impact on that. In addition, the wearables launch we're doing there is one of the biggest launches we've ever done. There's going to be huge amount of awareness, PR, advertising, celebrity input, social media, digital, video. It's going to be very significant, and we're expecting that could change the direction pretty quickly. In addition, we still have big opportunities there in men's and in Jewelry, the brand is still very productive on a sales per foot or inventory turn basis, and we're still putting shop-in-shops globally. Asia for example is also a relatively small market, so there's long-term growth there. So I think we're looking at this brand as something that we can turn around. And to say exactly when, we're not sure, but we think we can get it going.

Our next question will come from Simeon Siegel with Nomura Securities.

Thanks. Good afternoon, guys. Sorry if I missed it. But did you quantify how much the wearables revenues are embedded in the high end and low end of the full year and Q3 guidance? And then just from your early learnings, do you have any ideas where it will resonate most, I mean maybe which customer demographic? And maybe parlaying that, which of your owned or licensed brands do you see the greatest opportunities there? Thanks.

Yeah. So first part, we didn't specifically quantify, but it really represents the change in trajectory from the first half on sales. That's probably by the best way to dimensionalize it. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Yeah. As Dennis mentioned earlier, we've got a lot of launches going in, a lot of PR, lot of point-of-sale activity. You'll see more differentiation at point-of-sale as we've been encouraging all the stores that we sell through globally that turn their departments from watch departments into wearable departments. We will know at the end of the year, when we see sales in December, we'll be able to give you better size on how big this market is, what percent of our sales is it, and how we're going forward. But we're positioning it as a game changer. We've got a lot of stuff going on. We do have the capability, potentially of reordering for holiday and that could change the direction for next year as well. So we've got a lot of things going on. In terms of what we're seeing in the market, obviously the Watch business is very difficult out there, and we think it's clearly because of this interest in technology. So our number one mission of the company is to continue to gain share in the traditional watch business. So forgetting the technology, we are launching all types of new materials and ideas and differentiation and point-of-sale. We're expanding some of our newer brands to new markets. So we're doing everything we can to change the direction of the traditional watch business. Keep in mind also that when Watch business gets tough, we gain share. So we're being very aggressive in the marketplace. In addition to that, we do think, and it just so happens,…

Thank you. We will now hear from Ed Yruma with KeyBanc Capital Markets. Edward J. Yruma - KeyBanc Capital Markets Inc./Pacific Crest Securities: Hi, guys. Thanks so much for taking my question. In terms of wearables, have you been able to get or will you have wearables placement in maybe non-traditional watch stores, electronic stores? And in terms of the sell-in process for your traditional wholesale partners, are they accepting them on kind of a very similar terms as you would a traditional fashion watch? Or are there changes that may make this cadence a little lumpier? Thank you. Kosta N. Kartsotis - Chairman & Chief Executive Officer: We are actually – the entire consumer market, as you know, is changing very quickly and our channels are changing as well, especially with the impact of wearables. We are doing testing globally in certain consumer electronic channels, CE channels, and additional websites that we had not sold before. So we are gaining additional distribution and there's huge amount of interest on those distribution points part on the interest they have in not just wearable technology, but hybrid watches. They have a lot of those CE channels have a millennial customer walking in there and they're buying wearables and phones and other devices and there's an interest there on the hybrid watch as well. So we think that we're going to gain additional distribution for that.

Thank you. Erinn Murphy with Piper Jaffray. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Great. Thanks. Good afternoon. Maybe just following up on something, Dennis, you mentioned earlier. You highlighted one of the risks of your guidance was just the supply chain and the complexity of the wearables launch just given the scale and breadth of what you are looking for this holiday. Could you just remind us what are the lead times in that business? And then what are retailers' expectations for the timeline of deliveries? Do you have firm orders on hand similar to kind of what you would typically in a holiday season or is there more at once? Thanks. Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Yeah, I'll answer. This is Greg. On terms of timelines, first, we do have firm orders. Our sell-in profits has been very robust. We secured capacity much earlier this year than you would normally in a traditional watch business to make sure that we've got component supply and manufacturing capacity, and we're pretty much hitting our ramp-ups as we would have expected. So we're going to be able to meet the firm orders that we have in place. Lead times, I don't know that we'll say specifically what those are, but I will say that our early launches with Kors and Fossil will have opportunities for replenishment and we'll be able to respond to those. We'll then learn a lot on the very back half of the year to plan next year and really continue to scale up the opportunity based on the demand we see.

Thank you. We'll continue on to Betty Chen with Mizuho Securities.

Oh, thank you. Good afternoon. I was hoping you can talk a little bit about the supply chain efficiencies I think you mentioned earlier? Can you quantify what they are, what are the sources, and should we expect that to occur on a quarterly basis going forward? Thanks.

Yeah, I mean, sure. This is Dennis. The whole organization has been looking at opportunities to reduce costs in the supply chain across a number of different initiatives. We've been working on that really all year with a pretty good line of sight on it, but just because of the timing of when inventories roll through, it takes a little while for it to work its way through the financial statements. So that's what we're expecting to see start to hit in the third quarter and then even accelerate perhaps a little bit into fourth quarter. We didn't say how big it was, but it should be reasonably impactful to our margin. We'll still see headwinds in the margin. This is one of the levers that we're pulling to try to offset some of the existing headwinds in our margins.

Thank you. And Heather Balsky with Bank of America.

Hi. Thank you for taking my question. First, just a follow up regarding the question on orders for holiday. So does your guidance for the fourth quarter reflect current orders for wearables, or is it baking in some upside? Is there upside from your guidance if there's reorders during the quarter? And then I just wanted to clarify that for outside of Kors and Fossil that the wearables that you're launching in 4Q are hybrids? Just curious when some of those other brands are interested in getting into the smartwatch products?

Yeah, on the guidance, what we've tried to do in our range is to accommodate a risk of outcomes. So we think on the higher side, we've got the ability to sell-in and then as Greg mentioned just a minute ago, there's an opportunity for some reorders. This is still, though, a new business for us. And times are tight, it's a pretty critical time of the year, so we want the range of our guidance to reflect not fully executing on that plan. So we've got – I think the way we've approached our guidance is that we expect to operate somewhere within that range. Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Okay. And on the other half of your question, first, hybrids are the right place for us to start when you begin to push multi-brand and global, because we're adding features to existing designs that can be merchandised in our stores with products that are coin cell battery-operated, it slots right into our business model from design to manufacturing to distribution, and that's why we're starting there. We're going to be able to add features at a much higher average unit retail across all these brands that will bring energy to the category, that will resonate with customers and that just simply fits our business model. So it's the right place for us to start. On smartwatches, there's a lot more scale that's required to get in that game. So we're focusing on Fossil and Michael Kors first, where we've got the broadest distribution including direct-to-consumer for both of those brands. There's a lot of demand and interest across other brands to be in the smartwatch category, so those are in our roadmap. But we're first making sure that we…

We'll continue on with Anna Andreeva with Oppenheimer. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): Great. Thanks. Good afternoon, and thanks for taking our question. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Sure. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): I guess a question on the credit agreement amendment. Just making sure, if the leverage ratio improves, are you able to buy back stock again prior to May 2018? And with a cash burn, what kind of minimum cash cushion do you need to see on the balance sheet?

So – no, for the duration of this agreement we would not be able to purchase shares. I mean what we're trying to accomplish with this amendment is really to preserve our flexibility in the last few years. There's been headwinds in the business that have impacted EBITDA whether it's currency and category pressures, and that's compressed that EBITDA which limits our access to our existing revolver capacity. On top of that, we took on debt for the Misfit acquisition. So what we wanted to accomplish here was to restore our access to our existing revolver and maintain that level of liquidity. We still are generating strong cash flows, but a lot of that's generated overseas, which is accessible to us, but at a very high tax cost. So our goal is to preserve our overall liquidity at a cost effectively as possible, and this amendment accomplishes that for us.

Thank you. Randy Konik with Jefferies.

Yeah, thanks a lot. I guess a question here. It seems like the corporation has – it's always known for being a design-driven corporation that leveraged that design skill, manufacturing marketing skill across the different brands, and now we're getting more towards a technology-driven organization. How do you think about resource allocation, and how you try to like pivot the company to get more towards that technological side of things versus the design and still embody that design ethos you've always had? And then, I guess the other thing trying to think about with the wearables and hybrid investment, how should we be thinking about resource and inventory allocation across the traditional piece of the business versus the more technological forefront of where everything is going in the market tied to the business? How should we think about how the organization is allocating those resources? And lastly, when you add 100 SKU count, what do you take away from the business from – if anything, from the traditional SKUs? Just curious. Thanks. Kosta N. Kartsotis - Chairman & Chief Executive Officer: On the first question about design, actually I think it's very interesting to watch this company be as nimble as it has and pivot in such a strong direction for our entire organization from design, branding, distribution, digital merchandising, sourcing has pivoted towards adding this capability of adding technology which is really innovation to the watch product. So our design teams for example on each brand have – with Misfit's engineering help and guidance, have developed a capability to incorporate into their design briefs the ability to put technology in there. And the design teams for each brand in addition to, if it's a licensed brand, the brand partners are very involved in building the app, so that a…

Our next question comes from Laurent Vasilescu with Macquarie. Laurent Vasilescu - Macquarie Capital (USA), Inc.: Good afternoon. Thank you very much for taking my question. What are your free cash flow expectations for the third quarter and full year? And then secondly, you mentioned cost deferrals in the prepared remarks? Can you quantify the amount in dollar terms? And how long did you defer those costs to?

So we don't specifically guide to our cash flow for the year. With respect to expenses we are constantly looking at our expense base, and some things move out quite naturally and others we'll be able to reduce. So again, we didn't quantify it. We were able to – or as we went through the second quarter reduce some of those costs in the second quarter, pulled some costs down for the full year as well to help offset what we would anticipate will be slightly weaker gross margins for the rest of the year. So that's why you see us still with a vision toward delivering the top end of our sales guidance, but on slightly lower margins.

And our final question will come from Oliver Chen with Cowen and Company.

Thanks a lot. Kosta, I just had a question regarding the sales and marketing infrastructure. So when you do conduct this launch and there's really unique complexity across your multifaceted approach to connected. How will sales and marketing manifest in service, just because you've had a really good history of offering very good service? Also, could you just share with us your biggest surprises in terms of Fossil Q and Misfit, like what has surprised you to the upside or not in terms of your learnings? Because you were early to identifying battery life as a pressure point, and I'm just curious about what you're seeing and how that will translate into the product you're executing on. Thanks. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Well, our sales and marketing teams globally are through education and information transfer from the design teams and from our Misfit technology team all the engineers are selling these products into the stores. There's a lot of videos and instruction about how to do this. There's going to be a lot of point-of-sale activity. There's a lot of training for sales people that we're embarking upon, so there's a whole integrated approach. It's done through our normal sales and marketing teams. The only thing I'd say about our sales and marketing team is they've picked up the Misfit brand and they're selling to – we're getting tests in almost every store we sell through globally, so we're getting the ability to leverage our distribution channel to put more Misfit products in there. And then we do have a somewhat of a new channel with the CE channels, so our sales and marketing teams are also taking that on. We've added some additional resources for that and we've taken some people from Misfit to…

Thank you. And at this time, I'd like to turn the conference back over to Mr. Dennis Secor for any additional or closing remarks.

So thank you all for joining us again today. We look forward to speaking with everybody again in November. One note, while we haven't yet confirmed the date for the third quarter release, we do plan to adjust the calendar so that it doesn't fall on November 8, which is the U.S. Election Day. So we'll be sure to announce that a week or so in advance. So thanks again for participating.

Thank you. Ladies and gentlemen, once again that does conclude today's conference. Thank you all again for your participation.