Welcome to the Q3 2017 Fossil Group earnings conference call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Eunice Han, ICR. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group's third quarter 2017 earnings conference call. I would 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 8-K and 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 can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call in our earnings release filed on Form 8-K and in the Investor Relations section of our website. Please note that you may listen to a live webcast and replay of this call by visiting fossilgroup.com under the Investors section. Now I would like to turn the call over to the company's Chairman and CEO, Kosta Kartsotis.

Thank you. Good afternoon, everyone. I will begin with a few prepared remarks before turning the call over to Jeff Boyer. Jeff officially joined us on October 16 as our CFO and has been working with Dennis Secor during his transition into the Fossil Group. As you know, Jeff has been a member of our Board of Directors for 10 years, and we are glad to have him joining us during this crucial time in the business. His knowledge of our business model and organization has been very beneficial during his first few weeks. Following Jeff's comments, we'll have Greg McKelvey, our Chief Strategy and Digital Officer, join us for the Q&A, as well as Dennis Secor. While our business remains challenging and the retail environment remains in flux, we are pleased to deliver solid third quarter sales and earnings that align with our expectation for the quarter. These numbers reflect the focus and solid execution of our team as we transition our business, bringing innovative new products to the market and drive operational efficiencies that can ultimately enhance our profitability. There continues to be significant work ahead of us, but in the quarter, we made substantial progress against three operational objectives: to advance our wearable tech agenda; leverage scale to drive costs out of our supply chain; and to continue with the transformation of our business through our New World Fossil initiative. Beyond our operational efforts, we managed our working capital tightly, as we continue to work with our partners to support our longer-term capital requirements. As we enter the all-important holiday selling period, we are very excited about the potential of our new product launches and their ability to positively impact the business. We remain confident that wearables can be one of the key catalysts that offsets the…

Thanks, Kosta. It's great to be here with you on the call today. I'm excited to officially be on the job in my new role with Fossil. In my first few weeks, I'm very energized by what I'm seeing across the organization and the many opportunities we have in the front of us as we work to improve our product offerings, our financial performance, and our overall profitability. Before I cover our financial performance for the quarter, I'd like to share a few key points. First, during a challenging retail environment, we continue to make strong progress on transforming Fossil. This year we expect our New World Fossil initiative to drive underlying improvement in our product costs as well as significant reductions in our expense structure, to the tune of over $100 million this year on a run-rate basis. Second, in this environment, we are highly focused on improving our working capital efficiency and overall capital structure. During the past year, we have reduced our net debt by $170 million, reduced our net working capital by $230 million, and generated positive cash flow from operations. And third, as we shared with you in the past, we recognize this transformation will take time, but we are making significant progress to evolve our key categories and streamline our business to position us for profitable growth over the long term. Now turning to our financial results, third quarter constant currency net sales decreased 8% and on a reported basis decreased 7% to $689 million. Sales exceeded our expectations for the quarter, due in part to customers accelerating certain deliveries from the fourth quarter into the third, primarily to take advantage of pending price increases. We estimate that those additional sales favorably impacted the quarter sales rates by roughly 3 points, and we expect…

Thank you. We will now begin the question-and-answer session. And our first question comes from Ed Yruma from KeyBanc Capital Markets. Please go ahead.

Hey, good afternoon and thanks for taking my question. I guess I really want to click down a little bit on wearables. The performance commentary about being slightly short of goals, is that in regards to the product that was the legacy product, or how has the new product, the product that dropped in the September timeframe performed relative to expectations? And then I guess as a follow-up there, as you think about the balance between the display, smartwatch, and the hybrid, is there an opportunity over time to tilt more toward display if that's where the market is pointing toward? Thanks.

Sure. The first part, primarily, with the sell-through for older products, the generation launched last fall, the first three quarters of the year is well above our expectations. We came into the year with a revenue target that turned out was significantly higher than we were able to achieve. So that's the majority of the revenue delta versus our initial expectations. And then as we go to the fourth quarter of the year, we've launched successfully all of our new products. We're seeing some encouraging sell-through trends, although as we go into Q4, we're taking a relatively conservative approach in how we're thinking about the target for Q4, and we're just prepared to deliver on both great product, great marketing, broad distribution, and see where we land for the year. The second part, we're going to be coming out of Q4 and leading the market for hybrids versus display. I would tell you though, I think we're in the early innings of both of those categories being very material for us. We're seeing some encouraging signs in hybrids in our Fossil business, where we're seeing a high degree of penetration in hybrids and some early success there, and we're pretty excited about the innovation we have coming. So we will pivot and respond to the market trends. But right now, we're seeing encouraging trends in both categories.

Thanks so much.

Our next question comes from Omar Saad from Evercore ISI. Please go ahead.

Hey, thanks for taking my question. I'd love to hear some follow-up, Greg, on what are some of the encouraging signs you're seeing in hybrids that's giving you confidence over the long term. And then what are some of the key obstacles to get reaching a tipping point in the wearables category that you would count as material or significant enough to really start to move the P&L? And do you guys need to use social media or influencers, and do you have the capital budget to pursue those strategies well to get the word out on these products? Thanks.

Sure, a little bit more on hybrids. If you remember, we launched last year. and remember, we launched products that were typically an $80 to $100 premium over its traditional watch counterpart. This year, we've done a bunch of cost engineering and gotten the cost down so that it's only a $30 to $60 incremental up-charge versus traditional watch. Our design teams have brought great products, key selling styles now into hybrids. And so in Fossil stores, you're now seeing a roughly 60% to 40% – 60% hybrids, 40% unit sales mix versus display. So that's a good leading indicator on where that category – the balance of that category is going. And we're also seeing now that the styles are – we launched thinner and smaller styles, we're seeing female penetration increase significantly there. In terms of obstacles, we've got to create the category. It's not normal for (36:08) any other large player out there developing the category. So allowing Fossil to lead the way, a significant part of their marketing in Q4 will be against hybrids. They have influencer campaigns and social media as a heavy emphasis there. So I think category awareness is now the biggest obstacle. We've got great product, beautiful designs, a significant amount of cost out, and we're now leading the sharp price points needed to really grow the category. So it's really about awareness.

And in addition, as we mentioned before, we've got a significant amount of advertising more than last year between ourselves and our partners. There's something like 40% to 60% more marketing going out there. Most of it is based around influencers, social media, video. It's pretty incredible stuff. A lot of that just started. I think we actually started a little later this year than last year, so that's in place. One other thing I would mention, because it's very important is we talk a lot about wearables, but keep in mind that our number one objective is to gain share of the traditional watch business. We just think technology can be a catalyst for doing exactly that. And we are seeing globally somewhat of a stabilization. We saw in both Europe and Asia the traditional watch business stabilizing there. The U.S. is still a challenge because we think that that's where most of the strong competition in wearables is, in the United States. And we have identified in traditional watches a number of categories, brands in different geographies, new materials and ideas. There's a lot of innovation going on across the entire company. That's pretty exciting product coming. We do think that long term what we're doing with hybrids specifically, which is basically a traditional watch with connectivity, is bringing a younger customer into the business, and we know there's some cross-shopping going on there. The hybrid activity is really – it's a way for us to bring more excitement and a younger customer into the category, and we think we can accelerate that with new ideas and materials and products, et cetera, and that's our strategy.

Got it. Thanks for the information, guys. Good luck for the holiday.

Our next question comes from Ike Boruchow from Wells Fargo. Please go ahead.

Hi, everyone. Thanks for taking my question. I have a question on the balance sheet, I think for Jeff. So at the end of Q2, I think almost all your cash was overseas. Did you have to repatriate cash to make the debt paydown that you did during Q3? And then if I can ask, what level of EBITDA do you need to generate in Q4 such that you won't need to pay down more debt to manage the covenants in the quarter?

On your question regarding what we did at the end of Q3, we didn't have to repatriate any cash at the end of Q3 to have the balance sheet that we had. And regarding Q4, we're not anticipating having to repatriate at this point any cash for the covenants. Given our current projections right now, we seem to be fine. We do go through, as you know, a temporary paydown at the end of every quarter, and we disclose that in our reported results on that. So there's no repatriation, but there's a temporary paydown for covenant purposes.

Got it, thank you.

And our next question comes from Simeon Siegel from Nomura Instinet. Please go ahead.

Hey, guys. This is Gene Vladimirov on for Simeon. Can you speak to the differences you've seen between Kors Access and the Fossil brand wearables? And why do you think the full price sell-through is different? As you ramp up other portfolio brands, would you expect them to exhibit similar trends?

I think we mentioned this before that we've seen right out of the box, starting last year, the Kors selling extremely well. Part of that is just the average retail on Kors is higher. Obviously, it's around $250. So to go $350-$400 for a smartwatch is not as much of a lift as in Fossil, the average retail is $120 and we were going to $300, which is why we put in place some promotional activity in Fossil just to generate sales and demand and engage the customers. So that was the main reason for it.

And I would just say both brands are selling really well. So they've got unique designs. They're both getting I think better designs year over year. We've got smaller female sizes in both brands. And it's resonating, they're just different brands at different price points, both performing well.

Great, good luck for holiday.

And our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead. Erinn E. Murphy - Piper Jaffray & Co.: Great, thanks. Good afternoon. I guess my question is on just the Kors business overall. You talked a bit about it, improving to the down low single-digit rate in the quarter. Can you just compare and contrast what trends look like in that brand in Europe versus the Americas? And then just pivoting from focusing on the watch business, any comments on longer-term plans in your business for the leathers and jewelry divisions? They've both been a fairly significant drag year to date on the top line. Thanks.

We and Kors have seen stronger sales in Europe than we have in the U.S. So the U.S. is the one that has been mostly challenged. And that even continues, and we expect it will for the fourth quarter as well. In terms of leathers, we obviously had some challenges over the last probably three quarters in there. And we've mentioned before what we've done is totally reinvent the business. A lot of that came in for third quarter. We're actually seeing improvement on our own regular price stores where most of that new product is fully manifested. So we've seen quite a lot of improvement there in the fourth quarter. That will be more fully distributed around the world. So we're expecting sequential improvement, but we are seeing that happen right now. And we think long term, we have an opportunity in those categories, both leathers and jewelry. The overall handbag business has been somewhat difficult. But the upper end, as you know, is showing some signs of life and there's more interest in handbags just globally, and we think we can participate in some growth there. Erinn E. Murphy - Piper Jaffray & Co.: Great. Thank you, guys.

And our next question comes from Anna Andreeva from Oppenheimer. Please go ahead. Anna Andreeva - Oppenheimer & Co., Inc.: Great, good afternoon and thanks for taking our questions. I guess two quick ones. As you think about growth opportunity for wearables, say, for 2018, do you guys expect to expand this category across additional brands or more to drive units in the brands currently launched? And then secondly, initial thoughts of CapEx for 2018, what kind of maintenance CapEx number should we think about in the business? Thanks.

I'd make two points as we start to think about growth in wearables for next year. First, we will continue to expand the number of brands that we have on the platform. We'll continue to look for this to be a growth driver for the company. That said, as we go into next year, we now believe we got a lot of learnings for this year on how to think about product cycles and liquidation and inventory management, demand planning. We're going to implement those as we go into next year and make sure that we've got a much more conservative approach to how we think about demand planning and inventory management, especially in the first couple quarters of the year. But we are adding more brands. This will remain a long-term profitable growth engine for the company in summary. We just now have the benefit of a couple years of sales to use to project there.

One way to look at this is that if you look at our addressable market in traditional watches, it's $35 billion globally. The wearables business this year is about $20 billion globally and it's expected to grow by $36 billion by 2020. So now with the toolkit we have in place, traditional watches and a lot of competitive advantages there globally, and now with our technology capabilities to go after the wearables market, we have a much larger addressable market. And we're going to follow where the consumer takes us, and we have a good position now that we can bring technology to the fashion business and we can bring fashion to the technology business. We're very interested in how this plays out long term, but we think we're in a good position.

On the CapEx question, the question was about the maintenance level of CapEx on it. That maintenance level CapEx is about $25 million a year, and we anticipate we'll be at that level as we go forward. We're not in an investment mode right now, but more on a maintenance mode at this point. Anna Andreeva - Oppenheimer & Co., Inc.: Good, terrific. Thanks, best of luck.

Thanks.

And our next question comes from Heather Balsky from Bank of America. Please go ahead.

Hi, thank you, two questions. So first, can you talk about how your wholesale partners are managing their wearables inventory? Are they buying in line with sell-through? Are they stocking up for holiday? And that's globally. And then also, can you talk about – for the Connected business in terms of educating the customer and getting them more informed about the product? How do you overcome that in the wholesale channel where you're not controlling selling? Are you working to educate that salesforce? Is it marketing? Just how do you handle that? Thanks.

So on our wholesale business, first of all, I'd say we have a very significant amount of distribution around the world through most of our regular channels that are all prepared and they're in place. They've got fixturing. There's quite of lot of training that's going on as well, which I think we've done a pretty good job at. And in addition to that, it's not just our normal distribution but CE channels globally. There's a number of locations there also. So everything is in place. There's fixturing. There's visual presentation. There are videos in some stores. There's training in place. And we know how many doors we're in, and we are projecting sell-through percent. So our guidance is based on what we're expecting the sell-through to be in those stores. So we basically have got an indication and presentation from all our partners globally. Those are in place now. And the sell-through we get in December will determine what the shipments are from our warehouses. But I think one of the things that we've been able to do with wearables is just integrate it into our entire organization, is that from soup to nuts, from product development through all the way to point-of-sale, our training and organization, we have a global repair facility and call centers that are all prepared. We have visual presentation, our go-to-market kits, our marketing. Everything is in place. And it's not all around wearables either. We're just in place really to capture customers, whichever category they're most interested in.

Thank you.

As we have no further questions, I would like to now turn it back over to Jeff Boyer for closing remarks.

Thanks very much. I want to thank everybody for joining us on the call today. I appreciate you dialing in very much. We look forward to having you all join us in February when we cover our Q4 and year-end results. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.