Rocky Brands Inc (RCKY) 2006 Q1 法說會逐字稿

Before we begin with our review, please note that today's discussion including the Q&A period may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to change, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties please refer to today's press release and reports filed with the Securities and Exchange Commission, including Rocky's Form 10-K for the year ended December 31st, 2005.

I will now turn the conference over to Mr. Mike Brooks - Chairman and CEO of Rocky.

Thanks, Brendon.

Welcome, everyone, to our first quarter 2006 earnings conference call. I am joined today by David Sharp, our President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer.

Our first quarter results were driven by double-digit increases in our Western footwear business as well as positive gains in our work footwear segment in our retail business. Sales in the first quarter of 2006 amounted to $57.5 million, compared to sales of $61.5 million a year ago. The earnings per diluted share were $0.16 versus $0.20 in the first quarter of fiscal 2005.

I think it is important to take into account a couple of key points when comparing our financial results on a year-over-year basis.

First, revenues for the period ending March 31st, 2006, included just $900,000 of footwear sales to the U.S. military as compared to $3.7 million in a corresponding period of 2005. Furthermore, last year's first quarter also included approximately $1.4 million in revenue from two separate sources that are not part of our business plan in 2006.

This includes the John Deere footwear license, which we acquired in our purchase of EJ Footwear in January of 2005. In August of 2005 as part of our right under the terms of the agreement, we decided to return the license to the owner rather than to continue to produce a line of footwear under the John Deere brand-name which was positioned in the marketplace to compete against the Rocky brand.

The second piece is the $1.4 million of non-reoccurring revenue from our Beacon division which is no longer a focus of our operations.

Lastly, our net income for the first quarter of fiscal 2006 includes approximately $94,000 in stock compensation expense required by current accounting standards. While no stock compensation expense was recorded in the first quarter of fiscal 2005, excluding a stock compensation expense, earnings per share was $0.18 in the first quarter of this year.

I will now turn the call over to David Sharp, who will review our performance in more detail.

Thanks Mike.

The first quarter was an important period for our Company as we began to take advantage of the recent integration of the Rocky and EJ salesforces. During the past few months, our entire staff has worked very hard to leverage our organization's current retail customer relationships and further penetrate our current account base and gain important shelf space for our entire portfolio of brands.

For example in this first quarter, 400 Georgia brand customers became Rocky-branded work accounts and 335 Durango customers now carry the Rocky Western footwear line. As a reminder, when we joined forces, EJ sold into roughly 10,000 accounts while Rocky sold into approximately 4800 accounts.

Of the total 14,800 accounts, there was overlap in just 600. So as you can see, we really are just beginning to scratch the surface in terms of potential cross-pollination.

Wholesale sales for the first quarter were $40.6 million compared to $41.9 million a year ago. As Mike mentioned earlier, our wholesale sales a year ago included revenues for approximately $1.4 million related to the John Deere footwear license and Beacon business.

Beginning with our work segment, first quarter revenues increased to $19.2 million versus 18.7 million in the first quarter of fiscal 2005. Sales of our Georgia Boot brand were up 4% or $700,000 and our Dickies business increased 43% or $400,000. And while our Rocky Work footwear was off slightly year-over-year - down approximately $200,000 in the first quarter - this was primarily due to our inability to meet demand from several of our new accounts for many of our best selling products. With that said, demand remains strong and we are now in a better position to capitalize on these opportunities.

Our Western category continued to perform well with sales increasing 27% to $11 million in the first quarter. Both our Durango and Rocky Western footwear registered solid gains, up approximately 30% and 20%, respectively. Importantly Western trends in our channels of distribution remain strong and we are committed to capitalizing on the many opportunities we believe still exist in the marketplace.

Sales of our outdoor footwear declined to $2.7 million from $4.2 million in the first quarter of 2005. The first quarter has historically been the smallest period for our outdoor products in terms of sales and profits. However, in the early part of 2005, we were able to benefit from the heavy snowfalls to drive sales of our key waterproof boots. Something that did not repeat itself again this year.

While outdoor sales were below plan for the first quarter, we remain comfortable with our guidance of flat sales to this category in 2005. Typically in the year following a long dry fall season - and remember we were coming off consecutive years where this occurred - retailers have taken a cautious stance with regard to their initial orders. Therefore we believe if we experience normal weather -- excuse me, normal weather patterns throughout the majority of our key markets during the back half of the year, we will be able to take advantage of the clean inventory positions at retail.

Now turning to our Duty category. Sales of our Duty footwear were flat versus last year at $4.1 million. However, we are encouraged by our bookings of new product for the United States postal workers which will be available in the second and third quarters.

First quarter sales of apparel declined to $1 million from $1.9 million, primarily as a result of weaker-than-expected demand for camouflage garments. Importantly though we remain confident in our aggressive growth plans for our work apparel categories in 2006.

Moving on to retail. Retail sales, which include our Lehigh business and our Company owned store located at our headquarters here in Nelsonville, were increased $60 million during the first quarter.

I will now turn the call over to Jim to discuss the financials.

Thanks, David.

Net sales for the first quarter decreased 6.5% to $57.5 million, compared to $61.5 million for the corresponding period a year ago. Decrease in sales year-over-year is primarily due to the significant decline of footwear sales to the military which were $.9 million in the first quarter of 2006 compared to $3.7 million in the prior year period.

In addition the first quarter of 2005 included the previously discussed $1.4 million of non-recurring revenue. Net income was $.9 million for the first quarter of 2006 compared to $1.1 million achieved in the first quarter of 2005 and earnings per diluted share were $0.16 versus $0.20 a year ago.

Again, net income for the first quarter of 2006 includes $94,000 in stock compensation expense required by current accounting standards while no stock option compensation expense was recorded in the first quarter of fiscal 2005. Excluding the stock compensation expense, earnings per share would have been $0.18 in the first quarter of this year.

Gross profit was $24.9 million or 43.3% of sales for the first quarter of 2006 compared to $24.2 million or 39.4% of sales a year ago. The 390 basis point gain in gross margin was driven primarily by the elimination of footwear sales to the military, which carry a lower gross margin than our branded product.

In addition, our gross margin also benefit from the mix in sales as our Western and work footwear carry higher gross margins than our outdoor footwear.

Selling and general and administrative expenses were $21.8 million for the first quarter of 2006 compared to $20.7 million in the prior year. Expressed as a percentage of net sales, SG&A expenses increased to 37.9% of net sales for the quarter from 33.6% last year. The increase in SG&A expenses is partially related to a one-time charge of approximately $.6 million related to the curtailment of the Company's defined benefit pension plan which occurred during the first quarter of fiscal 2006.

Income from operations was $3.1 million or 5.5% of net sales for the first quarter versus $3.5 million or 5.8% of net sales in the prior year period. Excluding the aforementioned one-time charge of approximately .$.6 million, income from operations for the first quarter of fiscal 2006 was $3.7 million or 6.5% of net sales.

Interest expense increased to $2.4 million for the first quarter, up from $1,9 million in the prior quarter due to the increase in interest rates versus a year ago.

Also during the quarter the Company benefited from a one-time gain of approximately $.7 million related to the sale of a Company-owned property. Funded debt as of March 31st, 2006 was $94.1 million compared to $98.1 million as of March 31st, 2005. We are comfortable with our balance sheet position as cash flows from operations are more than sufficient to cover our current interest expense and debt repayment requirements.

Inventory increased to $83.0 million at March 31st, 2006 compared to $69.3 million on the same date last year - primarily related to the increases in our Western and work footwear inventories needed to support the growth of these businesses.

Now turning to guidance. We remain comfortable with our previously updated guidance for fiscal 2006 of sales between $287 million and $292 million. And dilutive earnings per share of between $2.28 and $2.38 - including a non-cash charge of approximately $0.07 related to stock option expensing. Excluding this charge for fiscal 2006, the Company expects dilutive earnings per share to be in the range of $2.35 to $2.45.

Rocky sales and earnings for the full year 2006 are subject to all the risks set out in the Safe Harbor statement of this release and are also subject to audit by the Company's independent public accountant. So there can be no assurance that actual earnings will be as presently anticipated by the Company.

I will now turn the call back to Mike for some closing comments.

Thanks, Jim.

We are pleased with the start of our new fiscal year and encouraged by the current pace of our business. We are also excited about the opportunities our new integrated sales force has created and our commitment to building on our recent progress. At the same time there is still work to be done, creating a stronger platform to support future growth across the board and to further leverage the strength of our brands into the new products an additional category extensions. We believe our strategy is sound.

We are all confident that our entire organization is focused on achieving the goals in 2006 and beyond.

Operator, we are now ready to take the calls and questions.

Margaret Whitfield.

Ryan Beck. Good afternoon. I missed something. Could you tell me again what the work-related revenues were for this quarter?

David's got that right in front of him.

Work segment was increased to 19.2 million versus 18.7 million in the first quarter.

Thank you. And you mentioned retail was 16 million this year. Did you also tell us what it was a year ago?

It was 15.9.

15.9. Okay. Mike, I hate to bring up military but is there any update for us?

I anticipated that. Actually the update is no military contracts have come our way. We have four contracts outstanding that we have -- outstanding contracts that we bid on. They totaled $37.5 million that we are still waiting to hear on. We have two new contracts that we just received this week, totaling $15 million that we will be bidding on.

And we also got a very positive report from the contract we completed last year which was a $21 million contract. Very good report that the contracting officer would highly recommend us for additional contracts as far as on-time delivery and quality.

So the news is no hard orders, but we will have six new orders in the hopper waiting to hear from shortly.

Okay. Final question, I see you maintained your guidance for the year although you were slightly below consensus views for this quarter. Any thoughts on seasonality or where you expect the earnings to fall? Will it be a similar pattern to last year? Do you see any specific shipments that we should be aware of when we do our quarterly modeling?

There's nothing particular. I just encourage you to look at how we shipped by segment last year being wholesale, retail and military as you are building your models going forward.

Okay. Thank you.

And margins associated with those.

Yes I think we should add that I think retail is a buying close to the best and there may be some shift in second to third quarter, at the end of the second quarter into the third quarter.

Okay. Thanks.

Deena Friedman.

Good afternoon, gentlemen. A question for you. Last quarter you talked about getting reimbursed for some expenses related to that contract that was pulled. And just wanted to get the status of that.

Jim, why don't you -- ?

Yes. We had two areas that we had -- we were going to try to reimburse for. That was the raw material and work-in-process that we had on hand when the military was -- when the contract was . Canceled and then also some expenses that would have been occurring mostly going forward for severance and overhead costs and interest to cost and so forth.

We have applied for the reimbursement of the raw materials. That just happened last week sometime. We were gathering that information, make sure we had it in the correct form to be reimbursed. We are now going through that same process with trying to estimate our expenses that we are incurring -- we've incurred since January basically the 1st of this year. And we will be putting in for reimbursement in the near future for that.

And remember we were a sub on that. So we are partnering with the winner of the contract which was ADS. So we are working together with their counsel and specialists in helping prepare this document. So the short answer is, as Jim said we've sent about one-half of it in. The other half will go in any day.

Just to keep in mind that the first part of that, the inventory, does not have a P&L effect. It's just we have those on our balance sheet right now. The only expense we are incurring there is the interest expense for carrying those inventories.

So, do you think these funds will be received sometime inside the quarter or is this a long drawn out process?

I think the funds will be received this year. I don't consider that under military standards a long drawn out process. I think the second quarter may be a little wishful thinking. I'm hoping that we will start to receive funds. We have asked for fast track, so to speak.

We want those funds. They are sizable. But I would say second quarter might be a little wishful thinking. So I would think second half would be more correct.

Great. Thanks for the information.

(OPERATOR INSTRUCTIONS) Craig Kennison.

Craig Kennison. Robert Baird. Good afternoon. Could you provide an update on your apparel strategies?

Yes, David, why don't you take that one?

House strategies are all about line extension with the Rocky brand in both hunting and work. The hunting apparel, of course, is camouflage and it coordinates with the footwear and plays on the cachet that the Rocky brand has with hunters.

Then the work apparel is primarily waterproof warm work apparel. And this spring we also launched and delivered -- just beginning to deliver bug repellent apparel.

Thanks and can you comment on any momentum or retail wins in that regard?

On the bugs off?

In general on the apparel side.

Yes. We plan on growing the work apparel this year by 100%. We plan the outdoor apparel pretty flat because of the retail experience last year and it looks like that's the way it is going to play out. We are very very confident in our work apparel. And we are very focused on differentiating the product even further and broadening the product line.

If I may, one accessory note, we have been -- we are rolling out leather belts under the Rocky logo; and we are rolling out leather belts under the Georgia logo and later this year we will be rolling out leather belts under the Durango logo. That brings me to a point that -- we had talked about doing some Durango apparel, more Western influenced. But that is scheduled for next year, not this year.

That's helpful and could you discuss any changes in input cost, commodity exposure?

Nothing of significance.

And then, earlier, I missed a portion of the call but you mentioned that you had some momentum in a product but - on the demand side - but you were unable to fulfill that demand. Could you explain what happened in that situation?

We had our -- we realigned the salesforce around (technical difficulties) market segments. Work being one of those. So our work salesforce now carries Georgia work boots and Rocky work boots. And they were -- these salespeople are largely experienced Georgia salespeople and they've opened up -- I think it was 300, 400 accounts that were Georgia accounts and opened them for Rocky also. So there was a large demand for our core products in a very short period of time. Since most of all of this product is sourced in China it's a pretty long pipeline and we didn't anticipate a pretty much -- it was a 40% bookings gain (MULTIPLE SPEAKERS) in the quarter.

The work shoe buyer buys and expects at once delivery and we just depleted our inventory with all the new accounts opening and had to sit with really no inventory in some key brands - key products I should say - and we just have to play catch-up. So by the time we get the inventory in we think we will be successful. We will fill those orders and get reorders maybe another two times this year.

To you believe you lost any of those 400 accounts because of inability to deliver or might you ship in future quarters?

No. We will ship them in the second quarter and then we will hope we will add new -- additional new accounts in the second quarter and hopefully ship them. And it's a common problem when the customer's not buying futures, he's buying at once. If you get a big influx of new business as we did there with the 400 new accounts we just ran out of inventory.

Great. And the final question I had is with respect to the sale of real estate. Could you discuss the motivation behind that and whether any further real estate sales are contemplated in your guidance?

We built a new distribution center here just north of Nelsonville five years ago to take care of our needs looking forward and we had an old office facility and and old distribution center that we had outgrown. So we have had that property on the books for the past five years, using part of it, leasing it out but not using it to run the business but leasing it out. So we've had it on the books to sell for three or four years and finally completed that sale.

So that's the story on that property. But do we have additional business or property to sell or dispose of? No. That was our only piece that we were focused on getting rid of.

Okay. Thanks Mike.

[Steven Martin].

Slater Capital Management. A couple of questions. You talked about the revenue from the military and its effect on some of your other line items. Can you rough cut for us the impact military had on the income from operations last year?

Hold on one second. It generated about $.5 million to income from operations last year.

Okay so that if you didn't have the one-time charge and military was out, your sort of core business would have been something like 3.8 million versus 3 million?

That's about right. Yes.

As an aside, just as a suggestion, you could include some of the stuff that you give us the segment information - it would be helpful if you included it as a table so that we don't have to scribble it and hear it wrong.

Mike, could you comment on trials you have out there with Dickies in Georgia and some of the more mainstream channels?

Yes. I'm going to have David speak to that for you.

Steve, we are still growing at Sears. We are running about 27% ahead. We are in 650 key stores there, tracking at about 4.5 to 6% average push per week. There's a potential but not confirmed women's test in Q4 (MULTIPLE SPEAKERS) and we are also working hard with Sears.com for placement there.

At Meyers we're, in Q3, getting -- for Q3 delivery we are getting three new work boots going in all stores and the Big Five - our wholesale volume - will double this year.

At Mervyns, I think we already talked about this on the last call where we have orders for three work boots for 52 stores for tests; and that will ship in Q3 and we have a 12 store test for women's shoes. [Staphos] was just expanded Dickies and we now have 27 patterns which were added in Q1 and Q2. So we are pretty pleased with this business. It seems to be we are getting good placement, good placement with key retailers that could -- and good tests which can explode for us in the future.

Okay. Within the hunting segment, there's obviously going to be a change coming. As you know Berkshire Hathaway has a deal to buy Russell.

Yes.

Any thoughts on -- it's not -- Mossy Oak's been struggling under Russell's in that management. Any thoughts on what may happen there?

Well, I mean -- we are asking ourselves the same question. What's wrong with the hunting business? And I don't -- I'm not trying to take Russell off the hook or the Mossy Oak division, it's just a lot of inventory in the marketplace. And we are contemplating how we are going to be able to re-energize the business; and we think that's in new product, new product development. Get the excitement of the customer.

That's difficult with Mossy Oak. They've had that pattern in the market breakup for ten years and it's a little old and a little tired. So I don't know. I've got my own problems to worry about.

All right. And in terms of the composition of the inventory, you made some comments about that earlier in the presentation.

Yes. I think the composition of the inventory is just fine. I'm not overly concerned that. We've probably got -- it's fairly typical when you don't have enough of something you kind of over crank it out and I think we did that a little bit on our Western and in some of the work boot category, as well.

So I think we got good controls and we will shrink it back where it needs to be shrunk back and try to pull it forward, where we need that inventory such as the Rocky work. But I'm pleased with the quality of the inventory. I don't think we have any problems there.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS). Management, there are no further questions at this time. Please continue with any closing remarks you may have.

We thank you, ladies and gentlemen, for listening in. We will look forward to speaking with you separately and individually; and with no other questions the Operator will end the conference.

Thank you, Sir. Ladies and gentlemen, this concludes the Rocky Shoes & Boots first quarter fiscal 2006 earnings conference call. If you'd like to listen to a replay of today's conference call, please dial 800-405-2236 with access code 11059504 followed by the pound sign. (REPEATS INSTRUCTIONS)

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