Rocky Brands Inc (RCKY) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands third-quarter fiscal 2006 earnings conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up the questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference is being recorded today.

I will now turn the conference over to Brendon Frey of Integrated Corporate Relations. Please go ahead, Brendon.

Thanks. Before we begin, please know 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 31, 2005.

I will now turn the conference over to Mr. Mike Brooks, Chairman and Chief Executive Officer of Rocky Brands.

Thank you, Brendon, and thanks to everyone for joining us to review our third-quarter performance. With me on the call today are David Sharp, President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer.

As we have previously discussed, our outdoor business has been challenging for some time, due to a number of factors, including the weather, and the increased competition. This is reflected in our year-over-year comparisons. In addition, a slowdown in our fashion-oriented Western footwear business, combined with a significant reduction in sales to the military, contributed to our revenue and earnings decline in the third quarter. Jim will review the numbers in more detail later. But briefly, total sales in the third quarter were $78.1 million, compared to $94.1 million a year ago. Diluted earnings per share were $0.76 versus $1.15 last year.

While certain areas of our business have experienced some difficulties this year, I am confident in this organization's ability to improve on our recent performance and further build our position in the industry. Our company operates a portfolio of well-recognized and established brands that have a reputation for performance, quality, comfort, durability in their respective markets. The Rocky, Georgia Boot, Durango and Lehigh--we are leaders in the outdoor, working Western, and our licensed brand Dickies is the largest work apparel manufacturer in the world.

Rocky, our performance-priced line of footwear, has a 30-year history of excellence and owns a large market share of the premium hunting boot category. Georgia Boot has been in business for 69 years, providing moderately priced, rugged work boots for farmers, ranchers and tradesmen. Over the past four decades, Durango has evolved into one of the most popular names in the Western footwear by appealing to a broad range of consumers with high-quality, value-oriented product lines. Our retail division, Lehigh, known for its safety footwear, is a leader in the occupational marketplace and is currently gaining important market share of the fast-growing, non-slip segment of the market which is trademarked under Slip Grip footwear products. Finally, Dickies, our licensed brand of value work products footwear, is a leading brand name in the work market and provides us with a large growth opportunity.

In an effort to expand our portfolio of brands and further diversify our business, we recently announced two additional licensing agreements with Michelin and Zumfoot. Michelin is one of the most recognizable and well-respected brands in the world. We believe that our ability to produce high-quality (indiscernible) footwear, combined with the Michelin brand name, will allow us to develop a broad array of footwear products, ranging from work and safety to adventure-performance. We currently offer a small line of Michelin-branded work footwear and will be introducing our new adventure product in the second half of 2007. Our licensing agreement with Sole Matters LLC to produce, market and distribute a line of women's and men's comfort-casual footwear under the brand name Zumfoot gives us entree into the $15 billion casual and dress-casual footwear category. We debuted the collection this past August at WSA, and early reactions were very encouraging. Shipments of this new product line are scheduled to begin in late second quarter of next year. At the same time, we have continued to evolve our head-to-toe strategy for the Rocky brand through the development of apparel and accessories extensions. We recently re-engineered much of the Rocky apparel line for 2007, and the feedback from our retail partners has been positive.

As you can see, we have created a solid foundation through a combination of organic growth, acquisitions, and licensees, which is supported by our well-built infrastructure and first-class sourcing capabilities. We continue to believe in the strength and the vitality of each of our brands, and we are extremely--and we are extremely focused on improving upon our position in the marketplace.

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

Thanks, Mike.

Beginning with our wholesale business, total sales for the third quarter were $63.4 million, compared to $70.7 million a year ago. Sales of our work footwear category, excluding Dickies, increased 5.5% to $19.9 million compared with 18.8 million in the third quarter of 2005. Sales of Georgia were up 3.8%, while Rocky Work was up 11.3%, which continues to benefit from our cross-selling initiatives. Dickies sales were up 8% during the quarter. For our outdoor footwear category, sales were down approximately 18% to $18.8 million versus $22.9 million in the year-ago period.

Looking at the fourth quarter, we are optimistic about the prospects for both our outdoor footwear and outdoor apparel segments, as the recent cold and wet weather across much of the country, coupled with clean inventory levels at retail, have created meaningful reorder opportunities.

Our apparel business, which includes both outdoor and work apparel, was down 16% to $8.4 million from $10 million. Again, we have seen a nice pick-up in sales of our outdoor apparel over the past month.

Western footwear sales were $9.8 million compared to 11.7 million last year. Our Durango business was down 25%, due primarily to a slowdown in sales of our women's category, while our Rocky Western business was up 8%, driven by the increased distribution in Durango accounts and the acceptance of our new technical products.

Now turning to our duty footwear category, where sales were $3.9 million compared to $4.4 million in last year's third quarter, we are pleased to announce that one of our large customers recently received a three-year contract to supply the Transportation Security Administration's workforce with Rocky duty footwear beginning in the first half of 2007.

Looking at our retail division, sales were $14.6 million, up about 4% versus last year's sales of $14 million. In just a few weeks, we will be opening another Lehigh Outfitter concept store, which will be in Columbia, South Carolina.

With regard to the military, sales were $200,000 during the third quarter compared to $9.4 million a year ago. We currently have five outstanding bids for the military that total approximately $58 million, and we will be sure to update everyone as soon as there is any progress on that front.

I will now turn the call over to Jim, who will review the financials in more detail.

Thanks, David.

As discussed, our sales for the quarter declined 17% to $78.1 million, compared to $94.1 million a year ago. Excluding the $9.4 million of military sales in the third quarter of last year, sales were down 7.8%.

Gross profit was $32.1 million or 41.1% of sales, versus $34.1 million or 36.2% of sales in the third quarter of last year. The 490 basis point improvement in gross margin was attributable to the decline in footwear sales to the military, which carry lower gross margins than our branded business. Gross margin in our wholesale business increased in the quarter to 38.5% and the gross margin in our retail business was up slightly to 52.7%.

SG&A expenses were $22.6 million or 28.9% of sales, compared to $21.8 million or 23.2% of sales a year ago. The increase of $0.8 million is the result of a shift in timing of certain advertising and professional expenses.

Operating income for the quarter was $9.5 million or 12.2% of sales, versus operating income of $12.3 million or 13% of sales. Our interest expense increased to $2.9 million from $2.5 million last year, due to an increase in interest rate versus a year ago.

For the third quarter, net income was $4.2 million versus net income of $6.5 million achieved in the third quarter of 2005. Earnings per diluted share were $0.76 versus $1.15 last year.

Turning to the balance sheet, inventories at September 30, 2006 increased to $87.7 million from $77.3 million at September 30, 2005. Our funded debt at the end of the third quarter was $127.3 million compared to $127.5 million a year ago.

Now, to guidance--we remain comfortable with our previously issued guidance for net sales of approximately $265 million for the year ended December 31, 2006. We achieved net sales of at least $265 million for 2006. The net earnings are anticipated to be approximately $1.25 per diluted share for the year ended December 31, 2006, including a non-cash charge of approximately $0.07 per share related to stock option expensing.

Rocky sales and earnings for the full year 2006 are subject to all of the risks set out in the Safe Harbor statement of this release and are also subject to audit by the Company's independent public accountants. There could 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.

Before we open the call up for questions, I would just like to reiterate that we are very confident in our ability to improve on our performance year-to-date, and we are committed to taking the necessary steps in order to reinvigorate our topline results and drive long-term, profitable growth. As we begin the fourth quarter, we are encouraged by the recent trends in our business and believe our upcoming new product introductions and expanded portfolio of brands is setting the table for a strong 2007.

Operator, we are now ready to take your questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Margaret Whitfield, Ryan Beck.

Mike, I wondered if you could elaborate on your comments about reengineering the Rocky line for '07. Then I have a few follow-ups.

The reengineering of the Rocky apparel line, I think I probably used the words last quarter that we ran into the similar buzz saw this year and late last year in apparel that we found in our hunting boots; and that was we needed to be unique and different, that our customers had access to all of those--the same raw material components that we used. So we just needed to design and get some fresher cuts, and the key elements in the product line. We've been working on that throughout this year and we just started to introduce it to our key customers in the last two months.

But this is focused on apparel, not the footwear?

Focused on apparel.

Okay, no changes to the footwear in terms of the pressures you discussed on the last call from private label?

It is similar, I mean, but we had been changing elements and designs of the footwear every year, but we were a little stale in the apparel.

Okay. I wondered if Jim could repeat what he said about Western, and if you could talk about the composition of the inventories, where you think you have excess inventory and where you hope the year-end numbers might be.

Yes, I'm going to let David speak to that and I will tell you that most of the inventory increase is in Western, but David, I will let--.

I think in terms of--do you mean, Margaret (multiple speakers)?

I missed your initial comments as to what the Western sales number was this year versus last.

Okay. Western was $9.8 million this year, versus 11.7 last year.

Okay, and most of the increase is in Western in the inventory build?

Well, it was predominantly in the women's end of the business, and we've been aware of that. We've been carrying that excess inventory. This time last year, we were under-inventoried and we couldn't service a demand, and we finally caught that demand early this year, about the same time the women's business softened. So we've been carrying that inventory. We are selling it down intelligently, I believe. I don't have an exact dollar figure. Jim, do you have (multiple speakers) Western piece?

Yes. Margaret, just to give you some numbers, at the end of June, our Western--when I say Western, I'm talking about Durango, because that's where we--on that brand. Our inventory year-over-year was up about $3.8 million and by the end of September, it was up $2.2 million. So we've been having luck in bringing those numbers down and in absolute numbers, we've brought it down a couple of million dollars since the end of June.

But we haven't done a fire sale. We've let them--we think that's the prudent thing to do right now.

Mike, you mentioned the weather trends have been favorable and suggesting potentially reorders. How would you--could you comment on what the status is of retail inventories of your hunting boots?

Margaret, the last two months have probably been the best two months that I've seen in hunting retail market in three years. I mean, it has been very positive. Now, I don't want to oversell that because our retail partners have also gone through what we've gone through a little bit with inventory in the last three years. So they've nibbled around the edges; they've taken more inventory, a little more inventory. But really what they say to me is their inventories are in great shape for next year, they are picking up a few opportunity buys, but they are going to be very, very clean for next year.

So our inventory is in pretty good shape on outdoor. I mean, I'm not saying we're going to be--we are not going to be 0 but we're going to be in better shape than we have in the past.

Okay, thanks.

John Zolidis, Buckingham Research.

I think you addressed some of my questions; I was going to ask you about the cadence of business throughout the quarter. I know you just said that the last two months have been the best two months in the last three years for the hunting business. Is that true of other elements of your business as well?

Well, I'm going to tell you that August was soft in most all of the business, work included, so there was a little softness in the heart of summer. Work picked up also, maybe not to the same extent that hunting did. Western, we talked about Western. Two-thirds of the Western scenario did very well; the only third that didn't was the women's. Rocky Western did well; Durango Western did well. We expected the women's were going to slow down some time; we just didn't know when.

So the answer is Work was good, but hunting and cold weather goods, gloves, hats, apparel, insulated footwear, was excellent.

Okay, well, that's good news. Can you give us an update on where you are with cross-selling? The brands that I guess were--that came along with the EJ acquisition into the Rocky accounts and vice versa? I guess, how much progress have we made with the cross-selling, and what opportunity remains?

Dave?

I think we've been pretty successful in the Western channel where Rocky, the Rocky Western business will grow to about we think about $17.5 million this year from 12 million, 11 million last year. We think that we've got some room to improve in the work business, and we were just busy over the past couple of months kind of reorganizing people around that to better facilitate that cross-selling, which includes an additional sales force, really, so now that we have two work sales forces around four different brands.

Okay, thank you. Then lastly, on the Dickies, can you give us an update on where the rollout and/or test of that brand with I think some--they were some big major retailers you were putting it into. Where are we with that?

Yes, Shoe Carnival, we are in all stores there. We're selling pretty well there, selling 8 to 9% a week. They are adding two new boots for spring. They are also testing our slip-resistant line in Q1 at Shoe Carnival.

At Sears, we've had continued success with the fall boots that we have in there, selling about 4 to 7% a week. We had a Work ad in October; that ran with pretty good success. We are on Sears.com starting in Q4 on all brands, not just Dickies.

Mervyns, we had a 54-store test we told you about last quarter, and that's been successful and they are expanding for spring. There was no extra money for Q4 but we did move some orders out to cover faster rates of sales.

The women's tennis store test was successful, but we haven't got that expansion test there yet. Shoe Pavilion is expanding to seven boots, all stores, for spring. Those orders are in our pocket.

So overall, we are still experiencing good feedback, generally, from the retail community on (multiple speakers).

John, we took a major step this year in the Dickies business, and our forecast for next year is also a large increase. We are on track.

Great, thanks a lot and good luck for the holiday season.

Mitch Kummetz, Robert W. Baird.

Yes, thank you. A few questions--let me start with your outlook for this year and what is implied in the fourth quarter as a result of that. I just want to be clear on one thing to begin with. You are not assuming any military business in the fourth quarter, or very little, I would think, right?

Zero, none.

Okay.

If we got it tomorrow, Mitch, we would have to buy raw material and make it, and this year is shot; it's over.

Okay. With that said, it looks like, in the third quarter, your non-military business was down about 8%. What implied in the fourth quarter, based on your full-year sales forecast, is for the non-military business to be up I guess around 8 or 9% in Q4, so a pretty nice turnaround expected there. Are you looking for more of an improvement on the wholesale versus retail? It sounds like, especially on the outdoor business--I'm trying to get a sense as to where I should be modeling the increase in the fourth quarter.

Mitch, this is Jim. Yes, I think that we are looking for--what we've been hurt with the last two quarters particularly is a year-over-year down in the outdoor footwear business and the outdoor apparel business. But some of the--particularly the outdoor footwear business in the third quarter was a little bit of a shift to the right with some of our major customers, so based on that shift and what we know we have in orders for the early part of the fourth quarter, we actually are not seeing that downturn on a year-over-year comparison in the outdoor. So you're right, that's where it's coming at in the outdoor. At worst, we see it flat and we think, potentially, it could be up in the fourth quarter on a year-over-year comparison.

Okay. Help me understand the cadence of the outdoor business a little bit. Mike, you mentioned that the last couple of months have been very good. Does that basically drive the reorders over the balance of the quarter? How important is it that November and December stay cold and wet? I mean, is that a factor as well or is that more of (multiple speakers)?

Really it isn't, Mitch. By November, by the middle of November next week, it's pretty much over. The reorders just aren't going to happen. It's coming early; it's coming in September and October is the real key. Obviously, those are behind us and we know what happened there. Cold weather, wet weather in the hunting states--Upper Midwest, South--was very important. Really, I don't want to over--it cleaned their inventory out and gave us some small opportunities. It wasn't a home run but it was a nice opportunity to pick up a few sales. They are reporting, our customers, that they are going to be very, very hungry for next year.

Okay, sounds good. Then on the margins, Jim, you mentioned that gross margin was strong in part as a result of military not really being in the numbers. But it also looks like your wholesale gross margin was up quite a bit as well. Was that really just a function of mix or are you just seeing better gross margin across the wholesale business?

I think it's a combination of both. I think I'd say more of it is about mix because we did more Work and Western business in the quarter as a percentage of the total than we did last year, if you are comparing it to last year. But we are also seeing, you know, we've been running, on a yearly basis, probably 1.5 points or so up on the wholesale business. We did some price increases; we've gotten probably some better pricing because of our volume out of our sourcing partners in China. So I think it's close to about 50-50, product mix and actually improved margins on our other businesses.

Does the favorable outdoors situation imply a pick-up in gross margin in the fourth quarter as well, or is that not really a margin factor?

No, that would be--if anything, that would probably be--would lower our margin. Historically, our outdoor products, there's more price pressure on that and we typically have our lower gross margins on our outdoor footwear product, particularly. So, that would probably, if anything, push it down a little bit, but it probably would be marginal.

Okay. Then lastly, you know, as we start thinking about '07, it sounds like there are couple of incremental pieces hitting the P&L. You've got Michelin and Zumfoot. Then Mike, if you just go over that contract within the Duty business, I didn't quite catch everything you said in terms of its timing.

When Homeland Security first put all the personnel in the airports, what was it? Three years ago or four years ago? I forget. We supplied the first footwear contract, and we are a subcontractor. Our customer, who I don't want to mention their name, had the uniform supply head-to-toe. We were the footwear in that contract. So we've been expecting and have been working to try to get a second contract through this same customer of ours. We were just notified a few weeks ago that in fact the contract has been let and we are the sole provider of the footwear.

I don't want to put a total number dollar on it yet. I mean, I know how many associates are out there and I know what it should produce, but they will go out and they will fit every associate at the airports and Homeland Security with all new uniforms.

So, it's meaningful. It's a three-year contract. It's not like a $20 million military contract. It will be smaller numbers, but it will be in the low single digit millions, not in the high, or mid double digits.

All right, that's very helpful. Thank you.

Sam Poser, FTN Midwest.

Good afternoon. Mike, you know, back a few months ago when you were saying, you know, you were confident that, prior to Q2, you were confident that the outdoor business was going to be flat to up on a year-over-year basis, and you had a tough quarter and then you've lower the numbers and now things are looking good. How much of Q4 is in now? I mean, with what's ahead of us, and you sort of hinted at it, in the next month or two months. I mean, how much can that move the needle in the outdoor business right now?

Well, I don't think I ever said it would be up. I thought it would be flat (LAUGHTER) but you know, let's not--we had a very solid October, but the hunting footwear business is still a challenge, and as I said in my prepared statement, a combination of a lot of competition and a combination of our great retail partners also in this business, direct. There's still a lot of challenges.

Are you looking down the road to--I'll use the word "reposition", I might not mean it that firmly, but to look at the brand and its positioning versus private label, versus the higher end, and shift it around and add things add more special features to the boots and so on and so forth?

I think I also said this in the last conference call, that I think the answer to what you said is yes, we are. We're looking at maybe not chasing some price points; we are looking at features and benefits. The only option we have we think to play is in the upper end of the market and the premium end of the market. We want to make sure we stay true to that.

I actually believe that we will see higher margins in outdoor in the years ahead, starting next year, because we won't be chasing these opening price points. David, you may have-?

Yes, If I could just to add that yes, with the Rocky brand, that's kind of our strategy but we are addressing the lower end, the opening price point with our Georgia brand and being pretty aggressive there, I think, in terms of pricing.

So we don't think we're going to give up total dollars but we want to carve out the upper end and the higher margin goods under the Rocky label.

Got you. Then, just one other thing on the Duty contract--a year or two ago, you announced the military contract that had to be bidded on. This doesn't have any of those potential issues, does it?

No, I mean I hope not. This was bit on, but it's really not--our customer has a contract for-- it's bid on but in a different way than the military boots were bid on.

So you feel confident--this is a--we are not going to see what happened a couple of years ago with that military--?

I was going to make a political statement, but I'm not going to. You know, assuming the Homeland Security is still here the next couple of years, they are going to need footwear and uniforms.

Okay, great. Well, I wish you the best. Thanks so much.

Heather Boksen, Sidoti & Company.

A lot of my questions have been answered, but a couple of housekeeping ones first. The 200,000 in military sales from this quarter, what was that?

It wasn't much! (LAUGHTER) We have a small order, Heather, a very small order for a special boot that we make for the military. We are the only one that makes it but it's--(indiscernible) if my memory serves me right, it's I think just $400,000 a year. It's just a very tiny, little order.

Okay, so I guess that's not--we shouldn't take anything from that, that the prospects for future military business is improving?

No. the only hesitation there, the change--we were told by the procurement officers that the new budget for '07 is in place, and we should expect, not just us, all military providers should expect contracts to start to be let in November, this November, right now. So we expect to see some contracts being let and they've just--those have dried up for almost a year. Like I say, we've got this one little special boot order that wasn't even worth mentioning, but it was in that quarter. I think we're close to receiving something.

Okay. You know, with respect to the debt right now, I assume you guys are still within all of your covenants.

Heather, we did some covenants in the third quarter, but we've received commitments from our lenders to waive those covenants for the third quarter and to amend some of them going forward.

Is to any way to know what the amended covenants will be? Can you share that?

Well, we will be sharing that. We will be publishing the amendment hopefully in the next day or so. Right now, we are still finalizing that.

Okay. With respect to the newer brands, the Zumfoot and Michelin, you said the early reaction was encouraging. Can you give us any additional detail in terms of doors or what kind of accounts we can expect that to be headed to in '07?

Heather, Zumfoot was, as you know, was targeted at primarily the Birkenstock store distribution. We feel we have been very successful in receiving orders from most of the accounts that we went after.

Michelin, the Michelin business is--we are not yet ready to show the Michelin line to the accounts. The Adventure series products, the outdoor products that we've done, will be sampled in about two weeks from now and then going on the road to show prospective accounts that line.

We have our sales meeting in ten days, and it's really premature to give you doors or numbers right now. There's a lot of hard work still that has to go on there. I think, as I mentioned in my prepared statement, the Adventure Michelin will be the second half, rollout the second--it will actually be in the third quarter. I expect some revenue in the third quarter. Zumfoot will be late in the second quarter. So it's a little premature to--they will be relatively small next year, but we will start to talk more about them in terms of doors and revenue a little later on.

Okay. You know, lastly, with respect to the retail side of the business, you know, we haven't we talked about the Work category much on the call. You know, up 4% in the quarter, kind of reverse the trends you saw the first half of the year. Can you talk about I guess what happened in Q3?

Yes. Our retail business was kind of flat in the first couple of quarters. I mean, we are actually--we see improvements. The third quarter was definitely a big improvement at 4%. You know, we are still investing in that business heavily with IT, and we see that as a very good growth platform in '07.

What's different between the first half this year and Q3 in terms of is it--?

Well, I think the economy is good. I think that there is opportunity but really it's moving into a different--footwear is moving into slip-resistant footwear more than just steel-toe work boots. It's the fast-food restaurants; it's the casinos; it's the cruise ships; it's more pairs. Typically that's a young person that's in those jobs and the turnover is quite large. So the business is changing a little bit and we're just trying to get out front with our Slip Grip product. That's also what's driving some of the Dickies. We have a similar slip-resistant sole in a Dickies product that is driving the Dickies business.

Heather, our initial plan for the business was to be up 4% for the year, so unfortunately we didn't achieve that in the first half. We're seeing some positive events in the second half, and we are achieving that. So we're hopeful that will continue through the back half of the year and into next year.

Okay, so you think this quarter was more indicative of what we can expect to see going forward out of the retail segment?

Yes.

Okay, well, thanks, guys.

(OPERATOR INSTRUCTIONS) Jim Ragan, Crowell Weedon.

Yes, just getting back to the duty boot contract, I just want to understand exactly how that works. You will be shipping that directly to the prime contractor?

Yes, we will ship that to direct-- Hi, Jim, this is Mike. We will ship it right to the prime contractor. He or they, in turn, will be supplying a head-to-toe uniform, including footwear, to the associate that's in the working.

Right, okay, great. Then other than that, on the duty side, I think you just addressed it somewhat with the Slip Grip. But can you talk a little bit about your overall outlook for the wholesale side of the duty business? Is the Slip Grip in on those black boots line as well or what kind of product enhancements have you made for that line in '07?

On the pure duty line, well, we've added some athletic influence products, light-weight flexible athletic bottoms with soft leather uppers, more like you might think of an athletic brand for police, for letter carriers, for UPS drivers. And actually, high-priced boots which we used to sell large quantities of, heavy-duty boots have changed to more flexible, lighter-weight shoes, much less revenue per pair. So we have to sell 1.5, 2 times as many pairs to keep the revenue there. So it's changing a little bit, and we're changing with it. All of those issues must carry a co-factor of friction, a similar product to the Slip Grip that we sell to the restaurant business.

Okay, great. Then also, on the Rocky Outdoor line, you talked about reengineering the apparel line for '07. My impression is that you'll be doing that as well for the Outdoor boot line.

Absolutely, Jim. My only--and probably the confusion is we were doing that on the outdoor boot line almost a year ago, to be in position. But I guess we didn't realize that we needed to do it also on the apparel side, so we started that about six months ago. The boots we started about ten months ago. So yes.

So the fact that the inventory level has been very low at the retailers and you revamping the line for next year, I mean I would imagine that you've got to feel pretty good at this point.

I feel good about next year. I don't want to oversell that, but I feel good about next year. I see an opportunity.

Okay. Then finally, Jim, maybe for you, could you talk about where the debt position might be by year-end this year?

We will have approximately, in term loans, we will have approximately 31, $32 million. I would anticipate the--hold on one second; let me just--I think I have that number here, what our projection is on that. One second, Jim. I would say we would be in the neighborhood probably of about $110 million in total debt.

Okay, thank you.

Down from what?

127 million.

At this time, we have no further questions in queue. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Well, thank you very much for listening in. We are here if you want to speak with us, and we look forward to our next conference call with you. Thank you, operator.

You're welcome. Ladies and gentlemen, this includes the Rocky Brands Inc. 2006 third-quarter results conference. If you'd like to listen to a replay of today's conference, you make dial 1-800-405-2236 and use pass code 11075298# to access the conference.

Thank you again for your participation today and you may now disconnect.