Rocky Brands Inc (RCKY) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands fourth quarter and fiscal 2006 year end 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 for your questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded today.

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

Thanks. Before we begin, 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 31, 2005.

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

Thanks, Brendon. Welcome and thank you, everyone, for joining us this morning to review our fourth quarter and fiscal 2006 performance. I'm joined today by David Sharp, our President and Chief Operating Officer; Jim McDonald, our Chief Financial Officer and Treasurer.

As you saw from our press release issued earlier today, we reported fourth-quarter sales of $70.6 million and full-year sales of $263.5 million, which was slightly below our projection for sales of approximately $265 million for 2006. The sales shortfall in the fourth quarter was primarily related to weakness in our women's Western fashion business. As you may recall, women's Western boots enjoyed a very strong year in 2005, creating a tough comparison this past year. We had budgeted this business to be down in the back half of 2006, as fashion trends have changed.

With regards to earnings, we reported a net loss of approximately $78,000 or $0.01 per diluted share for the fourth quarter, and net income of $4.8 million or $0.86 per diluted share for the full year. Included in our fourth-quarter and full-year results is a non-cash impairment charge of $800,000 or $0.09 per diluted share, reflecting the write-down of intangible assets related to our Gates trademark.

The lower sales volume I just discussed contributed to about one-third of our earnings miss. In addition, our SG&A came in above forecast, as we incurred higher levels of marketing and advertising expenditures and an increase in healthcare benefits.

Lastly, our interest expense was up, driven by both an increase in borrowing and a higher interest rate versus a year ago. We are clearly disappointed in our fourth quarter and fiscal 2006 performance. However, there are some highlights that I believe deserve mentioning from the past year, beginning with our Dickies Footwear business, which posted a 45% gain for the year, as we benefited from a broader product assortment and increased shelf space at several of our retail partners.

Additionally, we announced license agreements for the development and distribution of two additional footwear product lines under the Zumfoot and Michelin brand names. While it is still very early, we are encouraged by the opportunities we believe exist for both Zumfoot and Michelin going forward.

Before I turn the call over to David, who will review each of our operating segments in more detail, I want to reiterate that this management team is very focused on turning our business around, and we are committed to improving our future performance and delivering consistent sales and earnings growth in the years ahead. In order to invigorate our top line, we recently integrated our sales department, so as to better capitalize on branded relationships at major accounts.

We also introduced a new sales management incentive program, in an effort to maximize our opportunities and drive increased sales throughout our organization. As discussed, we have expanded our portfolio of brands, and with the addition of Zumfoot, we open up new channels of distribution for our company in the casual, dress casual and leisure footwear categories, which, combined, make up more than half of the $30 billion non-athletic footwear market.

We are also exploring all other options aimed at reducing our fixed costs to improve our leverage and drive increases to our bottom line. We recently made the decision to trim our headcount, marketing and advertising expenditures for 2007 to effect a $2 million decrease annually, and we are confident these cuts will not negatively impact our brands' performance.

David?

Thanks, Mike. For the fourth quarter, our wholesale sales increased 8.1% to $56.1 million, compared to $51.9 million last year. This is the first time in 2006 sales in our wholesale segment were up year over year, giving us a heightened degree of confidence about this business as we head into 2007.

For the full year, our wholesale sales were $203.2 million versus $209.9 million a year ago. The decrease was primarily attributable to a decline in our outdoor footwear and apparel segment during the first nine months of the year, coupled with the slowdown in our women's Western business in the fourth quarter.

Sales of our work segment, including Dickies, were $25.6 million in the fourth quarter, compared with $25.3 million in the prior-year period. For the full year, sales increased 3.5% to $87.7 million versus $84.7 million in 2005.

Our Dickies business more than doubled in the fourth quarter to $2.1 million, and was up 45% for the year to $8 million, as we continue to expand our distribution within Sears and other national retailers like Mervyns and Shoe Carnival. We're also pleased to report that we just signed up Kohl's for an 80-store test in California during the back half of 2007.

Our Rocky branded work footwear was also up in 2006. However, Georgia, our largest work brand, was down slightly. That said, we recently completed several trade shows, including WSA and SHOT, and the response to our new Georgia product was very positive, evidenced by a meaningful increase in our current bookings for fall 2007.

For our Western segment, fourth-quarter sales were $11.5 million versus $12.4 million a year ago, with the decrease coming from the aforementioned slowdown in our women's business. In 2006, sales increased 2.5% to $41.3 million from $40.2 million in 2005. Looking ahead, we are now solely focused on the core basic footwear within this segment, which is really our sweet spot and a much more stable business compared to the women's fashion business.

Turning to the outdoor footwear segment, fourth-quarter sales increased 19.4% to $8.6 million versus $7.2 million in the fourth quarter of 2005, which was our first quarter of positive growth in 2006 for this business. However, for the year, sales were down 15.1% to $35.4 million, compared with $41.7 million in 2005.

Our apparel business, which includes both outdoor and work apparel, was up over 90% in the fourth quarter to $4.2 million from $2.2 million in last year's fourth quarter. Like our outdoor footwear, this was apparel's first positive quarter, following nine months of declining sales. For the year, apparel sales were $16.2 million versus $19.3 million the year before.

We believe our fourth-quarter performance reflects the progress we have made reengineering the entire product line, incorporating more technical fabrication and design. We begin this year encouraged about our prospects for this business, particularly as we just secured distribution in the Dick's Sporting Goods chain and others.

Our duty footwear category posted a sales gain of 4.7% in the fourth quarter, with sales of $4.5 million versus $4.3 million in the last year's fourth quarter. For the year, duty footwear sales increased 2.3% to $17.3 million from $16.9 million in 2005.

Looking at our retail division, which includes our Lehigh "Retail on Wheels" business and two concept stores, fourth-quarter sales were essentially flat at $14.4 million versus sales of $14.3 million the year before. In 2006, retail sales were up slightly to $59.2 million, compared with sales of $8.4 million.

We have worked hard to improve the operating platform of our retail business, in order to drive increases in sales and profitability. Having owned this business for two years now, we have a better understanding of how it operates, and we believe we are in a much better position to capitalize on our future prospects compared with a year ago. In fact, Lehigh's biggest competitor in the safety shoe market, Iron Age, recently filed for bankruptcy protection. Therefore, we believe there is meaningful opportunity to capture market share in 2007 and beyond.

With regard to the military, we had $0 sales in the fourth quarter, compared to $8.7 million in the fourth quarter of 2005. For the year, military sales were approximately $1 million, compared to $27.7 million last year. On top of receiving no military bids in 2006, we are still working to recoup the cost for the raw materials and work in process we purchased for the aborted contract for hot weather boots that the military canceled early last year. We're confident we will receive payment for these materials. However, in the interim, we have been paying interest on $2 million.

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

Thanks, David. Net sales for the fourth quarter decreased 5.8% to $70.6 million, compared to $74.9 million for the corresponding period a year ago. It is important to note that the fourth quarter of 2005 included $8.7 million of footwear sales to the military, compared to $0 footwear sales to the military in the fourth quarter of 2006.

Gross margin was $28.2 million or 40% of sales for the fourth quarter of 2006, compared with gross profit of $27.2 million or 36.3% of sales a year ago. The 370 basis point gain in gross margin was primarily due to the decrease in shipments to the US military in the fourth quarter of 2006, compared to the fourth quarter of 2005, as military boots carry a lower gross margin than our branded products.

Selling, general and administrative expenses were $25.2 million for the fourth quarter of 2006, compared to $21.2 million in the prior year. Expressed as a percentage of net sales, SG&A expenses increased to 35.7% of net sales for the quarter from 28.3% last year. The increase was primarily as a result of higher payroll healthcare costs, licensing fees, trade show expenses and distribution expenses. In addition, we recently conducted our annual evaluation of our intangible assets, which resulted in a non-cash impairment charge of the Gates trademark of $800,000.

Income from operations was $3 million or 4.2% of net sales for the fourth quarter, down from $6 million or 8% of net sales in the prior-year period. The fourth quarter reported a net loss of $78,000 or $0.01 per diluted share, with net income of $2.6 million or $0.46 per diluted share a year ago. The non-cash trademark impairment charge reduced net income by $500,000 or $0.09 per diluted share this year.

Net sales for fiscal 2006 decreased 11% to $263.5 million, compared to $296 million for the corresponding period a year ago. It is important to note that fiscal 2005 included $27.7 million of footwear sales to the military, compared with $1 million in 2006.

Gross profit was $109.3 million or 41.5% of sales for fiscal 2006, versus $112.2 million or 37.6% of sales in fiscal 2005. A 390 basis point gain in gross margin was driven by the reduction in footwear sales to the military.

Selling, general and administrative expenses were $90.4 million for fiscal 2006, compared to $83.2 million in the prior year. Expressed as a percentage of net sales, SG&A expenses increased to 34.3% of net sales from 28.1% a year ago. The increase was primarily the result of higher payroll and healthcare costs, trade shows expenses, marketing and advertising expenditures, professional fees and the Gates trademark impairment charge.

Income from operations was $8.9 million or 7.2% of net sales for fiscal 2006, compared with $28.1 million or 9.5% of net sales in the prior-year period. Net income for the full year was $4.8 million, compared to $13.0 million in the full year of 2005. Earnings per diluted share were $0.86, compared with $2.33 from a year ago. The non-cash trademark impairment charge reduced net income by $500,000 or $0.09 per diluted share this year.

Funded debt as of December 31, 2006, was $110.5 million, compared with $105.4 million at December 31, 2005. Interest expense increased to $3.3 million for the fourth quarter, up from $2.7 million in the prior-year quarter, and increased to $11.6 million for the year ended December 31, 2006, compared to $9.3 million for the year ended December 31, 2005, primarily due to the increase in borrowings and interest and an increase in interest rates versus a year ago.

Inventory increased to $77.9 million at December 31, 2006, compared to $75.4 million on the same date last year.

Now, turning to guidance, based on current information, we currently expect fiscal 2007 revenues to increase approximately 5% over 2006 levels, and diluted earnings per share to increase approximately 35% over 2006 levels. Rocky's sales and earnings growth targets for the full year 2007 are subject to all the risks set out in the Safe Harbor statement in this release, and are also subject to audit by the Company's independent public accountants. So there can be no assurance that actual earnings will be as presently anticipated by the Company.

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

Thanks, Jim. Despite our recent performance, we remain confident about our long-term prospects for our portfolio of owned brands, which include Rocky Outdoor, Georgia Boot, Durango and Lehigh. At the same time, we are optimistic about the near-term prospects for our license brand Dickies, particularly in the mass market channels, where, as David mentioned, we have recently secured distribution in Kohl's beginning late this year. Our Dickies footwear now sells in key retailers such as Sears, Mervyns, [Meyers] and Big 5 Sporting Goods.

We're also encouraged by the initial feedback from retailers about our Zumfoot and Michelin product lines. We will soon begin delivering our spring line for Zumfoot, which include initial distribution and strategic targeted independent footwear retailers across the country. For fall, we're also expanding the line, and we are working to add new accounts in additional doors.

We also recently began to ship our new line of Michelin work products, which focus on specific industrial professions, primarily in the indoors. So there is minimal overlap with our other work brands, which target outdoor occupations.

This coming year, our growth strategy also includes increasing our breadth and depth of apparel collection. Our apparel business got off to a slow start in 2006, which we believe was the result of too much inventory at retail, combined with a lack of compelling, innovative products in the marketplace. During the year, we tweaked our merchandising assortment slightly to include more technical fabrics, and witnessed a steady pickup in sales in the fourth quarter, which we believe bodes well for the category as we begin 2007.

In closing, we are confident, with our strong portfolio of brands and experienced management team, that we can improve on our recent performance and, over time, return this company to historical rates of sales and profitability. There is much work to be done, and we are committed to better executing our business plan and delivering increased value to our shareholders beginning in 2007.

Thank you very much. Operator?

(OPERATOR INSTRUCTIONS). Mitch Kummetz, Robert W. Baird.

A few questions. Let me start with your sales outlook for 2007. You're saying 5% growth. Then, you also said that you have got some goods orders coming in, at least on the outdoor business. I'm not sure how the Western orders are shaping up.

But how do you expect that 5% growth to play out over the year? Is that more back-half-weighted, given the strength of the fall orders on outdoor? I'm not sure how you would expect to see the benefit of Iron Age play over the course of the year. Could you just talk a little bit about that 5% growth from a first half/second half standpoint or even quarterly, if you would?

That's a good question, and I'm going to let David field that one, David Sharp, a little bit.

A lot of the increases in our order book we're seeing are going to be in the third and fourth quarter, orders for the third and fourth quarter. You even heard Mike talk about the test at Kohl's, the 80-store test at Kohl's. That's even third quarter. That's fourth quarter; it's October.

I think we're very optimistic about this opportunity that Iron Age is handing us, but they have a lot of inventory, and they are in the process of running that inventory down. So I think our salespeople are out there. We're seeing some of their customers come online, but it will be 90 to 180 days before we actually makes sales with them.

Generally speaking, our work shoe business is pretty steady year-round in all the categories. We talked about the overall success, the 45% increase, in Dickies last year. That's going to carry forward nicely throughout the year. Our work brands are going to do -- are performing -- we see the bookings are up substantially, but they go completely through the back half of the year, and we're excited about that. I think, to be frank with you, a 5% increase is modest, and we are going to be conservative.

In terms of the SG&A outlook for 2007, I know it was mentioned that you have got about $2 million that you're pulling out of your fixed costs, in terms of reduced marketing and headcount. If I calculate, based on your sales and your earnings outlook for 2007, if I'm doing the math right, it looks like maybe there's about a 140 basis point improvement in your operating margin, which about 70 basis points or so might be that reduced marketing and headcount.

Is that about right? If that's the case, where exactly is that money coming from, in terms of what positions are you cutting, what marketing are you cutting? Then, aside from those two items, where else would you expect to see some improvement, in terms of your op margin in 2007 versus 2006?

I think that the math sounds right on that. The function of the basis points improvement in the operating margin comes from two things -- the increased sales and leveraging those fixed costs over a bigger base and the increased gross margin on those, as well as the reductions that we just talked about. So I think that when you do the math on those, that probably sounds about right on the increase in operating margin.

Anything happening mix-wise that would affect the gross margins in 2007?

Not significantly. I think the biggest change we had this year was that we are -- in 2006, that we didn't have any military sales, which -- that really accounted for most of the increase. However, I will tell you that I wouldn't anticipate an increase in gross margin as we move into 2007, because we're seeing a lot of the positive gains in outdoor footwear and the apparel business, particularly some of the apparel business that we have with Wal-Mart, some of our lower-margin goods. So I think we will hold steady, but I wouldn't anticipate an increase there.

To add a little bit on the reduction of headcount, we looked at every department in the Corporation. We didn't just load up on one or two. To be frank, again, in some departments, we're going to add a few heads, so the $2 million that we spoke about that we are -- that's a net reduction that we're going to annualize. So it came from a combination, is where it came from, and some departments that we felt we needed some more muscle in we didn't touch, or we're anticipating adding a few people.

On the advertising, again, we didn't think we just needed to focus on one big chunk. We just said we're going to spend less advertising over all the brands, and if we think we need to spend to initiate a rollout of a brand such as Zumfoot, we will continue.

This was not a panic cut; this was the right thing to do. We're still trying to build a long-term, successful, growing business.

Just one thing to note -- the reduction in advertising expenses will basically get us back just to about 2005 levels, or just slightly below, so it's not like we're slashing and burning that. It's basically returning to where we were at in 2005.

Jim, what are you looking in terms of tax rate and interest expense in 2007? It sounds like your interest expenses was a little higher than planned in the fourth quarter, so how should we be thinking about that for this year?

As far as the tax provision, we estimated 37%; we came in just slightly below that. I think we are thinking that will be steady. We may have a slight decrease from that, but I wouldn't say significant at this point. So I would say 37% is a good number to use, and that's what's in our estimates.

As far as the interest rates, we have three different loans. We have a revolving line of credit; it's at LIBOR plus 2.5%. We have a term loan that's approximately $22 million right now that is at LIBOR plus 3.25%. Then we have a $15 million term loan that's at LIBOR plus 8.5%, and then some small mortgages, about $3 million of mortgages, that are at 8.25%. That's kind of the blended rate.

(OPERATOR INSTRUCTIONS). It appears we have no further audio questions. Please continue.

Ladies and gentlemen, thank you for listening and your questions, Mitch. We're working hard. We're excited about 2007 and extremely pleased to get 2006 behind us. So with no further questions, we will end the conference call. Thank you.

Thank you. Ladies and gentlemen, this does conclude the Rocky Brands fourth quarter in fiscal 2006 year end conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 and enter the access code of 11085874. (OPERATOR INSTRUCTIONS). Thank you. Have a great day.