Rocky Brands Inc (RCKY) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands first-quarter fiscal 2007 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 the time for you to queue up for questions (OPERATOR INSTRUCTIONS) I would like to remind everyone this conference is being recorded and will now turn the conference 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, 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 the 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, 2006.

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

Thanks, Brendan. And thanks to everyone for joining us this morning to review our first-quarter results. With me today on the call are David Sharp, President and Chief Operating Officer and Jim McDonald, our Chief Financial Officer and Treasurer.

We are pleased with our start of fiscal 2007, particularly our top-line performance. During the first quarter, our sales trends were similar to what we experienced toward the end of last year. Both our work in hunting categories were up, offset by declines in our Western business, again primarily on the fashion side.

While David will go into more detail in a moment, I'd like to point out that all of our work brands, Georgia, Rocky, Lehigh and Dickies were up year-over-year while our Rocky and Georgia reported positive gains in hunting. As I mentioned, Western sales were down in the first quarter; however, we did witness an increase in our Rocky Branded it Western footwear which compared to Durango is more core basic footwear and is a focus of our growth strategy in that category going forward.

With regards to earnings, there were a couple of factors that contributed to our bottom-line performance. First, our gross margin decline was a result of a decrease in Durango sales which carry some of our highest margin in our portfolio. At the same time, we made a strategic decision to liquidate a portion of our old inventory at closeout prices. While this negatively impacted our near-term results, we are committed to improving our balance sheet and reducing our inventory to more appropriate levels.

Secondly, on a positive note, we were finally reimbursed by the U.S. Military for expenses associated with the third-party contract we were awarded back in October of 2005. As you may recall, that contract was later canceled in early 2006. However, during that time we had initiated production and it had inventory in raw material and personnel for our factories. It has taken over a year to recoup our losses which totaled approximately $700,000. However, that process is substantially completed and we look forward to taking advantage of our domestic factories to once again produce footwear for the military.

Overall, we are encouraged by our first-quarter performance. And we are optimistic about our ability to drive continued improvements in our business throughout the remainder of 2007 and beyond. In fact, many of our recent initiatives aimed at increasing future sales and earnings are set to positively impact our results beginning in the back half of this year. They include new and innovative product introductions, both in footwear and apparel; a more comprehensive launch of Zumfoot into casual footwear market; increased distribution of Dickies; and a reduction in our SG&A levels.

I will now turn the call over to David who will review each of our operating segments in more detail. David?

Thanks, Mike. For the first quarter our wholesale sales increased 9.7% to $44.6 million compared to $40.6 million last year. Sales of our work segment which include work footwear under our own brands, Georgia Boot and Rocky, and our licensed brands Dickies and Michelin, and beginning this quarter, our Duty footwear under the Rocky Brand increased nearly 13% to $27.3 million in the first quarter compared with $24.2 million in the prior year period.

As Mike mentioned, each of our work brands reported sales increases led by Dickies which was up nearly 60%. We're very pleased with the recent performance of our work category and more importantly, we are optimistic about the direction we believe this business is headed.

As we announced on our last call, we signed up Kohl's for an 80-store store test in California during the back half of 2007 and more recently we secured increased distribution at Sears with our Dickies brand. We currently sell four styles in 550 Sears' locations. Beginning in September, we will be taking three of those styles to 900 doors. Furthermore, we will be adding four new models of slip resistance footwear, three men's and one women's in over 550 doors. Further, we have just received notification that our Rocky and Georgia brands will be tested in 100 stores this fall.

For our Western segment, first-quarter sales were $9.9 million versus $11 million a year ago with the decrease coming from the ongoing slowdown in our women's business. As a result, sales of Durango were down approximately $1.7 million from last year. However, this was partially offset by a 22% increase in our Rocky Western footwear. We continue to focus our time and resources on more basic Western influence footwear where our core competencies lie and where the consumer buys western boots regardless of the fashion trend.

Now to our hunting footwear which posted its second consecutive quarter of positive gains after a difficult 18-month period for this category. Sales increased approximately $400,000 to $3.7 million. And while this is historically the smallest quarter for our hunting segment, we are encouraged by the recent performance which indicates the steps we have taken to improve this business are beginning to show meaningful results.

Our apparel business which includes both outdoor and work apparel was up just over 30% in the first quarter to $1.4 million from $1.1 million a year ago. We've made significant progress re-engineering our apparel over the past year primarily by infusing the product with more technical innovation and we look forward to shipping our new offerings this fall. Importantly, we reduced a large portion of outdated apparel inventory during the quarter. So retail channels are clean headed into our key selling seasons.

Looking at our retail division which includes our Lehigh Retail on Wheels business and two concept stores, first-quarter sales increased $1 million to $17 million from $16 million the year before. Lastly, we had approximately $100,000 of sales to the military in the first quarter compared to $900,000 in the prior year period.

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

Thanks, David. Net sales for the first quarter increased 7.2% to $61.7 million compared to $57.5 million for the corresponding period a year ago. Gross profit was $26.1 million which included $0.7 million from the reimbursement of expenses from the military or 42.3% of sales compared with gross profit of $24.9 million or 43.3% of sales a year ago. The basis point decline in gross margin was primarily due to the decrease in Durango business and an increase in closeout sales versus a year ago.

Selling, general and administrative expenses were $22.3 million for the first quarter of 2006 compared to $21.1 million in the prior year. Expressed as a percentage of net sales, SG&A expenses decreased to 36.2% of net sales for the quarter from 36.7% last year.

Income from operations was $3.8 million or 6.1% of net sales for the first quarter compared to $3.8 million or 6.6% of net sales in the prior year period.

For the quarter, we reported net income of $766,000 or $0.14 per diluted share compared with net income of $893,000 or $0.16 per diluted share a year ago.

Funded debt at March 31, 2007 was $89.9 million compared to $94.1 million at March 31, 2006. Interest expense increased slightly to $2.5 million for the first quarter versus $2.4 million in the prior year quarter due primarily to the increase in interest rates versus a year ago. Inventory decreased $11.2 million or 13.5% to $71.8 million at March 31, 2007 compared to $83 million on the same date last year.

Now turning to guidance, based on current information, we remain comfortable with our previously issued guidance and continue to expect fiscal 2007 revenues to increased approximately 5% over 2006 levels and diluted earnings per share to increase approximately 35% over 2006 levels.

Rocky sales and earnings growth target for the full-year 2007 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 accountants. 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. After what was a difficult year in 2006, we are pleased to get off to a solid start in 2007. We are confident that our portfolio of owned brands, Rocky, Georgia, Durango and Lehigh in line with our licensed brands, Dickies, Zumfoot and Michelin, provide us with clear and compelling growth opportunities into the future.

We have worked very hard to outline the prospects for each of our brands and their respective markets and implement strategies in order to ensure our Company is best positioned to capitalize on this full potential. We move forward more focused than ever on a successful execution of our business plan and we remain dedicated to returning increased value to our shareholders.

Operator, we are now ready to take any questions.

(OPERATOR INSTRUCTIONS) Mitch Kummetz.

Robert Baird. A few questions and congratulations on a good quarter, guys.

Thanks, Mitch.

First of all on the military reimbursement, Jim, I didn't quite catch exactly what you were saying in your comments on the gross margin. So this was basically -- this came in on the cost of goods line? And how much was it? And are you going to see any more of this going forward?

That was, Mitch, it did come on the cost of goods sold line reimbursement of factory expenses and it was approximately $700,000 and we have the potential for some more but it hasn't been -- we haven't settled that in full so we are still working on the potential for some additional dollars.

Okay. Was this factored into the guidance? I mean the guidance that you gave on your last call which is still the 5% sales, 35% earnings, were you assuming that you were going to get some of this in that guidance or how did that work?

Yes, we assumed some of it but not -- we were conservative on that assumption. So there was some in there.

Okay. And then talk about the SG&A in the quarter. It came in on a percentage basis better than what I would have thought and some of that I think had to do with sales coming in better. I know you mentioned on the last call that you were cutting some expenses here and there. Could you just kind of go over what is happening on the SG&A line? And Mike, you mentioned that as one of the items that you guys were focusing on this year and expecting growth out of the business as a result of that. So can you talk a little bit more about what you guys are doing there?

Well, we, Mitch, we did take action and cut substantial SG&A about six weeks ago but those results really did not affect Q1. There were some severances and some -- we did it properly and businesslike but we reduced SG&A heads by about $1 million that we -- and we've also reduced our plan on advertising. So there is some major reductions in cost that will benefit us in the balance of this year.

Okay. And then on the Western business, which was really kind of the only area that was a drag on the quarter. And that was just the fashion side of it. Can you give us some idea as to how that business breaks out Rocky versus Durango and at what point do you anniversary the tough comparisons on Durango and you would expect the overall business you could start to see growth in it again?

Mitch, our Durango business for the quarter was down 22%. It was $1.7 million on a base of $7.9 million the year before. The Rocky business was up 22% or $680,000 on a base of $3.1 million. So as we said earlier, the Rocky Brand is really always been when we entered that market segment three or four years ago, we really focused on that core user in the core market. So we are still seeing expansion there.

We really had very tough comparisons to go against in first quarter and it starts to -- we'll start to see it swing back I think by the end of the second quarter that is when we started these declines particularly in the third and fourth quarter. And at the same time, we are reengineering the Durango line to be more focused around that core market also.

Okay. And then maybe a couple of last questions and maybe continue with you, David. You talked about in your prepared comments, you talked about all the distribution happening on the work side with Kohl's and Sears. Kohl's you said 80-store test in the back half. When does all the distribution kick in for Dickies and then Rocky and Georgia with Sears? Is that also back half?

Well, yes. It's really 9-1. And there's a lot of -- they're also in a lot of preprinted advertising -- they have a pretty large tabloid in the back half also that they are including us in. So it is all pretty 9-1, the Michelin and Georgia tests for 9-1. We're also in a work catalog that is in September also, so it should all hit around September.

Okay. And then I guess last question I'm trying to reconcile your full-year guidance particularly on the sales line with what you guys did in the quarter and what seems to me a better outlook in the back half then the first half. It sounds like the Western business should improve. It sounds like as I recall the orders on the outdoor business are pretty good in the back half and then it sounds like work could accelerate with some of this new distribution.

So, help me understand why you guys came in sales up over 6% in Q1, why shouldn't we be thinking that the sales could be stronger for the year? Is there anything weird happening in Q1 where there was a shift in deliveries that made the sales look a little bit stronger there? I think you got an easier military comparison in the back half too, not hugely so, but a little bit, right?

Mitch, there was actually no military in the back half of the year of '06 -- so there's no comparison there. We had like $100,000 in the back half of '06.

Right. So you are not comping -- in Q1 you are at least comping up against some military business and in the back half, you are basically not.

Yes. So we are -- again a large portion of our business in our work, our Western, our businesses are at once while we seeing very positive gains in the first quarter and things look good for the back half of the year, as we were sitting here last year, we felt really good about the Western business in the first quarter but we just -- we want to give numbers that we believe are achievable. And so we sit here today feeling much better about the back half of the year than we did last year at this point. But, again, a large portion of our business is at once business.

One other thing in Q1 as we did mention, we did liquidate some inventories of some of the sales that we got in the first quarter year-over-year were sales to bring down some inventory levels and as you saw, our inventory levels went down pretty substantially in the first quarter. They were down about $7 million from the end of the year and $11 million year-over-year.

What specifically was that inventory? Was that in any particular category?

It was in our apparel business and then we also -- it was the fashion part of the business in Durango, we had to bring down some of those inventory levels that got higher as that slowed down toward the back half of last year.

Mitch, and it's really across the border. We're really focused on better logistics and inventory management and turns and we've got a specialist that has been on board for about a year and it's a combination of making a decision to get it down and to turn it more rapidly. And if I may, just throw in one more -- we mentioned this on the last call as well -- but under our retail division or Lehigh, Iron Age, the number one in volume and our number one competitor has been in bankruptcy since January. And we just learned -- we knew that was a slow process to liquidate but we think that is about behind us. We think we will capture more and more of that business in the second half as well. We know we will.

Okay. Great.

I think we're just trying to be little conservative also.

That is fair. Again, congratulations and good luck.

Thanks, Mitch.

Heather Boksen.

Heather Boksen with Sidoti. I might have missed it, did you give just total wholesale sales for the quarter?

We did. But they were $44.6 million I believe, the number. Let me just -- $44.6 million was our wholesale sales for the quarter, yes.

Okay. And I'm assuming these just going back to that military reimbursement charge, it's -- just to clarify -- it was always included in the guidance?

Yes.

Okay, so that 35% year-over-year includes the charges and it's versus last year's GAAP?

Correct, it is versus our reported earnings for last year.

Okay. With respect to Zumfoot, when are those initial deliveries going to start? And can you give us any idea of the kind of accounts we might see it in?

Yes, we shipped just a very, very small portion in the first quarter, tail-end of the first quarter. It was just to a select amount of stores. We will have a large shipment, the largest shipping period will be fall, 7, 8, 9-1. And we also anticipate based on some early reactions to our sandal line for spring, we also anticipate that we will have shipments of spring in December of this year.

And the types of stores, we've really focused on that core comfort where one might find a pedorthist on staff, that kind of distribution. We feel it is very, very important to validate ourselves there first, validate the brand there first. So perhaps one of the stores you might know is -- it is a seventh store chain out of Atlanta called ABBA Dabba's. Are you familiar with that outfit, Heather?

Not tremendously. But it's basically it's a lot of small independents, it sounds like nobody big initially?

That's correct. But that's our strategy --

But that is our strategy, Heather. You've got to start this at the -- where the real fitting occurs. These are premium shoes and fitted shoes. So that is the place to start. You won't hear any big national names to start off with. We have to have the success there first before we can look to the majors.

Okay and lastly, just one last question. Can you give us an update status I guess of any outstanding military bids just how much is out there -- just any commentary on what you guys are seeing?

Heather, we have three active bids and again, that changes throughout the year. Obviously we haven't received one in over a year so -- but we have three active bids that we are waiting to hear from. One we expect to hear from any day. And it's about $50 million in total if you got all three bids. But clearly one bid is the overwhelming majority of that. And that is the big bid we are waiting to hear from. So we would hope to have something to report very shortly.

Okay. All right, thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) (inaudible).

Actually it's [Allen Tisdale] on behalf of Tony at (inaudible) Capital Partners. Great quarter, guys. Just a quick question. I may have missed this I called in a little bit late. But are you currently within your debt covenants?

Yes, we are.

Okay, that is great. Sorry, you may have talked about or you mentioned this briefly, I think you were referring to the Iron Age liquidation in the first quarter. Just wondering a bit more detail how that is affecting Lehigh if at all?

Actually once they announced -- once they announced bankruptcy they had been selling off inventory at low prices, as you can imagine. So it has had a little negative effect on the first quarter so we are eager to see them go away which we have reason to believe that will happen in the next few weeks. When I say go away, be liquidated and out of our distribution channel. That will enable us to capture more business and enhance our margins.

Fantastic. Great. Well thanks and great quarter again.

Thank you.

(OPERATOR INSTRUCTIONS) At this time I'm showing no additional questions in the queue. I'd like to turn the call back over to management for their concluding remarks.

We thank you for calling in and we look forward to reporting to you in the future. So if there's no more questions, we will get back to work. Thank you, Eric.

Thank you very much, sir.