Rocky Brands Inc (RCKY) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands second quarter of 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 that time for you to queue up for questions. (OPERATOR INSTRUCTIONS).

I would like to remind everyone this call is being recorded. I will now to the conference over to Brendon Frey of Integrated Corporate Relations.

Thanks. Before we begin, please note that today's discussion including 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 31st, 2006.

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

Thanks, Brendan and thank you and thanks for everyone for joining us this morning to review our second-quarter results.

With me today on the call are David Sharp, our President and Chief Operating Officer and Jim McDonald, our Chief Financial Officer and Treasurer.

As you saw from our release issued earlier this morning, second-quarter sales increased 2.6% to $58.1 million. However our earnings were down as we reported a net loss of $1.4 million or $0.25 per share versus a loss of $0.04 a share a year ago.

Our topline performance was below our expectations, primarily due to weaker-than-expected wholesale sales, partially offset by 16% gain in our retail division -- while our bottom-line missed our projections due to the decrease in gross margin as a result of increased production costs, and higher closeouts. That said, there was some positive takeaways from the past several months that have us confident about our growth prospects and our ability to drive the improved results in the back half of this year and beyond.

These include the refinancing of our long-term debt. In May we executed a $40 million private placement of senior term notes that allowed us to repay all outstanding amounts under our senior term loan which approximated $31 million. While we did incur a non-cash charge of approximately $800,000 or $0.09 per share associated with retiring loans, this restructuring provides us with additional working capital to help fund our growth plans and allowed us to lock in at a fixed interest rate on a good portion of our long-term debt.

Secondly we ended the second quarter with a backlog number that was up over $10 million versus year ago. Importantly, the majority of these orders are scheduled to be delivered over the next three to four months, including several new and innovative products in our work and hunting footwear and apparel segments that we believe will help our brands gain a key share of their respective markets.

At the same time, we will debut a new comprehensive assortment of footwear under our new license brand, Zumfoot, as we look to further penetrate the much higher -- the much larger casual footwear market. We are also increasing our distribution of Dickies with additional sales and additional doors at Sears, along with a test of 80 Kohls stores in California.

More recently we made the strategic decision to consolidate our distribution and warehousing, as part of our continued effort to reduce costs and enhance our operating efficiencies. Beginning next year, we will be shipping all domestic orders from our Company's own facility in Logan, Ohio; and we will no longer utilize our leased facility in Pennsylvania. As part of this transition we have signed a letter of intent with [Caine Distribution] to manage and operate the Ohio distribution center. Caine currently operates a Pennsylvania facility where they have done an excellent job managing the distribution process of our Georgia, Durango, Dickies and Lehigh brands. And we look forward to benefiting from their expertise on a broader scale.

Lastly as we announced this morning we have received an order to fulfill a contract to the U.S. military to produce hot weather boots for approximately $6.4 million. We are obviously pleased to have received this order and look forward to once again manufacturing footwear for our Armed Forces. Not only will this contract provide us with incremental revenue and earnings, primarily beginning in 2008, it will allow us to better utilize our Company-owned manufacturing facilities and help reduce our overall production costs.

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

During the second quarter our wholesale sales decreased 2.7% to $41.9 million, compared to $43.1 million last year. Sales of our work segment which include work footwear under our own brands, Georgia and Rocky, and our licensed brands, Dickies and Michelin, combined with our duty footwear under the Rocky brand increase slightly to $24.9 million in the second quarter compared to $24.8 million in the prior year period.

While work sales were below our expectations for the quarter, we believe momentum of this segment is building because we get sets deliver several new and innovative products across each brand. We debuted our new fall line to retailers at trade shows earlier this year and the reaction was positive. The selling period went well, evidenced by our increased bookings and we are confident in our ability to drive meaningful growth throughout the remainder of the year.

As a reminder we will also be increasing the Dickies SKU count and door count at Sears beginning in September, while at the same time conducting the test at Kohl's in 80 stores in California.

For the Western segment second-quarter sales $8.2 million versus $9.3 million a year ago. The decrease was once again attributable to the slowdown in our Durango business, which continues to be negatively impacted by a consumer shift away from fashion-influenced product.

Looking ahead we are optimistic. Comparisons for Durango will moderate and our continued focus on more basic Western footwear means that we should have improved results going forward.

Now to our hunting footwear, which was up for the third consecutive quarter. The sales increased approximately $150,000 to $5.5 million. As we head into the peak selling season for our outdoor business, we believe retail inventories are relatively clean and that the Rocky Brand will continue to occupy a leadership position in the marketplace.

Our apparel sales in the second quarter were $2.2 million compared to $2.5 million a year ago. Importantly, our backlog for apparel is up significantly over a year ago. The majority of our reengineered apparel lines are set for delivery during the third and fourth quarter.

Now looking at our retail division which includes our Lehigh retail on wheels business and two concept stores. Second-quarter sales increased 16.6% or $2.4 million to $16.6 million versus $14.2 million a year before which represents the largest quarterly sales increase for Lehigh since we acquired the business in early 2005. We have recently increased the number of trucks we have in operation to 90 from 78 and our team is doing a very good job of capturing the market opportunities created by the bankruptcy of a key competitor.

Lastly we had $300,000 in sales to the military in the second quarter compared to no sales in the prior year period. As Mike mentioned earlier we received a $6.4 million contract from the military which includes four additional option years at the same amount. We are also waiting for word on four additional bids which totaled approximately $41 million.

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

Net sales for the second quarter increased 2.6% to $58.8 million compared to $57.3 million for the corresponding period a year ago. Gross profit was $23.9 million or 40.7% of sales compared with gross profit of $24.1 million or 42% of sales a year ago. A 130 basis point decline in gross margin was primarily due to the increase in our Durango business which carries higher gross margins, combined with higher production costs and an increase in closeout sales versus a year ago.

Selling, general, and administrative expenses were $22.8 million for the second quarter of 2007, compared to $21.5 million in the prior year. Expressed as a percentage of net sales SG&A expenses increased to 38.8% of net sales for the quarter from 37.4% last year. Income from operations was $1.1 million or 1.9% of net sales for the second quarter compared to $2.6 million or 4.6% of net sales in the prior year period. For the quarter we reported a net loss of $1.4 million or $0.25 per diluted share compared with a net loss of $0.2 million or $0.04 per diluted share a year ago.

Funded debt as of June 30, 2007 decreased to $102.7 million compared to $109.7 million at June 30, 2006.

Interest expense increased slightly to $3.3 million for the second quarter versus $3 million in the prior year quarter, due to the write-off of prepaid financing costs related to the refinance of the Company's term loans.

Inventory decreased $10.3 million or 11% to $84 million at June 30th, 2007 compared to $94.3 million on the same date last year. The decrease in inventory is primarily the result of our continued focus on approved inventory management to the scheduling of receipts to more closely coincide with projected shipments and reduction of discontinued products.

Now turning to guidance. Based on current information we remain comfortable with our previously issued guidance and continue to expect fiscal 2007 revenues to increase approximately 5% and dilutive earnings per share to increased 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 and in this release. They 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.

We remain encouraged about both the near- and long-term growth opportunities for our brands and our company. Going forward we are focused on building our position in the work, hunting and Western footwear markets while at the same time increasing our presence in the apparel catalog -- in the apparel category.

We are also committed to successfully penetratomg the much larger casual footwear market and over time capturing meaningful market share through our licensed brand, Zumfoot.

For the past six months we have executed several initiatives, aimed at improving our cost structure including reducing our headcount, cutting our advertising budget, and consolidating our distribution and warehousing. We continue to explore additional opportunities to eliminate overhead in order to drive increased profitability in the years ahead.

Operator, we are now ready to take any questions.

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

Got a few questions. Mike, let me start with the new military contract. Could you give us some of the details on that? When will you start delivering the product? How much of that is going to hit this year? You know, Q3 versus Q4? What kind of margin or margin impact we might expect from that? Is that -- I would not think that with the into million dollar backlog increase. Is that correct?

That is correct. We are not showing the military order in the $10 million backlog. That is correct.

We will start to deliver that -- the first portion of that order in October, late October so you'll see some of that roughly a little less than a quarter of that delivered late this year. And it's a one year contract, a little over $6 million with four additional years that will happen we expect will happen but they have the right to execute that.

On the margin it will be close to what it has been in the past which is low single digits or high single digits in that range. Again no SG&A. The big key here, Mitch, is it helps offset our overhead cost in our factories. We got hurt with that last year and that will help us immensely.

Then on the bids you are still waiting to your backlog is there anything there that could still hit in the back half of this year?

No I don't expect -- they're so unpredictable as to when they are going to let those bids and then the fact that we got back contract a week or ten days ago and we can't recover and start to deliver that quickly. So I think I would say no. I wouldn't count on anything for this year even if we got a bid.

Then in retail you obviously had a nice increase there and it was mentioned, I think David mentioned some of that was Iron Age bankruptcy. Some of that was the new trucks. You got more trucks out there. I would think that you would -- you know an increase like that based on those two items might be sustainable going forward.

Is there anything else that benefited the retail business in the quarter or would you think that you would expect to see stronger sales out of that business in on a go forward basis for those two reasons?

Mitch, I think we are already seeing you know we were up about 16, 17% in the quarter second quarter of already seeing early on in the quarter substantially more as this rolling stock is being put into service. So we're very optimistic about being able to take advantage of this void in the market. On a trailing 12-month basis, Iron Age did $72 million. So we are optimistic about growing that business over the next three years.

So when did the new trucks come into service in the quarter? Was it late in the quarter? Or was it early, middle?

Extremely late in the quarter. Actually these were trucks that we picked up from the bankruptcy. They were the better trucks, the better lower mileage. So it was late in the quarter and of course I'm repeating but Iron Age had been dumping product below cost for the first five months of the year.

So that has been relieved and that will benefit us in the second half. And beyond.

Then your inventory at quarter end looks pretty good. Is there anything left to close out beyond what you did in the second quarter?

Very little. There's always some in this business but we have really taken care of the overwhelming inventory problems that we needed to correct.

Then last question. Question for Jim. How should we be thinking about the interest expense on a quarterly basis going forward, now that you've done the debt refinancing?

Well I mean, we have $40 million of that which you have it 11.5% fixed in there. So that will be the same every quarter of the year. And then we have some small mortgages that are about $3 million at 8 -- 8.5% and then we have our revolving line which is variable at LIBOR +2.75. And that balance will fluctuate anywhere from $50 million -- $45 million, $50 million up to $75 million with the peak being in the third and fourth quarter and the low points being in the first and second quarter.

Good luck.

David Mayer. Brean Murray.

I was just wondering if you could -- you know I missed a little bit of the conversation on the backlog. You said it was up $10 million versus last year. Is that correct?

And what was the base that that was (multiple speakers).

Received $6+ million of military.

And what was the base that is off of?

About $125 million.

And could you also -- I don't know. Could you talk a little bit about the Zumfoot and Michelin initiatives and just sort of where you are at this point and what we can expect for the rest of year?

On Michelin, we've had some good starts and we've had some disappointments. The initial factors that we were directed to source these issues from actually went bankrupt; and we moved this production to our key supplier out of Asia. So that was a little setback.

I believe we've freshened the product line with new styles. It looks exciting, we will be showing those next week. We will show those to you as well at WSA. And I think Michelin is gaining strength. I feel good about the brand overall.

On Zumfoot, once again, you'll see a new line of additional styles in Zumfoot, open-toed, sandalized footwear, some new bottoms. And very excited, he has seven stores and his buyer was here and put all of the new styles in for spring of '08.

So both of those are [teeny] quantities today. We will have a better handle on what our expectations are going forward.

Lastly, I don't know if you provide this, I may have missed this but could you sort of break out -- as far as the Western category -- how the fashion boots did versus the more core work -- the more core Western business?

Yes, I think David's got that.

Yes. Our core business was actually up in the quarter about 6%.

(OPERATOR INSTRUCTIONS). Heather Boksen with Sidoti & Co.

A couple of questions. I guess, first, given the refi of most of the debt. Can you better quantify for us what we should be looking at for interest expense on an annual basis here in '07?

Again I think (inaudible) $40 million at the fixed rate of 11.5%. I haven't done the math on that but that's what that would be looking at. You got about $3 million of mortgages at a fixed rate also of about 8.5% and then our -- the only other debt we have is our revolving debt which is at LIBOR plus. You know LIBOR is in the low 5, 5.5. LIBOR + 2.75 and that will be at its low period in January or so and it will be peak out in October. And it will be anywhere from $45 million to $75 million with more -- an average probably more in the $60 million range.

And with respect to the consolidation of the distribution center, have you guys run any numbers yet in terms of do you know yet what kind of benefit, how much money that is going to save you next year?

Yes we have and it's substantial. I really don't want to give you a number right now. There's substantial savings. I will give you a little direction. Our distribution center has been running it at under adequate performance levels. By bringing all this together we will run our -- the VC is just like a factory. If you run it 80, 90% full it's very successfully run. If you run it in the 40 or 50% range, it's a drag.

So there's a sizable savings that will see move forward.

I think the other thing that is important here is that with outsourcing the management of this that we -- Mike talked about it. And if there are any inefficiencies or other under utilization we -- the way our contract will work is we will have the fixed cost prepared for storage and shipping. So we will -- if there would be any, we won't have to take that so we will know exactly what our distribution cost is going to the on a prepared basis. So that's certainly a positive in forecasting.

And if I may, we had a contract that was in September or October of this year. So we were under contract. We couldn't make this move in the past without breaking the contract, which would have been very expensive. So we've known for some time that we wanted to make this move. But we weren't in a position to do so.

Our contract was inherited from when we purchased EJ. They had the contract with Caine in eastern Pennsylvania.

Understood. So we -- I guess when exactly is this transitioning going to start? When are we going -- will it be the first quarter '08 (multiple speakers) ?

It's actually started now in a very small way. The end of this year. By the end of this year all footwear will have been removed from Caine and moved over from eastern Pennsylvania to Logan, Ohio. It is a long slow process because it's expensive if you do it rapidly. So we have targeted the first of the year as a solid 100% kickoff. It will be -- everything will be in Logan but it actually has started now.

So it's not like it is going to be an on-off switch kind of thing?

No. No. It's -- we have got to be very careful there not to incur additional cost as we are trying to get to additional savings.

And, lastly, maybe you could help. I know the military orders are going to begin shipping at the end of this year and go through '08. Any help you can give us to timing as to when you think the bulk of that will be going?

It will be broken up. I expect it to be broken up at about -- well it's not a big order. I'm disappointed, it's not a bigger order but you've got $7 million divided by four. It is going to get -- by four quarters -- it is going to get -- or 12 months. It is going get evenly distributed over a 12-month period, pretty evenly distributed.

That's what I was hoping to find out.

Not all in one lump.

With respect to this backlog is any of that orders that might have gone into Q2 that got pushed back to Q3 or is it legitimate additional orders?

It's legitimate additional orders. Retail partners are doing the same thing that we are doing. That is they are trying to carry less inventory. So they tightly control when they will take these goods in and in the past that may have let us move them forward if we had the inventory. But that seldom happens anymore.

(OPERATOR INSTRUCTIONS). At this time I am showing no additional questions in the queue. I would like to turn the call back over the management for any concluding remarks they have.

This is Mike Brooks again and I know we will see most everybody Monday at WSA and we will answer more of your questions and sit down with everybody. So we thank you for tuning in bright and early Friday morning.

Ladies and gentlemen, this does conclude Rocky Brands' 2007 second-quarter results conference call. You may now disconnect and thank you for using AT&T Teleconferencing.