Rocky Brands Inc (RCKY) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank for standing by. Welcome to the Rocky Brands fiscal 2007 fourth quarter and full year 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 that this conference call is being recorded and I will now turn the call to Brendon Frey of Integrated Corporate Relations. Please go ahead.

Thank you. 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 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.

Thank you, Brandon. Thank you, and thanks to everyone for joining us this afternoon to review our fiscal 2007 fourth quarter and full year results. With me today on the call are David -- David Sharp, President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer.

During the fourth quarter, we continued to experience mixed result as the retail business once again posted 30% plus point gains, while our wholesale sales were down year-over-year, driven by decline in our outdoor and western footwear segments. At the same time, our earnings continue to be negatively impacted by higher operating expenses primarily due to the expansion of our Lehigh retail business. Furthermore, as you saw from our earlier release, we incurred a non-cash charge related to our impairment of our goodwill that further reduced our profitability during the quarter. Our recent performance was disappointing -- was a disappointing end to a challenging year for the company.

Looking back at 2007, we faced a number of internal and external factors that contributed to create a difficult environment for several of our brands and products. Beginning with our top line, we continue to see consumer demand in the outdoor category come down across the industry. While we have reduced our expectations for the business at the start of the year, another warm, dry fall season as well, the steady -- as well as the steady increase of private label products further reduced our operations -- our opportunities in 2007. We were also up against tough comparisons in our western business, having benefited from strong fashion trends in the women's Durango business in 2006. While we continue to focus our efforts on core, basic western footwear, we were unable to fully replace those lost sales this past year.

With regards to our earnings, we have seen an increase in product -- in product costs over the past several months, from both our company owned and operated facilities and our third-party manufacturers. Pricing pressure has also impacted our gross margin in 2007. This includes a one-time price concession we provided retailers in order to increase shelf space for many of our work products, as well as a price reduction we were forced to take on our outdoor footwear due to an affirmation slowdown in the demand and increase competition in the market place.

Despite these setbacks, there were several highlights from the year that deserve mentioning. First, from our retail operations increased 19.4%, to more than $70 million in 2007. After Lehigh's largest competitor went out of business, we reacted quickly capitalize on the near-term opportunities to capture key market share. At the same time, ongoing investments in our retail platform, both in our fleet of vehicles and our eCommerce web site continue to drive meaningful gains without existing -- with our existing accounts.

In our wholesale segment, we are all pleased -- we are all pleased with our positive momentum in the work category led by Dickies brands, which grew by some 30% versus last year as a result of an increased distribution across country as we broadened the breadth and the depth of the product line. Further, we continued our entry into the large U.S. casual footwear market with the introduction of Zumfoot's first complete line. We have purposefully limited Zumfoot's distribution in early stages of the brand's development and we are very encouraged by the initial -- by the initial results and feedback from those accounts. We are committed to further expanding product offering in this line and increasing Zumfoot's door count this coming year. While long term, we believe the brand provides us with a good opportunity for growth outside of our traditional channel of distribution. We will now turn the call over to David, who will review each of our operation segments in more detail.

Thanks, Mike.

For the fourth quarter, wholesale sales were at $52 million, compared to $56.1 million in the corresponding period a year ago. And for the year, we're $202.6 million versus $203.2 million in 2006. Sales of our work segment, which includes work footwear branded Georgia and Rocky and our licensed brands, Dickies and Michelin, increased slightly to $25.3 million in the fourth quarter, compared to $25 million in the prior year period. For the full year, work sales increased to $93.5 million, up 7% from $87.3 million in 2006. The performance of our work footwear continues to be driven by Dickies, which was up 33% this past year.

We have added new styles to the collection, and increased our door count with chains such as Sears, Academy Sports, Big 5, Bob's Stores, and Shoe Carnival. Currently, we are in discussions to test the new line of footwear at both Wal-Mart and K-Mart, under the Genuine Dickies brand, the mass channel label. Meanwhile, Georgia, the largest and most mature work brand, posted a respectable 6.2% increase in 2007. Now, turning to our western segment. Fourth quarter sales were $10 million versus $10.9 million a year ago. For the full year, sales were $37.6 million, down from $41.2 million in 2006. Throughout 2007, we saw significant decline in our women's Durango business as consumers moved away from the fashion-forward product, which negatively impacted our performance.

That said, we have been very pleased by the continued growth of our Rocky brand of western products, sales of which improved approximately 15% this past year, and now account for more than 43% of our western footwear sales, versus less than 35% a year ago. As we move forward, we continue to focus on the core, more basic western designs for both brands. As far as our prospects to expand our western business this year, we are optimistic about acceptance of our new products and will begin to anniversary much easier comparisons. Now hunting footwear, where sales in the fourth quarter decreased to $6.8 million, versus sales of $11 million in the prior year's fourth quarter. For the year, sales were $31.4 million, down from $35.5 million in 2006. The hunting category continues to be challenging for us, primarily due to a more competitive landscape, combined with a slowdown in industry-wide sales.

Despite the recent results of this business, we remain focused on product innovation, which has been the hallmark of the Rocky brand for over 25 years. Our Duty footwear reported a large quarterly percentage gain as sales increased 21% to $5 million from $4.1 million a year ago. For the year, sales increased 3.8% to $17.8 million from $17.1 million in 2006. This improvement marked the first year-over-year gain in several years. Apparel sales in the fourth quarter increased $500,000 to $3.7 million compared with $3.2 million a year ago. And rose slightly to $16.4 million in 2007, versus $16.1 million in 2006. Much of the growth in apparel has come from hunting, where our recent introductions of innovative and customizable systems that feature zip-in and zip-out liners that can be worn in varying temperatures have been very well received by consumers. We are also seeing strength in our light-weight scent control garments which debuted this past fall.

Looking at our retail division, which includes our Lehigh Retail on Wheels business and two concept stores, fourth quarter sales increased $4.6 million or 32% to $19 million versus $14.4 million last year. For the full year, retail sales were up 19.4%, to $70.7 million from $59.2 million the year before. We ended year with 94 trucks in operation, compared to 78 trucks at the end of 2006. This allowed to us take advantage of the sales upside created by Iron Age's bankruptcy. Importantly, as we head into 2008, we will begin to see the positive benefits from the recent investments in our retail infrastructure, and should experience meaningful operating expense leverage from this business going forward.

Lastly, during the fourth quarter, we shipped approximately $1.5 million of boots to the military, as we began the initial shipments of the $6.4 million contract we announced in July of 2007. In the fourth quarter of last year, we had no sales to the U.S. military. More recently, we announced we had received a second contract from the U.S. military this one for $5 million, and we'll begin shipping boots from the contract late in the second quarter of this year. Both contracts include options for an additional four years. I will now turn the call over to Jim to review the financials.

Thanks, David.

Net sales for the fourth quarter increased 2.8% to $72.5 million, compared to $70.5 million for the corresponding period a year ago. Gross profit was $28.7 million, or 39.6% of sales, compared with gross profit of $28.2 million or 40% of sales a year ago. The 40 basis point decline in gross margin was primarily due to an increase in shipments to the U.S. military. Military boots are sold at lower gross margins than branded products. Sales, general and administrative expenses were $26.2 million for the fourth quarter of 2007, compared to $24.5 million in the prior year. Expressed as a percentage of net sales, SG&A expenses increased to 36.1% of net sales for the fourth quarter of 2007, from 34.7% last year, as a result of higher head count and additional vehicles in our retail division. Non-cash intangible impairment charges increased to $24.9 million, compared to $800,000 in the fourth quarter of 2006. The increase was attributable to the non-cash impairment charge related to the carrying value of goodwill. As a result, we reported a loss from operations of $22.3 million, compared to income from operations of $3 million.

For the quarter, we reported a net loss of $23.6 million or $4.31 per diluted share, compared to -- with a net loss of $800,000 or $0.01 per diluted share a year ago. For the year ended December 31, 2007, net sales increased 4.5%, to $275.3 million, compared to $263.5 million for the corresponding period a year ago. Gross profit was $108 million, compared -- or 39.2% of sales, compared with gross profit of $109.3 million, or 41.5% of sales a year ago. The 230 basis point decline in gross margin was primarily due to pricing pressures from major retail accounts, higher manufacturing costs and an increase in closeout sales versus a year ago.

Selling, general and administrative were $96.4 million for 2007, compared to $89.6 million in the prior year. Expressed as a percentage of net sales, SG&A expenses increased to 35% of net sales for 2007, from 34% last year, as a result of higher head count and additional vehicles for our -- in our retail division, as well as higher professional fees. Again, non-cash intangible impairment charges increased to $24.9 million, compared to $800,000 in the fourth quarter of 2006. The increase was attributable to non-cash impairment charge related to the carrying value of goodwill. As a result, we reported a loss from operations of $13.3 million, compared to income from operations of 8-point -- $18.9 million a year ago. The 2007, we reported a net loss of $23.1 million, or $4.22 per diluted share, compared with net income of $4.8 million or $0.86 per diluted share a year ago. However, we think a better comparison of our business year-over-year would be to exclude the goodwill impairment charge in 2007 and negates the trademark impairment charge in 2006. If you did that, we reported net income of $400,000 or $0.08 per diluted share this year, compared to net income of $5.3 million or $0.95 per diluted share in 2006.

Funded debt as of December 31, 2007, decreased to $103.5 million, compared to $110.5 million at December 31, 2006. Interest expense for 2006 was flat at $11.6 million. Inventory decreased $2.5 million or 3.2% to $75.4 million at December 31, 2007, compared to $77.9 million on the same date last year. The decrease in inventory is primarily the result of our continued focus on improved inventory management through the scheduling [inaudible] to more closely coincide with projected shipments and reduction of discontinued products. I will now turn the call back to Mike for some closing comments.

Thanks, Jim. While 2007 did present us with a number of challenges, we have approached them head on. Over the years, our business has experienced similar ups and downs and we have managed to turn things around before and we are confident in our ability to do so again. We expect the consumer environment to remain tough, and retailers to be cautious with limit -- which will limit our top line opportunity, particularly in the first half of this year. That said, we are confident about our long-term prospects of our entire portfolio of brands and are constantly exploring ways to maximize their full potential. Domestically, this includes developing more innovative, durable, and comfortable footwear and leveraging the strength and the popularity of our owned -- owned and licensed brands to gain additional distribution, shelf space, and a greater share of the work, outdoor, western, and casual market segments.

Overseas, particularly in Europe, we believe immediate growth opportunity exists for several of our brands. We are in the final stage of negotiations with a distributor from eastern Europe, including Russia and the Baltic states and hope to have Rocky branded products on the shelves later this year. In fact, in two weeks, we will be showing at the IWA show in Germany, which is the European equivalent of the SHOT Show and expect to open additional countries in regions in the near future. Over the past several months, we have taken a very hard look at our operating expenses across the board, and believe we have found opportunities to reduce spending in several areas without impacting the necessary support for each of our brands. We have also reviewed our compensation structure so that the majority of our senior level pay is now more closely aligned to the company's overall performance. Based on those factors, we do expect to see our bottom line to grow at a faster pace than our -- than our revenue in 2008. To close, I would like to take this opportunity to thank all of the employees for their hard work this past year, as well as thank our shareholders for their continued support. Operator, we are now ready to take any questions.

Ladies and gentlemen, at this time, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Mitch Kummetz, Robert W Baird. Please go ahead.

Okay. Thanks. I have got several questions. Let me first ask about -- about '08. You guys obviously haven't provided any official sales and earnings guidance. Mike, you made some comments there about the first half being -- expecting it to be a bit challenging, some opportunities, reducing spending over the course of the year and as a result of that, you expect earnings to grow faster than your sales. But can you give us a little bit more help of how we should be thinking about '08 in terms of sales and earnings?

Yes, I am going to let Jim handle that.

Mitch, I think like you said, we believe the first half of the year, particularly with the challenging retail climate will be a little difficult for us from a top line standpoint. With that said, I think that we -- we expect -- expect our top line to grow, mid, single digits. And then from a bottom line perspective, we think that it will grow as Mike said, much faster as we start to leverage our SG&A across this board. We have made some SG&A cost containment measures that we think we are going to have there. We are just hesitant based on the retail climate and our recent performance to quantify it more than that. So we just think it's in the best interest of our shareholders to -- to not provide that guidance.

Okay.

And Mitch, this is Mike. We have been through three major shows so far this year, Denver, Las Vegas twice, The SHOT Show and WSA. And I've got to tell you, I came away from there fairly pleased. Of course, we have gotten almost two months now of bookings in front of us and sales. I'm generally more pleased now than I was six weeks ago. So we just think we just need to -- we are not afraid of anything. We have got to perform. We have got to show our shareholders what we can do and there's's no sense in throwing a number out there that we can't leap over. As of the first of the year, we did have a sizable increase in our -- in our price prepare, and that's been passed on fairly willingly.

So -- and as of the first of the year we did have a sizeable increase in our price per pair, and that's been passed on fairly willingly. So, I'm feeling better about this year. I think the first quarter, I just want to send a little caution memo out on first quarter. I feel good about '08 as a whole.

Okay. All right. That's helpful. And then, Mike, you mentioned some opportunities to reduce spending. Could you just outline those a little bit?

Well, we -- we've sat down over the last two months and -- and looked at every part of our business. And part of this is holding down the SG&A, as we all know, and having that under control, and we have taken out personnel. We have cut some expenses in advertising. We have looked at every aspect of our business, and looking for savings. And I can tell you that we've got well over 2 point -- $2.5 million out of this business. Now, going forward, we have some pay-as-you-go, you may say with severance packages that will -- that won't come into full net positive for us for a few months, but we're going to get this business back to where it should be.

Okay. A few more questions. You mentioned you started new military contract in the fourth quarter and that you have another one coming in in Q2. It's about $10 million for the full year in '08, something like that? And what's the cadence? I mean, how should we be thinking about the volume flowing in on those contracts? I wouldn't expect it to be that linear, right? Or maybe it is.

It's going to be fairly consistent, I believe, and -- boy, I hate to say that, because it's the military. But I think expectations this year should be about $10 million and I think we'll hit that. And pretty flat. I don't see any -- I don't see any big swings, except the second piece, we are only getting into that in the second quarter. So there will be -- there will be larger numbers and more flap, I believe, for the remaining half.

Okay. All right. That makes sense. And then maybe just a couple of housekeeping items. Starting with the fourth quarter, I guess I'm having a little bit of a tough time coming up with the $0.02 loss when I run your numbers on a pro forma basis, I get -- Jim, I get a pretax income of around $43,000 loss. That's if I pull out the charge you took in the quarter for the write-down. Am I doing something wrong there?

Pretax, that's right on, $43,000 loss.

Okay. How does that translate into $0.02 loss -- what are the taxes? What was the pro forma tax rate or how do I --

Well, I think that -- again, we trued up in the fourth quarter and we ended up actually with a true up of a little bit of an expense of $45,000 on that, so that gets to you roughly the $0.02.

Okay. All right. And then -- and then looking out into '08, actually, before I ask that, D & A and CapEx in the fourth quarter, do you happen to have that and your outlook for '08.

The CapEx for the total year is $5.5 million.

Okay.

And the -- I'm just looking it up here for you, the depreciation, I'll give it to you in a second here.

What's your outlook on CapEx for '08.

For '08, I think we're looking at it being $5 million or less in '08. We spent $5.5 million this year so we are -- we had some large investments in technology this year. We think we can take down next year, and, so we -- normalized just to run the business, we are probably between $4 million and $5 million on a normalized basis.

Okay.

The depreciation was $5.8 million this year.

Okay. 5.8.

And it will be -- it will be up slightly next year because of -- of the investments that we have made in the last couple of years have been primarily in technology with pretty short depreciation life. So. I think that we will -- it will be up about $6 million this year.

Okay. We will have a pickup on CapEx from a cash standpoint, CapEx versus depreciation. And then maybe one last question. Can you just run through the gross -- gross profits on the segment? I know you give that in the Q and the K. I was hoping you might be able to have that for the fourth quarter.

Yes, I can give you the -- for the -- for the year, and then I will give you fourth quarter, but for the year, the gross profit on the wholesale division was $34.8 million, for the retail, it's $51.1 million, and military, because we had reimbursement in 2007 of that -- of our prior comp -- cancelled, contract is really not meaningful. But it's about, usually between 10% and 12%. And for the quarter, it was, wholesale was $36.8 million, retail was $50 million, and -- and the military was $10 million.

Okay. Great. Thank you very much. Good luck.

Thanks, Mitch.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of James Ragan, Crowell, Weeden. Please go ahead.

Yes, thank you. I was just wondering if could you talk a little bit about what your plans will be in '08 for the Durango and the Georgia lines. Specifically, with the weakness in the women's western side, is that something that you are continuing to pursue in '08?

Jim, as we mentioned in the prepared statements, we are very focused on the -- the core western market, and those kinds of products that the core western wear wearer wears every day. That is how we built this now pretty significant Rocky business around that core consumer, and we grew that business 15% last year. It's now $17 million business or trending towards $20 million. So we see a lot of upside with Rocky, Durango, as we mentioned, has been challenged because the comps were against this big fashion trend. So the one thing we have going for us as we go forward is that we think we have hit the bottom of the trough and we are going against the smaller comps now.

Okay, good. And then switching to the balance sheet, you did a pretty good job with the inventory looks like, are you pleased with that number, $75 million, and then also, with respect to pursuing some of these international opportunities, would you have to increase the inventory exposure to do that?

Jim, this is Mike. I think the inventory we can continue -- I don't think the inventory will go up. I think we've got some focused, talented people on the inventory, and doing a little better job. Some of that inventory reduction really was selling off some obsolete and slow-moving material. So we are working diligently to control the inventory, but really, with the bulk of our business in work shoe business today, you can't sell it if you don't have the inventory, but -- and I don't think we are going to see -- you are going to see a -- you're going to see a continuous decrease. I think our sales are going to go up and our inventories go down.

On the issue of our expansion in the international market, as we do that, Jim, we are going to be doing that with distributors and we will be shifting containers that frankly they will ow from the port and we will be doing that with LCs and it's very low risk, pretty good margin business that we are looking forward to.

Okay. Great. And I don't know if you have give then number or not, but did you give a cash from operations number for the quarter and the year?

No, we did not, but, typically our free cash flow is pretty much our -- our net earnings since we -- our depreciation and amortization is pretty close to that, so.

Right. Okay. Okay. Thank you.

Thanks, Jim.

(OPERATOR INSTRUCTIONS) One moment, please, for our next question. Ladies and gentlemen, that does conclude our question-and-answer session. I will turn the conference back over to management for concluding remarks.

Well, it was a tough year, ladies and gentlemen, but we're focused and we're going to turn this business around and I think we will prove that to you over the months ahead. So thank you very much.

Ladies and gentlemen, that does conclude today's conference. We would like to thank you for your participation. You may now disconnect. Please have a pleasant day.