Rocky Brands Inc (RCKY) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Rocky Brands Incorporated Fourth Quarter 2008 Full Year Results Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call is being recorded today, Thursday, February 19, 2009.

I would now like to turn the conference over to Mr. Brendon Frey. Please go ahead.

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 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, 2007.

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

Thank you, Brendon. Thanks everyone for joining us this afternoon to review our fourth quarter 2008 full year results. With me today on today's call is David Sharp, our President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer.

We're very pleased with our fourth quarter operating performance, which represents a solid finish to the year for our company. 2008 was clearly one of the most challenging periods that the footwear retail industry has ever faced, particularly the last six months as the economy contracted more than expected and consumer environment deteriorated even further.

As we expected, fourth quarter sales were down versus a year ago; however, we were able to report a significant earnings improvement for the fourth quarter and consistent quarters. For the fourth quarter, diluted earnings per share, excluding the noncash charge detailed in our earnings release, was $0.13 versus a loss of $0.02.

While sales were $66 million, down 9% for the full year, diluted earnings per share on an operational basis improved over 800% to $0.75 from $0.08 in 2007 despite selling decline of 5.7% to $259.5 million.

Our enhanced profitability was achieved through a number of actions taken over the past 18 months aimed at rationalizing our operational platform and improving our wholesale gross margin. In the fourth quarter alone we reduced our selling, general, and administrative expenses by $4.6 million, or 18%, and for the year lowered it by $8.9 million, or 9%.

The savings came from several area of our organization, including lower distribution expenses, lower compensation, a reduction in our total headcount, lower auditing fees, a reduction in certain marketing and advertising programs, a decrease in tradeshow expenses, and a decrease in consulting fees. We are pleased with our ability to take costs out of the business as we work to better realign our infrastructure with current sales volumes.

That said, we have been mindful to maintain a balance between driving profitability and properly supporting our brands with the resources they need to develop. We are confident that the adjustments we have made to our operating platform have created a leaner, more efficient company from top to bottom and have us well positioned for future market share gains, particularly when we exit this economic downturn.

In addition to our cost reduction, our bottom line performance was positively impacted by the improvement of our gross margin for 2008. Our total gross margin was up 20 basis points. And, more notably, our wholesale gross margin increased 180 basis points. This was accomplished with a combination of improved operating efficiency in our company-owned manufacturing facility and better sales transaction terms with our retail partners.

Managing our inventory was another area where we showed solid improvements. We ended the year with inventory levels down 7%. This allowed a reduction in borrowing under our bank facility and helped contribute to a $2.3 million, or 20%, decline in our annual interest expense and a $15 million, or 15%, decrease in our -- over our year end debt levels.

Before I turn the call over to David, I want to quickly touch on a couple of strategic decisions made recently that are worth noting. First, we have decided to pull back from our initial entry into the women's euro-comfort casual footwear market and have entered a licensing agreement with Zumfoot. Since the development of the brand in June 2006, we had produced a compelling product line and received positive feedback from a number of wholesale accounts; however, the challenging economic conditions have made it increasingly difficult to build this business in a meaningful way and current level of retail commitment did not justify us moving forward at this time.

We still believe we can compete in the casual footwear market and will reevaluate our opportunities once the economy improves. I think it is important to point out that we have structured our investment in Zumfoot to be low risk. And a result, there is little or no cost associated with the exiting of this business.

Secondly, last year, we entered into a new licensing agreement with Haas Outdoors to be the exclusive manufacturer and marketer of Mossy Oak branded hunting boots. Mossy Oak is one of the best known and well respected names in camouflage development and design today. We have been using several of their most popular patterns in our Rocky hunting boots for over 30 years. And they have historically been some of our best selling models.

We believe our expertise in designing and marketing, along with the strength and popularity of Mossy Oak, will be a winning combination, and, with lower operating price points, will allow us to reach a segment of the market we currently do not serve with the Rocky brand. Like Zumfoot, this agreement has minimal risk, particularly from an inventory standpoint, as the product is seasonal and will only be made to order.

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

Thanks, Mike. For the fourth quarter our wholesale sales were $49.4 million, compared to $52 million in the corresponding period a year ago. And for the year our wholesale sales were $187.3 million versus $202.6 million in 2007.

Within our work category, which includes footwear under our own brands Georgia and Rocky and our licensed brands Dickies and Michelin, sales were $23.7 million in the fourth quarter, compared with $25.3 million in the prior year period. For the full year work sales decreased to $89.5 million from $92.2 million the year before.

Now turning to the western category, fourth quarter sales were $8.5 million versus $9.9 million a year ago. For the full year sales were $31.1 million, down from $37.3 million in 2007. All of this decline was due to the disruption in supply that we suffered due to a dispute with a supplier. This dispute is resolved.

Now to our hunting footwear -- fourth quarter sales were flat year on year at $7.3 million. For the year sales were $29.8 million, down from $32.4 million in 2007.

Sales of our duty footwear in the fourth quarter were $4.9 million versus $5 million a year ago. For the year sales increased slightly to $17.9 million from $17.5 million in 2007.

Apparel sales in the fourth quarter increased 43.6% to $5.2 million versus $3.6 million a year ago and decline slightly to $16 million in 2008 versus $16.1 million in 2007.

Now to our retail division -- fourth quarter sales were $15.4 million versus $19 million the year before. For the full year retail sales were down 7% to $65.8 million from $70.7 million last year.

Finally, we reported approximately $1.2 million in sales to the military versus $1.5 million in the same period last year.

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

Thanks, David. For the fourth quarter, net sales decreased 8.9% to $66 million, compared to $72.5 million for the corresponding period a year ago. Gross profit in the fourth quarter was $24.8 million, or 37.6% of sales, compared to $28.7 million, or 39.6% of sales, for the same period last year.

Wholesale gross margin for the fourth quarter was $16.8 million, or 34% of net sales, compared to $19.1 million, or 36.8% of net sales, in the same period last year.

Retail gross margin for the fourth quarter was $7.9 million, or 51% of net sales, compared to $9.5 million, or 49.9% of net sales, for the same period in 2007.

Military gross margin for the fourth quarter was $100,000, or 9.5% of net sales, versus $100,000, or 8% of net sales, in the fourth quarter a year ago.

Selling, general, and administrative expenses decreased 17.5%, or $4.6 million, to $21.6 million, or 32.7% of sales, for the fourth quarter of 2008, compared to $26.2 million, or 36.1% of sales, a year ago. The decrease in SG&A expense is primarily the result of reductions in compensation, distribution, and tradeshow expenses.

During the fourth quarter of 2008 we recorded a noncash charge of $3 million net of tax benefit, or $0.54 per diluted share, for the write-down of the Lehigh and Gates trademark. This compares to a noncash charge of $23.5 million net of tax benefit, or $4.29 per diluted share, for goodwill impairment recorded in the fourth quarter of 2007.

Excluding these charges, income from operations was $3.2 million, or 4.9% of net sales, for the fourth quarter of 2008, compared to income from operations of $2.5 million, or 3.5% of net sales, for the fourth quarter of 2007.

Interest expense for the fourth quarter decreased 22.4% to $2.2 million from $2.9 million in the fourth quarter of 2007 as a result of lower borrowings under our credit facility.

For the quarter, excluding the charges, we reported net income of $700,000, or $0.13 per diluted share, in the fourth quarter of 2008, compared to a net loss of $100,000, or $0.02 per diluted share, in the fourth quarter of 2007.

For the year ended December 31, 2008 net sales decreased 5.7% to $259.5 million, compared to $275.3 million for the corresponding period a year ago.

Gross profit was $102.2 million, or 39.4% of sales, compared with gross profit of $108 million, or 39.2% of sales, a year ago.

Selling, general, and administrative expenses decreased 9.2%, or $8.9 million, to $87.5 million for 2008, compares to $96.4 million in 2007. Expressed as a percentage of net sales, SG&A expenses decreased to 33.7% of net sales for the year, from 35% last year as a result of the cost reductions Mike detailed earlier.

Income from operations, including the noncash impairment charges recorded in the fourth quarter of 2008, increased to $14.7 million, or 5.7%, for the full year, compared to income from operations, excluding noncash impairment charge recorded in the fourth quarter of 2007, for $11.6 million, or 4.2%, last year.

Interest expense for 2008 decreased 20%, or $2.3 million to $9.3 million versus $11.6 million for the same period last year. The decrease in interest expense was due to reduced borrowings under the Company's line of credit as a result of better inventory management and, to a lesser extent, lower interest rates compared to the same period last year.

For the full year, excluding the impairment charges, we reported net income of $4.1 million, or $0.75 per diluted share, compared to net income of $400,000, or $0.08 per diluted share, in 2007.

Funded debt as of December 31, 2008 decreased 15.3%, or $15.8 million, to $87.7 million, compared to $103.5 million at December 31, 2007. We remain comfortable with our current debt structure, which consists of a $100 million revolving line of credit and a $40 million term loan. The bank line matures in 2010, and we are in the process of negotiating an extension. As of December 31, 2008, we had $44.8 million outstanding on the line.

Inventory decreased $5.1 million, or 6.8%, to $70.3 million at December 31, 2008, compared to $75.4 million on the same date last year.

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

Thanks, Jim. We began 2009 cautiously optimistic. There is little doubt that there are challenging times -- that these are challenging times. But we are focused on properly managing our business for this environment while at the same time building our recent successes in a controlled and disciplined manner.

As we outlined earlier in the call, we made meaningful progress improving the productivity of our wholesale business in 2008. We also began the process of restructuring our retail platform in order to drive greater operating expense leverage. And this initiative continues as we begin this new year.

The steel-toed safety shoe business has currently been impacted by the economic slowdown with significant layoffs throughout the US manufacturing and service sectors.

Our customers have come to us looking for cost savings, and we have been proactive by initiating them to make purchases over the Internet, where we can offer greater savings. In a relatively short period of time we've extended this program nicely. Of the 18,000-plus accounts who have made purchases in 2008 approximately 35% have set up customized Websites with us. Furthermore, we have quickly broadened the merchandising assortment since December.

While it is still early, year-to-date orders are up significantly on our B2B Websites. As a result, we have made adjustments that should significantly lower our retail SG&A in 2009, including removing mobile shoe stores from the road and reducing headcount. And we expect to see improved profitability from this division on a smaller revenue base going forward.

We have always operated in a conservative manner and 2009 will be no different. This coming year will be about protecting our assets and maintaining a leadership position our brands have established. As always, we look to maximize productivity and run the business as efficiently as possible in order to preserve cash and drive down our borrowing and interest expense. We feel good about our recent performance and move forward committed to executing a strategy that we believe will result in long-term growth and profitability and increased shareholder value.

Thank you. Operator?

Thank you, sir. Ladies and gentlemen, at this time we will conduct a question and answer session. (Operator Instructions). One moment please for our first question.

Mitch Kummetz, Robert W. Baird and Company. Please go ahead.

Hey, guys. This is actually Kevin Kim calling for Mitch. Just a couple quick questions. As far as the supply chain disruption in Q4, I know you guys quantified the impact of it on the Q3 call. And, David, I think you mentioned a $1.4 million shortfall on the western business, if I'm correct there. Can you guys quantify the total disruption there?

Well, the total was the last number that David quoted for the whole year. You're talking about for the whole year?

No. Just for Q4.

Oh, for Q4. Okay.

Q4 sales were $8.5 million versus $9.9 million a year ago. So (multiple speakers) over $9.9 million the year before.

It just affected the western part of the business? Is that correct?

Primarily, yes.

Primarily. There were some effects, but the western, by far, was the largest, Kevin. But there were some other -- this supplier made 20% of our shoes -- over 1 million pairs -- 1.3 million pairs.

All right. And then can you guys comment on the Genuine Dickies launch at Wal-Mart? I know you guys were excited about that going in, I think, November 15. I think about 400 stores -- how did that performance--?

Kevin, you have a great memory. We were excited. And the shoes did not get distributed as we had expected in the time period right before Thanksgiving. Some shoes did not get out. So there was a slower start. And for some reason or another, our customer, Wal-Mart, increased the retail price $5 a pair.

So the start has been less than we had hoped for. And as we got through the Christmas selling season and into January and now February, we have been recently down at Wal-Mart and kind of restarting the distribution of those styles.

So the start did not kick off the way we hoped. We're restarting it. We're going to test 50 stores on top of the original 400 rollout with the agreed upon price point to see what that delivers. So we're still going through tests.

Okay. And then as far as SG&A, you guys have a lot of positive momentum there in terms of '08 and cutting that 9%, I think. How should we think of the wholesale business and the SG&A there for '09?

Kevin, this is Jim. I think that we should think of that -- we're planning on attempting to make reductions there, too, in the wholesale business absent any sales increase and the variable cost that goes along with that. But we should think of that, I think, at worst case flat with last year and hopefully down going forward.

We're looking at all areas of the business. It just happens to be that retail was the first one based on the last four months sales trend and shifting that business to the more of a web-based business and not needing the assets that we had in the past.

Okay. And then as far as '09 tax rate and CapEx?

'09 tax rate should be at a normalized 36%. And CapEx, again, similar to '08, in the $5 million to $5.5 million range.

Okay. And I'm done. Thank you so much, guys.

Reed Anderson, D.A. Davidson & Co. Please go ahead.

Hi this is Dan on for Reed. I just had a question about the Mossy Oak program. Any more color you could put on that with the potential size and [time to deliver]. Thanks.

I didn't understand the question.

Maybe if you picked up the phone so it's (technical difficulty).

Sorry. This is Dan on for Reed. I just had one follow-up question on the Mossy Oak program about the potential size and more on the timing of the rollout of that.

Okay, now I got you. The beauty here is that there's a price point in the hunting boot category that we don't want to reach down to. It's too low of a price item. We have a long-time -- I have a long history with Mossy Oak, and they've asked us to do this in the past. And we felt it was the appropriate time to do it -- little risk.

And this is not going to be kicked off to be tens of millions the first season. But I think that -- we've currently shown this to our key customers, and I would say 60% of the key customers have shown strong interest and will buy some product. And, as I mentioned in my statement, there's no inventory that will carry. This is make and ship. So we'll build the shoes in our factory or build them in the Orient and ship them directly to our customer. But it should be a -- it will be a low-risk growing business over, I think, a two-, three-, five-year period.

But it will start in June of this year.

Yes. We'll start shipping this fall.

Okay. Thanks a lot.

Thank you. (Operator Instructions). [Timothy Stavos], [Stavos Associate Management]. Please go ahead.

Yes. Hello, gentlemen. Congratulations. I think it's a good quarter, stripping out the unusual items.

Thank you. That's nice to hear. We wanted more. We worked hard and our team worked hard. And we're pleased. We're pleased under very difficult circumstances.

I missed the first two or three minutes of the call, so I don't know if you talked about this in more detail. I see in the press release the SG&A reductions are really, frankly, impressive. Forgive the phraseology of this question, but was there a lot of fat in the Company?

I understand that phrase. We were building a company for the future. And I don't think there was a lot of fat in the Company, but 18 months ago we got aggressive and started to bring the SG&A down aggressively over a 16-month period. We had some fat, sure.

You certainly did it at the right time considering where the economy is at. It could have been a much more gruesome situation for Rocky (multiple speakers).

Absolutely. I'm happy as I can be that we took those actions a long time ago. But the other part, I don't know if you got it or not -- we're continuing to look inside the Company and see how we can combine jobs. And we have to be mean and lean. The one thing we can control is cost.

Are the reductions -- it refers to reductions in compensations in the press release. Are those mainly combinations of jobs and attrition and layoffs and whatnot? Or is that outright wage freezes and/or salary reductions for people?

We have not done salary reductions. Those would be a freeze on hiring. They would be a freeze on salary increases.

Is that pretty much across the board for you guys?

The answer to that is yes and no. We've done it piecemeal last year. We've done it a number of different ways.

Okay. Oh, let's see what else here. The write-off of some of the goodwill and intangibles -- is that exclusively a common stock price issue and not a belief or an evaluation on management's part about a permanent impairment on the potential returns of those operations that carry the goodwill and intangibles?

The goodwill that we wrote off in 2007 was just strictly a --

2008? Well, forget 2007. 2008.

So the trademarks were a result of the projected sales on those and where you can go with those projected sales based on the economy, where it's at now. So I think that it's a mathematical formula you go through. And I think it's a pretty common event right now. So I don't think it has anything to do about the overall value in the marketplace of these trademarks.

Okay. At what point do you anticipate wholesale gross margins getting back to their historical levels and/or sales for that matter?

Well, I think the wholesale gross margins this year are for the most part back to historical levels. I think that if you look at our margin from -- going back over the last five, six years of this Company, we've only had one year where they've been higher than they were this year. And that was 2005, I believe -- or 2006, I think. But that's -- we historically run in the high -- 36% to 38%. So we're right in there.

Okay. So the number -- let's say what was the number for the full year again on wholesale gross margin?

I believe 36.8%.

So that's actually, that's a reasonable -- not a bad range for you guys for full year number?

No, it's not a bad range. We're predominately -- this isn't fashion business or as high a margin business as -- it's branded, but this is pretty --

So the 34% you had in the fourth quarter is something that you're rebounding from in the first quarter essentially.

Well, we were rebounding from -- I think the fourth quarter was our lowest quarter margin of the year. And part of that is that our hunting business, which goes out primarily in the third and fourth quarter, that business, based on the nature of that market, is the lower margin goods.

Okay. So it's more seasonal that you were at 34%. That's partly seasonal as well then you're saying?

Partly, yes.

Okay. Just one other thing and then I'll get back in the queue here. The insider buying window -- the stock closed at $3.03 -- I bought some shares before the market closed at $3.03 in fact. When does the window for insider buying open?

It will probably open on Monday.

And there was a lot of -- a considerable amount of buying in the $5 area by various insiders, and then it was kind of quiet. Was the window closed for some reason, or just --

The window was closed since December 9.

Okay, since December 9. And then will we see insiders stepping up or can't say?

My Chief Financial Officer is shaking his head no. We can't say.

We can't say. We've taken advantage. I've taken advantage. We're aware of that. We have a window at different time periods every quarter.

Will the window open up? There's nothing material going on right --

It will open up.

It will open up? Okay. There's nothing material going on right now that you're aware of that would preclude it from opening?

Not that I'm aware of.

And then just a related question and then I'll get out. Is company buybacks -- [in] your debt agreement, you can't do a buyback, right, of common stock?

We're limited by it, certainly, yes.

Can't do it? You say limited.

We're limited in the amount of it. It's very small.

Okay. So we don't have -- the board's not going to be talking about an authorization?

We've talked about it in our last board meeting. We talk about it. But there are limitations in capital that we can use to buy back.

Okay. Let me squeeze one more in if I can. Debt reduction goals for the year -- do you guys have a number -- a year-end '09 debt number goal?

Yes. But we're not going to tell you.

Is it a single-digit millions reduction in debt from year end '08?

We haven't issued any guidance on that.

Yes. The last year -- I think last year it was at $11 million? What was it?

Last year we went down $7 million.

$7 million. This year $15 million. It will be sizeable.

Okay. It will be sizeable in the right direction -- down? Okay. Thanks.

Thank you. (Operator Instructions). Timothy Stavos, Stavos Asset Management. Please go ahead.

I always like being the follow-up right after myself. It stokes my grandiosity. Are there any concerns about price increases on product lines that you guys are passing through or whatever being balked at or anything like that?

No more than normal. Nobody likes a price increase, but nothing to be concerned with.

Okay. And as far as the tradeshow and distribution expenses, are you guys potentially being pennywise and pound foolish in the tradeshow aspect, and you're saving money but you're not getting exposure out there like you should?

We're basically sheep on this. This is --

I'm sorry, we're what? We're sheep?

Yes, we're following. There's -- a lot of the major players in the marketplace have abandoned the shows. We're doing the same. Tim, I've been in the business a long time. This is a normal channel of movement. Tradeshows come and tradeshows go. And we're there when they're important. And we're not there and save sizeable funds when they're not important. So we'll do whatever it takes that's prudent and can deliver returns for shareholders. It sounds like you're one. But that should not be a concern.

Just one or two others. What's going on with Durango then? Are you pleased with the -- I haven't seen the new product. Are you pleased with the quality of what you're seeing and the style? And what type of reaction are you getting out there in the market now that you're coming back out there in full force?

We've really focused on Durango and the resourcing assets. And we're now in four factories versus one. And we have a lot of new product, which is being extremely well received in the marketplace.

Four factories instead of one -- it's still, it's one supplier though? One company? One -- is it four --

No. Four suppliers versus one supplier.

That's a pretty diversified supply base. I guess you learned a lesson. And then, finally, I don't know if you want to discuss any aspect of this online here like this, if not just say so. But the status of the former manufacturer, the product status or status of your pursuit of them or whatever? Maybe that's not something you want to talk about here?

The lawsuit has been settled and we're moving forward. And, frankly, we don't pay a lot of attention what they're doing or care less.

Any gain or any effect on the fourth quarter of that settlement of the lawsuit?

No. Not at all.

Are they going to have competing product out there or not?

If I have anything to do about it, no.

Well, does the settlement say that they're not going to have copycat product or--?

I can't comment on what the settlement is.

Okay.

I'm comfortable where we're going forward.

Okay. And then, finally -- truly finally -- do you anticipate a revenue increase for the year?

We're anticipating a flat revenue. A revenue increase would be a very nice thing, but I see a very tough year.

Thanks a lot. I really think there's a lot of value here. And you guys are protecting the value. You've got a fair amount of debt and everything, but you did a nice job in reducing it and showing the market that you guys got staying power.

We just got to duplicate it again this year. And we will.

Thank you. And I'm showing that we have no further questions at this time. Please continue with any closing remarks.

Thank you for tuning in and listening in. We'll stay in touch. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.