Rocky Brands Inc (RCKY) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brand's fiscal 2009 first quarter 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. If anyone has any difficulties hearing the conference, please press star-zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded.

I will now turn the conference over to Brendon Frey of ICR.

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, 2008.

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

Thanks, Brendan, and thank you, everyone, for joining us this afternoon to review our first quarter results. With me on today's call are David Sharp, President and Chief Operating Officer, and Jim McDonald, our Chief Financial Officer and Treasurer.

Our first quarter results were generally in line with our internal projects. We did expect sales and earnings to be down from a year ago, as we were up against tough comparisons in our retail division and higher than normal gross margins in the first quarter of 2008, which we were unable to anniversary.

Our top line was also impacted by lower than anticipated wholesale sales, primarily in our work and western segments. As the difficult economic environment continues, more and more of our retail partners have cut back on the size and frequency of their orders and choosing to operate with leaner in-stock positions until the market condition improves.

We have been doing business with the majority of our account base for many years, and everyone understands we are all in this together. Because of these longstanding relationships, I am confident we will continue to work successfully with them to help offset risks and maximize productivity.

Importantly, we continue to focus on areas of our business that we can directly control -- namely, expenses. And once again, we did a very good job managing costs down in conjunction with lower sales volumes. That included reductions in salaries and benefits, advertising expenses, sales commissions, which contributed to a 13.5%, or $3.1 million, decline in S&GA versus last year.

Our SG&A was also down due to our ongoing efforts to drive more of our Lehigh Safety shoe business to the West. While we are still in a early stage of executing this strategy, we are pleased by our initial success of transitioning a greater percentage of the transactions over the Internet, which has always used to reduce costs associated with operating our Lehigh mobile stores. We would expect this trend to continue as the year progresses.

While we have not seen any clear signs that the recession is ending, nor are we predicting when it will happen -- however, there are a few factors specific to the business that have us cautiously optimistic about our prospects in the back half of this year.

First, our year-over-year comparisons begin to moderate beginning with the third quarter. In addition, we have started to see a shift in our sales back to more of a Q3 and Q4 timeframe. Prior to our acquisition of EJ in early 2005, our sales and earnings were heavily concentrated in the third quarter. With the addition of work and western Footwear, our sales became much more evenly distributed through all four quarters.

While we don't expect that to be so heavily dependent on the third quarter, the shift in retail buying patterns is indicating that the greater percentage of our overall business will now occur between approximately June and November. And with a large portion of our costs fixed, we would therefore expect expenses -- expenditures, greater operating expense leverage during this period.

Second, we have seen a very nice response to our new hunting and work footwear, particularly from several of our major accounts, and that is reflected in a solid increase in our backlog for fall.

Third, we recently signed a distribution agreement for Rocky hunting footwear and apparel with Garlands, one of the premiere hunting distributors in the UK. They cover England, Scotland, Wales and Northern Ireland. We expect to begin to shipping them product beginning this fall, and along with our distribution in Eastern Europe, international sales should be a meaningful version this year.

Finally we would expect to gain some incremental business as a result of the multiple spending programs recently announced by the federal government. As you know, a large portion of the $750 billion stimulus bill is dedicated to rebuilding the Company's infrastructure -- namely, bridges and roads. This will put a significant amount of people to work who will need work and safety footwear.

So, either through our direct retail operations or through our wholesale account, we do anticipate capitalizing a portion of this business -- capturing a portion of this business beginning this summer.

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

Thanks, Mike. I'd like to talk about our retail division first, because this is where our business has been most challenged. As you know, the Company took steps in the fourth quarter to remake our retail business. Our plan now is to offer our industrial and hospitality customers to provide their workers with safety footwear, a better economic proposition.

Customers may now opt to purchase via custom websites as opposed to us driving trucks containing inventory and fitting employees in their workplace, a very cost-laden way to transact business. The new model is resonating well with our customers, and our cost savings story is particularly relevant in this economic downturn.

In advance of fully implementing this new model, we chose to strategically downsize our fleet of mobile trucks, particularly in locations where operating profits were marginal, and to benefit from reduced expenses, knowing full well that our sales would be negatively impacted until the new strategy is fully leveraged.

As Mike highlighted, our expense reductions in the first quarter was substantial, and the downsizing of our mobile fleet operations contributed to this reduction significantly. In addition, we did not yet fully realize all of the cost reduction benefits because we incurred one time severance and store closing costs in the first quarter.

So, first quarter sales in our retail division was $13.7 million versus $18.9 million the year before. In the quarter, we saw many customers defer their purchases due to cutbacks of their facilities. However, we are very encouraged by the response to our new model.

In the quarter, we set up 1,300 accounts with fully customized websites. We expect more and more customers to convert to the Web as they and our sales force become comfortable with the model.

Now, turning to our wholesale division, for the first quarter, our sales were $36 million, compared to $39.7 million in the corresponding period a year ago. Within our work category, which includes footwear under our own brands, Georgia and Rocky, and our licensed brands, Dickies and Michelin, sales were $18.5 million in the first quarter, compared with $22 million in the prior-year period.

During the first quarter, the major portion of the sales in this category is driven by the retailer filling into their basic inventory models. We saw retailers reduce these models during the quarter in response to economic conditions, hence the lower sales.

Additionally, we had a major account change their merchandising philosophy, which effectively stalled our shipments to them in the first quarter and caused a decrease of $900,000. Fall of goods to this account is now resolved.

Now, turning to our western category, first quarter sales were off 10%. They were $7.2 million, versus $8 million a year ago. As you're aware, last year we struggled with supply issues as we resolved a dispute with a major supplier for this category.

We're now sourcing this category from three new suppliers and have an adequate supply and inventory, and we're properly prepared to fully realized the sales potential of the category when the economy begins to recover.

Now to a bright spot. Sales of our duty footwear in the first quarter were $5.3 million, compared to $3.8 million a year ago, an increase of nearly 40%. Obviously, this business is, for the most part, conducted in the public sector and has not been impacted by the economy like other businesses. We also believe, because of our commitment to innovation, that we continue to win over new customers every day in this category. Federal, state and local law enforcement procurement officers are increasingly enamored with our products. As such, they will specify the Rocky brand when they outfit their workers.

Finally, before I pass the call on to Jim, I just wanted to punctuate two points that Mike touched on earlier. First, early last year, we made the decision to multiply our assets and new product development and innovation. Successful implementation of the decision is evident in our order backlog to fall, where we will be first delivering this new product. In all categories -- work, western and duty -- we are encouraged by a growing backlog of orders for new products.

Second, for the past 18 months, we've been focused on building distribution of the Rocky brand beyond North America. We've had great success in Europe. We now have multi-year distribution agreements, which contain performance criteria, with four large established hunting goods distributors.

We now have representation in 28 European countries for Rocky hunting footwear and apparel. Now we're turning our efforts to include focus on our western product line and the Durango brand.

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

Thanks, David. Net sales for the first quarter decreased 17.2% to $50.1 million, compared to $60.5 million for the corresponding period a year ago. Gross profit in the first quarter was $20.1 million, or 40.1% of sale, compared to $25.9 million, or 42.9% of sale, for the same period last year.

The 280 basis-point decrease in gross margin was primarily attributable to lower retail sale, which carry a higher gross margin, and to a lesser extent, lower wholesale gross margins due to increased manufacturing cost versus a year ago.

Selling, general and administrative expenses decreased 13.5%, or $3.1 million, to $19.9 million, or 39.8% of sales, for the first quarter of 2009, compared to $23.1 million, or 38.1% of sales, a year ago. The decrease in SG&A expenses is primarily the result of reductions in salaries and benefits, advertising, freight, professional fees, and Lehigh mobile store expense.

Income from operations was $0.1 million, or 0.3% of net sales, for the first quarter of 2009, compared to income from operations of $2.9 million, or 4.8% of net sales, for the first quarter of 2008.

Interest expense for the first quarter decreased 26.3%, or to $1.8 million, from $2.4 million in the first quarter of 2008 as a result of lower borrowings under our credit facility combined with lower interest rates, compared to the same period last year.

For the quarter, we reported a net loss of $1.1 million, or $0.20 per diluted share, in the first quarter of 2009, compare to net income of $0.3 million, or $0.05 per diluted share, in the first quarter of 2008.

Inventory decreased $1.4 million to $78.4 million at March 31, 2009, compared to $79.8 million on the same date a year ago. Funded debt as of March 31, 2009 decreased 8.4%, or $7.9 million, to $86.2 million, compared to $94.1 million at March 31, 2008.

As a reminder, on March 31st we announced that we amended our credit facility with GMAC Commercial Finance, LLC to extend the facility's maturity through April 30, 2012. The credit facility was originally scheduled to mature on January 5, 2010. In addition, the amendment reduces the commitment under the facility from $100 million to $85 million. As of March 31, 2009, we had $46.2 million outstanding on the line.

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

Thanks, Jim. While I do believe there are still challenging times ahead of us, I do think that the worst of this recession is now behind us. Looking out at the remainder of 2009, our sales compared to begin to moderate -- our sales comparison begins to moderate, particularly starting in July, and we should see some incremental business driven by the stimulus spending.

We do expect gross margin to be roughly flat versus last year, nine months of 2008, and SG&A to be down over the same nine-month period of last year, although not at the same rate it was in the first quarter. We are also forecasting that our debt levels will come down further by year-end.

Our entire team continues to do a very good job managing our business through this volatile environment, and I believe we are well positioned to capitalize on the market share opportunities that will materialize when the economy improves.

Operator, we will now be ready to take any questions.

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) The first question is from Reed Anderson with D.A. Davidson. Please go ahead with your question.

Good afternoon.

Hi, Reed.

Mike, I was curious, how are you feeling in terms of pricing in this environment? Have you been able to kind of maintain kind of pricing integrity? Are you feeling pressure to offer a little incentive? What's your thought on pricing at this point?

Reed, we're fortunate that we have multiple brands, and we have price-segmented those brand, and we have not had price pressures that we have reduced our wholesale selling price. We are generating some interest through free freight from time to time, and some additional incentives, some in-store marketing, but we have not felt the need to break price, if that is your question, and especially with the new product that we're offering that they have signed up for, and our backlog is up starting in the second half over last year. There has not been price pressure.

David, maybe you have something. David Sharp.

No, we took -- at the end of this year, we took about a 1.5%, 2% price increase.

Okay.

And our retail customers seem to be settled into that pretty well.

That's good. And then in terms of if you -- the other side of that, the cost side, I mean, is it your sense that maybe later, as this year moves on, you might see a little benefit on the cost side of things, or is too early to tell?

Well --

And I'm talking about ending up the sourcing production necessarily, not the SG&A side. I'm sorry.

Yeah, I understand the question, and a year ago there was inflation with the cost side, almost runaway inflation. That's been reversed, and factories are not full.

No.

And there are some opportunities -- not great, but there are some opportunities for volume orders, so we're trying to take advantage of that.

Okay. Okay. And then you talked a little bit about trend -- the early stages of migrating some of the Lehigh business to the Web and that sort of thing. It sounds like you've gotten a lot of people looking at that. What's the thinking there in terms of to provide them an incentive, whether it's a volume discount, or is that where the freight piece comes in? How would you -- how would we think about the benefits of the customer? How would you position that?

The sales proposition is all around the cost savings, and what we're showing customers is, if they go to the Web, it's about a 15% to 25% cost savings.

Okay.

And we're selling that to the management that will keep those cost savings. And old habits are hard to break, but we think once management sees the cost savings, in today's environment they almost cannot say no.

Okay, good. And then, lastly, on Lehigh, could you give an order of magnitude of either number of trucks you're down -- just you talked about a lot, and it sounds like you've made big progress. I'm just curious what that equates to in actual numbers.

We're currently operating with about 65 trucks, which is down about 20 from December of last year.

Okay, great. That's it for me. Good luck. Thanks.

Thanks, Reed.

The next question is from Mitch Kummetz with Robert W. Baird. Please go ahead with your question.

Hey, guys. This is actually Kevin Kim calling for Mitch.

Hey, Kevin.

Hey, Mike. I just had a quick question as far as genuine Dickies and the launch at Wal-Mart. I know that you guys were working through some of the issues when you guys reported Q4. Can you give us an update on that, maybe total doors and total SKUs and kind of how that's being going so far?

Kevin, you're correct. At year-end last year, we talked about a start late last year, November timeframe -- late November, and not a good distribution of the product in the stores.

Uh-huh.

The answer is there's been more of the same. Our customer, Wal-Mart, has moved the buying headquarters from Bentonville to New York. Just two weeks ago, they assigned a buyer, a footwear buyer. We were there last week, and then we've got good information that they're going to test lower price points, they're going to test location in the footwear department, and are going to distribute into -- I think maybe they had the wrong stores instead of -- we were in many of the wrong doors.

So, we don't have a strong answer for you other than we've got a new manager, or a new buyer, she is open to ideas to regenerate sales interest in the brand.

Okay. And then as far as guidance, I realize you guys aren't providing official guidance, but given all the positive things that you guys were talking about that could hit in the second half, whether it's federal spending or this new UK or the backlog increase, would you guys go as far as to say that you guys are expecting top line growth in the second half of '09?

Kevin, this is Jim. I think that as Mike said in his closing comments, we feel like the gross margins are going to be flattish with where they were last year in the last nine months of the year. And we feel SG&A is going to be down year-over-year, although maybe not as significantly as it was in the first quarter, but certainly down year-over-year.

The biggest question is the top line, and we feel as we move to back half of the year, the comparisons become easier because our business was down more particularly on our retail business in the back half of the year.

So, we certainly have a greater opportunity to equal our last year as we move towards the next nine months.

Okay.

So, that's -- obviously, everybody's $64,000 question is what does sales look like at the back half.

Exactly. That's tough right now.

Yes.

And then as far as this backlog increase that you guys are experiencing in the second half, can you guys quantify that in a specific way? I think, David, you mentioned by certain categories that you see increases?

No, I don't think we want to do that, but I can tell you that our business in outdoor around these new products is up substantially at our -- at some of the key retailers, and we're experiencing the same kind of reception to our work and western products.

But, traditionally, you don't have quite the pop in the third quarter on, so we are very optimistic about what we see then and what that can mean for the back half of the year.

Okay. No, that's great to hear.

We have those orders in-house, so we know what those numbers are, but we just -- as compared to last year, we know where the new business is coming from and just need to let it play out.

Okay. And that's it for me. Thank you so much.

Great. Thanks, Kevin.

(Operator instructions) The next question is from Peter Larson with Columbia Management Group. Please state your question.

Hello, all.

Hi, Peter.

Just a couple things. Anything from the military that you might be waiting on a decision or have some potential for being there a little ways out?

Peter, there are two answers to that question. Part of the increase that we saw that David talked about in our duty line is actually -- it's a branded military special boot that we've had in the line now for a couple seasons, high priced in delivering margin and sales, and so that's actually military. That's a positive.

The negative is the bidded business is very, very difficult. And we were just in -- we were just over at the Department of Defense last Friday. There's a bid that we're still waiting to hear from that we bid late -- the middle of last year, and here we are almost one year and they've not let the bid. Now, they did indicate that they're going to give everyone another opportunity to readjust their bid.

So, I don't have anything positive to report. We've got a couple little contracts that we're working through, and we need a sizable contract. The Department of Defense is aware of that. We've verbalized it, and so we're really just sitting and waiting like everyone else.

Okay. So, I guess I always look at military as just giving you a little extra. It helps absorb some of the costs and --

We see that also, and that's important to us now. The one thing that I -- I'll back up, and this other branded boot is also built in our same plant. It's a made-in-USA product, therefore it falls under the (inaudible) compliance. But those aren't hundreds of thousands of pairs. That's probably a 30,000-pair unit annually, but at real good margins and good prices.

Is Zumfoot ever going to mean much to you guys?

We've passed on Zumfoot.

Okay.

We were trying to build that, and we announced that the last quarter, Peter, and basically we were investing money to try to build the long term, and when -- so the answer to your question, no.

No. Okay.

It's not.

I assume -- you mentioned that you expected to pay down debt further. I assume that means you expect, over the next several quarters, to have again free cash and that the target for that is going to be pay down debt?

Yes, that's right.

That's correct. That's correct, which we've done the last two years, and we'll continue to do that. We think can take some inventory out, more inventory, run it a little tighter, and watching that inventory every day.

And we're also trying to limit our capital expenditures as much as possible.

Right.

So, to build some more cash to put against the (inaudible).

But, Peter, also our business is we get an order today and we ship it tomorrow. We don't have a -- except the fall business that David Sharp talked about with our order books. We have to have inventory to service our customer, so I don't want to mislead anybody and tell you that we're going to run down inventory so that we can ship to our customers. We've got to balanced that.

Yes. No, I'm actually interested in your debt getting paid down some and using free cash in that role or that mode.

So am I.

I can imagine. I was out in your neck of the woods yesterday. Sorry I wasn't able to get in there.

I wish you had stopped.

Planes just didn't work. Anyway, thanks for the answers, and let's hope things get better for everybody.

Yes, sir. Thanks, Peter.

Yes.

(Operator instructions) I'm showing no further questions in queue. I'd like to turn the call back over to Management.

Great. Well, thank you, ladies and gentlemen, for listening. We appreciate the questions, and we look forward to talking to you next quarter.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.