Rocky Brands Inc (RCKY) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Rocky fourth quarter and fiscal year-end conference call. We will conduct a question-and-answer session following the prepared remarks.

(Operator Instructions) I would like to remind everyone that this conference call is being recorded and 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, [2010]. I will now turn the call over to Mr. David Sharp, President and Chief Executive Officer of Rocky Brands.

Thank you. Good afternoon, and thanks for joining us. With me on the call today is Jim McDonald, our Chief Financial Officer. We're very pleased with our fourth quarter performance. We ended the quarter on plan, which, given the mild weather throughout much of the country in November and December, was an encouraging end to 2011. Sales trends were very similar to the first three quarters of the year. Namely, our top line was driven by demand for our new product introductions in the work, hunting and western categories. And we continue to experience increased sales velocity under our fast growing commercial military segment. To properly evaluate sales in our fourth quarter and full year, we believe it is prudent to exclude our nonrecurring operations, namely our military segment. This is the bid business conducted by the Department of Defense, and also excludes the Dickies license business, because that was discontinued at the end of 2010. As a point of reference, we reported military segment sales of $17 million in 2010, versus $2.2 million in 2011. Dickies sales were $7.6 million in 2010, and we had just $200,000 in sales of Dickies in 2011.

I should note that, after dramatically improving our balance sheet and significantly reducing our expense structure, we have more recently been able to free up resources and once again put more emphasis on growing our top line. While we have identified several long-term growth vehicles that I'll discuss later in the call, the initial phase of expansion centered on leveraging our core strengths in product innovation, to develop new and compelling footwear that appeals to our brand's core customers. So, let's focus on our own wholesale brands, Georgia, Rocky and Durango, and our Lehigh retail division. During their long histories, our brands have established leadership positions in their respective categories by consistently being at the forefront of innovation, and delivering the latest in durability, comfort, and functionality. Due to the internal and external challenges we faced a few years ago, including integrating two sizable organizations, I believe we lost focus, and brought to market some uninspiring collections during that time. That said, I'm confident that the operational changes we've implemented, which include a new product development system, have made our R&D platform stronger than ever, and this is reflected in the recent performance of our new products. To underscore this point, approximately 28% of wholesale sales this past year came from products introduced in the last two years.

A few of the standouts include our redesigned and improved Blizzard Stalker cold weather boots that, despite the unfavorably warm winter, sold well in the sporting goods channel at national and regional players like Dick's Sporting Goods, Cabelas, Wholesale Sports, and Gander Mountain. Our Georgia boot brand continued to gain overall shelf space, driven in large part by sales of our new Crossridge styles, a hiker inspired work boot collection featuring our Vibram Lug outsole that also performs well in the rugged outdoors. Sales have been particularly strong in the northwest for the Georgia brand, where we saw solid gains in the farm and ranch channel at locations like Coastal Farm and Home, and multi-store work wear accounts like Whistle Work Wear. In western, it was women's fashion product, as well as our new little Durango kids line of boots that has allowed us increase business at core market multi-store retailers like Cavender's Boot City and RCC Western. We also chased production all year on our newly launched Rocky branded Long Range collection. Many of our key retailers experienced expanding un-forecasted demand for the line throughout the year, including in the sporting goods channel, as well as western stores at accounts like Bass Pro Shops. At the same time, we have seen a great response to the fully drainable boot we developed for the US Navy Seals, and a hyper light weight boot that soldiers like to wear on base and when they are traveling in uniform. As a reminder, this is a high margin business, and should not be confused with our low margin government contracts that we receive from time to time, which we report as our military segment.

This higher margin business component has now grown to be very significant. Sales were almost $20 million in 2011, versus $8.6 million in 2010. There is still upside here, which I'll discuss later. The second major area of focus has been on remaking our retail division. It has been a multi-year process of switching out high cost sales through our legacy mobile platform for a more efficient web based direct ship model. Since its debut in late 2008, we have made steady progress transitioning customer sales to the Internet, which has allowed us to decommission more than 50 trucks, including 18 last year, and we have shuttered all but 3 of 43 stores supporting the mobile business. In the third quarter of 2011, our retail business hit an important inflexion point. It generated a positive operating profit on higher gross margins and lower expenses, and, for the first time ever, more than half the sales came from the web and our call center. This trend accelerated in the fourth quarter, and, for the full year, division performed way beyond our expectations and operating plan.

Jim will now go through the financials in detail, and then I'll return to discuss our growth strategies for 2012 and beyond. After that, we'll be happy to take questions. Jim?

Thanks, David. As we announced last quarter and detailed in today's earnings release, we recorded a one-time non-operational charge of $3.7 million net of tax associated with the termination of our defined benefit pension plan. To recap, the defined benefit pension plan was the predecessor to our current 401(k) program, and was frozen since the end of 2005. The assets in the pension plan under-performed expectations over the past several years, and the expense associated with this under-performance have been capitalized on our balance sheet. This expense would have been recognized over the next 10 years. Therefore, we made the decision to terminate the plan, instead of letting the gap between the asset value and the commitments continue to widen and, in turn, increase the ultimate expense to be recognized. By closing the plan, the Company will save approximately $200,000 in annual maintenance fees. The following discussions excludes the impact of the aforementioned charge. For a reconciliation of our GAAP results, please see the tables that accompany today's announcement. Now to our results.

Net sales for the fourth quarter were $64 million, compared to $66.7 million for the corresponding period a year ago. Wholesale sales for the fourth quarter were $51.7 million, compared to $52.5 million last year. We experienced significant growth in our commercial military business, which more than doubled versus a year ago, while at the same time our Durango brand posted a 9% growth in the quarter. This was offset by decline in our work category, due primarily to discontinuation of our license agreement with Dickey's at the end of 2010, and softness in our hunting category as a result of the mild weather late in the year. Retail sales for the fourth quarter were $11.9 million, compared to $12.4 million a year ago, and military segment sales were $0.4 million, versus $1.8 million for the same period in 2010. The decrease in military sales was attributable to the completion of our initial order under our contract with the GSA before the start of 2011. Gross profit in the fourth quarter was $22.5 million, or 35.1% of sales, compared to $24.3 million, or 36.5% of sales for the same period last year. The 140 basis point decrease in our gross margin was primarily driven by a non-reoccurring inventory adjustment resulting from our annual physical inventory. Excluding the adjustment, gross margins in the fourth quarter were 36.3%.

Selling, general and administrative expenses declined 11.7% to $16.7 million, or 26.2% of net sales for the fourth quarter of 2011, compared to $19 million, or 28.4% of net sales a year ago. The $2.2 million, or 220 basis point improvement was primarily due to lower compensation expense, professional fees, and operating costs of our retail business. Interest expense for the fourth quarter decreased to $0.2 million from $1.7 million in the fourth quarter of 2010. As a reminder, in the year-ago period, we recorded a non-cash charge of approximately $1 million associated with deferred financing costs relating to extinguishing our previous credit facility and the repayment of our senior term loans. The remaining decrease in interest expense was due to lower interest rates versus the same period last year. Our effective tax rate for the fourth quarter of 2011 was 29.4%, compared to 24% in the fourth quarter of 2010. For fiscal year 2011, our effective fax rate was 30.9%, compared to our previous estimate of 32.6%. The lower effective tax rate was a result of additional permanent capital investments we made in our Dominican Republic operations during the fourth quarter. We reported net income of $3.9 million, or $0.52 per diluted share, versus net income of $3 million, or $0.41 per diluted share. This represents an increase of 27%.

Now I'll quickly touch on a few highlights from our full year results. For the fiscal year ended December 31, wholesale sales excluding Dickies increased 6.5%. Gross profit margin, excluding the inventory adjustment, improved 160 basis points to 37%, with retail gross margins up 200 basis points. Operating income improved $1 million, or 70 basis points as a percentage of sales. Interest expense was down $5.5 million. Net income improved $4.3 million, and diluted EPS increased 40% to $1.60, compared to $1.14 last year. Turning to the balance sheet. Our funded debt was $35 million at December 31, 2011, versus $35.1 million at December 31, 2010. Inventory increased 10.5% to $65 million at December 31, 2011, compared with $58.9 million on the same date a year ago. The increase in inventory was the result of an increase in cost per pair -- per unit, partially offset by a decrease in units of footwear.

David?

Thanks, Jim. We are pleased with the top and bottom line results generated by our core wholesale and retail segments, and with our momentum as we start 2012. Building on the successful introductions from 2011, the product pipeline for this year, particularly the second half, is quite strong. We're confident we have the capabilities to increase our total market share through higher sales volumes in our existing lines of business, and by extending our reach further into new categories, new distribution channels and new geographies. With regard to new categories, there are two main areas of focus. The first being the healthcare industry, which is projected to add more than 5.6 million jobs over the next 10 years. Leveraging our existing hospitality and duty product line technologies, we've created new footwear and developed sales strategies to go after this large and growing market. Two initiatives we are particularly excited about are a new boot targeting EMT workers that incorporates blood borne pathogen protection, and our new Rocky four-year sole clogs for nurses and doctors, who are on their feet for the majority of their shifts.

The second category extension is in the outdoor space, and involves going after the survivalist adventurist segment with a similar product that has been very successful with hunters and military personnel. A lost these weekend warriors play in environments where the core benefits we provide, like light weight, durable, drainable, waterproof, really make perfect sense for them. Next is new distribution channels, and this primarily involves Durango. Through product line extensions that contain a higher elements of fashion, we're opening up the brand to mainstream retailers in more metropolitan locations. We introduced our newest western collection at the FFANY show in New York late last year, and the response was very positive. So far we've received commitments from notable retailers like Zappos.com, Trade Home Stores, Shoe Show, and Fingerhut. Product will be on their shelves this fall, and we are optimistic that consumers will respond favorably. Geographic expansion is another initiative we've been working on, and continue to make solid progress, penetrating select international markets.

In 2011, sales outside the US increased 19% to $10.2 million, with the majority of the growth coming through direct operations in Canada and European distributors of our hunting products. We recently signed new distributors for the Rocky Brand in Finland, and for the Georgia brand in the United Arab Emirates, and we're looking for other partners to fill out the map in the years ahead. I want to close today's prepared remarks by thanking all of the employees of the Rocky Brands for all of the hard work that went into making this past year a success. We tackled the challenges of 2008 and 2009 head on, and we're now in a much better position to take advantage of our strong brand portfolio. And thanks, also, to all of our vendors, suppliers, and all of our other stakeholders for their continued support.

Operator, we are now happy to answer questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

(Operator Instructions) Mitch Kummetz, Robert W. Baird.

Yes, thank you, and congratulations on the quarter. I've got probably a handful of questions. I'll try to get through these quickly. But, David, let me start with you. You mentioned the commercial military business that was up, or it was a double versus last year on the quarter. Could you say how big that business is now for the full year 2011, and kind of what your plans are in terms of expected growth for 2012?

I think the numbers we just read were $20 million for the year, and it was about $8.2 million in 2010, and, obviously, I think it's going to be hard to replicate that kind of growth in 2012. However, we are launching three new extensions of the S2V, which has driven a lot of this business -- a jungle boot version, and an all leather aviator version for the US Air Force, and the steel-toe version that the Army has been asking for. And we're also -- right now the business is really contained in the US Army, and we're going aggressively after the US Navy and the National Guard units in '12. Currently, this business, our largest customer is the MCSS, the military clothing sales and service stores that are on base around the world, and we're about 25% of the unit sales there now, and about 18% of the dollar sales. And, obviously, some stores do a lot better than others, so we're really targeting those stores that we haven't had great volume with in trying to improve sales there, also. So we -- you know, we're very optimistic that we can continue to grow the business, but not at the clip we grew it in.

Got it. And then on the international piece -- you highlighted that as one of the growth opportunities for the company, and you said $10.2 million in 2011. What do you think that business can do this year, given some of the new markets that you're going in?

Well, as I mentioned, we recently signed two new distributors. We're talking to three currently about signing up. I think there's a great -- we've spent a lot of time in Europe -- there's a great deal of conservatism there right now. We're going to continue talking to folks there, so that when things do turn around there finally, we don't have to start all over again. But we are focused right now on South America and Central America, and have some things cooking there. I think we could -- our plan is to grow that business 10% this year.

Okay. And then, Jim, on the cost side -- first of all, could you say for 2011 what the gross margin impact was from input costs? I'm assuming there was some drag, or maybe not. And then kind of what your thinking is on 2012, in terms of the input cost outlook to gross margin?

Well, I think that the drag came late in the year here, as we -- when we really started to recognize the increased costs. Now, we have taken a price increase that we think will offset that increase next year, so I would say that, our gross margins -- our hope is to hold those flat with where they were in 2011, on a segment by segment basis.

Okay. Got it. And then also just thinking, how are you guys thinking about budgeting SG&A in 2012, excluding maybe the variable piece on whatever sort of sales growth you might be looking for?

I think that we're -- we certainly have reached the -- with the Lehigh business, we've taken -- those costs have all -- the big severance costs and things like that that we've had are behind us now, and they were behind us since the beginning of last year. So, I think we're looking probably more flattish on the other SG&A because -- or maybe even slightly up a little bit as we -- because we're investing in these new product lines that we have with marketing and sales and things like that, which is what we need to do a little bit.

Got it. And then just quickly last question, just more of a housekeeping item, but can you tell me what the gross margins were, the segment margin were on the quarter?

Sure. The wholesale was 33.8%. The retail was 47.8%, and military was 14.3%. There was very little sales there.

Right. Okay. Great. Thanks and good luck.

(Operator Instructions)

Sam Bergman, Bayberry Asset Management.

A few questions -- the new Durango line that's being launched, what retail stores are going to have that product? Is Macy's one of them?

Well, we're certainly approaching Macy's. I can tell you that today we were in New York City at a major department store chain, and we had a very, very favorable meeting. And we think that we'll have a -- we'll be there in some measure, it's just too early to speak about it. What we're looking for here, Sam, is new channels of distribution, and that middle America main street is somewhere that today we don't penetrate at all. So we've been focused there, and I think in the prepared statements we talked about we've received commitments from four retailers -- large retailers that you would know, Fingerhut, SHOE SHOW, there were two others. And they were --

Zappos, I believe.

Yes. Zappos.com, and one other of that ilk. And we're at that platform this week also, and I can tell you that I spoke -- about 3.00 p.m. today I spoke with sales folks there today, and they're very, very pleased with the outcome; it has exceeded our expectations. We've opened new accounts. And about half the orders have been written to this channel of distribution that we -- today that we don't sell. So there's a lot of upside there.

Now, ending the last quarter, there was a tremendous amount of inventory, and the inventory came down this quarter. Was any of the inventory increase still related to the weather in this -- in the fourth quarter?

Well, I think we ended pretty clean with respect to heavy insulated goods. It's been our standard operating procedure over the last few years to not buy more than our orders for anything over 200 grams, so that kind of played well for us. We do have some apparel that we'll carry over into next year, some insulated underwear apparel that we'll be carrying over, but none of the -- we don't have any problem with inventories. You know, I think that at our -- we've worked with all of our key accounts. And, I think overall, there will be some shift from one account to another, but overall, I think our business will be up a little bit in hunting, with key accounts, and with now doing the buying group shows, groups like NBS and Sports Inc, and we're not seeing any softness there because of carryover, so (inaudible) about that.

Our inventory of footwear units, pairs, was actually down 96,000 pairs from December of last year, so --

Okay. And who is your nearest competitor when it comes to the medical shoe market?

Well, the people that we hope to give a good run for the money is DANSKO. We think -- we've done a lot of research here. We've researched this category for the last 12 months. We think it's very under-served, these consumers are very under-served, particularly with respect to safety, with non-slip products. They're on hard tile. They're around a lot of fluids. We do that kind of product within our hospitality lines, and we think we can build a more comfortable product line than our competitors, also. So we'll be showing this product line to the trade in about another 60 days.

Is this a -- besides the line itself, is there any extensions to the line that you'll be showing -- any new products, or it's the same or similar line you had last year?

No, this is a totally new line.

So that's the new line that you have with the non-slip technology in it?

That is built specifically for nurses and doctors, yes.

Okay. And the last question in terms of picking up more coverage for the Company, which way are you leaning towards at this time for 2012?

Can you be more specific with that question?

Well, are you planning to do more IR shows versus last year? Are you meeting at more groups, such as like the ICR XChange, or perhaps a Roth meeting or a Needham meeting going forward?

Well, we will do the Robert W. Baird conference this year, and we've been in contact with some other analysts about the potential of them picking up coverage, and hopefully they will in the future here.

Thank you very much. Again, very nice quarter.

Mark Cooper, Pacific Ridge.

Good afternoon. Thank you for taking the call. Could you elaborate a little more on the inventory adjustment at the end of the year?

Yes, we had a -- in our retail operations, we had a -- when we took our physical inventory, we had some shrinkage in our inventory that we needed to -- that we had to adjust out, and that affected our gross margin by about 120 basis points in the quarter.

So that was in the retail division?

It was, yes.

So then, if I heard your numbers correctly, your gross margin in that division was 47.8%?

Right. That was absent that inventory charge.

Absent the inventory charge.

That's right.

Okay. And then did you -- so then looking at the gross margin on the wholesale side, there was no inventory charges to that decline? I don't know what the magnitude there was, but --

It was down about 120 basis points. Most of that was related to the increases that we've had in our cost of our products that we took the price increase in the beginning of October. We didn't get full benefit for that in the quarter, so that's really what most of that was related to.

Okay. And you did mention that at the outset of the call. I appreciate that. What is -- what was the cash flow from operations for the quarter?

I don't have that number with me right now. I can let you know, but I don't have that number with me right now.

All right. Okay. Thank you.

Gentlemen, there are no questions in the queue. I would like to hand it back over to you for closing comments.

Okay. Well, thank you. We'll continue to work hard over the next 90 days and speak with you again in April sometimes. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.