Wolverine World Wide Inc (WWW) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Wolverine World Wide second quarter 2002 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session for analysts and portfolio managers. This conference call is being recorded at the request of Wolverine World Wide. At this time, I would like to introduce you to Tom Munns, vice president of corporate strategy and communications for Wolverine World Wide. Please go ahead, sir.

Thank you, Wendy and good morning to everyone. On today's conference call are Tim O'Donovan, president and CEO; Stephen Gulis, executive vice president and CFO; Steve Duffy, executive vice president; Blake Krueger, executive vice president and general counsel; and Nick Ottomez, vice president of finance and corporate controller. This morning we issued a news release announcing second quarter financial results. If you have not yet received a copy call Laurie Williamson at 800-435-9539 to have a copy faxed to you. It is also on the wires in full text and can be reviewed from corporate website at www.wolverineworldwide.com, Before I turn the call over to Tim O'Donovan and Stephen Gulis to comment on the second quarter results, I would like to remind you predictions made in today's conference call regarding Wolverine World Wide and operations may be considered forward-looking statements. As a result, we must caution you with any prediction or projection, there are a number of factors that could cause results to differ materially, these risk factors are identified in the SEC filings and on our press releases. That being said, I will turn the call over to Timothy O'Donovan and to Steve for comments on the quarter.

Thanks, Tom and good morning. Thanks for joining us today. I am pleased to report record sales and record net earnings for the second quarter of 2002. Earnings per share of 21 cents were even with last year's second quarter and equal to consensus estimates. Sales were strong for the quarter, up 11.6% to $169.3 million. Gross margins improved from first quarter and we were pleased excluding the European acquisitions, margins exceeded the comparable quarter last year. Recently acquired CAT and Merrell operations added approximately 8.3% to our second quarter sales volume, while ongoing businesses accounted for the remaining 3.3% increase. Historically, the second quarter is the lowest volume and least profitable quarter for our acquired European businesses. These new businesses were 2 cents diluted in the second quarter and year-to-date, we continue to expect the CAT and Merrell Europe acquisitions to add approximately 10% to 2002 sales and be non-diluted for the full year. From a balance sheet perspective, I was pleased with our progress in the quarter and for the first half. Our pattern has been to use cash and build working capital in the first half. However, this year, we generated significant amounts of cash from operations and kept our combined investment and inventory receivables flat during the first half in spite of European acquisitions. Excluding these acquisitions both inventory and receivables ended the quarter down from year ago levels. From a sales perspective, Merrell had a strong quarter, exceeding our planned 20% sales growth goal. Increases were strongest in the U.S., but were above planned in the U.K. and Canada. Merrell across distribution channels continues to exceed our retail partners planned levels. This resulted in excellent reorder activity in all categories during the quarter. Merrell women's and children's businesses are growing even faster than the men's business. Looking at our fall backlog, the backlog for women's and children's product exceeds the dollar value of our men's backlog. While the after-sport and sandal categories were excellent, Merrell's core multi- sport product continues to be a top performer. A recent industry survey in the hiking category indicated that Merrell multi-sport products were not only the number one selling item in the category, but accounted for four out of the top 10 best selling patterns at retail. Merrell's multi-category success at retail is opening up opportunities for deploying Merrell shops in some of the very best retail space in the U.S. Several new shop and shops will be placed this fall with key retailers with the more significant rollout plan for 2003. Having a prominent Merrell presence with broad product presentations and top quality high traffic retail locations will be an important next step in our Merrell growth plan. Overall, sales the Wolverine footwear were down slightly, excluding impact of exiting the U.S. Coleman footwear business, the reorganization of the safety distribution business and declines in the Stanley payless business as the brand anniversary last year's pipeline sales would have been up for the group. Harley-Davidson sales were up double digits in the quarter. Harley-Davidson continues to enjoy good retail sell-throughs, resulting in a 15% increase in reorders during the quarter. So far in 2002, Harley-Davidson has opened 200 new stores and has a commitment from Sears to double the distribution of Harley-Davidson from 200 stores to 400 stores this fall. Strong sell-throughs and expanding distribution bowed well for achieving the Harley-Davidson growth objectives. We recently received good news regarding our Wolverine boot brand. While real work boots for real workers is at the core of the Wolverine brand, Wolverine is the fourth largest selling brand of hiking, rugged casual footwear in the U.S.. According to sports market research groups 2001 market track, Wolverine holds a number four market share position, trailing only Timberland, Nike and Merrell. Wolverine is working to capitalize on this strong position with expanded rugged casual footwear offerings and a growing apparel licensing with LeBlance sportswear. This is in the early stage of development, I believe they have significant long-term potential. The aggressive marketing plans for Wolverine will continue with the coordinated television, radio and print campaign, launching in September. Hush Puppies global sales in the quarter were down mid-single digits with U.S. reorders continuing to be soft. However, the order and backlog trend did improve during the quarter. And Hush Puppies is entering the back half with a mid-single digit increase in order backlog. During the quarter, Hush Puppy women's 360 active casual product was expanded to all Nordstrom doors, as well as other upper tier retailers. We are experiencing up-kick in order activity from a number of mid- tier accounts, such as JC Penney. The combination of these trends are encouraging entering the fall season. Internationally, the Hush Puppies business in U.K. and Canada continuing to benefit from the successful repositioning of the brand in those two markets. Hush Puppy licensing revenues will benefit in the back half from the expansion of global product. Excluding the newly acquired European businesses, the CAT boot business was counsel in the quarter, reorders were generally soft. However, orders for fall delivery increased during the quarter and CAT ended the quarter with high single digit increase in order backlog. Our new U.S. CAT management team has moved quickly to introduce new rugged casual product and has obtained opening orders for the fall from the Buckle, Gadzooks, Journey and Nordstrom. I objective integration is moving forward aggressively. New logistic support and contract warehousing distribution moves are being implemented as we speak. New systems and business processes will be in place to ensure timely execution of fall deliveries. While our CAT and Merrell acquisitions were diluted in the first half, we expect improved performance in the back halftime. European order backlog increased during the second quarter, setting the stage for stronger back half shipments. In terms of our other business units, leather business had an excellent quarter by the strength of demand from internal customers, particularly Merrell. Our leather is the cornerstone of the brand. As well as outside customers such as new balance. Our performance leather continues to play an important role in providing our brand with the competitive advantage and unique selling proposition. In summary, the overall retail environment is far from easy. However, retail inventories appear to be relatively lean. While cautious, retailers have stepped up fall commitments for our brands. This is reflected in our unshipped order file, which ended the quarter up 8.1%, excluding European acquisitions. Backlog including the European acquisitions is up 21.5%, all but a small portion of the backlog is for shipment in 2002. Overall, we are off to a solid start in 2002, as consumer demand for lifestyle products remain high. Our newly acquired European businesses appear on track to add about 10% to 2002 sales. We continue to expect full-year sales and earnings to meet previously announced ranges of 820 to 830 million and $1.12 to $1.15 respectively. I would like to turn the presentation over to Stephen Gulis, Wolverine CFO to give you additional details.

Thanks, Tim. Good morning, everyone. This morning we announced record second quarter earnings. Net sales for the corporation totaled $169.3 million, which was 11.6% increase over the $151.7 million reported for the second quarter of 2001. For the year to date, 2002 net sales totaled $346.6 million for 11.8% increase over the $309.9 million reported for the same period of 2001. Net earnings for the second quarter of 2002 totaled $9.1 million, which exceeded the $8.9 million reported in 2001. For the year to date, net earnings in 2002 totaled 59.5 million versus $14.8 million in 2001. Earnings per share for the second quarter were 21 cents in both 2002 and 2001 and 36 cents and 35 cents for the year-to-date in 2002 and 2001 respectively. The acquisition of the European acquisitions have reduced earnings per share by 2 cents in the second quarter and for the year reflecting the seasonality in integration of these operations. The second quarter is historically the slowest quarter for these operations, we continue to forecast the operations to be non-dilutive on an annual basis. Excluding the operations of the European acquisitions, net sales improved 3.3% and 2.6% for the quarter and year-to-date respectively. These increases exceeded our original forecast as we projected pre-acquisition businesses to be flat in the first half of the year. The European acquisitions have added 9.2% to year-to-date revenues and are projected to add 10% to annualized consolidated revenues. Divisionally, the pre-acquisition revenue increase was led by Merrell and Harley-Davidson businesses. Merrell continues to exceed its 20% growth plan and the Harley- Davidson business is running ahead of plan. While the total Hush Puppy business was down in the quarter and for the year, the international businesses generated a high single digit revenue increase. In a work boot arena, Wolverine revenues were slightly lower in the quarter, prince pale the result of our plan to eliminate profitable business in the HYTEST and Coleman operations. Our core work product continues to maintain strong market position and is on track to produce a mid-single digit increase for the year. Our CAT footwear business is down both domestically and internationally as the new management team modifies the product offerings to build a global lifestyle business. Additionally, our Wolverine leather business had a strong quarter, generating upper digit increase for the year, driven by success of Wolverine leathers in the Merrell product line and increased sales to external customers. Reported gross margins of 36.4% were flat with 2001 levels. Excluding the European acquisitions, gross margins increased 50 basis points in the quarter. On a year-to-date basis, pre-acquisition gross margins have increased 110 basis points and are up 70 basis point when is including the acquisition The projected annualized margin expansion of 40 to 50 basis points continues to be appropriate as we face stronger margin comparisons in the final two quarters of 2002. The gross margin expansion has primarily been driven by several factors: a higher percentage mix being Merrell and Harley-Davidson, which operate at higher margin levels and increased volume in our tanning operations which provide increased absorption and continued efficiencies in our own manufacturing operations. It is worth noting these margin improvements were made while reducing inventory levels on pre-acquisition businesses in the first half of the year. Consolidated selling were 27.5 percent and 26.5% of net sales for the second quarter of 2002 and 2001 respectively. On a year-to-date basis, selling and administrative expenses were 28.1% and 26.8% of net sales for 2002 and 2001 respectively. These increases resulted from increased pension costs and the cost associated with the additional businesses in Europe and the U.K. In the second quarter, total selling and administrative expenses excluding pension cost and the acquisitions increased 1.7% in absolute dollars over 2001 second quarter spending levels on a 3.3% net sales increase. Annualized selling and administrative expenses as percentage of net sales are projected to be 150 basis points lower than year-to-date results as we anticipate cost reductions from the establishment of European base centralized services operation and increased sales leverage. Additionally, the annualized non-cash non-operating expense increase related to the pension plan is forecasted to reduce earnings per share by 6 cents per share, when compared to 2001, which is consistent with prior guidance. Interest expense has improved slightly over 2001 levels for the quarter and year-to-date is outstanding amounts under the revolving credit agreement have been reduced. An estimated annualized income tax rate of 33% is being used in 2002, which compares to the 34% rate experienced in 2001. This estimated rate reflects the change in profitability mix of our business. The weight of the average shares outstanding for the quarter were 42.7 million shares, compared to 42.5 million shares a year ago. We are pleased to announce we are continuing to generate strong operating leverage from our pre-acquisition businesses. The year-to-date net sales increase of 2.6% has generated improved operating results of 8.4%. This leverage is in excess of targeted 2-1 earnings growth to sales growth ratio. One additional item of interest may be the impact of the weakening U.S. dollar on our operations. The recent movement had little, if any, effect on first-half results and the second half impact will be minimal. In the second half, the weaker dollar is expected to increase sales by approximately 1% and the net earnings change will be minor as we have purchased currency contracts for the majority of inventory purchases for the upcoming fall season in order to fix our product costs and lock in margins. The balance sheet of the corporation continues to strengthen. Interest bearing debt of 87.9 million is $10 million below the balance at the end of last year's second quarter and we ended the quarter with no revolving debt. These improvements resulted in our total debt to total capital ratio being 19%, which is below our operating range of 20% to 40%. Additionally, we ended the quarter with 26.8 million dollars of cash, which resulted from the strong cash flow generation from operating activities. During the first half of 2002, we generated $39.2 million of cash from operating activities, which was improvement of $36.8 million over 2001. Based on this strong start, we have revised our target for free cash flow generation to $75 million for the year. Which would approximate $1.75 of cash generation per share. Our asset management programs have reduced working capital investment on pre-acquisitions businesses by $25 million for 8.8% improvement. Total accounts receivable of $146.9 million are 5.2% below at balance at the end of the second quarter of 2001. Excluding the acquisitions accounts receivable were reduced by 11.7% over the prior year and day sales outstanding were reduced by 6%. We continue to focus on reducing our day sales outstanding. Inventory improvements accelerated during the quarter as pre-acquisition inventories were reduced by 1.7%, when compared to 2001. Total inventory increased 8.1% over 2001 second quarter, which reflects the recent acquisitions. We are pleased to see our strategy of merchandising deeper on fewer SKUs is paying dividends. We have reduced inventory while continuing to provide best in class service to customers. Further improvements are targeted for the remainder of the year. During the quarter, we used 9.6 million of cash to repurchase approximately 540,000 shares of stock under previously approved repurchase program. We have repurchased approximately 1.2 million shares of the authorized 2 million share repurchase and will continue to repurchase as deemed appropriate over the remaining time period granted by the authorization. As Tim mentioned, we are projecting revenues to be in the 820 to $830 million range and earnings per share to range from $1.12 to $1.15. Sales for pre-acquisition operations are expected to accelerate in the back half of the year. Under this scenario, the pre-acquisition businesses would continue to produce annualized operating leverage in excess of our stated earnings growth to sales growth goal. I thank you for your time and attention and would like to turn the call back to Tim for final comments.

Thanks, Steve. From a long-term perspective, there are key points shareholders should consider. We are successfully repositioning our mix of businesses and brands resulting in increased profit and growth opportunities for the company. Our three lifestyle brands, Merrell, CAT and Harley-Davidson, accounted for 40% of first-half sales. This percentage will continue to grow. These higher margin lifestyle businesses are still at early stages of development, with future strong growth prospects both in the U.S. and globally. While some of the other businesses have moderate growth profile, they do add stability to our portfolio and are solid profit contributors. Secondly, in addition to the benefits of diversified brand portfolio, we are geographically diverse, generating one-third of the operating income from outside the U.S. With our recent European acquisitions this percentage will grow over time. I am pleased with the progress we have made in integrating our European acquisitions and am confident we will see positive synergy develop over the next 12 months. With a strong base of operations in Europe, we will have future growth opportunities for our entire portfolio of brands in the world's largest market for better footwear. Other markets around the world, licensing arrangements produce excellent returns with low risk. Finally, as Steve alluded to, we are generating large amounts of cash and should continue to do so. We expect to produce a record $75 million of cash from operations this year. This gives us the latitude to simultaneously reduce debt, repurchase stock and internally fund growth initiatives. In today's nervous and volatile market environment, Wolverine offers a relatively low-risk, high-growth opportunity. We are making real progress toward our goal of becoming the world's premiere footwear company in the non-athletic segment of the market. I appreciate you taking the time to join us this morning. Thank you. At this time, we will open up the call for questions. Please go ahead, Wendy.

If you would like to ask a question, press * 1 on your touchtone phone. To withdraw your question press * 2. To ask a question, press * 1 on your touchtone phone. Our first question comes from John Shanley. Go ahead and state your company.

John Shanley, Wells Fargo Securities. Congratulations on a nice quarter. Tim, I wonder if you can give us indication of the gross margin levels in Merrell's women's and kids product line? Is it as strong as the men's category and also, are the margins of Merrell obtaining in Europe as strong as in the U.S.?

John, beginning with your first question. The women's category, overall margins are slightly better, the children's would be more in line with the men's margins. In terms of how we are positioned from a pricing margin standpoint in Europe, very similar to the way we are positioned in the U.S.

Great. Either Tim or Steve, can you give us more color in terms of how you may be ordering your priorities to use some of that $75 million in free cash flow? Are we more likely to see emphasis placed on reduction of debt or share repurchases or increased add spending or any other purposes, including possible acquisition or two?

This is Steve. In the back half of the year, we will be required to make $15 million worth of principal payments on long-term debt. We will make a principal payment on both of the issues that we have out there. So, that will be a portion of the cash that we will be using. We still do have an amount of stock available under the repurchase program. The current program expires in October of this year. So, if the market conditions are appropriate, we would see ourselves continuing to exercise our repurchase. The other key is that we will want to make sure we keep ourselves flexible enough so that if the right acquisition opportunities do arise, we have the drive power, either with the cash or the financing available without having to go outside our existing structures to do any types of opportunities that might come up.

Does it make sense, Steve, to increase over and above the $15 in debt repayment scheduled, would it be beneficial or are there - well, in terms of accelerating the debt to repayment efforts?

(inaudible) are pretty stiff right now. And you know, given that we're on the $75 million senior debt issuance out there, we have that for another six and a half years. To have six and a half percent money for another six and a half years, I would hate - I wouldn't want to pay that down. I would imagine over the next - that period of time, we will find opportunities where we will have to think money will look cheap and we will be able to use that as part of the funding. I wouldn't want to repay it for two reasons. One, the make hold provisions. Two, it is good long-term money to have.

Fair enough. On the Hush Puppies program, what percentage of the overall domestic business is 360 collection and where do you see the growth in 360, could it become the major growth story for the brand or likely to stay pretty much the same level?

In terms of overall percentage , it would be less than 20% of our women's business. What I think is significant about it is it is leading the way in the whole active casual product category for us. And where we see the growth coming from Hush Puppies is really to continue to reposition the brand moving our price points and distribution and product quality more up market. That is where we are achieving success with accounts like Nordstrom. When you get an opportunity to see the spring '03 product line, a portion of our product line now that really is geared to a more contemporary casual customer has become a predominant product offering in the line. That is a pretty dramatic change from where we were just two or three seasons ago. we have a lot of work to do, but are making good progress.

Great. Keep that up. Last question is just a quick summary on the European business. It seems like that thing is really catching fire for you. Longer term as far out as you feel comfortable commenting on, how much could Europe represent the total revenue and possibly even operating profit margins?

John, in 2002, we expect Europe to represent 15% of revenues. We would see that portion of our business drawing faster than the overall business in the next couple of years. That percentage we believe will grow.

The profitability of it is likely to be as rich as it is in the U.S. or will it be -

That would be our goal. It is not at this current point in time, the real key there is getting our centralized services structure in place, which will replicate the structure that has been successful in the U.S. We are moving along at a pretty rapid pace to make that happen. We expect to have some - to realize significant synergies over the next months as we put that structure in place. And that is going to increase the overall profitability of our European business, not just newly acquired CAT and Merrell business, but our pre-existing Hush Puppies U.K. business and Merrell U.K. business which had stand alone infrastructure and will benefit from centralized structure.

Thanks. I appreciate it

Thank you. Once again, to ask a question press * 1 on your touchtone phone. Our next question comes from Bob Gerbil. Go ahead and state your company name.

Lehman Brothers. Good morning. Couple of questions to tighten up a few things. On the gross margin comment you made earlier, you talked about 40 to 50 basis points. Is that on the existing businesses or consolidated for the full year?

On consolidated businesses, which include - the ongoing businesses would be in excess and there would be slight pull-back with the European additions.

Okay. And then, I guess, could you put more color around what you're seeing cross brands on the replenishment side of the business? Backlog is 8%, talk about the level of replenishment in the departments channel and what you saw most recently and what your expectations are for the rest of this year?

Bob, in the most recent quarter, we saw modest increases in our overall reorder business. A lot of that was driven by demand for that increase was driven by demand for Merrell and Harley-Davidson. We're as we go into the back half of the year, we believe we're going to see some modest increases in our reorder business, I think particularly in the fourth quarter because early in the fourth quarter, our fourth quarter - recall last year, began on September 11th, and clearly for four or five weeks, reorders were very weak a year ago. As we go up against the numbers, we anticipate that we are going to see improvements against last year's numbers.

Okay. I guess I would like the final question to pose would be when you look at what you are seeing with Hush Puppies and the Caterpillar business, in terms of repositioning there, do you see anything that you think poses a challenge from continuing to make progress? Are you happy with what you are seeing right now? When do you expect to see a little bit more tangible top-line or operating margin type progress in those specific businesses?

Bob, it never happens fast enough. I will tell you that. I think the best indicator objective indicator out there is what is happening on the forward-order front. We are seeing improvement in Hush Puppies, overall backlog at the end of the second quarter is up mid-single digits. We saw pretty significant uptake in incoming orders for CAT in the U.S. the second quarter. Now, we are in a positive backlog position. That is the first time we have been in a positive backlog back order position for several quarters. So, I think we are we're getting some signals out there that people and retailers are responding more positively to the product offerings we have out in both the brands. And we would anticipate having - seeing modest increases in sales as we get into the back half in both businesses.

Okay. Great. Thank you.

Thank you and at this time, there are no further questions, sir.

Thank you. We would like to thank everybody for joining us today on our conference call. This call will be available for replay at our website, www.wolverineworldwide.com. Again, that is all one word. The replay is also available by phone until 5 p.m. on Monday, July 15th, eastern time by calling 800-695-3396. This concludes today's conference call. Once again, thank you for joining us. Goodbye.