Wolverine World Wide Inc (WWW) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Wolverine World Wide fourth quarter and full year 2002 results call. At this time all lines are in a listen only mode. Later we will conduct a question and answer session for analysts and portfolio managers. As a reminder, this call is being recorded at the request of Wolverine World Wide. At this time, I'd like to introduce you to Tom Mundt, Vice President of Corporate Strategy and Communications for Wolverine World Wide . Please proceed, sir.

Thank you, Wendy. And good morning to every one. On today's conference call are Tim O’Donovan, President and CEO, Steve Gulis, Executive Vice President and Chief Financial Officer, Steve Duffy, Executive Vice President, Blake Krueger, Executive Vice President and General Counsel and Nick Ottenwess, Vice President of Finance and our Corporate Controller.

This morning we issued a news release announcing our record fourth quarter and 2002 financial results. If you did not yet receive a copy, you can call Stacey Craig at 616-253-0100 to have a copy faxed to you. It’s also out on the wires in full text or it can be viewed from our corporate web site at www.WolverineWorldWide.com. Before I turn the call over to Tim O’Donovan to comment on our fourth quarter and full year results, I'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by securities laws. As a result, we must caution you that, as with any prediction or projection, there are a number of factors that could result -- could cause results to differ materially. These risk factors are identified in the company's SEC filings and in our press releases. That being said, I will turn the call over to Tim O’Donovan, and then, in turn, will turn it over to Steve Gulis for their comments on our record year.

Tim O’Donovan: Thank you, Tom. Thank you for joining us. Fiscal 2002 was a year of significant accomplishments for Wolverine World Wide. We produced our third consecutive year of record results as sales grew 14.9% to $827.1m, and earnings improved 7.5% to $1.15 per share. Our asset management program accelerated working capital turnover and contributed to record cash flow from operating activities.

During 2002, we successfully integrated the Merrell and CAT European acquisitions and put in place the management team and infrastructure to become a much more important player in Europe, the world's largest better-grade footwear market. The company's year over year sales gain was fueled by growth from our preacquisition operations as well as the addition of these new businesses. As planned, our European acquisitions accounted for approximately two thirds of the company's 2002 sales growth and generated earnings slightly above break-even in this transition year. The balance of the company sales increase came from our core businesses. In total, these operations produced a 4.9% sales increase. I was pleased to see the sales momentum accelerate in the fourth quarter, with an overall increase in the quarter of 16.7%.

The acquired European businesses contributed just under 9% of the increase, while our preacquisition operations contributed just under 8% of the increase. This is the fourth consecutive quarter of increased sales momentum from the preacquisition businesses.

In the terms of profit, each of our four major businesses, Hush Puppies, Wolverine, CAT, and Merrell contributed to the improved earnings during the quarter. The Merrell brand continues to be our most significant growth engine with sales in the quarter accelerating beyond the levels experienced in the first three quarters. The Merrell gains were strongest in the U.S. but also exceeded 25% range in the U.K. and Canada European sales were relatively small as we're still in the startup phase for this business. The Merrell business is now over seven times larger than when we acquired the business five years ago and is our largest profit producer.

In 2002, over 7 million pairs of Merrell performance footwear were sold to consumers in 130 countries. During the fourth quarter and throughout all of 2002, Merrell's women's business was the fastest-growing segment, followed by children's and men's.

We now have an excellent balance across genders that matches up well with the market potential. In terms of product, the two fastest growing categories this past fall were multi-sport product, these are essentially performance outdoor cross trainers, and the after-sport category. That's the category that Merrell invented several years ago. In spite of numerous competitors' attempts to enter this category with look-alike product, Merrell continues to innovate and grow this category.

From a customer perspective, Merrell enjoys very significant gains for the most recent quarter with its key accounts, including,Dillar, REI, Galleons and EMS. While Merrell has added distribution in specialty Shoe retail channel, most of the brand’s growth has come from increased penetration with the brand's existing premiere retail accounts.

We will further accelerate that going forward with our Merrell shop and shop program which was formally introduced to the trade at last weekend’s outdoor retailer show in Salt Lake City.

With great retail partners, the industry's most innovative product and impeccable marketing, we fully expect to grow this business at a rapid pace around the world. The Wolverine footwear group had a mid single digits sales gain for the quarter. The Harley-Davidson, Bates, and Stanley businesses all had double digit sales increases partially offset by a 3% decline in the Wolverine boot business. The reduction in Wolverine boot sales was principally attributable to the planned exit from the US Coleman business and the restructuring of the high test direct to industry industrial boot business.

Wolverine continued to enjoy strong sell through at retail in the Cortex sport boot category. Wolverine's King Caribou boot was the number one performing outdoor hunting boot for much of the fall season based on point of sale information from sport scan info. Retail performance for cold weather work and sport product was generally good and retailers are ending the season with lean inventories which should bode well for our fall 2003 sell-in.

Harley-Davidson footwear also enjoyed a strong quarter, exceeding our sales plan for the quarter and the full year. This is the fourth consecutive year of double-digit sales increases for Harley-Davidson. I had the opportunity last week to experience firsthand the excitement surrounding the brand by attending the Harley-Davidson dealer show in Orlando, Florida. Over 600 Harley dealers were in attendance and they reported very strong holiday sales of apparel, footwear and accessories in their dealerships.

As a result they're optimistic about their ability to continue to grow their footwear business, especially as Harley celebrates its 100th anniversary this year. We also made progress in 2002 in opening new retail distribution for the Harley-Davidson brand in department stores and better independent footwear stores.

The Bates uniform business had a record quarter and record year in terms of both sales and profits. Bates realized sales gains in the civilian as well as the military uniform markets. A significant portion of these gains is being driven by product innovation. Bates has successfully transferred our patented dura shock comfort technology that revolutionized our Wolverine boot business into the uniform footwear market. We believe we are building a truly superior product, and as a result, gaining share with both our military and civilian uniform footwear customers. A good example of the increased penetration we are achieving recently came from the U.S. Marine Corps, which contracted with Bates to produce 75,000 pairs of desert combat boots, incorporating our direct attach construction, which provides a lighter-weight, more durable, and more comfortable boot.

After slower sales for the last few quarters, the Stanley boot business also had a strong fourth quarter due to increased purchases by Payless. A successful October sales promotion for the Stanley brand at Payless shoe source was a major contributor to the fourth quarter increase.

Caterpillar US footwear sales had a mid single digit sales increase for the fourth quarter. This was the second quarter of improving sales for this business as retailers are expressing renewed interest in the brand.

[ indiscernible ] shoes that retailed this fall, particularly for the new active casual product, were generally strong, which should lead to continued positive sales momentum. The successful integration of the CAT European business was a significant accomplishment during the year. We made great progress in establishing state-of-the-art systems and logistics to support this business as well as our other businesses in Europe. From a fashion perspective, the young lifestyle boot business in Europe is making a come back, and combined with successful line extensions into the active casual category, we're optimistic that the European Caterpillar footwear business will become a more significant contributor by the second half of 2003.

Turning to the hush puppy company sales were flat in the fourth quarter. Strong sales to the U.K. and to our international licensees offset modestly lower sales in North America as reorders particularly from department stores were not particularly strong in the quarter. In the back half of the year, the Hush Puppies Company’s sales were up in all segments of the business with increases in the U.S., U.K., Canada, and to our International licensee. Hush Puppies company profits also increased both in the quarter and for the full year as margins were strengthened and expenses kept in check.

I continue to be encouraged by the acceptance we are receiving to the new, more contemporary Hush Puppies casual product in brand imagery. We are gaining ground with upscale retailers such as Nordstrom’s and Macy's who are best positioned to serve our target customer.

With regard to our other businesses sales in slipper business and retail business were up modestly in the quarter, and our leather division had a very good quarter on the strength of internal demand from Merrell and Hush Puppies as well as other outside sales to other upper tier brands who utilize our performance sway. In summary, the overall retail environment remains challenging. However, in the categories in which we compete, retail inventories appear to be in relatively good shape and retailers are stepping up and making future order commitments for our brands.

We ended 2002 with an increase in our order backlog of just over 19%. The backlog for orders due to be shipped in the first half of 2003 was up 15%. We are encouraged by the solid order backlog and continue to target full year 2003 sales to be in the range of $875m to $885m and earnings per share in the range of $1.21 to $1.24 which includes the impact of 11 cents per share of increased pension expense. Steve Gulis, our CFO, will now give you some additional details about our 2002 results, as well as our goals for 2003.

Thanks, Tim, and good morning, everybody. As Tim has already noted, we are very pleased with our record 2002 sales and earnings performance, and I would like to review some of the financial highlights of the fourth quarter after I review the fourth quarter, I will give additional insight into our financial goals for 2003.

For the year, we reported record sales of $827.1m, which approximated a 15% increase for the year. Additionally, we reported a revenue increase of just under 17% for the quarter. These increases included contributions from our European acquisitions, which achieved our original plan and contributed approximately 10% of the increase.

We were very pleased to see our organic growth accelerate in each quarter of the year, with the growth of our preacquisition businesses accelerating to an increase of 7.9% in the fourth quarter. Our record EPS of $1.15 calculates to an increase of 7.5% over the $1.07 per share reported for 2001. Additionally, our fourth quarter EPS increased to 42 cents, a 4 cents per share increase over 2001.

Substantially all of the profit improvement came from preacquisition businesses, with the European acquisitions generating a slight profit in the year. Several items supported the profit improvement from our preacquisition businesses, including sales increases, expanded gross margins, reduced interest expense, improvements in our effective tax rate, and the impact of our share repurchase program.

Our branded divisions and their operating models continue to deliver strong leverage, as pre-tax earnings from pre-acquisition businesses, prior to the increased pension expense of $4m, increased 10% for the year on a sales increase of 4.9% for the year. Thus, we achieved our stated objective of growing our operating earnings at twice the rate of our sales increase in 2002.

Gross margins for the full year of 2002 on a preacquisition basis improved 50 basis points, and reported gross margins for the full year were off 10 basis points. Gross margins in the fourth quarter, before acquisitions, continued to improve, as their margins increased 30 basis points.

This resulted primarily from our lifestyle businesses continuing to be a higher proportion of our overall business and the positive impacts of our inventory management programs, which have reduced mark-down expenses.

Reported gross margins for the fourth quarter, with 35.4%, reflecting a 60 basis point erosion. The impact of disposing of excessive inventories which were acquired with the CAT Europe business was the primary cause of the reduced margin.

For the full year of 2002, reported selling and administrative expenses increased to 26.3% of net sales, which compares to the 25.3% reported in 2001. Increases in employee benefit costs and start-up investments for Merrell Europe caused the increase.

Despite this overall increase, costs in corporate departments were flat for the year, reflecting the impact of cost control programs and focus on brand support.

Selling and administrative expenses for the fourth quarter increased 70 basis points on a pre-acquisition basis. The increase reflects higher employment benefit costs, including the increase in pension expense, which has been noted. Additionally, reported selling and administrative expenses for the fourth quarter increased 80 basis points. The additional increase resulted from the noted investments in the Merrell Europe business.

Other expenses for the fourth quarter of 2002 includes relatively flat interest costs and a slight benefit resulting from the weakening U.S. dollar in our international operations. For the full year of 2002, net interest was slightly lower as our debt levels were fairly consistent with 2001 levels, as we used our cash generation to repurchase shares and pay down debt throughout the year. As a result of this debt Pay down our year-end debt levels were approximately 20% below 2001 levels, as we reduced revolver and senior debt by $18m in the back half of the year.

Income taxes for the quarter end year were recorded at an analyzed rate of 33% in 2002 which compares to an annualized rate of 34% in 2001. Additionally, 41.8 million shares were used in the calculation of fully diluted EPS for the full year of 2002.

The company generated in excess of $85 million of cash from operating activities for the year, which exceeded our guidance of $75 million. The generated cash was utilized to reduce interest-bearing debt, a 20% reduction, fund our European acquisitions, repurchase shares, and increase cash dividends.

Our total debt to total capital ratio at year-end is16.6%, well below our operating range of 20% to 40%. This compares to the 19.6% reported at the end of 2001. During the year, the company repurchased 2 million shares under its authorized repurchase programs at an average price of $15.69.

During the fourth quarter, the company repurchased 570,000 of these shares and currently has 1.4 million of these shares remaining under the repurchase program approved by the board of directors in August of 2002. Additionally, the company declared $7.3m of cash dividends during the year, which reflects the ninth annual increase at an annualized compounded rate exceeding 20%.

Accounts receivable increased by $4m, or 2.6%, at year end. This increase was significantly lower than the fourth quarter sales increase of 16.7%. We exceeded our short-term goal of improving [ indiscernible ] sales outstanding by 8% and reported a year end improvement in DSOs approximating 13%. At a pre-acquisition base accounts receivable were reduced by 7.6% on a fourth quarter sales increase for these operations of 7.9%.

While we are pleased with the progress to date, we believe there are opportunities to further improve our DSOs. We were very pleased with the progress we made in reducing our inventory levels as we reduced year-end inventories for preacquisition businesses by 16.6%.

Improvements were made in all of our branded groups as well as in the raw material and finished goods process levels. Reducing our inventory levels not only lowers our working capital investments but it also allows our distribution facilities to operate more efficiently, eliminates costs associated with bulk storage, and minimizes mark-down exposure exposure.

While we were able to increase the turn ratio of our finished goods inventory in our warehousing facilities, we feel that further progress can be made through better sourcing efficiencies, focused SKU management, and improved product development processes. Our management team is committed to further reduction in our inventories, and once our base is reached, we would envision working capital investments to increase at a rate approximating 50% of our sales increase.

I would now like to take several minutes to discuss the upcoming year. Forecasting 2003 continues to be a challenge, as the retail environment continues to be difficult, and retailers are cautious on product purchases. It is our opinion that significant first half open to buy dollars are still available, but we are not anticipating significant changes in the environment as retailers are not releasing funds until they are nearly certain that their operations are generating sales increases.

Additionally, this visibility into the second half of the year is sketchy, and thus, we are being cautiously optimistic about our overall 2003 opportunities.

We indicated in our third quarter conference call that revenues from 2003 should range between $875m and $885m. If we were to achieve the midpoint of this range, revenues would increase 6.4% over 2002 levels, which would be at a rate in excess of twice the projected industry growth rate.

Merrell footwear is anticipated to produce 50% of the increase, which would give them a mid-teen sales increase. The Harley-Davidson business is projected to grow at a high single digit rate with our other branded footwear operations, Hush Puppies, CAT, and the Wolverine footwear group, anticipated to grow at a rate slightly in excess of the overall market. We are entering 2003 with an overall backlog increase of 19%, which reflects the strength of our brands and gives us a solid start to the year. But we are cautious will reorder rates as retailers continue to manage their businesses aggressively. With this in mind, we feel that sales increases will be fairly proportionate throughout the year as we are not anticipating a significant change in the overall retail environment.

Gross margins for 2003 are expected to improve as we see further benefits of our inventory management programs and improvements in the operations of the European acquisitions. We are projecting a gross margin increase in the 20 to 40 basis point range on an annualized basis. The improved margins also result from the Merrell business growing at a faster rate than our other businesses and Merrell carries higher gross margins in its operations.

Total selling and administrative costs for 2003 are projected to increase approximately 70 basis points, primarily reflecting the 11 cents per share pension expense increase discussed in our third quarter conference call and increased marketing and advertising support behind our brands. While the pension charge increases selling and administrative costs by 80 basis points as a percentage of net sales, we are controlling our other over head costs aggressively.

We are increasing our marketing and advertising spend at a rate approximating twice that of our sales increase. We expect other selling and administrative costs to grow at a pace below our sales increase, which will produce earnings leverage. These improvements result in significant leverage being obtained by our operating division. Excluding the pension expense increase noted above, our pretax earnings would improve at a rate of excess of twice our sales increase, which is in line with our long-term objectives.

With our debt levels being lowered by $18m by 2001 levels, we are anticipating a million dollar reduction in our interest costs for 2003. We are also anticipating further debt reductions during 2003, but they will occur in the latter half of the year, as the next principal payments on our senior notes are in the third and fourth quarters of the year. We are also expecting a slight improvement in our annualized tax rate for 2003 as a higher percentage of our operating profits will be generated in tax jurisdictions which have lower rate structures than the U.S.

Additionally, we are forecasting our outstanding shares for fully diluted EPS to approximate 40.8 million shares on an annualized basis, which includes further opportunistic share repurchases and the impact of an increased stock price on share delusion. Operating results at this level and strong balance sheet management will continue to generate strong positive cash flow for the business. Cash flow from operating activities is again projected to approximate $75m, and capital expenditures are planned at a level of $15m.

Our capital expenditures continue to be lower than our depreciation levels as depreciation is budgeted to be $18m in 2003. All of this results in earnings per share productions in $1.21 to $1.24 range, which is consistent with our earlier guidance. Achieving this range would provide a sales and earnings per share improvement in the 6.5 to 7% range. The improvement includes the 11 cents per share increase in pension expense. Excluding this increase, EPS would increase in excess of 15%, which highlights the strong operating leverage being generated by the business.

In closing, Wolverine continues to generate strong operating performance. Our operating model continues to perform well, and the highlights I would like to summarize for 2003 includes sales increasing at a rate exceeding twice the industry growth rate, continued gross margin expansion, reductions of core selling and administrative costs, while investing in brand support, operating leverage of 2.5% sales increase excluding the impact of increased pension costs, EPS leverage through debt reduction and share repurchases resulting from strong cash flow generation, and a diversified brand portfolio, which limits a significant portion of the risks associated with single-brand businesses. I thank you for your time and I look forward to updating you on our progress during 2003. I will now turn the call back to Tim for a few closing comments.

Tim O’Donovan: Thanks, Steve. Fiscal 2003 will mark the company's 120th anniversary. What started in 1883 as a small West Michigan tannery and work boot manufacturer is now a leading global marketer of premier footwear to consumers in 150 countries. Strategically we are positioned with strong brands and market segments that provide an opportunity for us to grow our business at several times the industry growth rate. Organizationally we have the right team on the field. Operationally we have state-of-the-art business systems and infrastructure in place to meet the demands of the market on a global basis.

Financially, the company has never been stronger. We have successfully expanded our boundaries for 120 years, and we believe the best is yet to come for Wolverine World Wide and our shareholders. Thank you for joining us this morning and we will now take questions.

Wendy, we will take questions now. Please go ahead.

Thank you. At this time if you would like to ask a question, please press star 1 on your touch tone phone. To withdraw your question you may press star 2. Once again if you would like to ask a question, please press star 1 on your touch tone phone. Our first question comes from Bob Drbul. Sir you may ask your question and please state your company name

Hi, this is Omar Saad on behalf of Bob Drbul. Congratulations on the strong results this quarter.

Tim O’Donovan: Thanks, Omar.

a few questions, if it's all right. I wanted to start by asked -- if you could dig into the order backlog a little bit, by brand particularly, with -- if we could talk about Merrell and what you've seen in terms of how the backlog's been building sequentially?

Tim O’Donovan: This is Tim O’Donovan. You know, we don't break our backlog down by individual brand, Omar. I think it's certainly safe to say that the Merrell backlog -- we're in a very strong position. We had excellent reception to Merrell's spring Oak3 product line, and as a result, we had many of our major accounts planning their Merrell business up for the spring season. They gave us larger future orders. They gave them to us earlier than we had seen in prior years, so we have a significant increase in the Merrell backlog.

Okay, good. Going further on the Merrell business, could you talk a little bit about the shop and shops, kind of where you ended the year at and what your expectations are for '03 in terms of magnitude?

Tim O’Donovan: Sure. In '02, we put a couple of shop and shops in place to fine-tune and test the concept. We were very pleased with the results. One of those concepts was in the highest volume independent shoe store in New York City, and they saw the daily rate of sales for Merrell product go from about a dozen pair a day to in excess of 20 pair a day, so it is certainly encouraging, what we learned from those first few tests. We have now got a good program structured for shop and shops which we think will need the needs of different kind of retailers, whether they are independent shoe stores, outdoor specialty stores, major sporting goods stores or department stores and we officially launched that program at this past week's outdoor retailer show in Salt Lake City, when we'll be doing a similar thing at the WSA show in Las Vegas that begins in just a few days here.

In terms of our goals, we have about 60 shop and shop retailers who have committed to want to be a part of the program. Our goal is to have 100 shop and shops in place over the next 12 to 18 months.

Okay, great. Another question, if that's okay could you kind of gauge the performance, where you are -- you talked a little bit about the Hush Puppy and the CAT business, and I want a comment on the turn-around, especially given the environment -- the difficult environment retail.

Tim O’Donovan: You know, that clearly creates a challenge when you're asking, you know, retailers to put a new brand into their stores, but again, I think the key is if you have innovative product, you've got strong marketing support behind the product, you know, we expect to make continued progress -- we made good progress in the back half of the year with very healthy increases in the CAT footwear business in the U.S. and also increases in our Hush Puppy business in the U.S. in the back half of the year. We'd always like the pace of things to, you know, be even faster, but I think we're making good progress.

Okay, great. Thank you very much gentlemen.

John Shanley you may ask your question and place your company name.

This is Christopher Fuzzier (ph) in for John Shanley, congratulations on a very good quarter in a difficult environment guys. I was just wondering if you could add a little color with regard to the potential for your Merrell and Caterpillar businesses in Europe going into fiscal '03 and beyond in terms of top-line growth and in terms of bottom-line contribution, maybe a little color on margin, things of that nature?

Tim O’Donovan: Let me speak to the first half of that, Christopher, and I'll let Steve talk about our business and some of the other aspects of the business. Beginning with the Merrell business in Europe. That was really a startup situation in 2002. The sales for Merrell in Europe were less than 1% of the corporation's total sales, so relatively small. We're encouraged by the opportunity for that business, but we're dealing off of a very small base. But I think we're going to expect to have you know, reasonable growth in that business. Because of its small base, its impact on the total company as a whole is not all that significant, but I think what's important is we're laying a base for the brand in Europe.

And as we saw in the U.S. market, you know, from a very small sales base over a couple of years, we saw some really exciting growth, and we think that same kind of pattern can play out in Europe, but it won't all happen in one year. It will take a couple of years to see that kind of momentum build.

The Caterpillar business in Europe we're expecting some reasonable growth from that business next year -- not major growth but reasonable growth -- and we're encouraged by the fact of two things going on there now. One is, from a fashion perspective, the lifestyle boot business, we believe by next fall, is going to become much more important at retail. Secondly, we are getting some good opportunities in terms of distribution there, we're making some progress.

In working with some of the major sporting goods groups, particularly in the U.K. who have expressed interest in the Caterpillar brand and I think as that begins to play out, we'll see some nice growth there in the second half of '03.

Christopher, this is Steve. From a financial perspective, you know, the opportunity in Merrell is really to get more leverage off our selling and administrative expenses. As Tim had mentioned, the Merrell Europe business is really a -- Merrell Europe business is really a startup initiative for us and we don't really need to be adding costs to the business as the sales growth starts to begin. So the operating performance of that business should benefit quite positively from the sales growth that we're projecting and expected.

From the CAT side, you know, I think the real opportunity on the margin there is from a gross margin perspective in the CAT business, because we started that business acquiring some inventories that, you know, were a little stale, I guess would be a fair way to say it. The predecessor owners had some difficulty servicing their customers, and thus we had some inventories that were not current season goods, which we moved during the year but that had some margin impact on the business.

So I think that we have some gross margin expansion opportunity in the CAT business as well as top-line growth in that business in Europe and the U.K. I guess another way to look at it is, you know, we've indicated that the long-term operating margins of those businesses should be no dissimilar to those that we experience here in the U.S., and it will probably take us 24 months or so to get there. And I think that this year, we will probably get about a third of the way there. I guess that would be the way to kind of outline as to the beginning of the contribution that those acquisitions are going to make from an accretive perspective.

Just one question to build off of that. I guess as we look at the Merrell brand as a whole, given the fact it's your leading margin performer, to build off that in Europe and continue to build off that in the U.S.?

Tim O’Donovan: I think what you're alluding to there, Christopher, is that in my gross margin expansion comments for 2003, I indicated that, you know, Merrell becoming a higher proportion of our overall business and the fact that they have higher gross margins will lead to some of that gross margin expansion, so we've embedded some of that into our plans for next year.

Okay. Great. That's it. Congratulations, gentlemen.

Tim O’Donovan: Thank you.

Thanks, Chris.

Thank you. Once again, to ask a question, please press star 1 on your touch tone phone. Our next question comes from Lee Backus. You may ask your question and state your company name.

Buckingham Research. Tim, could you discuss your entire international business, just give a sense of what that is contributing now to total profits and what you see happening on international business going forward, and maybe you could also in that discuss the impact of the exchange rates.

Tim O’Donovan: Sure. Let me take the first part of that question, Lee, and I'll let Steve handle the second part. In terms of our -- you know, of our top-line revenue, we indicated our European businesses in 2002 would represent about 15% of our top-line revenue, and then we have some additional revenue outside the U.S. from our own operations in Canada and our licensed and distribution income in other parts of the world. Combined, those businesses do contribute quite nicely to our bottom line. Our licensing and distribution model, you know, outside the areas where we have owned businesses, we report a relatively small increment of sales, but there's a nice degree of profit in those businesses, and I think Steve could probably give you the overall percentage.

If you took all of our international operations, which would be Europe, Canada, and our licensing, that's about 35% of our operating profits today, Lee. At one point in time in the business, it was about 50%. But as we've accelerated the growth of the Merrell business here in the U.S. and the profitability associated with that, our international licensing has become about a third of our overall profits. It hasn't reduced any, but as a percentage, okay, it has come down.

Regarding the weakening of the U.S. dollar, our strategy really, Lee, is both, as the dollar weakens and as it strengthens, is to lock into currency contracts for our inventory purchases for our international businesses so that we can lock into wholesaling margins. So that really doesn't drive any additional profitability into our operations.

The other impact that the weakening dollar does have, though, is for some of the international distributors, their pricing and their markets can get better and thus they can drive more business. So there's a volume impact from the international distributor side that can have an upside to it, but it also allows us to lock into our product cost at a more reasonable rate and be more market aggressive from a pricing perspective at retail in foreign markets. So that's really the way we're looking at the U.S. dollar versus foreign currencies in our operations.

Excellent improvement in the operating profits of the U.K. acquisition. Do you see you're international profits increasing, staying the same? What do you see going forward?

Tim O’Donovan: I think right now the strength of our international operations is very solid, and I would say that our international operations will improve at a higher percentage than what our U.S. operations would be. So I think that percentage would increase slightly.

Sourcing costs. Are you seeing any improvements in sourcing, or what's happening on that front?

Lee, I think, you know, overall, we're not seeing dramatic changes there. Leather prices, you know, over the last six months have moved up a bit. We've been able to hold, you know, our pricing with our e-contract factories so they've been absorbing, basically, that increased leather cost. But looking forward, I think we're seeing the environment being pretty stable right now.

Thank you.

Tim O’Donovan: Lee, the one thing I would add to that is also on the West Coast distribution facilities perspective, we were up in Vancouver for about six months this year, and things will become more efficient by being able to go through the California ports again.

Thank you.

Thank you. And I have one more question. One moment. Alan Metroni, you may ask your question and please state your company name. .

Alan Metroni, Copper Beach Capital. I apologize, I missed some of your outlook in the beginning so I apologize if you already addressed this but can you address the competitive market as it relates to market and -- do you think you're taking share from a Timberline, or Columbia Sportswear or other companies and what your outlook is from a competitive standpoint? On the boot size and the casual side, if you could address them separately?

Tim O’Donovan: If you look at the non-athletic sector of the footwear market, it is highly fragmented with lots of competition. So, you know, we operate in an extremely competitive environment. Really, all the segments that we're operating in. We are growing faster than the industry average, and implicitly that means we're taking market share away. You know, it varies tremendously by brand and business.

I would say, in the case of Merrell, for example, some of the open-to-buy dollars that we're gaining with the Merrell brand is coming out of the athletic sector. For example, in an account like Dillard's, where we have built a very strong program over the last couple of years, most of the open-to-buy from Merrell has come out of their athletic footwear open to buy, and their rationale is that they have higher initial margins and higher maintain margins with the Merrell brand than they did in the athletic sector, so they were more than happy, you know, to transfer those dollars to a brand like Merrell.

You know, in the boot business, again, we have a lot of competitors in that business. When we look at our composite market share with all of our brands in that sector, we have the number one market share, and we fight very fiercely to maintain that position. But certainly there's no lack of competitors. But we've been, over the long haul, gaining market share, and we've done it with innovative product.

When we introduced our Durashock technology into the business, we really revolutionized that marketplace and we've continued to innovate with that product year over year. We've also, in the case of our Wolverine boot brand, we have the largest share of voice in terms of our market spend in that category and we're going to continue to do that.

Okay. Fair enough. Thank you.

Thank you. At this time we are showing no further questions. I'd like to turn the call back to your speakers for any closing remarks.

Thank you, Wendy. I'd like to thank everyone for joining us today. Our conference call will be available for replay at our web site, which I'll repeat is www.WolverineWorldWide.com. The replay is also available by phone until 5 p.m. on Monday, February 10th, Eastern Standard Time by calling 888-402-8736. This concludes our conference call, and thanks again for listening. Good-bye.