Wolverine World Wide Inc (WWW) 2003 Q2 法說會逐字稿

Good morning and welcome to the Wolverine World Wide second quarter conference call. All participants will be on a listen only mode until the question and answer segment of today's conference call. This conference call is being recorded at the request of Wolverine. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Thomas Mundt, Vice President of Corporate Strategy and Communications for Wolverine World Wide. Mr. Mundt you may proceed.

Thank you Cathy and good morning and welcome to everyone to our second quarter conference call. With us today Timothy O’Donovan, our President and CEO, Steve Gulis our Executive Vice President and CFO, Steve Duffy our Executive Vice President, and Blake Krueger, our Executive Vice President and General Counsel and Nick Ottenwess, Vice President of Finance and Corporate Controller.

Earlier this morning Wolverine World Wide announced a record second quarter results, another great achievement for the company. If you did not yet receive a copy of this press release, please Stacey Craig, at 616-233-0500, and have one faxed to you. The release is also available on many news wire sites and it can also viewed from our corporate Web site which is www.wolverineworldwide.com. Before I turn the call over to Timothy O’Donovan to comment on our second quarter, I'd like to remind that the predictions and projections made in today's conference call regarding Wolverine World Wide and it's operations maybe be considered forward looking statements by security laws. As a result we must caution you that with any prediction and or projection, that there are a number of factors that could cause results to differ materially. These important factors are identified in the company's SEC filings, and our detailed on our press releases.

With that said, I'd like to turn the call over to Tim to talk about our record quarter.

Timothy O’Donovan: Thanks Tom, good morning and thanks for joining us today. I'm pleased to report record sales and earnings for our second quarter and first half of 2003. Sales were strong for the quarter, up 8.7 percent to $184 million, and earnings per share of 23 cents were up two cents from the prior year for a 9.5% increase.

While Merrell continues to be our major growth driver it's encouraging to see solid sales and profit contributions from a number of our businesses. For the first half, all four of our major brand and business groups, Hush Puppies, Merrell, Caterpillar Footwear and the Wolverine Footwear Group reported sales and profit increases. The Merrell sales gain for the first half exceeded our 15% growth plan, and our three other business groups met our mid single digit growth objectives.

After a strong first quarter, Hush Puppies global sales were down slightly in the second quarter. The decrease was attributable to the U.S. business which experienced lower re-orders as well as reduced sales to off price retailers. Although retailers reported that Hush Puppies [Inaudible] were relatively good during the quarter, weak overall retail results, particularly in the department store sector, resulted in very cautious fill inactivity. The quality of the Hush Puppies business continues to improve, with less off price activity and improving quality in terms of product, margins and distribution. Hush Puppies' more focused product line resulted in a 23 percent decrease in inventory levels from the comparable quarter last year, while we also improved service to our retail partners.

Because of the improved quality of the sales mix, Hush Puppies' profit improved again in the second quarter, as did the order backlog for back half delivery. The average price and margins in the order backlog are up nicely, and this should contribute to additional profit improvements in the back half of the year.

New fall products in the Hush Puppies' Crush collection has recently been delivered, and initial sales-through results are strong on accounts such as Macy's East. We continue to be encouraged we're on the right track to achieving our goals to the Hush Puppy brand.

The Wolverine Footwear Group had a mid-single digit sales gain in the quarter and a larger percentage profit increase. Double digit sales gains for the Harley Davidson, Bates and Stanley brands more than offset lower sales of Wolverine boots.

Varied shipments of Wolverine boots were up in the quarter, but average prices were lower, a trend we have seen for the past several quarters. Harley Davidson is continuing to build business with the Harley Davidson dealer network, while also expanding distribution to department stores, shoe stores and specialty boot stores. Two hundred new doors were open in the first half of this year.

One example of expanded distribution is the Carson Pirie Scott department store. me="00:34:47" id="L36"/) Carson's has established 22 focus shops for Harley Davidson footwear and apparel to meet consumer demand during the 100th anniversary celebration of Harley Davidson.

Our Bates uniform footwear business is having a record year. In addition to the introduction of a new line of tactical ultra-light uniform footwear, for the civilian uniform market, Bates has been successful at expanding its franchise with the military market by introducing technically superior boot product to this market. These new products not only deliver superior comfort and durability, they are also reducing foot-related injuries to our servicemen and women. While our Bates military footwear business is a lower gross margin business, it is also a business with a lower expense structure and produces a net operating margin comparable to our other wholesale footwear businesses.

The Caterpillar footwear business has had a very good quarter, with sales up over 10 percent. That and improved profit contribution. The European business acquired last year had a particularly good quarter and is on track to meet our profit expectations for year. Sales in Europe were driven by very strong performances in the U.K. and French markets.

We've had our challenges with the Caterpillar footwear business as work-inspired lifestyle boots took a backseat with some young consumers to retro-athletic and lower-profile active casuals. While we are not predicting a sudden reversal of these fashion trends, we do see renewed interest from fashion-forward accounts in both Europe and the U.S. to the classic Cat boot product as well as Cat work-inspired active casual product.

We are also seeing stronger interest in our Cat women's product. We believe this bodes well for the future of the Cat business. It's now been 18 months since we acquired the Cat distribution business in Europe and I'm very pleased with our progress. We have a very strong team in both the U.S. and Europe and a cohesive, global approach to product, marketing and logistics supporting these businesses as well as our internation distributors.

Merrell achieved its 22nd consecutive quarter of growth with a mid-teens sales increase. First half sales are running ahead of our 15 percent growth plan for 2003, with double digit increases in the U.S., Canada, U.K., Europe and other international markets.

While at a very early stage in development, sales in Europe has doubled during the first half of the year. Merrell sports style and multi-sport product is enjoying strong sales rues in Europe. Merrell had an outstanding response at the recently completed Hispo's sporting goods trades show in Munich. During the show, Merrell opened 48 new accounts in Germany and Austria alone. The brands presence is growing in premier European accounts such as Decathlon, Globetrotters, Sportscheck, and other similar high profile retailers. Merrell performance in retail in North America was strong this spring in spite of a generally tough retail environment. Merrell performed at or above plan with it's major accounts this Spring and did it at regular price in the midst of a very promotional environment.

Merrell's women's sport casual sandals were some of the very best performing product in a category that was a challenge for many retailers. With regard to Fall, Merrell has it's strong product line-up. While deliveries of new Fall product are just beginning, initial selling reports are very strong. With Merrell Women's tetra performance casual product selling particularly well. New fourth quarter programs have also received strong retailer response. These new collections -- several of them I'd like to point out are First Stormfront. This is a collection of $100 retail price point Gore-Tex multi-sport performance footwear. Another collection under the title Helium -- this is a unique ventilated multi-sport trail running product. While this is really designed for the Spring season, many accounts have requested fourth quarter delivery. Finally, Board Runner, a youthful collection of sports style inspired casuals for both Men and Women. From a marketing standpoint, the Merrell stop and shop program is exceeding expectations. 18 shops were installed during the second quarter.

Sales increases have ranged from a low of 25% to a high of 175%. Our retail partners are delighted with the results. 20 more shops will be in place in Q3 and a total of 60 by year-end. I also wanted to update you on some future plans for developing the Merrell brand outside of the footwear arena. Merrell has developed a stock program incorporating a unique graduated compression technology. While a Spring '04 programs, some initial deliveries will take place in the fourth quarter of this year. This will be followed by a pack and luggage launch in the second quarter of next year. These new line extensions are one more step in building a stronger connection with the growing number of Merrill enthusiasts around the world. Overall, I'm pleased with our results for the first half.

Our 2003 plan was predicated on Merrell growing at a 15% rate and our other key branded groups growing at a mid-single-digit rate. Through the first half, we've slightly exceeded these growth expectations. Clearly, we are in an environment that is unpredictable. However, we continue to believe our sales goal for 2003 of $875 million to $885 million and our earnings per share goal of $1.21 to $1.24 are achievable. I'd now like to turn the call over to Steve Gulis, Wolverine's CFO to provide additional details on the company's financial results.

Thanks Tim and good morning everyone. This morning, we were pleased to announce record second quarter sales and earnings. Net sales for the corporation totaled $184 million which was an 8.7% increase over second quarter 2002 sales of $169.3 million. For the year, net sales totaled $375.5 million, which equates to an 8.4% increase over the $346.6 million reported in 2002.

Earnings per share for the second quarter of 2003 totaled 23 cents per share, which was a 9.5% increase over the 21 cents per share reported in the second quarter of 2002. For the year to date, earnings per share total 41 cents in 2003 versus 36 cents in 2002 for a 13.9% increase. Year-to-date earnings per share have exceeded our planned levels and were aided by additional sales growth and reduced shares outstanding.

A portion of our revenue growth in the quarter was fueled by our base military business in Wolverine slipper operations. The increase in our military business reflects contract increases, which are resulting from our domestic manufacturing capabilities and technological advances. Additionally, we had significant slipper shipments to Lands' End, as they have expanded their catalogue selection. And we are shipping product direct to Sears. Also, a portion of our sales increase was generated by currency gains, as these gains improved sales by 2.1% and 2.4% for the quarter and year to date respectively.

Reported gross margins for the quarter equaled 35.7%, which was a 70-basis point reduction from 2002's second quarter. Gross margins were impacted by lower Wolverine leather volume and a change in business mix, as our military and slipper businesses represented a higher percentage of our overall shipments. These businesses generate lower gross margins but also have lower cost structures.

Additionally, we incurred closing and operating costs related to the consolidation of our Mexican manufacturing operation into our Dominican Republic facilities. These costs decreased our margin by 50 basis points and are substantially behind us. Positive margin trends were recognized in our European operations and our overall markdown requirements were lower, as we reduced our SKU levels by an additional 9% since year end.

On a year-to-date basis, our reported gross margins of 35.9% are a 20-basis point improvement over the 35.7% which was reported in the first half of 2002. Our year-to-date margins have been increased, as our lifestyle businesses continue to be a higher percentage of our overall mix. We improved margins in our European operations, and less markdown provisions have been required to move end-of-season goods. Our year-to-date margin improvement is in line with our plan, and we continue to forecast an annualized improvement of 40 to 50 basis points.

Consolidated Selling & Administrative expenses were 27.6% and 27.5% of net sales for the second quarter of 2003 and 2002 respectively. On a year-to-date basis, Selling & Administrative expenses were 28.7% and 28.1% on net sales for 2003 and 2002 respectively. The increase relates entirely to an increase in the pension expense and the foreign currency translation impact of our European and Canadian operations.

In the second quarter, 2003's pension expense exceeded 2002's level of $1.6 million, which increased 2003's expenses as a percentage of net sales by 90 basis points. Additionally, the weakening of the U.S. dollar increased consolidated Selling & Administrative expenses in the quarter by 30 basis points.

Excluding pension and currency impacts, Selling & Administrative expenses, as a percentage of net sales for the quarter, decreased by 120 basis points. On a year-to-date basis, Selling & Administrative expenses increased 60 basis points in 2003 over 2002 as a percentage of net sales. Pension expense increases and currency changes created the increase, and excluding these items, Selling & Administrative expenses decreased 110 basis points. Strong expense controls over our core Selling & Administrative costs should allow us to achieve our forecasted goal of keeping costs as a percentage of net sales at a 100 basis point increase on an annualized basis.

Interest expense has improved over 2002 levels for the quarter and year to date and outstanding amounts under the revolving credit agreement have been minimal. And our senior debt balances are $15 million below 2002 levels. Record second quarter net earnings of $9.3 million exceeded 2002's results by $200,000. However, our operating model continues to be strong.

Operating income adjusted for the pension expense increase and Mexico consolidation costs noted above would have increased over 20%, which, in our opinion, reflects the leverage we are obtaining from our operations. For the year to date, net earnings of $16.7 million exceeded 2002's results by $1.2 million. The net earnings calculation included an estimated annualized income tax rate of 32.5% and average shares outstanding of 40.8 million were used in the fully diluted EPS calculation in the second quarter.

From a balance sheet perspective, accounts receivable totaled $152.4 million at the end of the quarter, which was a $5.6 million increase over the end of 2002's second quarter. We have improved our DSOs by 10.8%, when compared to 2002's second quarter DSOs. And the reported 3.8% increase in year-over-year receivables is significantly below our sales gain.

Inventory improvements continued during the quarter, as inventories were reduced by 5.3% when compared to second quarter 2002 levels. We continue to focus our inventory controls on SKU assortments, and our overall SKUs have been reduced by 18.5% over the last 12 months. Our inventory levels within the operating groups appear to be in line, while we continue to strive to provide best-in-class service to our customers. Additional improvements are targeted for the remainder of the year.

All of these operational and balance sheet improvements have assisted in improving several of our core operating ratios. Our total debt to total capital ratio was 16.3% at quarter end and continues to be below our 20 to 40% operating range. Additionally, our after-tax return on assets have improved to 8.8% percent, 30 basis points better than second quarter 2002 levels. And our after-tax return on equity has improved by 50 basis points to 13%, when compared to the same time period in 2002.

While we have made improvements in both these ratios, we have further improvements to make in order to achieve our targeted ROA of 10% and ROE of 15%.

During the first half of the year, we generated approximately $30 million of cash from operating activities, which is in line with our annual plan of $75 million. The first half generation was slightly below 2002 levels, as working capital reductions were less.

Of the cash generated, we used $1.4 million to repurchase 78,700 shares of the company's stock in the open market. Over the last 12 months, we have repurchased 2.8 million shares at an average price of $16.15, which is a 19% discount to our recent 52-week high. Obviously, this has been a good investment for our shareholders.

Also, we currently have 990,000 shares authorized for repurchase and we will continue to repurchase our stock on an opportunistic basis. Yesterday, we received Board of Director approval for a 5.5 cent per share quarterly dividend for shareholders of record on October 1, 2003. We continue to believe in our long-term growth of consistent annual dividend increases, as earlier this year we announced our 10th consecutive annual dividend increase.

In closing, we continued to improve our operating results by strengthening the position of our brands around the world. Our portfolio approach to the footwear market is working, and we feel it is the right strategic platform for the future. We continued to support our annualized guidance of sales ranging from $875 to $885 million, and earnings per share ranging from $1.21 to $1.24. Additionally, we are planning on further balance sheet strengthening.

I appreciate you joining us for our second quarter update, and I will now turn the call back to Tim for a couple of closing comments.

Timothy O’Donovan: Thanks, Steve.

To win in today's tough market conditions, it's important to stay focused on the execution of a few strategies that will truly make a difference, strategies that will help propel the company toward its vision of becoming the world's premier non-athletic footwear company. To that end, we've made significant progress in several areas. First, we're beginning to realize the benefits of last year's Cat and Merrell acquisitions in Europe, with positive sales momentum and improving profitability.

Secondly, the Hush Puppies and Cat brand revitalization plans are paying dividends as new, better-grade retail venues are being opened, and consumers are responding positively to new product offerings. Finally, we are continuing to maximize the global potential for Merrell, not only for footwear, but with brand extensions which will include new lines of performance socks and luggage, which will be introduced to consumers over the coming months.

The entire Wolverine management team is committed to our vision and looks forward to reporting on even greater levels of success in the future.

Thank you again for joining us this morning, and we would now invite your questions.

At this time, we are ready to begin the question and answer segment. If you would like to ask a question, please press star, one on your touchtone phone. You will be announced prior to asking your question.

Our first question comes from Bob Drbul. You may go ahead, and please state your company name.

Lehman Brothers. Good morning.

Timothy O’Donovan: Good morning, Bob.

Couple of questions for you. On the backlog, the 5.4 percent increase you talked about how many retailers have yet to complete their orders. Can you give us an idea in terms of the percentage of the order book you have complete? The number of retailers, where you are with that, and maybe give us an idea on, maybe, the channel breakdown in terms of the percentages as well?

Timothy O’Donovan: Bob, this is Tim. I -- in depth analysis I don't have right at my fingertips. What I think I can give you is more of an anecdotal sense for where we believe the market is. My sense is there's still a significant amount of open-to-buy money that's out there, particularly for fourth quarter delivery. I think in the kind of environment we've been in, retailers are being waiting until the last possible minute, being cautious as they try to get a view of what the -- how the fall season is going to unfold for them.

I think that when we look at it on an account for account kind of basis, between channels, I think that the department store channel probably would have the most, relatively speaking, open-to-buy, but it's true of independent retailers and I think it's not uncommon across almost all the distribution channels.

OK, in terms of -- is there any -- would you say that you maybe had 60 percent of the orders in or is there any sort of number you could help us to get a better understanding with it?

Timothy O’Donovan: Well, I think the best way to view it, Bob, is to look at our overall guidance for the year and we just -- are we affirming that guidance today? And we're doing that on the basis of the backlog we currently have, the quality of that backlog and also, on the basis of what we're seeing, the trend we're seeing in re-orders. Earlier in the year re-orders were difficult, we saw it really improve in the latter part of the second quarter, and that trend went from negative to positive in terms of re-order activity, so I think retailers -- at least, the retailers that we're doing business with in the categories that we're doing business -- were back, re-ordering merchandise toward the end of our second quarter.

We think that's a trend that's going to continue and -- because I think their inventory positions in our products and our categories are in good shape.

OK. Great. Steve, a question for you. On the gross margin line, given what we saw here with the slippers and the military business, how would you expect that to play out for the rest of the year related to maybe a consolidated full year gross margin target?

I indicated in my comments, Bob, that we're still comfortable with our 40-50 basis point improvement on an annualized basis. If you look at that for the back half of the year, we'd have to average about 100 basis points improvement in the two quarters. In our backlog, margins support that type of a trend, OK, and the consolidation of our Mexican facilities is significantly and substantially behind us and that had a 50 basis point impact to this quarter and it was the right thing to do for the long term, it wasn't a big issue at all for us, and the timing was appropriate to do it, so I'm pretty comfortable with our gross margin forecast for the year.

OK, one final question for me would be -- on the mirror you talked about a wide range in terms of the new shops -- I think 25% or a much greater number than that. What do you think is accounting for the disparity of the sales performances in some of the ones that are doing much better than the other ones?

Timothy O’Donovan: Bob, I think there's probably a couple of things. I think one in looking - trying to do some analysis of those trends, at the lower end of the range those particular shops were in a retail venue where the overall footwear sales in that venue were actually down fairly significantly. So we were running counter to a broader trend within that particular retail environment.

So I think that's probably the major reason. But I think what - the people that have put these shops in are very pleased with the results. In many of our independent outdoor stores what they're finding is this focus on Merrell is actually giving some uplift to their total footwear sales within their stores. Clearly Merrell is leading it, but having that kind of focal point - and in some cases they have taken square footage within those retail venues that might have been devoted to apparel or equipment or some other category and put it into footwear.

Well it's having a real positive impact on their overall footwear environment. And they're doing business at these Merrell shops at full price. So it's not - the sales increase isn't being driven by promotional activity. It's being driven by the excitement behind the product and the brand, and that's a major margin driver for our retail partners also.

OK. Thank you.

Timothy O’Donovan: Thanks, Bob.

Thank you. Our next question comes from John Shanley. You may go ahead, and please state your company's name.

Wells Fargo Securities. Congratulations, guys, on a nice quarter again.

Tim, I have a question also on the forward order activity level. The 5.4, while still a very fine level, was certainly below what you had posted at the end of the first quarter. Can you drill down for us a little bit in terms of where there is less forward order activity by product line? In other words, a little bit more detail in terms of where there is less activity. And how much of that is likely to be picked up by more aggressive [Inaudible] business?

Timothy O’Donovan: John, I think, you know, we try to go through all of our various brands and segment them all out. I think the - it's a pretty general trend across the business in most product categories of ours that - you know I think retailers have not fully committed for particularly the back half of the fall season. I think it's a general trend that applies pretty much across brands and product categories. And I suspect it's a trend that will unfold for the industry as a whole would be my guess.

The other I think aspect of it is in terms of the [Inaudible] trends, that they turn positive towards the end of the second quarter. And we believe that that's going to continue because of the fact that retailers in our products and our categories have pretty lean inventories right now.

OK. But there was no major difference between Cat and Harley and Merrell or Hush Puppies? So it was all pretty much even...

Timothy O’Donovan: I would characterize the general trend as across product lines.

OK. Fair enough. You mentioned also in your commentary about renewed interest in the Cat brand. I'm wondering if you could just clarify. Does that mean that in your estimation there's another fashion shift going on, where kids on either side of the Atlantic are moving more towards brand shoe products? And, if so, is that coming at the expense of other brand shoes or is it coming at the expense of athletic footwear products?

Timothy O’Donovan: John, I think where we see the trend most prevalent is, you know, in a market like London. The fashion forward retailers there have bought more aggressively into the Cat product, have planned their business with Cat. [Inaudible] for this coming fall season I think they're very astute typically in that category. London and England as a market has tended to be probably a leader in that category.

I think it's premature to say there's a real broad trend happening here, but we certainly are seeing some specific retailers who we believe are - you know, tend to set the trends particularly in London and the U.K., who are being much more aggressive in that product category. And I think that's also spilling over into some U.S. retailers; two particularly in major markets like in New York City.

Right. Is it in certain retail distribution channels in the U.S., Tim?

Timothy O’Donovan: It's the more fashion forward independent shoe retailers right now, John, who are really driving it.

All right. Good enough.

Steve, I have a question for you. I'm not sure if I understand what's going on with the currency issues. Was currency-related issues accretive or dilutive to earnings in the second quarter?

They were just slightly dilutive, and that's because the expense structure we have in our Merrell Europe operations and our investments there in the infrastructure were slightly above the margin contribution we had out of that business.

OK. And what about the second half? Is your feeling that that same trend will continue, or do you think it's likely that we will see an accretive position in currency?

You know I think it's going to be relatively neutral, John. It wasn't that big of an item for us in the quarter and it's not going to be anything that can significantly throw us one direction or the other.

OK. Good enough. I'm just trying to see how we should balance our models.

And the last question I have is I'm not sure I understand what's going on with Mexico and the Dominican Republic. Can you just touch base with us on that and tell us what the game plan is...

Yes. Sure, John. We have upper making operations that produce the more labor-intensive part of our boot [Inaudible] , and we have had in Mexico and in two facilities in the Dominican Republic. We also produce some completed slippers in our Dominican Republic operations.

We've made the decision during the quarter to close the Mexican facility, which was a relatively small facility at the time we closed it. It had about 180 or so employees. And to consolidate that work into our two other operations in the Dominican Republic.

That has a positive impact on our operations in the back half of the year and going forward, because we will simply have less overhead by eliminating one facility and consolidating it into two existing facilities. That will be more efficient and that will be a margin contributor.

OK, great. Thanks a lot. I appreciate it.

Timothy O’Donovan: Thanks, John.

Thanks, John.

Thank you. Our next question comes from Raymond Jones. Jones, you may go ahead. Please state your company name.

Delafield Hambrecht. Let me go back to the bookings issue real quick. Is there any specific channel you could point to or that you're watching carefully in terms of the bookings or the open to buy dollars right now?

Timothy O’Donovan: Again, I think it's a more general trend. I think clearly one channel we'd be paying, I think, closest attention to is the department store channel and the timing. And one of the benefits of having a more focused inventory position, much more focused product lines today is that it allows us to be narrower and deeper in terms of our product lines, so that we can respond faster, respond with shorter lead times to how retailers want to operate today. So I think we feel we're going to be as well positioned as anyone to respond to the shorter lead times that retailers are leaning toward as they try to manage their business in an uncertain retail environment.

Sure. Do you see anything maybe geographically, either on an international or a domestic basis that would stick out as well?

Timothy O’Donovan: I would say that it's more of a North American issue than it is a European issue. I think most of our European customers tend to be probably a little aggressive than their North American counterparts in placing larger upfront orders. We hope that trend continues, but we'll see.

R.J., this is Steve. The other thing that supports our feelings that the at-once business, or the closer to market reordering should occur is when we look at the sell through rates at retail on our products, we're continuing to get very solid reports on our product sell-throughs, and that's what really created that reorder activity for us late in the quarter. And our sell-throughs continue to be good. So that also gives us a good feeling for the general trend that we're projecting.

OK, great. Related to the Harley Davidson line, do you guys expect anything maybe a little bit special this year in terms of results related to that 100th year anniversary?

Timothy O’Donovan: R.J., I think what we have really seen, we -- a relatively strong Harley business that's been going on for some time now. So I think it's more of a longer-term proposition. I don't think there's going to be a real short window because the way Harley Davidson has managed their anniversary process, it's been really a rollout that started about a year ago and really culminates in Milwaukee this summer. So it's been a long-term proposition. We think that there's going to be a long-term benefit to it to because of the increased profile for the brand in general, increased marketing spend that Harley has put behind the brand in the last year.

Sure. One last question on the extensions with Merrell on the luggage. Is that going to be maybe rugged packs, or can you just give us any maybe broad strokes on that?

Timothy O’Donovan: Sure. It's going to be a combination of packs and travel kinds of luggage. It's going to be unique, as our Merrell product is unique. It's going to have its own special earmarks and features.

It's going to be highly functional. It's going to be a premium product and priced that way. We're not going to be competing in the price point day pack kind of business. We're going to be producing and marketing a premium product with a lot of special features that we think are going to appeal to the very same consumer who is buying our footwear product.

Sure. Congratulations and thank you very much, you guys.

Timothy O’Donovan: Thank you.

Thanks, R.J..

Thank you. Once again, if you do have a question, please press star, one on your touch-tone phone. Our next question comes from Steve Martin . You may go ahead, and please state your company name.

Hi. Thanks a lot - and good quarter, guys.

A couple of my questions have been answered, although on the licenses, can you talk about who the licensee is, what your minimum - your first year minimums are? And is there a minimum royalty on that?

Steve, there is no licensee. The stock and [Inaudible] luggage program we are doing internally.

OK.

And we've [Inaudible] talent into the business to help us execute those projects.

All right. So you're going to incur some expenses. When do you expect to start shipping those, and what are you looking at sort of over the first year in terms of volume?

Timothy O’Donovan: Steve , I think it's very early to start predicting volume. We're just now exposing the stock program to our retail partners around the world. And those - it's designed as a spring '04 program, but we will be making some shipments in the fourth quarter this year.

The bag program is really a second quarter introduction to the trade, with initial deliveries in the fourth quarter of next year. So...

So that's way out there.

Timothy O’Donovan: Yes. It's way out there, but a lot of development work has been occurring on both those programs really over the last nine months, because we're not going to market with a me-too product. We're going to market with something that - in keeping with our overall brand strategy for Merrell of producing something that we think will surprise and excite consumers.

All right. Is there anything else in the hopper, as I always ask on that licensing sort of other product front?

Timothy O’Donovan: Nothing we're really prepared to talk about at this time.

Well, does that mean there is and you're not prepared to talk about it or does that mean there's not and you don't want to talk about it?

Timothy O’Donovan: I think, Steve , as you and I have talked over some period of time, we believe Merrell has the capability to be a lifestyle brand. Consumers are responding to this brand I think in a very unique way. They have very strong feelings about the brand once they interact with the product. And we think we're in - positioning this brand to appeal to a specific consumer's lifestyle needs. And that those needs will over time unfold beyond just the footwear product.

OK. Steve, you made some reference at the end, and maybe I missed the detail to further balance sheet strengthening. Was there something you said prior to that, because I was not totally paying attention, that referenced your balance sheet?

No I think - all I was referring to there, Steve , in making reference for is that, you know, we are going to continue to work on our days sales outstanding improvements and our inventory return improvements. And you know we've talked about how much additional working capital investment can we get out of the business and then at what pace will we have to invest in working capital in the future. And really what we're trying to do is continue to improve those metrics. And that's the balance sheet improvement that I'm referring to.

OK. Now do you expect more of that in Europe because you've already done most of that here and you've done a lot of warehouse consolidations over there?

Well, the warehouse consolidations were a consolidation by brand. We did not have necessarily duplicate product in warehouses. So there wasn't really an inventory issue there. It was more of from a servicing and consolidation perspective to get all of our brands under the same roofs.

So it wasn't a reduced working capital investment initiative. But our inventories over there are in pretty good shape right now. But there are some improvements we can make.

The big glut of inventory that we had with the acquisition primarily of Cat Europe, that's behind us. So that improvement has already been embedded in our numbers. But again, we're challenging our European operations, just like the U.S., to keep our working capital investments as minimal as possible while improving our service levels.

All right. And on your long-term debt, that's a term loan, as I recall?

I have $15 million of principle I can pay down now with a chunk of it in August and a bigger chunk of it in December. So we would anticipate taking our long-term senior debt down another $15 million by the year end.

What are you currently paying on the $15 million?

We're paying - our blended rate on the $2 is about 6.7%, 6.75%.

And you said you have another...

Our [Inaudible] provision is way too expensive to prepay it.

It's a shame those weren't done in today's day and age. They practically give you the terms.

Well, that's true, but you know it's still - from a historical perspective, it's very affordable funding.

OK. So you can pay down $15 million in August and then how much in December if you want to?

$4.5 million in August and $10.5 million in December.

Oh, I see, $4.5 million in August and $10.5 million in December. And then when would be the next slug, the following August?

The same thing in 2004, the same time period.

OK. Thank you very much.

Thank you.

Thank you. At this time, we show know further questions. I would now like to turn the call back over to Mr. Timothy O’Donovan.

Actually, this is Thomas Mundt. I would like to say to Tim and everybody thank you. And everybody for participating on the conference call today.

Just as a reminder, our conference call replay is available on our Web site at www.wolverineworldwide.com. The replay will be there and available through July 23, 2003. And that concludes our conference call. And thank you very much for participating.