Wolverine World Wide Inc (WWW) 2003 Q3 法說會逐字稿

Good morning and welcome to Wolverine World Wide's third-quarter conference call. All participants will be in a listen-only mode until the question-and-answer section of the conference call. This call is being recorded at the request of Wolverine. If anyone has objections, you may disconnect at this time. I would now like to introduce Mr. Tom Mundt, VICE President of Corporate Strategy and Communications for Wolverine World Wide.

Thank you, Wendy, and good morning to everyone. Welcome to our third-quarter conference call. On the call today are Tim O'Donovan, Wolverine's 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.

Earlier this morning, Wolverine World Wide announced record third-quarter results, another great achievement for the company. If you have not yet received a copy of the press release, please call Stacey Craig (ph) at 616-233-0500 (technical difficulty) to you. The release is also available on many news sites and can be viewed from our corporate website, at www.WolverineWorldWide.com.

Before I turn the call over to Tim O'Donovan to comment on our third quarter, I would 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 (technical difficulty) prediction or projections, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the company's SEC filings and in our press releases. With that being said, here is Tim.

Thanks, Tom. Good morning. Thanks for joining us today. I'm pleased to report record sales and earnings for our third quarter and for the first three quarters of 2003. Sales for the quarter were 230.6 million, a 5.2 percent increase from the prior year. Year-to-date sales are up 7.1 percent. Earnings-per-share of 40 cents were up 3 cents from the prior year for an 8.1 percent increase.

While Merrell continues to be our major growth driver, it is also encouraging to seem major contributions from our other footwear businesses. With the exception of Caterpillar footwear, all of our major footwear groups achieved improved sales in the quarter; and all of the footwear groups reported improved earnings.

Hush Puppies sales in the quarter were up mid single digits with gains in both the U.S. and international segments of the business. The brand repositioning effort in the U.S. market continued to gain traction during the quarter. In the Hush Puppies women's business, sellthroughs this fall have been very encouraging, particularly in the better department stores. Consumer reaction to Hush Puppies new contemporary casual collection in both Macy's and Nordstrom's test stores have been strong, and we anticipate expanded doors later this fall and for next spring. In addition, we now have commitments from all Federated divisions as we head into spring '04.

In men's, Hush Puppies new Crush and Bounce collections were delivered to key independent retailers during the quarter, and these accounts are reporting very good sellthrough. Several accounts are already on their third reorder, and we remain optimistic about our men's business, even though the overall climate in the men's footwear area has remained difficult.

From a profitability standpoint, Hush Puppies margins improved in the quarter, as the brand is selling higher quality, higher priced product to more upper tier retailers. Good progress has also been made in focusing the product line and reducing inventories, which are down 11 percent from the comparable quarter last year. Overall I am very pleased with the progress we're making with the Hush Puppies brand.

Wolverine Footwear Group had a very solid quarter, with sales up mid to high single digits. The sales increase resulted from a low single digit increase in the core Wolverine boot business and double-digit increases in both the Bates uniform and Harley-Davidson businesses. After some softness in the first half, Wolverine's work business increased during the third quarter. Consumers are responding positively to Wolverine's initiative to provide innovative and high value added boot product in the important 100 to $120 retail price point range.

Wolverine also realized nearly a 20 percent increase in outdoor sport boot shipments during the quarter. Wolverine is gaining shelf space with Cabela's and other major boot retailers. In order to promote sellthrough, Wolverine is launching a major fall ad campaign utilizing both television and print. And promoting Wolverine's core work product will air in September and October, while television and print ads supporting the sport boot category will be seen October and November.

In total, it is a strong (technical difficulty) 400 million consumer impressions for the full year. Footwear News recently ranked Wolverine boots and shoes as the fourth-largest footwear advertiser in the nonathletic category.

Harley-Davidson sales during the quarter were driven by strong dealer activity in conjunction with the 100th anniversary activities that culminated in Milwaukee in August. Also, younger product offerings are generating a stronger back to school business for Harley-Davidson footwear. We are on track to achieve our 2003 goal of a high single digit sales increase for this business.

Bates uniform footwear also enjoyed a strong quarter, with heavy shipments of military contract footwear, as well as expanded distribution for civilian uniform shoes and boots. The strategy of utilizing Wolverine's DuraShocks comfort technology in Bates uniform product is providing Bates with a competitive advantage and driving increased consumer loyalty for the brand.

Caterpillar footwear sales were down in the quarter due to weaker U.S. results. While we continue to make good progress in expanding the younger and rugged lifestyle portion of the product line, the industrial business was off in the quarter. CAT order backlogs for fourth-quarter delivery are up, and we expect to have a better fourth quarter as the recent sellthroughs with the major work and industrial accounts have improved quite significantly.

Caterpillar footwear sales in Europe were about even with this comparable quarter a year ago, as unusually warm weather in Europe pushed back boot deliveries. (technical difficulty) Gross margins (technical difficulty) the operating model is working well as we improve efficiencies and service to our customers.

The Merrell business had another very strong quarter, with sales up in the mid teens. (technical difficulty) around the world reported increases, with the largest increases in continental Europe, where the business has more than doubled through the first three quarters of this year when compared to the same period last year. Merrill's growing position in the sports fashion segment of the footwear market is helping to drive the international business, and opening premier distribute (technical difficulty) of European sports specialty and outdoor specialty stores.

In the U.S. market, the Merrell shop in shop rollout continues, with 38 shops now open and another 22 scheduled for the fourth quarter. Sales results in the participating retailers is also excellent, with increases ranging from 25 percent to 300 percent.

Sellthrough on Merrell fall product is off to a strong start. (technical difficulty) collection of rugged casuals is the best performing men's collection we have delivered in several seasons. In the women's category, the Tetra collection of performance casuals is producing double-digit weekly sellthroughs in a number of our major accounts.

Sellthrough information from NPD continues to position Merrell as one of the leading brands of outdoor footwear. Merrill is also on track to meet (technical difficulty) sales goal of a 15 percent revenue increase.

Based on our results for the first three quarters, our current backlog, and the expected level of fourth-quarter reorders, we feel good about our prospects for achieving our 2003 plan, which calls for sales of 875 to 885 million and earnings per share of $1.21 to $1.24. While we're early in the 2004 planning process, we're currently targeting sales for 2004 in the range of 945 million to 965 million, and earnings-per-share of $1.34 to $1.40. Steve Gulis will provide (technical difficulty) regarding our 2004 plan in his comments in a few minutes.

Finally, I wanted to update you on the Sebago acquisition. A definitive acquisition agreement was signed by both parties a week ago Friday, and we expect the closing to take place in the first week of November. A good deal of progress has already been made for a smooth transition of this business, and we're more enthusiastic than ever about the potential for Sebago to participate in premium distribution channels with brands like Cole Haan, Cotts (ph), and Coach.

During the industry's recent global trade show in Dusseldorf, Germany, I had an opportunity to meet with Sebago's European distributors. They indicated their retail customers had an excellent spring and summer season with Sebago product. They are quite optimistic about the brand's future prospects in Europe.

(technical difficulty) corporation of our Merrell management team in their counterparts at Sebago, several new product development projects for Sebago have (technical difficulty) and we're looking forward to being an even more serious contender in the performance marine and premium casual/dress-casual segments of the market with the Sebago brand. I would now like to turn the call over to Steve Gulis, Wolverine's CFO, to provide some additional details.

Thank you, Tim, and good morning, everyone. As Tim has already outlined, we were pleased with our records sales and earnings-per-share in the third quarter, with quarterly revenues increasing 5.2 percent and earnings-per-share increasing 8.1 percent. We continue to drive efficiencies out of our operating model; and with the exception of the fourth quarter of 2001, which was (technical difficulty) of 9/11, we have reported improved operating results in 10 of the last 11 quarters.

Sales of $230.6 million were reported for the third quarter of 2003, which is a 5.2 percent increase over the $219.2 million reported for 2002. Earnings per share increased 3 cents per share or 8.1 percent to a record 40 cents. This quarterly performance has brought our year-to-date sales to a total of $606.1 million, or a 7.1 percent increase; and our year-to-date earnings-per-share (technical difficulty) cents versus 73 cents per share in 2002, or an 11 percent increase.

The Hush Puppies, Merrell, and Wolverine Footwear Group operations reported sales increases for the quarter, and we realized profit improvements in all four of our footwear operating groups. Additionally, we were pleased with the acceleration of the earnings growth in the CAT European business, and this operation (technical difficulty) to reach normalized operating margin levels by 2005.

Reported gross margins for the third quarter were a strong 37.6 percent, which was a 200 basis point improvement over the third quarter of 2002. The improvement was better than expected, and several factors contributed to the increase. (technical difficulty) higher percentage of our overall sales being in-line goods; less required markdowns on slow-moving inventories; improvements in our CAT European margins reflecting improved inventory positions and a stronger currency; and a higher mix of lifestyle products, which maintain higher gross margin levels.

On a year-to-date basis, our margins have improved to 36.6 percent, versus the 35.7 percent reported in 2002. The improvements noted above generated the majority of this improvement, and we are forecasting our annualized gross margin increase to approximate our current improvement of 90 basis points.

Selling and administrative expenses for the third quarter were 26.2 percent of net sales, which compares to 24.4 percent of net sales for the third quarter of 2002. We continue to report the impact of the planned increase in pension costs; and these increases accounted for 70 basis points of the quarterly change. Employee benefit increases drove an additional 80 basis points of the (technical difficulty).

We continue to focus on aggressively controlling our core overhead expenses, to enable us to investment spend in product development and branding, which is an investment in the future of our business. Year-to-date selling and administrative expenses are 27.7 percent of net sales in 2003, as compared to 26.7 percent in 2002. We are anticipating a slight improvement of our year-to-date expense ratio for the full year of 2003.

Interest expense for the (technical difficulty) year-to-date reflects the impact of reduced debt levels, which have resulted from our strong cash generation. We have estimated are annualized tax rate for 2003 to be 32.4 percent, which compares to the 33 percent in 2002. Shares outstanding used to calculate year-to-date earnings-per-share in the quarter, in the third-quarter of 2003 was 40.9 million shares, which reflects the impact of our ongoing share repurchase program.

Reported net earnings of 16.4 million for the third quarter of 2003 (ph) (technical difficulty) compares to 15.3 million of earnings in 2002. On a year-to-date basis, net earnings are $33.1 million in 2003, versus 30.8 million in 2002. These earnings levels equate to 40 cents and 37 cents per share for the third quarters of 2003 and 2002 respectively; and 81 cents and 73 cents per share for the year-to-date period in 2003 and 2002. These earnings levels continue to reflect operating leverage increases on the sales gains which the company is experiencing.

During the quarter we experienced a work stoppage in our tanning operations, and we took appropriate actions to continue an ongoing supply of our performance leather products. While the tanning operation experienced a sales decline in the quarter, we were able to meet all essential shipping requirements. Subsequent to quarter end, we have settled the labor dispute and expect minimal disruptions to the fourth-quarter operations. Additionally, the work slowdown impacted our overhead absorption, and thus negatively impacted gross margin.

From a balance sheet perspective, we continue to make improvements. Accounts Receivable (technical difficulty) of the third quarter of 2003 are $191.4 million, which compares to $191 million in 2002. This minor increase allowed us to improve our Day Sales Outstanding by 7.9 percent, and at the same time make significant improvements in our overall aging. We continue to be aggressive in our receivables management processes, and anticipate our DSOs to continue to improve, as we are targeting receivable growth at two-thirds the rate of our sales growth.

Inventory improvements continued in the quarter, as we reported a $7.9 million reduction, for a 4.2 percent decrease over 2002's third-quarter levels. We continue to merchandise narrower and deeper product offerings, and are aggressively disposing of slow moving merchandise. We are pleased with the progress made in this area, but feel that further utilization can be achieved. In this regard, we are forecasting inventory reductions this year; and in the future the growth rate of inventories are targeted to be two-thirds of our future sales growth rate.

Our strong operating results and balance sheet management have allowed us to continue debt reductions, as we have reduced our Senior Notes by $4.5 million during the quarter and had no outstanding revolver debt at quarter end. The end of the third quarter is historically the peak of our working capital requirements, and we cannot recall a time when we had no outstanding revolver debt at the end of this quarter.

The debt reduction resulted in a total debt to total capital ratio of 14.8 percent, which is significantly below our operating range of 20 to 40 percent. Additionally, we would anticipate continued improvements in our overall leverage, as we are forecasting additional Senior debt reductions of $10.5 million in the fourth quarter; and we anticipate minimal borrowing requirements for the funding of the Sebago acquisition.

We are continuing to forecast $75 million of cash generation from operating activities in 2003. During the quarter, we repurchased 77,400 shares of stock under the August 2002 repurchase program, at an average cost of $19.07 per share. We have 912,000 shares available for repurchase under this program, and we will continue to repurchase shares on an opportunistic basis throughout the year.

Looking towards the fourth quarter, we have a good start as we are entering the quarter with a backlog increase of 5.5 percent. While we are pleased with the level of this increase, we will need solid reorder levels in the fourth quarter to reach our sales goal of 875 to $885 million. As sales levels within this range and continued margin improvements, we continue to support our earnings-per-share target of $1.21 to $1.24, which if accomplished would be considered a very solid year of performance for the business.

We have outlined our initial guidance for 2004, with sales ranging from 945 to $965 million, and earnings-per-share ranging from $1.34 to $1.40. This guidance reflects the previously announced sales projections for the Sebago acquisition, and organic growth rates at approximately twice the rate of the industry's growth. At the midpoint of our guidance ranges, earnings-per-share growth would reflect significant operating leverage, as EPS would grow at over twice the rate of projected organic sales growth, as the Sebago operations are anticipated to be breakeven in the transition year of 2004.

I thank you for your time, and I would now like to turn the call back to Tim for a couple of closing comments.

Thanks, Steve, and as many of you are aware, Wolverine is hosting an investor conference to discuss our longer-term strategies for the business. While we do not have time in this call to go into great detail, I do want a highlight a few of the key points. Our vision is to position Wolverine as the premier global company in the nonathletic segment of the footwear market.

We have made some meaningful progress towards this goal over the past decade, with compound annual sales gains of over 10 percent, and earnings-per-share gains in the strong double-digit range. Looking forward, we believe we can grow our sales at mid to high single digits. As we develop an even sharper focus for each of our brands, develop innovative product and marketing programs, and provide excellent service to our customers, we believe we can achieve revenue growth at several times the industry's history historic growth rate.

We'll also be fine-tuning our business model to improve operating earnings leverage, and believe we can achieve double-digit annual earnings increases over the next several years. This model will also produce positive cash flow, to provide the necessary capital to simultaneously fund growth, reduce debt, repurchase stock, and increase dividends, all of which add up to increased shareholder value.

For those of you who cannot join us this afternoon for our conference, our remarks will be webcast over the company's website. Replays will also be available through October 15. Thank you again for joining us this morning, and we will now turn the call back to the operator so we can take your questions.

Thank you. At this time we are ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Bob Drbul.

This is Omar Saad on behalf of Bob Drbul from Lehman Brothers. Congratulations on the strong results. A couple quick questions. I wanted to see if you could talk a little bit about the backlog. You mentioned 5.5 percent overall. What are the trends you're seeing by channel? And if you could talk a little bit more about at-once (ph) trends; that was something you'd mentioned in last quarter as well.

Sure, Omar. I think in terms of the backlog, I think as most people in our industry have been experiencing, retailers are waiting as long as they can before they make commitments for the next season. In terms of our overall order trends, we are pretty pleased with the direction those trends have been taking recently.

In terms of reorders themselves, it has been a bit erratic over the summer months; in total our reorder activity during the quarter was flat to slightly up. But as you remember, we began the quarter with a 5.4 percent backlog increase, and finished the quarter with a 5.2 percent sales gain. We are comfortable, given the backlog increase that we have going into the fourth quarter, that we can achieve the goals that we have outlined.

Great. The other question I would have it could you, -- maybe Steve, you can elaborate a little bit on the impact of currency on the business in the quarter? And if it has had any impact on the backlog numbers as well?

In the quarter, currency impacted topline by about 1.5 percent. So it wasn't a big piece of the over (technical difficulty). The other side of it is, it has helped our gross margins as a percent. But also the way the accounting goes for that, our expense levels are higher, because we're converting at a higher rate.

So all in all, I would say that it didn't have a significant impact on the quarterly operations. And we are showing good improvements in our offshore operations on a constant dollar basis as well as a reported basis.

Great. Thanks, and I look forward to seeing you this afternoon.

John Shanley.

This us Christopher Svezia calling in for John Shanley. My congratulations as well on a really good quarter. Just wondering, a couple quick questions. As we look at the fourth quarter, you did a tremendous job in terms of on the gross margin side of your business, in terms of sellthrough. I was just wondering, as you look at the fourth quarter and given the guidance that you have provided, what can we look for in terms of margin improvement? Do you anticipate some of these trends that you saw in the third quarter to carry over into the fourth quarter as well?

If you went back to the second-quarter conference call, we're giving annualized guidance increases of about 40 to 50 basis points. And year-to-date right now we are up 90 basis points. In my comments I covered that we expect our annualized rate to be pretty much in line with where our year-to-date increase is at. So that would be close, in that 90 basis point range.

So we are anticipating continued gross margin improvement. Our inventories are in much better shape. We are not experiencing the markdown levels. We are through the transition year in Europe with Caterpillar primarily, where we had some margin pressures a year ago. So a lot of the hard work and focus we've been putting in has resulted in strong margin improvement this year. So I think that that should be apparent for the fourth-quarter also.

And just one other quick question. As you look at your guidance for next year, any impact at all with regard to pension expense, that has impacted this year?

Yes, one of the things we're pleased to announce is that next year's pension expense, at this point in time, appears to be flat with 2003 levels. So a lot of the operating leverage we have been generating has been offset by that pension expense increase. And if you look at us on a year-to-date basis today, our reported EPS is up 11 percent; but excluding that pension expense increase, our EPS leverage is up 22 percent. So it is almost double what you see on the face of our financial statement.

So we're pretty pleased to be able to announce that our pension costs should be flat next year. And thus the operating leverage that we're getting from our model will be much more apparent to the investment community.

Terrific. See you could anticipate getting some leverage on the SG&A side or on the operating side as a total company for next year?

Yes, we would be looking at some SG&A leverage next year. The real thing that we will always want to balance, Christopher, is how much we want to invest back into the business. That is one of the concerns we have had over the last couple of years. If the pension expense increases, we could not fuel the marketing and product development initiatives at the level we may want to. So we may take a piece of that, not all of it. (technical difficulty)

But as we work throughout 2004 plan, and we will report a lot more detail, some more detail this afternoon, more detail in December, we will get focused into exactly how much of that we will want to reinvest.

Terrific. See you later this afternoon. Congratulations.

Thank you. (OPERATOR INSTRUCTIONS) Lee Backus.

Buckingham research. Let me add my congratulations on a good quarter. Tim, could you discuss what you see at inventory levels among your customers? And maybe discuss the mood that they see going into this fall season?

Sure, Lee.

Not only your product, but the industry in general.

Sure. I think retailers have gotten pretty good at managing their business when there has not been the kind of sales momentum they might like to see. They did need to clear sandals earlier in the summer, but I think with the burst of warm weather that we experienced, I think they got their inventories pretty cleaned up. Based on what we see, I believe retailers have their inventories in pretty good shape.

Our sense is that business in September in the footwear category, I believe it is going to look stronger than it has the previous several months. So I think it is hardly euphoric, but I think there is a little more optimism out there.

Also on your sales, long-term sales goal of mid to high single digit, how much of that is internal? And does that include possible acquisitions? Or is that just with what you have on the table right now?

Lee, what we are going to be talking about in a little more detail this afternoon is our plan over the next couple of years. One of the things that is incorporated into that plan is picking up, frankly, the pace of growth in our core businesses. We believe we have our products and brands very well positioned today. We're beginning to gain some momentum in some businesses that were in a turnaround situation.

The 2004 guidance that we have given the does include, of course, the Sebago acquisition. But other than the Sebago acquisition, it is all growth from our core businesses.

Thank you.

Thank you. At this time, we have no further questions. I would now like to turn the call over to Mr. Tom Mundt. Mr. Mundt, you may proceed.

Thank you, Wendy. On behalf of Wolverine World Wide, I would like to thank all of you for joining us today. As a reminder, our conference call replay is available on our website, which is at www.WolverineWorldWide.com; and will be available through October 15.

On a separate note, as Tim indicated, we will be hosting an analyst meeting late today beginning at 1:00 PM Eastern time, at which Tim O'Donovan and Steve Gulis will be presenting Wolverine World Wide's new three-year strategic growth plan. A webcast of that event will be live and available on the company's website, at www.WolverineWorldWide.com; and again will be available through October 15. That concludes our conference call, and thank you very much. And everyone have a great day.