Wolverine World Wide Inc (WWW) 2006 Q2 法說會逐字稿

Good morning and welcome to the Wolverine World Wide second-quarter conference call. At this time all participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine. If anyone has any objections to this you may disconnect at this time. I would now like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you, Carlos. Good morning and welcome to our second-quarter conference call. On the call today are Tim O'Donovan, our Chairman and CEO; Steve Gulis, our Executive Vice President and CFO; and Blake Krueger, our President and Chief Operating Officer.

Earlier this morning we announced record second-quarter results marking our 16th consecutive quarter of both record revenue and earnings per share. If you did not yet receive a copy of the press release, please call [Erica Knoll] at 616-233-0500 to have one faxed to you. The release is also available on many news sites or it 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 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 predictions or projections, there are 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 I would now like to turn the call over to Tim.

Good morning and thanks for joining us today. I'm pleased to report record revenue and earnings for the second quarter and first half of 2006 and an improved earnings outlook for the full year. This marks our 16th consecutive quarter of record revenue and earnings per share.

Revenue for the quarter of $238.5 million increased from the prior year by 10.5% and earnings per share of $0.25 were up $0.03, a 13.6% increase from the prior year. The revenue and earnings increases in the quarter were broad based with the Heritage Brands Group, Outdoor Group and Wolverine Footwear Group all reporting double-digit revenue increases and The Hush Puppies Company, Heritage Brands Group and Wolverine Footwear Group each reporting double-digit earnings increases. For the first half of 2006 each of our four marketing groups has achieved solid revenue and earnings increases.

Regionally revenue growth was strong in North America and international markets while somewhat weaker in Europe. Following a strong gain in European revenue in Q1 many European retailers grew more cautious in the second quarter as spring season sales were slow to develop and retailers managed their inventory more conservatively. For the first half European revenue was up mid single digits and fall bookings are also up, and we remain very positive regarding the full year outlook for the performance of our brands in Europe and expect continued market share gains in this important market. Strong revenue gains in North America were led by double-digit gains in the Merrell business and strong results across our portfolio of boot brands.

Turning to our key business units, Hush Puppies' global revenue declined by 3.8% during the quarter due principally to lower sales in the U.S. resulting entirely from reduced closeout and discount channel sales. Hush Puppies' profit increased at a double-digit pace in the quarter due to significant improvement in gross margin resulting from a favorable change in the sales mix to higher priced higher quality product to upper tier channels. In the U.S. market sales to upper tier channels increased by 8% during the quarter continuing a trend established in the first quarter.

Hush Puppies' business with Federated continues to expand with the brand presence in approximately 240 Federated stores this spring season. At Macy's West Hush Puppies has become the number two volume brand in the women's comfort department as a result of strong regular priced sell through this spring season. Men's Hush Puppies achieved a solid sales increase in the second quarter and introduced a new collection of summer casual into a select group of Nordstrom stores. Additionally, in line with our strategic direction, Hush Puppies is growing its brand presence in the better independent shoe store channel with solid first half gains in this strategically important channel.

During the quarter Hush Puppies International Partners opened new concept stores in Spain, Venezuela, Ecuador and the Philippines. There are now over 340 Hush Puppies concept stores and an additional 550 shop and shops around the world all helping to build the Hush Puppy global brand presence with exciting product and consistent brand imagery. New global product concepts such as Wave Reflex, a proprietary comfort technology, are enjoying success in both men's and women's product categories and are helping reinforce the Hush Puppy brand heritage for comfortable market right casual product.

Following the positive trend established in the first quarter, the Heritage Brands Group, which includes our two largest licensed footwear businesses Caterpillar and Harley-Davidson, had a strong second quarter. Revenue was up 13.4% with double-digit gains for both brands. The Caterpillar footwear revenue increase was driven by stronger results in the U.S. and with international distributors. Sales in the UK and Europe were softer in the quarter reflecting the general retail conditions in those markets. Following the momentum established last fall, the CAT business benefited from good sell through of iTechnology work and casual product as well as fashion and retro boot product designed to appeal to the fashion denim customer.

The Harley-Davidson revenue increase was driven largely by increases with the Harley-Davidson dealer network. These gains resulted from the success of new dealer product introductions and focused dealer marketing support programs. As the Harley-Davidson dealer network continues to upgrade locations with larger footprint stores, we see an expanded opportunity to more effectively merchandise the boot category and attract an even larger share of the millions of dollars that Harley-Davidson loyalists spend on their favorite brand. In addition to gains with the dealer network, Harley-Davidson results were also strong with a number of the brand's other large retail accounts.

The Wolverine Footwear Group had a very strong quarter with revenue up 13.8% as a result of double-digit revenue gains in both the Wolverine and base businesses. The Wolverine brand increase was driven by strong consumer demand for Wolverine's core work boot product. New Wolverine product incorporating the brand's patented MultiShox comfort technology combined with aggressive marketing support resulted in strong reorder activity with the brand's core retail partners. Through the first half of this year Wolverine's brand business is up with eight of the brand's top ten accounts.

The strong product offering from our Wolverine, Bates, Caterpillar and Harley-Davidson boot brands is also helping drive market share gains for our HYTEST direct to industry safety shoe distributor network. The HYTEST group of 20 independent distributors operate 135 Shoemobile trucks that visit factories and other job sites to meet the individual worker's safety shoe needs. Through the first half of this year the HYTEST distributor network sales of our brands is up by more than 20%, a further reflection of the strength of our boot brand.

Bates revenue gains in the quarter were driven by the timing of Department of Defense shipments, a strong double-digit gain with the brand's civilian uniform footwear customers, and from increased export to Europe and the Middle East. The Bates team is working aggressively with the military's special operations forces to develop and field test new and innovative footwear solutions for the needs of our elite military personnel. Our capability to transfer proven footwear technology from the commercial sector to military applications provides Bates a significant competitive advantage and, we believe in the long run, will garner Bates a larger share of the uniform footwear market.

While the Bates business realized solid revenue increases in the first half of this year, we are anticipating a revenue decline in the back half of 2006 due to reduced demand and the timing of shipments to the Department of Defense. The majority of this decrease is expected to occur in the fourth quarter. This anticipated revenue decrease with the Department of Defense is reflected in the Bates order backlog which was down approximately 13 million at the end of the second quarter.

The Outdoor Group continues to be the Company's most significant growth opportunity with revenue increasing by 15.3% in the quarter. Merrell's 17% revenue gain accounted for the majority of the increase with Sebago revenue up slightly in the quarter. In addition, Merrell continued to be the Corporation's largest profit contributor. During the quarter Merrell achieved double-digit revenue increases in the U.S., Canada and with international distributors while revenue in Europe was modestly lower. For the first half of 2006 Merrell achieved strong revenue increases across all regions.

Merrell enjoyed solid sell through of spring season products with newfound strength in the trail running sector and ongoing success in the multisport category. Sandal sell throughs were also good where the weather was at all cooperative. In the U.S. market Merrell's growth came from across its key target channels -- outdoor specialty, department store and independent shoe shops. In the Canadian market Merrell continues to gain significant market share and is now a core resource for some of the dominant Canadian retailers in the general sporting goods channel. In Europe the same phenomenon is occurring as the brand continues to gain shelf space in leading sporting good retailers in the UK, France and Spain.

The Merrell backlog for fall is up in all regions and we anticipate a solid back half for the brand as the continuum approach to developing and presenting product at retail and the growing segmentation within the Merrell line is working well for our retail partners. Merrell's success over the past 12 months in the running category also represents new opportunities for the brand to further penetrate this important product segment.

In addition to selling in the fall '06 line, the Merrell team has been busy prelining the spring '07 line with key retail partners in both North America and Europe. The response to the line has been very encouraging and we are looking forward to the upcoming tradeshows to expose the line to a broader audience of retailers.

Sebago revenue improved in Q2 as consumers responded favorably to a more focused Sebago productline as well as new initiatives in the line. A number of the updates to classic Sebago Marine inspired product have sold through well at retail and we believe we now have a sound approach to growing the Sebago business moving forward.

The Patagonia Footwear project is progressing rapidly and on target with an initial 32 style Patagonia spring '07 footwear line introduced at the global sales team and international distributor network this past month. While it's very early in the sell in process, we are encouraged by the positive response to the line and the level of interest from a variety of top tier retailers globally. There will be a few early Patagonia shipments late in the fourth quarter with the bulk of the initial shipments planned for the first quarter of '07. Work is also progressing well on the Merrell Apparel program with a launch to the trade planned in late '06 with initial deliveries to retail beginning in the third quarter of next year.

We have a complete and talented design and development team in place working on the project, have set in place a sourcing team and are now finalizing the sales and marketing plans to support the launch globally. We continue to be enthused about the opportunity to develop the Merrell brand over time into a leading global lifestyle brand with the distinctive point of view and a unique appeal to consumers who appreciate the Merrell design aesthetic and its outdoor performance heritage.

Looking forward, we're pleased with the overall response to the Company's fall '06 product offerings and the 8% increase in our order backlog position at quarter end. The order backlog is broad based with mid single digit or higher backlog increases in three of our four marketing groups. The Wolverine Footwear Group backlog is below year ago levels due to the previously discussed reduced demand for Bates uniform footwear from the Department of Defense. Excluding the effect of the lower Bates' Department of Defense order backlog, the Company's overall backlog was up approximately 12% at quarter end.

One final matter I wanted to address is the anti-dumping situation in Europe. The European Commission has recently put forth a proposal that would call for a different protocol than the provisional dumping duties now in effect. The European Commission has until October of this year to make a final determination of the actions to be taken in response to its investigation and to obtain the support of the member states. And we expect there will be a number of proposals forthcoming from interested parties.

At this point in the process we remain hopeful that the footwear industry's point of view will prevail. However, we are planning our sourcing strategies based on the provisional anti-dumping duties currently in effect and have built those additional costs into our full-year revenue and earnings estimate.

In summary, we have positive momentum in our business as evidenced by our above plan first half record results. Based on our strong first half results and improved visibility in the fall season, we are increasing our revenue and earnings estimates for the full year which Steve Gulis will describe in more detail in his comments. I will now turn the call over to Steve, Wolverine's CFO and Executive Vice President, who will provide you with additional information about our results.

Thanks, Tim. And I would also like to thank everyone for joining us this morning for our second-quarter 2006 conference call. This morning we released record second-quarter revenue and earnings per share results. Revenue for the second quarter of 2006 totaled $238.5 million, a 10.5% increase over the $215.7 million reported in the second quarter of 2005. Earnings per share for the quarter increased 13.6% to $0.25 per share and exceeded 2005 results by $0.03 per share. This quarter marks the 8th consecutive quarter of double-digit earnings per share improvement.

Year-to-date revenue totaled $501.3 million which equates to an 8.8% increase over the $460.9 million reported in 2005. Earnings per share of $0.59 compares to $0.49 for a $0.10 per share increase or 20.4%. We continue to achieve solid operating leverage on our revenue growth as the rate of earnings per share growth again exceeded the revenue growth rate by a factor of two.

For the second quarter we were pleased to report strong double-digit revenue growth in three of our four branded groups and these contributions supported our strong revenue gain. Second-quarter revenue also included a change in the way we are conducting business with an international partner for all of our branded operating groups. The change from a distributor basis to a wholesale basis where Wolverine takes title to the goods and records revenue on a wholesale basis added $8.3 million or 3.8% to our second-quarter revenue growth. Conducting businesses in this manner will allow our partners to grow their business while managing Wolverine's business risk as letters of credit will support the new business model.

Foreign currency had a minor impact on second-quarter revenue growth, a positive 0.2% impact, and for the year-to-date foreign currency had a negative 0.7% impact on revenue growth. Reported gross margin for the second quarter 2006 is 37.9% and compares to 39.2% reported in the second quarter of 2005. The change in business models noted earlier had a negative impact on gross margin of 140 basis points as both revenue and cost of products sold were increased by $8.3 million. Additionally, we sold a higher percentage of our goods in our higher margin businesses. This business mix change improved gross margin by 20 basis points while product cost increases had a 10 basis point negative impact on gross margin.

In the second quarter the foreign currency impact on gross margin was neutral as the positive impact in our Canadian wholesale and Dominican Republic manufacturing operations offset the negative impact of a stronger U.S. dollar in our European wholesale operations. Excluding the impact of the business model change with our international partner, gross margin was in line with our projected levels as reported in our first-quarter conference call on April 19, 2006.

On a year-to-date basis gross margin of 39.2% in 2006 is flat with the 39.2% reported on a year-to-date basis in 2005. The change in our business mix had a positive 40 basis point impact on gross margin and foreign currency has improved gross margin by 20 basis points. These two improvements were offset by the business model change noted above.

Reported selling and administrative expenses as a percentage of revenue for the second quarter of 2006 were 28.8% and compare to 29.8% reported in the second quarter of 2005. The leverage obtained principally reflects the increase in our reported revenue. Included in the quarter was $800,000 of expense related to FAS 123R, stock option expensing, and we incurred $1.5 million of expense related to our ongoing investment in the Patagonia Footwear and Merrell Apparel initiatives. These two items had a negative impact on expense leverage of 50 basis points and reduced earnings per share $0.03. Overall expense levels are in line with plan and we continue to aggressively monitor our baseline expenses to assure that we are supporting product development and brand building initiatives.

For the quarter and on a year-to-date basis interest income on our cash investments principally offset interest expense on our outstanding senior debt. Short-term rates on investments have increased over the past several quarters and we anticipate this benefit to continue over the remainder of the year. An estimated annualized tax rate of 33.2% was used in the second quarter of 2006 and this reflects an increase over the 32.4% used in the second quarter of 2005. The increase reflects a higher portion of our income being generated in higher tax jurisdictions. Additionally, average shares outstanding of 57 million were used in the fully diluted EPS calculation for the year-to-date.

From a balance sheet perspective accounts receivable totaled $169.5 million at the end of the second quarter and is a 7.8% increase over 2005 second-quarter levels. We continue to experience strong cash collections as our days sales outstanding continue to be below our goal of 60 days and our accounts receivable balance has grown at a rate below our 10.5% revenue growth. Inventories of $186.6 million reflects a 1.8% reduction when compared to second-quarter 2005 levels.

This is our third consecutive quarter of year-over-year reductions in our inventory levels. These reductions have assisted us in improving our inventory turns by 0.3 turns on an annualized basis. We continue to look for further ways to minimize our inventory investment while assuring ourselves that we do not impact service levels with our customer base.

Our overall working capital investment has increased by only 0.6% on a year-over-year basis. On a trailing four quarter basis, our after-tax return on assets is 12.2% which reflects an improvement from the 11.5% reported at this time last year. Additionally, our return on equity of 17% has improved 100 basis points over 2005 levels. Both of these ratios are at historical highs.

The Company produced cash from operating activities totaling $33.6 million in the first half of 2006 and this supports our goal of generating $100 million of cash for the full year. In the second quarter we used a portion of this cash generation to repurchase 660,000 shares for $15.4 million and have a repurchase authorization of 1.5 million shares available for the future. At quarter end we had a cash balance approximating $81 million.

Looking toward the remainder of 2006 we are starting with a solid backlog position as we are currently up over 8% when compared to the same point in time last year. It should be noted that our base order backlog is about $13 million below year ago levels due to the reduced demand and timing of our business with the Department of Defense. This reduction had about a 4% impact on the Company's overall backlog increase. Additionally, the backlog shortfall will principally affect fourth-quarter revenues as anticipated throughout the year.

Based on this factor and our revenue growth to date we have increased our full-year revenue guidance range to $1,120,000,000 to $1,140,000,000. At the midpoint of this range we would achieve our stated objective of mid to upper single digit annualized revenue growth. Gross margin levels for the remainder of the year are expected to approximate our 2006 year-to-date levels of 39.2%. If achieved margin at this level would be in line with the estimates we provided in our first quarter 2006 call with relatively flat gross margin in the third quarter being followed by improvement in the fourth quarter. As stated in our first-quarter 2006 conference call, gross margin is anticipated to improve for the full year by 70 to 90 basis points over full-year 2005 levels.

Investment spending in Patagonia Footwear and Merrell Apparel and the expensing of stock options will increase our expenses as a percentage of revenue on a full-year basis by approximately 70 to 90 basis points, thus operating margin for 2006 is anticipated to approximate 2005 levels. The above factors and strong first-half operating results support our increase in earnings per share guidance for the full year. We are increasing our guidance to a range of $1.38 to $1.42 per share. Achieving the midpoint of this range would provide for the third consecutive annual double-digit earnings per share increase for the Company.

Additionally, we would anticipate third-quarter performance to be stronger than the fourth quarter as the Bates military revenue reduction and the gross margin impact from anti-dumping legislation will affect fourth-quarter operations. While all market environments seem to have their challenges, our product performance around the world continues to keep us optimistic about the future of the Company. We look forward to keeping you updated on our progress during the year and I would now like to turn the call back to Tim.

Thanks, Steve. We're pleased with our strong first-half results and encouraged that our strong business model provides the Company with the opportunity to invest in exciting new initiatives while producing above plan results. We thank you for joining us today and Steve Gulis, Blake Krueger and I would now welcome your questions.

(OPERATOR INSTRUCTIONS). Robert Drbul, Lehman Brothers.

Just a couple questions for you. On the Merrell business, are you seeing any more competitive pressures from other brands that are maybe getting a little bit more sharper with price or some new initiatives?

Bob, I think the category is a strong category in the industry right now so there's no lack of competitors. But I think what is encouraging for us is the continued momentum in the business. Merrell's performance in the first half of this year in terms of its revenue gain have exceeded our plan for the business. Their strong momentum and I think the other thing that's encouraging is the ability of Merrell to line extend into new categories and to do it very successfully.

And the trail running category is probably a good case in point. It's a category we've been working in for some time and really have some traction in that category now and that opens up further growth opportunities for the brand. So I think we can anticipate strong competition, but we're more than holding our own and continuing a very strong double-digit pace of growth for the Merrell business globally.

In the Patagonia business, as you look at it so far, have there been any major surprises as you progress? And I guess, when you look at the opportunity is it maybe bigger than you originally thought or is everything sort of exactly how you thought it would be at this point in time and as you look to the (indiscernible)?

Bob, I think what's been -- and it's early in the whole process, but we did have an opportunity at a recent trade show in New York to talk to quite a few of our accounts. And I would say the one point that was certainly encouraging was the breadth of accounts who have an interest in the brand. It's not just the outdoor specialty stores, some of our very best independent shoe store customers believe it's an opportunity; some of the very top tier department store accounts that we have a good relationship with see it as an opportunity. So the interest level across a broader spectrum of upper tier customers is probably something that's gone a little beyond what we originally had thought when we first began the project.

Great, thank you very much. Nice job.

John Shanley, Susquehanna Financial Group.

Good morning and congratulations on a really nice quarter, guys. Tim, can you give us some insights in terms of the product margins attainable in Hush Puppies' upper tier retail distribution to accounts like Federated and Nordstrom? Are they comparable to or better than what you generally attain in accounts like general merchandise retailers? And can you also give us some insights in terms of what the royalty income from Hush Puppies' international business was in the quarter?

Sure, John. On the first question, we have made good progress in improving our Hush Puppy margin in really two ways -- one, by building better product that has greater consumer appeal we've been able to price that product so that it still represents a good value but also represents solid margins for us. Secondly, with the average price, as we've segmented the soft style part of the Hush Puppy line and focused on really building the better part of the productline we've seen a significant increase in the average price point. So the gross margin dollars in addition to the percentage is also improving.

And then finally, as we've gotten better focused on the productline, done a better job of controlling our SKUs and inventory, we have made some improvements in terms of closeouts and mark downs and still have room to improve there. But the combination of those three things is really helping us improve the margins. In terms of the overall licensing revenue in the -- for Hush Puppies in the quarter, (indiscernible) was about comparable to year ago levels on a year-to-date basis as it's up in the mid single digits.

Tim, also the sales decline in Europe for the Merrell brand, was that due in part to the increased tariff on Chinese imports going into the EU? And would that change materially if there is an adjustment, do you think, in terms of the tariff requirements that you mentioned that are being considered?

John, at this point there hasn't been a -- as those additional dumping duties began phasing in in April, clearly we have moved some prices in Europe in order to protect our margin and factor in the impact of those duties. But I would not say that that had a significant impact in the second quarter. I think we saw really across our businesses the second quarter in Europe was just tougher and in the UK and on the continent and I think it was more a case of whether in general business conditions in the market.

But looking at our first-half results in total across our brands in Europe we had very solid performance. Looking at our order backlog in Europe for fall we're up and up pretty consistently across our brand portfolio. So I think what we saw in spring was a bit of a blip in the market, partially weather driven, maybe a little bit of World Cup mania where people were sitting in front of the television sets rather than shopping -- I'm not entirely sure. But just looking at the back half we're anticipating that we're going to see revenue gains across our brand portfolio in Europe in the back half.

Are Merrell's forward orders in Europe up?

Yes, they are.

Great, that's good to hear. The last question I have is for you, Steve. I'm not sure I understand the definition of a business model change with the distributor you mentioned. Did you buy that distributor? And if so, was there a cash outlay in the quarter for that?

No, John, we did not purchase the distributor. We just changed the way the product flow is going from a royalty basis to more of a wholesale basis from the factory to them. So we're taking LCs for the orders for product in that marketplace. We're putting orders to the factories and then we take title and ship it to the distributor. And because we take title we have to record the top line and the product cost of sales. And all that is supported by an LC.

Okay, I see. And are there other distributors that you may also change the relationship with sometime during fiscal '06?

We never say never, but we don't see anything on the horizon right now other than this one instance.

Good. Again, congratulations on a very impressive quarter. Take care.

Jim Duffy, Thomas Weisel Partners.

Good morning, everyone. Nice quarter. A follow-up to John's question on the distributorship and the changing relationship there. Given that revenue and cost of goods impact was the same, clearly this impacted the profitability. What do you anticipate from this going forward?

Jim, from a profitability perspective the business model really -- or the change really only impacted revenue and cost of products sold. The gross margin contribution in dollars was essentially the same, okay? So the profitability with that customer remained unchanged. Okay?

Okay. As it relates to the Patagonia product, which should hit in Q4, where will we see that? Will that be in the Patagonia stores?

Jim, what will happen in Q4 is -- it's really -- the initial productline is a spring '07 introduction. But there will be some retailers in southern climates -- Florida, Arizona, Southern California -- who will want to pull forward and we will try to accommodate them in terms of pulling forward some spring product. But we don't anticipate that it's really going to be very significant.

Okay. At the early stages of the Patagonia launch will the gross margins be in line with your longer-run expectations or will there be kind of an introductory period?

No, the gross margins will -- right from the onset will be in line with our overall gross margin plans and pretty comparable to our other business units. They'll be obviously on the -- on the front end of this there's going to be some fairly significant expenses involved with the launch but the gross margins will be very solid.

Okay. And final question on the working capital. You guys have done a great job with the management here. The inventory levels again our lean. Do you have enough inventory to support your growth expectations going forward? Is that something you're comfortable with or do you wish you had more?

Jim, you sound like some of our marketing guys now. No, we -- I think one of the keys that we have, Jim, is with our systems environment today we're really able to focus much better on what product is turning at what rate so we're able to buy more aggressively where product is selling and back off in areas where the demand isn't quite as high as what we might think it should be versus what is actually happening.

So I would tell you our overall service levels continue to be strong and we still feel that our inventory turns have some opportunity to improve. And I think that will happen in two ways -- continued strong inventory management but a growth rate in inventories at a rate lower than our revenue growth rate.

That's great; that should really help the cash flows. Nice quarter, guys.

(OPERATOR INSTRUCTIONS). Mitch Kummetz, DA Davidson.

I guess I can't ask my ten questions now. Let me start just to -- actually a follow-up on Jim's question about this change in business model. Because apparently it didn't have any earnings impact on the second quarter. But in terms of modeling the line items for the balance of the year, Steve, I thought you said that gross margin flat in Q3, then up a bit in Q4. But wouldn't you expect this business model shift to also drag down the gross margin, maybe juice up the sales a bit like it did in the second quarter over the balance of the year?

It will have some impact over the balance of the year, Mitch, but it's not going to be as dramatic as what it was in the first quarter -- or second quarter, excuse me. So there will be some but that guidance is still appropriate given the anticipated volumes we have with that partner.

Okay. And then secondly -- I guess this will be a multi part question -- but just to drill down on the backlog a little bit more. On a constant dollar basis -- did currency have any impact on the backlog? I know it did at the end of last quarter. And then also, we went from I think an increase of 14% end of Q1 to now 8%, although I guess it's up 12 if you strip out Bates. How should we think about the 14% at the end of last quarter? Did Bates have any impact on the backlog last quarter? I know it sounds like the decline is expected to come in the fourth quarter of this year. So maybe ex Bates it still would have been up 14%.

Yes, Mitch. At the end of the first quarter the Bates backlog was about neutral so it really didn't have much impact on the first quarter backlog. All the change really happened in the second quarter and that's why we wanted to point it out because we (technical difficulty). As you know, we -- going back to our initial guidance for this year, we anticipated that our Bates revenue for the full year would be down about what it was a year ago in the neighborhood of $12 million and that's still valid. It's just happening in the back half of the year, most of it in the fourth quarter due to the timing of when the Department of Defense has requested to receive this merchandise.

And currency was basically neutral on the backlog this time?

The constant dollar backlog -- it had about a 1% favorable impact on the backlog at the end of the second quarter.

And then the Bates -- the military contract that was just announced late last week, doesn't sound like that's having any impact on this year's numbers?

Yes, that's a good question, Mitch; I'm glad you brought it up because I think sometimes these announcements come out and it's difficult for people to interpret what it means. That announcement related to a combat boot contract for the Army and the Air Force that had been awarded to three different companies back three years ago, Wolverine being one of the three. What this announcement was was simply the Department of Defense exercising an option for the fourth year of this five-year contract.

And the other thing that happened and the way these things are reported -- the military gives themselves a very broad latitude on what their commitments are. The commitment on an annual basis for Wolverine for this contract is a minimum of around $1 million to a maximum of around $20 million. They rarely buy the minimum and they rarely buy the maximum, it usually falls somewhere in between. But what they report in these announcements is always the maximum.

So this particular contract was already built into our plan. They're simply exercising an option from July '06 to July '07 and it really does not change the landscape in terms of our business there.

Okay, that's helpful. Thanks.

Jeff Edelman, UBS.

Thank you, good morning. Another question on the distributorships. Is this volume -- was their volume relatively equal, spread out through the year or was it heavier in the second quarter? Because if we look at our original second-half sales assumptions, which already had the absence of Bates' volume and add in something from the distributors, then there seems to be a shortfall someplace else unless I'm wrong in the magnitude of the distributor volume.

First of all, Jeff, this is one distributor and it was all in the second quarter of this year so far, okay? And they'll bring in their product early in the season and then that's pretty much a one shot deal for their market. So it's not as consistent through the quarters as what our traditional wholesale business might be here in the U.S.

The other thing is we did quantify that at $8.3 million, so you can see the exact impact that it had on the quarter in the first half. And based on my comments earlier, we're not expecting it to be as significant to the back half of the year. So I have a disconnect with where you're looking for the revenue comment you made.

As long as it's more of a one shot as you said, that makes it clearer. Secondly, could you talk a little bit about costs? You have some cost pressures here. We are likely to see some impact from the rising Chinese currency. Could you give us some sense how you're looking at your costs?

Sure. I think you're right in that there are certainly some cost pressures in terms of the valuation of currency, relatively small so far, but certainly petroleum driven, componentry, some labor costs in Southern China and a couple of things going on there. One, we're working very hard with our contract factories there in terms of what we can do to help them from an efficiency standpoint. And I would tell you that they -- that our factories have been very aggressive in really working on the efficiency of their operations to help mitigate some of these cost pressures.

You know, Toyota lean manufacturing is the new buzzword in Southern China, which was not something you heard about two years ago. The second thing is we have been and will continue to make some selected price increases to offset some of those costs and have been doing that as we introduce new product so that we're working hard to protect our margin.

Okay, thank you.

Scott Krasik, C.L. King.

Let me echo everyone's thoughts, congratulations. A question on Hush Puppies. I guess over the last couple of years you guys have had some small tests with Nordstrom's on the women's side and now it looks like you're getting it on the men's side. You've raised prices here, you've raised quality. What do you think it takes to get -- for Nordstrom's to really commit to Hush Puppies as a brand on an ongoing basis?

Scott, that's something we certainly work very hard at and we've had limited success so far, it's been more regionalized. But it really is a case of us giving them the right product and the right marketing and support. We're encouraged by this men's test. I just saw a photo of what that display looks like and the flagship store in San Francisco. And it looks terrific and hopefully we're going to derive the kind of sell through rate that's going to encourage them to want to expand those programs, make them bigger and expand it to more stores.

Do you get a sense that some of the more fashionable department stores look at your men's independent Hush Puppies business and say, wow, it can sell to a fashion forward customer and that could lead to more or this just came out independently?

No, I think that absolutely is the case and that's one of the reasons why we've been talking about the strategic importance of these better independent retailers who we've historically had very good relationships with. And when we get them to -- they want to sell higher priced, higher quality product and we're giving it to them now. And so we're gaining a presence in those stores. And as we do I think certainly good retailers shop their competition and Nordstrom is one of the world's best so they are very where of what's going on in the footwear arena. And to the extent that they see us having success in those better independent channels, it certainly I think helps our cause in making the brand look more attractive to them.

Good, okay. And just real quickly on Sebago -- when you bought the brand I think one of the advantages you said or potentials was that Sebago is sold in about a third of the countries that Merrell was sold in and you thought you'd be able to really expand internationally. Has that been what you expected or has that gone more slowly as well?

No, Scott, we're pleased with what the international response -- when you start from zero with international distributors it takes time to build these businesses. And we've also needed to -- in order to really develop that international business we needed to have in place the right sourcing structure. When a lot of the product was coming out of the original Sebago factory in Maine it was at price points that really limited the international opportunity.

As we move that sourcing to our operations in the Dominican Republic I've gotten those operations more finely tuned in terms of our quality, price and delivery, supplemented the line with some product sourced elsewhere. We're putting together a much stronger Sebago package that has greater appeal to our international distributors. So I think we'll continue to see it grow, but it doesn't happen over night. It takes some time.

Congratulations again.

Liz Dunn, Prudential.

Good morning. Congrats on the good quarter. My first question is a follow-up on something you said earlier -- you said Toyota lean manufacturing is the new buzzword in China. My understanding was one of the large athletic footwear companies was really pushing that. Are you suggesting that -- for their own business are you suggesting that some of the improvements that they've been driving over there are potentially benefiting the entire industry from a sourcing standpoint in China?

Liz, yes, I think there was a mind set some years ago that because labor was inexpensive to throw people at issues, and I think that mind set has just changed over time. And one of the benefits that we think we bring to our contract partners is that we have a great deal of manufacturing expertise ourselves because we make product in addition to designing and marketing it and have people in our business who've spent their entire career making footwear products. So we're working with our partners, as are other companies, to help them be more efficient, try to share our experiences with them on actions they can take to be more efficient and more effective.

Okay, great. And then my second is a follow-up as well on something else you said earlier which was that a lot of your customers -- it sounds like your existing customers are more broadly interested in Patagonia than you had initially anticipated. And I know that their overlap with your customer base on the apparel side is about 25%. How much overlap do you think there will be between the distribution of Patagonia Footwear and Merrell footwear?

Right, I think going back to the point you were making earlier, when we looked at the Patagonia apparel dealer network, about 25% of them were also Merrell customers, about 75% of them weren't; so we saw that certainly as an opportunity. As we are talking to a lot of our key customers, I think there's going to be certainly a number of our better Merrell customers who see Patagonia also has an opportunity and I think are developing a comfort level now that we have clearly differentiated the Patagonia productline from the Merrell productline so it becomes not an either/or situation but an opportunity for them to bring in the Patagonia line to expand their business and not replace a portion of their Merrell business.

Okay, it makes sense. I've seen the product; I think it looks great and very different. So congrats and good luck.

Thanks, Liz.

Todd Slater, Lazard.

Just a follow-up; hopefully the last one on the distributor change, and then a question. If you're saying that the change will still have an impact on the third and fourth quarter albeit a lower impact, doesn't the flat to up gross margin outlook really mean even better margins than that if you include the change? Or is it so minimal that there's no --?

That's correct. There will be a negative impact on gross margins which will be offset by other improvements being business mix, being some of the opportunities that exist in the fourth quarter because of the repeat of some of our intercompany profit and LIFO adjustments which will not reoccur this year.

Great. And then the question I had just on the -- a quick inventory question because the news is really encouraging there, it was down 2%. Do you still see turnover improvements going forward and levels still be down year-over-year in the third and fourth quarter? What are you planning there?

I think our efficiencies can improve. I would get a little nervous about saying that we're going to definitely have inventory reductions. But if we have increases they would be at a rate lower than our sales increases so that we would be getting more efficiency out of the inventory.

Okay, great. Thanks.

Angelique Dab, Nollenberger Capital Partners.

Most of my questions have been answered, but could you talk about the refocus ex Sebago and some of the reaction you've seen to it?

Sure, Angelique. As we talked on our last conference call, I think we had broadly expanded the Sebago productline a year ago and probably broader than we really needed to at that stage in the line's development. So in talking to our key customers about the direction for the Sebago line, they encouraged us to reinforce some of the classic portions of the Sebago line, but with product that had some new features, some new interest to it and that's what we did.

So we focused the line, narrowed the line, brought some I think exciting new product into the productline. In fact, you might have seen it in the New York Times, on July 7th they did a review of boat shoe products that included one of the new Sebago products that they gave a very favorable review to. And I think just that narrower focus, much more in line with maybe the Sebago historical traditional Marine heritage -- I think we just did a better job this spring season and we're getting a good response from our retail partners to it and also from the consumer.

Great, thank you. Congratulations.

At this time we have no further questions. I would now like to turn the call back over to Ms. Christi Cowdin. Ms. Cowdin, you may proceed.

Thank you. On behalf of Wolverine World Wide I would like to thank you for joining us today. And as a reminder, our conference call replay is available on our website at www.WolverineWorldWide.com. The replay will be available through Wednesday, July 26, 2006. Thank you and good day.

Ladies and gentlemen, we do thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.