Wolverine World Wide Inc (WWW) 2012 Q3 法說會逐字稿

Good morning, and welcome to Wolverine World Wide's third quarter 2012 earnings conference call. All participants will be in listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Wolverine World Wide. (Operator Instructions) 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, Sue. Good morning, everyone, and welcome to our third quarter 2012 conference call. On the call today are Blake Krueger, our Chairman, CEO and President; and Don Grimes, our Senior Vice President and CFO. Earlier this morning, we announced our financial results for the third quarter of 2012, and if you did not yet receive a copy of the press release, please call Brad Van Houte at 616-233-0500 to have one sent 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 Blake 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 result, we must caution you that as with any prediction or projection, there are a number of factors that could cause results to differ materially. These important risk factors identified in the Company's SEC filings and also in our press releases. And with all that being said, I would now like to turn the call over to Blake.

Good morning, everyone, and thanks for joining us today. Before talking about our third-quarter results, I'd like to take a few minutes to discuss one of the most significant and exciting events in Wolverine's 130-year history, the acquisition of the Performance and Lifestyle Group from Collective Brands. We are extremely excited to welcome PLG to the Wolverine Worldwide family. Its portfolio of authentic, iconic brands, including Sperry Top-Sider, Saucony, Keds and Stride Rite, are leaders in their respective market segments and will add significant additional depth and breadth to our already strong brand portfolio.

The inclusion of these brands, with a combined brand equity of over 380 years, expands our footprint in the men's and especially women's markets, strengthens our athletic and outdoor offering, helps move the Company into the younger casual footwear market, and provides access to the retail doors and the infrastructure of one of the world's most trusted children's footwear brands. PLG is an excellent, well-managed business that has been growing at a solid double-digit rate for over the last several years, with fiscal 2012 revenue expected to top the $1.1 billion mark, another record for PLG.

Looking ahead, we will be focused on accelerating PLG's already robust growth pace with a concentrated focus on brand expansion into international markets. We also believe there are opportunities to achieve higher profit performance from the PLG business, as the team has a clear path forward for additional gross margin expansion and operating margin improvement. In addition, although this acquisition is not based on the realization of significant efficiencies, we now believe that we will deliver ongoing synergies above the high end of our previously disclosed range.

Now, I'd like to provide some background about our newest brands, beginning with Sperry Top-Sider. Founded in 1935, Sperry Top-Sider is the original boat shoe brand. While it still ranks first in the important US boat shoe market, it has expanded into casual and women's footwear categories, and continues to rank among the fastest growing footwear brands in the US, with revenue more than doubling in size every three years since 2002. As a result, Sperry Top-Sider has grown into a true dual-gender year round brand with one half of its revenue now coming from the women's offering and a balanced business across seasons. In addition to accelerating international growth for Sperry, our strategic growth priorities are focused on continuing to widen its non-boat shoe product offerings, building a stronger [owned] retail and eCommerce business, and accelerating the transition to a true lifestyle brand with a greatly expanded apparel and accessories presentation.

I'd next like to discuss the Saucony brand. With roots dating back to 1898, Saucony is a premier running brand committed to inspiring runners with market-leading innovation and technology. Today, Saucony is the leading brand in the all-important US run specialty channel and is poised to accelerate growth in market share with the brand's award-winning designs. We will focus on leveraging Saucony and Merrell's performance credentials to create a dynamic one-two punch in running, training, trail and minimalist products.

Now let's move on to Keds. This American icon was founded in 1960 with the launch of the Keds Champion, one of the first widely distributed sneakers in the industry. Today, the new Keds management team is executing its plan to refocus the brand on its primary target consumer, teenage girls and younger women. The Keds brand enjoys strong awareness among its target consumers and, frankly, women of all ages, which should get even stronger as Keds announced just last week a three-year partnership with multi-platinum six-time Grammy award winning singer/songwriter Taylor Swift. Taylor has become a fashion icon and she's been a fan of Keds for some time. Keds has introduced a limited edition Champion sneaker to help commemorate the October 22 release of her latest album, "Red." Although only a week old, the excitement and positive response to this collaboration has been amazing.

Finally, I couldn't be more pleased about the resurgence of the Stride Rite children's business, which for the last several quarters, has been realizing the benefits of the strategic turnaround plan implemented a few years ago. With a heritage dating back to 1919, the Stride Rite business has been recognized for generations as the technology and innovation leader in children's footwear. In North America, Stride Rite markets its own namesake brand, as well as children's offerings from the Saucony, Sperry Top-Sider and Keds brands through several consumer-direct websites and a network of 300-plus retail stores, which are delivering comp store increases in the mid- teens.

It also has a strong and growing wholesale business in the US that's generating year-to-date double-digit revenue growth. While our existing brands, most notably Merrell and Hush Puppies, have had pockets of success in children's over the years, the Stride Rite business gives us critical mass in terms of control distribution, design and sourcing expertise, and a seasoned sales force in the important children's market segment.

We held our Board of Directors meeting last week at PLG's offices in Lexington, Massachusetts, with the majority of the Board meeting dedicated to PLG's brands and the significant opportunities that lie ahead for the combined Company. Our excitement and confidence continues to grow as we plan the future growth of the new Wolverine and pursue the long list of these powerful opportunities.

I'd now like to provide some additional details regarding the pre-acquisition third-quarter financial results for Wolverine, which we reported on earlier this morning. While these results represent a solid performance for the Company, given the double-dip recession and economic headwinds in Europe, we have not fully realized the potential of our brands in that region, and still have plenty of growth opportunities in other geographic regions around the world. There are always opportunities for growth, regardless of the macroeconomic environment, and this continues to be our focus going forward.

With the exception of Europe, our performance this year has been solid in all major regions. Our combined US wholesale business continues to generate good growth, delivering a mid-single-digit revenue increase during the last quarter, with gains generated across our brand portfolio. Our international license and distributor business was also a bright spot, delivering solid year-over-year revenue gains.

Moving first to the Outdoor Group, which includes Merrell, Chaco, and Patagonia footwear. This group remained the Company's largest revenue and earnings contributor in Q3, but posted a revenue decline for the quarter compared to the near 20% growth it achieved last year. The Merrell footwear business today is focused on three distinct consumer segments, Performance Outdoor, where Merrell is the established leader, Outside Athletic, were Merrell is a relatively new entrant, and Active Lifestyle, which is the more casual side of the business. This is an exciting time for the Merrell brand as it expands its lead in many market segments and opens up new opportunities globally.

We are also especially pleased that Merrell increased its pace of market share gains in the last four weeks as reported by OIA VantagePoint. I will now talk in a little bit more detail about each of these three market segments. With respect to Performance Outdoor, Merrell simply dominates this category. This segment has been under some pressure throughout the year, as outdoor retailers have struggled to deal with the impact of last year's unusually warm fall and winter, as well as the shift in consumer taste to lightweight and athletic styling. However, this is Merrell's home territory and the brand continues to take market share with fresh new product introductions for the outdoor enthusiast.

Turning to Outside Athletic. This was white space for Merrell just a few seasons ago, and it is were Merrell has enjoyed incredible recent success and growth. Merrell's entry into this category began with the Barefoot Collection, which was the largest introduction in our Company's history, and it has now extended to address a broader range of activities and consumers with adjacent collections, such as Bare Access, Mix Master and Proterra. Merrell has positioned these expanded product offerings under the M-Connect umbrella, with a comprehensive marketing approach and an activity-specific segmentation strategy for the consumer. Retail response has been terrific, with key retailers clamoring for the early delivery of product in Q4. However, M-Connect largely remains a Q1 2013 program. Although Outside Athletic is the smallest of these three segments for Merrell, the year-to-date shipments are up almost triple digits and orders for delivery next year are up at a strong double-digit pace.

With respect to the Active Lifestyle segment, this has been the toughest category for Merrell over the last couple of seasons. Historically, Merrell has outperformed here with a continuous offering of spectacular new product, starting years ago with the original Jungle Moc that actually invented the after-sport category. This is clearly an area where we have the opportunity, as the loyal Merrell consumer is seeking cutting-edge new product from their favorite brand. The Merrell team is focused on bringing innovative new products to market on an accelerated timetable as we attack this important growth area.

Next I will focus on the Heritage Group, which includes the Company's oldest brand, Wolverine, our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, as well as Bates and HyTest. Overall, the Heritage Group had a solid quarter led by excellent double-digit revenue growth in the United States, driven primarily by the Wolverine, Cat and Bates brands, and in international markets as well, partially offset by softness in Europe for Cat and planned declines in the Harley-Davidson footwear business.

Starting with the Wolverine brand, this business continues to lead by a wide margin in the important US core work segment with a 22% market share as reported by SportScanInfo data. The brand continues to deliver on the strength of its core DuraShocks and Contour Welt collections, as well as new introductions like the Swamp Monster. The brand's innovative 1000 Mile collection of rugged casual footwear also contributed to the brand's success during the quarter as this premium price, made in USA, fashion offering continues to register with the global consumer interested in authentic Heritage brands.

During the quarter, we opened a Wolverine Company store in New York City's Nolita district. The performance of this store, which features Wolverine's made in America 1000 Mile collection for both men and women, is exceeding expectations. And the store was voted one of the 10 best pop-up stores during New York's fashion week. Wolverine apparel also posted a very strong double-digit revenue increase during the quarter, continuing its excellent performance over the last few years. The apparel business is forging solid connections with its target consumer, by developing and marketing collections in lock step with the core work and outdoor footwear offerings of the brand. The Wolverine apparel success is helping transform Wolverine from a footwear-only brand to a head-to-toe lifestyle brand.

Caterpillar footwear, our largest licensed brand, continued to leverage it's innovative anti-fatigue work product and new product offerings in the casual and women's categories to drive growth in the US and most global markets.

Now onto the Lifestyle Group, the home of the Hush Puppies, Sebago, Soft Style and Cushe brands. Let's start really with the Hush Puppies US business, which has quietly over achieved this year, as the turnaround strategy, which has been focused on better product and better distribution, is driving great results. The US business generated a strong double-digit revenue increase during Q3, with significant gains coming in both the men's and women's categories. Key revenue drivers include accelerated deliveries of women's boots to major department stores, strong retail sell-through of women's core casual programs, and the introduction of new items including the [CL flip-on] in a wide array of colors. The Hush Puppies brand also continues to add dedicated points of distribution around the world, as 19 new mono-branded Hush Puppies concept stores and 71 new dedicated shop-n-shops were opened in Q3 in China, Malaysia, India, Pakistan, Taiwan and handful of other countries. Hush Puppies remains one of our largest and most beloved global brands.

Sebago, our premium New England heritage brand, delivered an excellent double-digit revenue gain in the quarter. The brand's innovative Triwater Collection for men in the performance category, and it's greatly improved women's offering, are contributing to the brand's continued success. In addition, Sebago continues to expand its points of distribution as it opened new doors with major retailers such as Bass Pro and West Marine. A strong increase in department store business also contributed to the brand's success during the quarter. Sebago has also launched a new collection to further solidify its premium market positioning. This collection features a series of premium leather dockside and spinnaker styles with leather from the historic Horween tannery in Chicago.

Special packaging and marketing material have been developed which reflect the heritage of these two great American companies, and the premium pricing for this product. The collection will be promoted on top fashion blogs and sold through key retailers like Saks Fifth Avenue, Bloomingdale's, Nordstrom, Harrods, Russell & Bromley and John Lewis. In closing, I couldn't be more excited about the global growth opportunities for the new Wolverine World Wide and the perfect dovetail fit between the two companies. It's certainly a transformative move and a significant milestone in our history.

The new Wolverine World Wide has a portfolio of 16 powerful authentic brands with a combined heritage and brand equity of more than 1,000 years, and a very strong and deep management team, we will market over 100 pairs of foot wear and units of apparel annually, covers almost all product categories including casual, outdoor, work, athletic, dress and children's, and has access to consumers in over 200 countries and territories around the world. The feedback and excitement surrounding this acquisition from our retailers, international distributors, supply chain partners and most importantly, our team members in Michigan, Massachusetts, and around the world, has been universally positive and supportive.

I'd like to especially extend my thanks to the numerous Wolverine and PLG team members who spent countless hours and an immense amounts of energy helping to bring the new Company into existence. I'd also like to thank the PLG team for the excellent execution of each brand's strategic plan that has placed the group on an accelerated upward growth path. I will now turn the call over to Don Grimes, our Senior Vice President and CFO, who will add some additional commentary on our Q3 results and expectations for the full year. Don?

Thanks, Blake, and good morning, everyone. Earlier this morning, we reported our financial results for the third quarter. Revenue and adjusted earnings per share were in line with the expectations we shared shortly before the quarter close, and as Blake discussed, reflects solid performance across the portfolio in the United States, our largest market, offset primarily by ongoing difficult macroeconomic and retail conditions in Europe.

I'd like to share more detail on the quarter, discuss current global trading conditions, and provide an update on our revenue and earnings guidance for the full year, which now includes the impact of last week's closing of the acquisition of PLG. Taking a closer look at the third quarter results, reported revenue for the quarter was $353.1 million, 2.4% lower than the prior year when revenue grew approximately 13%. As anticipated, FX was a drag in the quarter, negatively impacting reported revenue by $5.4 million.

Our US business delivered another solid quarter, with single-digit growth from our two largest US brands, Merrell and Wolverine, accompanied by double-digit increases from Hush Puppies, Sebago, Cat Footwear, Bates and HyTest. Our international distributor businesses for Wolverine, Sebago, Cat Footwear and Harley-Davidson Footwear in markets outside of the EMEA region each delivered impressive double-digit increases during the quarter helping drive single-digit growth in Latin America, and double-digit growth in the larger Asia Pacific region.

Turning to the EMEA region, where we generate about 20% of our reported revenue, continued difficult macroeconomic and trading conditions negatively impacted the quarter's results, with EMEA unit volume down in the high teens versus the prior year, and revenue down over 20%. The tough economic environment in the EU is driving consumers to trade down when they are making buying decisions, not only for footwear, but also for many other consumer product categories.

A soft at-once order environment the UK, particularly during the Olympics and in the few weeks thereafter, led to a heavy promotional environment at retail in order to drive both traffic and sales. In addition to the bruising economic conditions, the outdoor channel in Europe was affected by a cold and wet spring and summer, which drove the worst season in years for outdoor activities. Although we are working closely with retailers to respond to these macroeconomic issues and consumer trends, we are not expecting a meaningful improvement in European fundamentals in the near term.

On the flip side, as demonstrated by this quarter's results, our diversified business model serves the Company well in times such as these, with expectations of continued solid to excellent performance in the other major geographic regions, helping offset weakness in Europe. Our Outdoor Group, which consists of Merrell, Chaco, and Patagonia footwear, delivered revenue of $134 million, a 7.9% decrease compared to the prior year. Merrell's expanded Barefoot Collection and other offerings in the outside athletic category grew nicely in the quarter.

Our Chaco and Patagonia footwear brands experienced revenue declines during quarter. Chaco's performance was mostly driven by softer retail conditions in the outdoor channel, and Patagonia footwear was driven by lower sales volume in Europe. While we remain appropriately cautious, there is good news on the horizon for Europe. Technical and specialty running is gaining momentum, which bodes well for Merrell's increased focus on outdoor athletic footwear and particularly the global launch of the M-Connect collection, which is poised to be the Company's single biggest product launch in our history.

As the outdoor market continues to shift to lighter-weight more athletic profiles, we believe Merrell is strongly positioned with M-Connect, which as Blake mentioned, has received overwhelmingly positive responses from important retailers. The Heritage Group, which consists of our Wolverine, Cat Footwear, Bates, Harley-Davidson and HyTest businesses, generated revenue of $129.6 million in the quarter, a 1.3% increase over the prior year.

We saw solid growth in US across all major brands. Again, diversification was a benefit here as the growth in the US more than overcame softness in Europe. The Lifestyle Group, Hush Puppies, Cushe and Sebago, generated revenue of $52.7 million during the quarter, a decline of 5.1%. For Hush Puppies, a strong double-digit revenue increase in the US was more than offset by revenue declines in other markets. Sebago grew at a strong double-digit pace in the quarter, led by growth in the US and non-European international markets.

Our other business units, comprised of Wolverine retail and Wolverine leathers, grew revenue 20.5% to $34.8 million. The growth was driven by continued solid double-digit growth in our eCommerce business, high-single-digit growth from brick-and-mortar, and increased demand for Wolverine leathers from third-party customers. Gross margin in the quarter was 39.2%, a decline of 140 basis points versus the prior year. Mix was the single biggest driver of the gross margin decline, lower gross margin on slightly higher closeout sales and negative brand mix.

The negative brand mix reflects the fact that we saw stronger growth in the US where some of our lower gross margin brands such as Bates and HyTest have large presences. Selling pricing increases and foreign exchange contract gains were offset by higher product costs. Adjusted SG&A, which includes $3 million of non-recurring acquisition-related expenses, totaled $89.2 million versus $90.2 million in the prior year. Exceptionally disciplined management of discretionary spending, the benefit from efficiency initiatives implemented earlier in the year, a lower outlook for full-year incentive compensation expense and a slightly stronger US dollar more than offset $2.4 million of incremental non-cash pension expense.

The $3 million of SG&A in the quarter directly related to PLG acquisition consists primarily of legal and other third-party expenses. Additionally, we incurred approximately $1.4 million of financing expenses in the quarter related to the new senior secured credit facility that was executed on July 31. The reported effective tax rate for the quarter was a low 27.1%, and reflects the benefit of the deductions of almost all of our acquisition-related costs in the US, a high statutory tax rate jurisdiction.

Fully diluted weighted average shares outstanding in the quarter were $48.6 million, down very slightly from the prior year's $48.7 million. We had no share repurchase activity during the quarter and the Company has approximately $86 million remaining under its current share repurchase authorization. When you get to the bottom line, earnings per share, adjusted for the $0.06 per share impact from non-recurring transaction integration expenses were $0.72, a decline of 12.2% versus the prior year's record results. Reported fully diluted earnings for the quarter were $0.66 per share.

Inventory at quarter end was down 2%, the second consecutive quarter of year-over-year inventory decreases. The inventory decrease reflects our disciplined inventory management in light of the current retail environment, and continued implementation of our narrow and deep inventory philosophy. Accounts receivable were essentially flat versus the prior year and we finished the quarter with cash and cash equivalents in excess of $144 million. Before discussing the specifics of our revised full-year guidance, let me offer some additional comments on the business and retail environment in our major markets.

We clearly believe that the challenges in Europe will continue over the near term. The macroeconomic environment is not showing any signs of improvement, the sovereign debt crisis has not a been resolved, and the European consumer is feeling the pinch. In general, European footwear retailers are seeing decreases in customer traffic, and those consumers that are buying are being very selective in their purchase decisions. Canada, where we do about 9% of our business, is more of a mixed picture right now. While there is solid performance in the work category, the outdoor market is being impacted by both retailer consolidation and consumers shifting tastes in more athletic profiles.

We believe Merrell's new M-Connect collection will help capitalize on this shift in preferences, but most M-Connect product will ship in 2013. M-Connect being successful in Canada is important to Merrell's overall performance because the brand over indexes in that country. The US market has been solid thus far in 2012 and we expect that trend to continue over the balance of this fiscal year and into the next, particularly with the contribution from the newly acquired brands, whose businesses is disproportionately skewed to the US market.

Our business with core outdoor specialty retailers remains strong and our market share is expanding in this sizable channel, a channel that is far more material to the Merrell brand than the department store channel. We're confident that our outdoor athletic offerings for spring 2013 and the full launch of M-Connect will have a positive impact on the first half of next year. Quarter to date through this past Saturday, our at-once orders are up in the mid-single-digit range versus the prior year and we expect even better at-once order growth over the balance of the quarter, driven partially by easier comparisons.

Nevertheless, based on the challenging conditions experienced in Q3, we have tempered our full-year outlook. Excluding the revenue contribution from the newly acquired PLG brands, we now expect full-year revenue in the range of $1.425 billion to $1.435 billion, growth of 1.1% to 1.8% versus the prior year's record $1.41 billion. The mid-point of this full-year guidance implies Q4 revenue of approximately $441 million, growth of 8.6% versus the prior year. Including the contribution from PLG in the stub period from the date of closing forward, we expect Q4 revenue in the range of $655 million to $665 million and full-year revenue in the range of $1.645 billion to $1.655 billion.

To assist you with projections going forward, PLG's full year 2012 revenue, using Wolverine's fiscal year, is expected to be approximately $1.12 billion. Excluding PLG, we now expect Q4 gross margin to be slightly down versus the prior year, driven by FX contract losses and negative brand mix resulting in a full-year gross margin modestly lower than the prior year. Excluding PLG, operating expenses will be impacted, as they have been all year, by higher non-cash pension expense and incremental costs related to a larger retail fleet this year versus last.

With all those inputs, we now expect full-year fully diluted earnings, excluding PLG, in the range of $2.26 to $2.31 per share. This range for full-year earnings implies Q4 earnings in the range of $0.42 to $0.47 per share compared to prior-year earnings of $0.47 per share. We expect the acquisition of PLG to be strongly accretive in 2013 and beyond, but as discussed last week when we announced the transaction closing, we expect dilution in the 2012 stub period in the range of $0.25 to $0.30 per share, driven primarily by the later transaction close and the seasonality of PLG's business.

We believe the future for the new Wolverine World Wide is enormously bright. Although we are not providing specific guidance for 2013 today, given that we still have 2.5 months to go in the current fiscal year, I'd like to offer some high level comments on how we're looking at next year. As discussed last week, we expect the newly acquired PLG brands to grow their full-year revenue at a double-digit rate in 2013 compared to full-year 2012 and to deliver improved profit margins.

Across the entire portfolio, we expect high-single-digit revenue growth in fiscal 2013 compared to a pro forma fiscal 2012 that reflects 12 months of PLG contribution. Further, we expect moderate gross margin expansion in 2013 driven by improvements in PLG's gross margin, fewer closeout sales across the portfolio, and the realization of sourcing efficiencies. We would expect to generate operating expense leverage off of the high-single-digit revenue growth and PLG's contribution to earnings will reverse from the dilution just mentioned for the short 2.5-month stub period to full-year accretion in the range of $0.35 to $0.50 per share helping drive the Company to record full-year earnings performance.

There are lots of moving pieces to be sure, but I wanted to share the high level view of 2013 now, and, obviously, we will share more details when we announce our Q4 results shortly after the fiscal year close. Thanks for your time, and I'll now turn the call back over to Blake for some final comments.

Thanks, Don. As a company and a team, we have grown accustomed to delivering a record year every year in terms of revenue and profit, actually,16 out of the last 18 years to be exact. Despite some things we can't control, and while the Company will have solid earnings performance this year, 2012 is disappointing to us from an earnings standpoint. I'm confident we will overcome these headwinds and overachieve in 2013.

In my 30 years of association with the Company, I have never been more excited about the array of future opportunities for global growth for the Company and really all of our 16 brands. I wouldn't trade our position today with anyone in the industry. I want to thank everyone for your time this morning, and I will now turn the call back to the operator so we can take your questions. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Kate McShane of Citi Investment Research. Please go ahead.

I was wondering if you could break down the drivers of your revenue strength in the US with price versus volume? And then with your sales guidance for Q4, how much of the top-line growth that you are guiding this morning is being driven by the sell-in of M-Connect?

Yes, as it relates to the first question, we had mid-single-digit unit volume growth in the US, and we had revenue growth in the quarter that was 2 or 3 percentage points higher than that. Obviously, there were some positive mix and price reflected in the reported -- in the US revenue. But we did have mid-single-digit unit volume growth.

And, Kate, your second part of your question was on the M-Connect?

Yes.

That's going to be -- it's not even present really yet -- that's going to be relatively small in Q4. A number of our key retailers are really asking us to pull ahead, and we are pulling ahead some product for Q4 delivery, but it's not going to be material really. It's going to be largely a Q1 2013 launch.

Okay, great. And then my follow-up question is -- what you announced last week about raising the accretion for the PLG acquisition. I wondered if you could quantify any more how much of that raise is from capturing the back-to-school business from PLG that you didn't have in 2012, and how much of it is from improved momentum in the PLG business?

Well, the raise in the accretion guidance was 2013 versus the prior 2013 commentary. So, it would have been 12 months versus 12 months. So, as we noted last week, the higher accretion versus the range we had talked about on May 1 was driven by the increased confidence regarding PLG's full-year profit delivery, slightly lower interest expense based on the better rates we got on the notes, as well as the term loan B, partly offset by the higher non-cash amortization expense. But clearly, the accretion in 2013 versus the dilution in 2012 is related to the full year of PLG results in 2013 and the unusual seasonality of PLG's business, such that the stub period in 2012 has 2.5 fairly low profit months for PLG.

Okay, great. Thank you.

Thanks.

The next question comes from Edward Yruma of KeyBanc [City] Markets. Please go ahead.

Thanks for taking my question.

Good morning, Ed.

With your revised revenue guidance for the balance of the year, I'm just trying to understand the moving pieces there. Obviously, you had some cautious commentary on Europe, which I think when we last spoke, you were still looking for very strong at-once business in the US. I guess, when I drill down the different components of your change in revenue guidance, how much of it was due to Europe and how much of that strong increase in the at-once business are you still expecting?

Well, I guess, with respect to Europe, we are expecting and are planning continued tough sledding overall in that market. That's factored into our guidance. We have seen Europe kind of deteriorate all year -- a pretty significant deterioration this past Summer. We expect that to continue, and we factored that in. The US business has remained fairly good the entire year. I would say the attitude of consumers actually spending their dollars has been a little bit better than maybe the retailers' mindset. But the US business has remained fairly robust throughout the year, as has our business in Latin America and Asia.

Ed, this is Don. We still have expectations for double-digit revenue growth out of the US in the fourth quarter. As I mentioned in my prepared remarks, on a quarter-to-date basis through the first five weeks of the quarter, our at-once orders were up in the mid-single-digit range. We are expecting an acceleration of that year-over-year growth over the balance of the quarter because this is -- we are entering a period of time, last year, when at-once orders really started to dry up. We expect strong double-digit increases over the last 11 weeks of the quarter, in the US in particular, on at-once orders.

So, we are thinking that we are going to have double-digit growth in the US for Q4 revenue, which is down from more of the high-teens revenue growth that we had been modeling before. We are forecasting Europe revenue to be slightly down versus the prior year, and Canada, mid-single-digit growth, and the rest-of-the-world, where we typically grow at a double-digit rate, that continue to grow at a double-digit rate in the fourth quarter.

Thanks, that color was helpful. I guess one second question -- you had indicated that you had a lower outlook on incentive comp. Did you reverse any accruals during the quarter? Thank you.

I wouldn't call it a reversal of accrual, as much as a true-up of the accrual. Q3 results would reflect a lower full-year outlook for incentive comp, but it would not have been a reversal of a prior accrual, just to true it up at a lower math than we would have accrued in last year's Q3.

Something we do every quarter.

Got you. Thank you.

The next question comes from Christian Buss of Credit Suisse. Please go ahead.

Hi. I was wondering if you could provide some color on how you are thinking about the stabilization of that European business, and what you think you are going to need to do to drive incremental revenues there going forwards?

Yes, I guess from a macroeconomic standpoint, we don't see any immediate solution or them working together towards an immediate solution in Europe. But all that being said, part of what's happened in Europe this year has been our fault. With hindsight, we probably did not widen the price points in many of our brands sufficiently to react to a kind of a downward shift in consumer buying. It doesn't mean cheap shoes, but consumers have clearly, in the vulcanized and canvas area, migrated lower. We probably should have been more responsive to that, especially in the European region, for our Hush Puppies brand, our Cat brand, our Merrell brand. We are working on that at the moment.

Despite the macroeconomic environment, the good news about the footwear industry is it continues to do fairly well in just about any economic environment. So, if you are there with fresh product, product that's priced where the consumer is buying, you've got room for growth. We are well on the path to addressing those issues.

Okay. And you had come into the year thinking a high-single-digit, low-double-digit growth rate for the core brands was the go-forwards plan. Can you talk about whether this year has caused you to reevaluate that, or how you are thinking about the strategic planning for the core business going forward?

Yes, I don't think our longer-term outlook has, frankly, changed. We've had some issues in Europe. We've had a few issues in Canada, as well. But when we look around the world, when we look at how early in the life cycle our brands are, despite some large businesses in Asia, and especially in Latin America, we see plenty of room for growth. So, really, our long-term outlook has not changed at all.

And, Christian, I will say that we have said publicly, I think starting back at the ICR conference back in January, that our pre-PLG portfolio, that over the medium to long term, we would expect kind of high-single-digit growth out of that 12-brand portfolio. Clearly 2012, for a variety of reasons, has been a disappointment. Full-year revenue is going to be well short of that.

But when you look at the opportunities that exist for our most important brands in many markets outside the US, and as an example, Merrell, our largest individual brand, is in about 140 countries around the world but does well over 90% of its business in its top 20 countries. So, it has a very, very small market share in the other 120 countries. There's enormous opportunity for Merrell to continue its global growth. Our expectations regarding the ability of our pre-PLG 12-brand portfolio to grow at that high-single-digit rate has not been diminished by what's been an unusual 2012.

Okay. Great. Thank you, and best of luck.

Thanks.

The next question comes from Jim Duffy of Stifel Nicolaus. Please go ahead.

Thanks.

Good morning, Jim.

Blake, there seems to be somewhat of a convergence of outdoor and athletic. How far down the path towards athletic are you willing to take the Merrell brand?

We are already there. To be honest with you, Jim, the way I view their leap into, really, the athletic side of the business, they skipped over a couple categories when they migrated to -- a great job -- when they migrated to Barefoot. They were a leader from the beginning. They continue to be a leader there.

But they have now, especially with some of the M-Connect categories, have backfilled, whether it's Mix Master, Bare Access, or even kind of the real light hiking casual product, Proterra, they have backfilled those categories. So, when you look at Mix Master, for example, and you look at a lot of the offerings from any number of the running-shoe brands, there's not a lot of difference. They are responding, have responded really on an accelerated basis to the shift in consumer taste.

Blake, the Barefoot category has, as you would expect, become increasingly competitive. Has the market grown at such a rate to absorb that incremental competition, or is there any indications of inventory buildup in the channel in that category?

No, we are still continuing to see that category build. Every specialty running shop now in America has a minimalist wall, a barefoot minimalist wall. We don't see that ending anytime soon. Certainly, Merrell's own experience there this year, almost up triple digits, kind of in that category year to date would indicate the category continues to be quite healthy.

Okay. Great. And then, Don, when you sum up the cumulative shortfalls from Europe over the course of the year, it's a big number. What, for 2012, will European revenue look like as a percent of the total? Trying to get my arms around what the potential incremental risk is there.

As we said, on a trailing 12-month or year-to-date basis, the broader EMEA region is about 20% of our revenue. If Europe grows at a slower rate than the rest of the business in the fourth quarter, that will drop to about 20%, or a little bit below 20%. But on a full-year basis, it's still going to be about 20%. It could be 19%-something, but in that range.

Got you. Okay. And then, how would you characterize inventories in the channel in Europe? Is the destocking at retail over with there? Or is there their still inventory that retailers need to move through?

I think destocking is largely over with. I think the European retailers -- I've made a couple of extra special trips to Europe here over the last year. I think they have been on their overall macro situation for some time. They have been very conservative. They have been very stingy with future orders. They have been relying on brands to kind of have what they need, when they need it, as opposed to placing everything in future orders. So, we think, in Europe, and frankly, the United States, retail inventories overall are in pretty good shape.

That's good to hear. Thanks so much, guys.

Thanks, Jim.

The next question comes from Mitch Kummetz of Robert Baird. Please go ahead.

Yes, thanks for taking my questions. Don, you've given us a lot of color on various components of your international business, but I was hoping you could maybe just sort of roll that up, and on a consolidated basis tell us how that came in on the quarter, in terms of the year-over-year change? And then maybe what you are thinking, just kind of all-in international for Q4, as well?

Yes, I don't have -- I have the detail, Mitch, I don't have the roll-up of all non-US business. I'm scanning what I do have here. Revenue in the quarter out of the US was up 6.5%. So, if you take all the rest, obviously, it's down. I can do the math on it and get it to you when -- if we talk later today.

No, that's helpful. With the US up 6.5%, I can back into the international. I know you talked about your expectation of acceleration of at-once orders from this point on in the US through Q4. So, again, if we can't talk about international rolled out for Q4, can you maybe just say what your overall expectation is for the US business in the fourth quarter, then?

As I mentioned in the answer to the first question, we are expecting double-digit growth out of US in the fourth quarter.

Okay. Got it. All right. And then on PLG, I really appreciate the color in terms of pro forma sales for this year, but could you maybe help us out a little bit thinking about the margins, at least from an operating income or operating margin standpoint, in terms of how that looks on a pro forma basis for your calendar 2012?

Yes, it's about $85 million of EBIT, which would be about a 7.5% operating margin on a Wolverine fiscal year.

Okay. That's great. That's helpful. And then lastly, I know you guys aren't referencing backlog anymore, but can you give us some sense as to how your Spring order book has come in? I know that, if I recall it correctly, your initial Fall order book was down maybe mid-single digits, if I'm not mistaken. Are we seeing, or are you seeing some acceleration in that order book as you move from Fall '12 into Spring '13?

Yes, I guess, just to give you some direction there, we see -- it depends on the brand and the geography. But we see, frankly, fairly good momentum. We see especially good momentum on the PLG side for Spring. So, it really depends on the geography and the brand. They haven't been very predictive in the past, frankly, on where our sales are going to give up. So, we are more than reluctant to go into a lot more detail than that.

But I think there are a couple of things working in our favor now. The fact that retailer inventories are in line, and frankly, have been in line for a couple of seasons. I don't even want to say this, because I don't want to jinx it, but it looks like we actually might have a Fall and Winter in the United States and in Europe, and for us, most importantly, the UK this year. It was 34 degrees driving to work this morning in Michigan. On the East Coast, there's just been more weather this year. Again, I shouldn't even say anything, it looks like it's going to be a normal Fall and Winter, which obviously helps our portfolio.

All right, that's helpful. Knock on wood there. Okay, thanks, guys. Good luck.

Thanks.

The next question comes from Chris Svezia of Susquehanna Financial Group. Please go ahead.

Good morning, everyone.

Good morning, Chris.

So, I just want to go back to this observation -- when you guys talked about fourth quarter and kind of how you think about the revenue by geography, you referenced Europe down slightly. I think you said it was down about 20% in the third quarter. Is it just an easier comparison? What gives you that confidence you get a swing to be only down slightly during that fourth quarter?

It's easier comparisons. The slowdown in at-once business last year in fourth quarter also impacted Europe. As Blake just mentioned, we are seeing weather in Europe, and in the UK in particular. We are not changing our forecast on a daily basis based on that day's temperatures, but we have expectations, as we have had all year, for a normal start to the Fall/Winter weather season. So, the fact that we are forecasting Europe to be down, but down a lot less than it was in the third quarter, reflects the ongoing economic challenges, but also the expectation that we are going to have easier comps in terms of at-once orders.

Just a quick question -- has the at-once business improved thus far in Europe, like you referenced? I think in the at-once business in the US, was up mid-single digits, or no?

That was total at-once orders were up mid-single digits.

Okay.

Actually, I don't have how it fell US versus Europe at my fingertips.

Okay. Just switching gears for one second, on the Merrell brand, when you broke out performance outdoor and outside athletic and lifestyle, when you think about kind of the growth trajectory of those three segments, just add some color. Is really most of the growth that you foresee over the next six to nine months really coming from that outside athletic? Or how do we think about performance outdoor and lifestyle in terms of the growth rates of those businesses?

I think performance outdoor, where Merrell dominates, is a smaller market than the other two. When you look at the runway in front of the brand in outside athletic and active lifestyle, which is really all casual footwear, those are significantly larger markets. So, right now, for the Merrell brand especially, we are not seeing any ceiling whatsoever in outside athletic. In fact, we are just still fairly early on our growth cycle there.

Active lifestyle, we've simply got to do a better job. That's a huge market. It's always been a huge market. Merrell has pretty consistently over-performed from season to season in that market. And frankly, we have under-performed the last couple of seasons in active lifestyle.

Okay.

And we're taking steps to address it through some accelerated product introductions and focus on design.

Okay. And then just, if I go to this 2013 general guidance, just so I have this correctly. You mentioned on PLG, double-digit growth versus 2012, and 2012 year it looks like a base of $1.1 billion. But when you talk about the high-single digit versus pro forma, what do you mean by that exactly, just so I have that correctly. Is that just assuming you had PLG all through 2012?

That's giving -- the 2012 base year reflects PLG's full Wolverine fiscal-year revenue of the $1.12 billion that I referenced, approximately $1.12 billion. And then the growth in 2013, we are thinking that is high-single-digit growth for the new 16-brand portfolio versus 2012, with PLG having a full year of revenue in the denominator in 2012.

Okay. And when I think about 2013 -- I know in 2012 you guys had, in the first half at least of this year, you had some discrete tax items and I think it was like $0.19. Do you anticipate revisiting that, or you go into next year and have a more normalized tax rate?

We have a more normalized tax rate next year.

So, okay. That's helpful. That's all I have. Best of luck to you guys, thank you.

Thank you, Chris, goodbye.

The next question comes from Sam Poser of Sterne, Agee. Please go ahead.

Thank you guys for taking my question.

Morning, Sam.

Good morning. You mentioned that the efficiencies and the synergies were above the high end. You had said that on the prior call when you announced the deal closing. Has anything changed from a few weeks ago? Or is that the same comment?

No, it is the same comment. That was just a week ago that we made that comment, which we kind of made also in July. But as we continue to work more and more on the integration, the ultimate synergies that we are going to realize from this, we believe, will be at or above the high end of the range we had talked about.

As I mentioned last week during the call, Sam, 2013 is a bit of a muddy year because there are a number of discrete yet significant projects that are going on related to bringing the two organizations together. Particularly in the systems area, in which we are incurring some incremental costs beginning in the fourth quarter of this year and into the first half of next year, that are in the kind of ongoing operating cost bucket. Therefore, we are not excluding those as non-recurring integration costs. But they are costs that we have to incur in order to realize, ultimately, the synergies that we're talking about. So, 2013, plus or minus, you won't see net synergies of $10 million or $15 million necessarily. But when we get to 2014, which is the first clean year for the PLG contribution -- that's why the PLG earnings accretion accelerates so much from 2013 to 2014.

Thank you. And then, you also -- two questions about SG&A. You've kept the SG&A really right in line, so on a non-PLG-related comparison for the fourth quarter, how should we be thinking about SG&A? Is that going to be up now? Is that going to now be up?

Yes, as a percent of sales, I would be modeling flat to very slight deleverage possibly.

Flat to -- okay. And then, the charge, or the dilution of the $0.25 to $0.30, does that all go into the SG&A bucket at that point, for all practical purposes?

No, it will be revenue. It's PLG's contribution to our results for the --. (multiple speakers)

Right, I understand, but from an earnings perspective?

It will be -- it's PLG's incremental revenue, incremental gross profit, offset by incremental SG&A including the costs we are incurring related to integrating PLG, offset obviously by interest expense and the incremental amortization expense. So, it will hit every line on the P&L.

How should we think about, let's say -- can you give us one of those, the margin or the SG&A line, so we can back into the other?

I really can't right now. You will need to make some assumptions on the revenue number down to the dilution number, and make some intelligent judgment calls on the individual line items.

Okay. Thank you very much. Good luck.

Thanks, Sam.

The next question comes from Diana Katz of Lazard Capital Markets. Please go ahead.

Hi. Thank you for taking my questions. Just wanted to go over 4Q guidance for Europe again. I guess I still don't understand why you expect it only down slightly versus the current run rate?

Yes, I mean, maybe we are getting into semantics here. But slightly could be upwards to high-single digits down in the quarter. Remember, we've got somewhat easier comparisons versus last year, but we are not anticipating anything like the range of 20% decrease that we had in Q3.

So, starting next year in the first quarter, have you really anniversaried then the issues in Europe?

We think we have. But also remember, starting in Q3, Europe kind of ticked down to a new level, at least for our business. So, we will be anniversarying some of the challenges in Q1 and Q2, and then it will be a much easier comparison in next year's Q3, if you are thinking of your model in that way.

Okay. And then, on M-Connect, can you talk about some of the new distribution that you are getting there, both here and in Canada?

Yes, the distribution is really in the athletic channel for the most part. Merrell has had some distribution there in the past before Barefoot, but frankly, it's been pretty minimal. So, that was pretty much complete white space for us. It's new distribution. It's great distribution.

You look at the run specialty channel in the United States, full service, sit and fit, it's a kind of distribution that we love, and that you need for running or minimalist or some of the other lightweight product that's out there. But I would say, the whole minimalist lightweight trend continues to spread across a number of footwear categories. So, you are seeing M-Connect migrating also out of the pure run specialty channel and into the sporting goods channel.

Okay. Thanks a lot.

(Operator Instructions)

Our next question comes from Scott Krasik of BBC. Please go ahead.

Hey, guys, thanks.

Good morning, Scott.

You changed to the British Broadcasting Corp, congratulations. (laughter)

Yes, just for today. (laughter) I'm going incognito. Can you help us understand what happened with Merrell in your non-EMEA, non-US business? I guess you didn't mention it in the reference about the distributors.

Yes, are you talking our Merrell international business?

Right, Merrell -- when you cited a bunch of brands did well with the distributors, you did not cite Merrell.

Oh, well, yes, our Merrell business internationally continues to grow. Remember, we had a huge last year in the international market for Merrell. So, the comparisons were a bit tougher. But quite honestly, Merrell is still early in its growth cycle. A year ago, Merrell would've had about 130 standalone Merrell stores around the world, for example. I think we ended the quarter with 186 or 189 this year. A lot of that being fueled by having a lifestyle brand offering -- apparel, accessories, and footwear. So, the Merrell business around the world continues to be very healthy.

I think there are some significant markets around the world. India and China, for example, that are very early in their lifestyle in migrating to this outdoor concept in the consumer's mind. So, we kind of see that as kind of, maybe longer term, but double upside for Merrell in some of those most significant markets.

Okay. And then, as you migrate more towards outdoor athletic, are you going to have to hit the athletic specialty chains in a big way? I can't imagine that specialty running on its own will deliver the growth you want.

Yes, we already have some interest from some of those folks. They are always looking for something new and fresh, as well. A lot of those people, 18 months ago, didn't have a minimalist wall or a barefoot wall. They now have offerings from not only Saucony and Merrell, for sure, but a number of other brands. So, it's a great opportunity for the Merrell brand, in particular, and frankly, a great opportunity for Saucony.

And then, how quickly -- you said you were going to accelerate some product development in your lifestyle piece of Merrell. That's one thing we heard from department stores and independents, frankly, that you just sort of gave up on that category, very little innovation in women's sandals, for example, some of the men's non-athletic. How quickly can you get that business on track?

I wouldn't say we ever gave up on the category. We may have taken our eye off the ball a little bit as we focused on more of the athletic side of the business. But that's also part of the heart and soul of the Merrell brand, and where that loyal Merrell consumer is still number one or two in intent to repurchase expects us to deliver excellent product. So, Merrell Barefoot, for example, was developed and brought to market in about half of the normal time. We've got a number of projects going on right now in that active lifestyle area, on that kind of a timetable.

Okay. And then just two more fast ones. Don, I know it's a little confusing. Now that we have a base for '12, the $0.35 to $0.50 accretion for next year, would that be off of the full number including the $0.25 to $0.30 dilution? Or would we exclude that? Help me understand.

No, the $0.35 to $0.50 of accretion next year is -- put your blinders on -- that's just a stand-alone. The incremental contribution in 2013 compared to Wolverine's pre-PLG acquisition-based business, it is not a -- it's not an earnings increase from the dilution in 2012. If you are looking at the year-over-year incremental impact from PLG, it would be, depending on which end of the range you use, it would be $0.25 of dilution compared to, let's say, $0.50 of accretion next year. That would be a $0.75 EPS lift from one year to the other.

Okay. That makes sense. And then, just last, you guys had talked a lot, particularly in the first half of the year, about how the hangover from fourth quarter last year was impacting at-once business. In terms of the pace of at-once orders you are seeing now in the second half of this year, how much of it is industry focus? What are the retailers telling you in terms of their approach towards Winter and cold weather and Christmas? Does that give you more confidence or less confidence about meeting your short-term targets?

Well, Scott, retailers always tend to be a bit optimistic. They always think they are going to have the perfect weather season. They have been watching their inventories. Their inventories are in line both here and in Europe, our two largest owned regions. It looks like, at the moment, we are getting the benefit of weather. Our brands are out there with some fresh new products. So, we expect the at-once environment to be especially good. And that's partly because, over the last several years, retailers have been kind of very stingy about their future orders, and they have been relying on brand owners to have the product there when they need it, more and more.

Okay. All right, thank you very much.

Thank you.

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

Thank you. On behalf of Wolverine World Wide, I would like to thank you all for joining us today. And as a reminder, our conference call replay is available on our website at www.wolverineworldwide.com, or the replay will also be available at other locations, and it is available through December 31, 2012. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.