Rocky Brands, Inc. ( RCKY)

Q2 2011 Earnings Call

July 26, 2011 04:30 PM ET

Executives

Brendon Frey – ICR

David Sharp – President and CEO

James McDonald – EVP, CFO and Treasurer

Analysts

Mitch Kummetz – Robert W. Baird

Reed Anderson – D. A. Davidson

Mark Cooper – Pacific Ridge Capital Partners LLC

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter Fiscal 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be given at that time for you to queue up for questions. (Operator Instructions) I would like to remind everyone that this conference call is being recorded.

And, we’ll now turn the conference over to Brendon Frey of ICR. Thank you. You may begin.

Brendon Frey

Thanks. Before we begin, please note that today’s discussion, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time, and are subject to change, risk and uncertainties, which may cause actual results to differ materially.

We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today’s press release, and the reports filed with the Securities and Exchange Commission, including Rocky’s Form 10-K for the year-ended December 31, 2010.

I’ll now turn the conference over to Mr. David Sharp, President and Chief Executive Officer of Rocky Brands.

David Sharp

Good afternoon, and thanks for joining us. With me on the call is Jim McDonald, our Chief Financial Officer. Today, for the first time, since the company entered the public market in 1993, Mike Brooks will not be joining us on the call. As we previously announced, Mike transitioned to the role of Chairman of the Board on July 1. While he is not involved directly with this earnings call he is still very much a part of our company, just as he is been for almost 40 years. And the management team here at Rocky Brands is looking forward to benefit from Mike’s guidance and wisdom in the years ahead.

Now to the second quarter, which represented our 8th consecutive quarter of increased earnings on a year-over-year basis. We’re particularly pleased with our recent results as a significant increase in net income on a non-GAAP basis was achieved through improved operating performance highlighted by a 6% rise in wholesale sales or 11% increase from continuing operations, which excludes Dickies and higher gross margins in both the wholesale and retail divisions.

If you look at our current profitability turnaround in stages, the first stage was driven primarily by reductions in operating expenses because we trim costs from all areas especially in our retail business as part of that division’s restructuring. In 2010, selling, general and administrative expenses were down more than $24 million, compared with 2007.

The next stage of our earnings growth was fueled by a significant reduction in interest expense. We improved our balance sheet during 2009 and 2010 by retiring our high interest term loan. We retired the loan with cash flow from operations, proceeds of our successful follow-on offering and funds from a new lower interest credit facility.

Our debt level at the end of last year was $35 million, down $68 million, or 66% versus the end of 2007. And our interest expense in 2011 is projected to be approximately $1.5 million, compared to $11 million in 2007.

More recently our bottom-line improvement has been aided by higher gross margins as our own wholesale brands, which carried the highest gross margins in our portfolio have become a larger percentage of our total sales.

Gross margins have also benefited from sales programs instituted in early 2010, which encourage our retailers to purchase their (inaudible) on a weekly or bi-weekly basis instead of waiting for us to stimulate the sales through price promotions. Additionally, gross margins have increased from a combination of higher average selling prices in our wholesale and retail divisions, and improved efficiencies in our company-owned manufacturing facilities. For the second quarter, gross margins were up 480 basis points, compared to a year ago.

Over the past three years, we have created a very lean, more efficient company with the heavy lifting on expenses, and the balance sheet improvements complete, we now have the financial flexibility to invest in our brands, and create new opportunities to grow our top and bottom lines.

Our research and development efforts over the past 12 months have yielded some positive results. We’ve been encouraged by the response of several new product introductions, particularly in our commercial line of military boots, and we continue to build momentum with our brand extensions in the DURANGO and ROCKY brands. This has led to increased shelf space with several of our domestic retail partners, and we think there is still opportunity to expand our brands within their existing work, western, and hunting footwear categories.

With that said, these categories have been growing at fairly low rates in the United States over the last several years. Therefore, we’ve identified and prioritized other key vehicles to also expand our business in the future.

The first of these involves growth in new markets. In 2010, we generated $7.9 million in sales outside the United States through direct operations in Canada and distributors in the European Union, Russia and Central and South America. This compared to international sales of $5.7 million in 2009, an increase of 40%.

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