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Quiksilver, Inc. (NYSE:ZQK)

Q1 2009 Earnings Call

March 11, 2009 4:30 pm ET

Executives

Bruce Thomas – Vice President, Investor Relations

Bob McKnight – Chairman, President and Chief Executive Officer

Joe Scirocco – Chief Financial Officer

Steve Tully - President, Women's Division

Analysts

Kate McShane - Citigroup

Sean Naughton – Piper Jaffray

Brandon Ferro – KeyBanc Capital Markets

[Unidentified Analyst] - J.P. Morgan

[William Ruter] - Banc of America Securities

Todd Harkrider - Goldman Sachs

Mitch Kummetz - Robert W. Baird & Co., Inc.

Eric Tracy - BB&T Capital Markets

David Glick – Buckingham Research Group

Operator

Good afternoon, ladies and gentlemen. (Operator Instructions)

I'd now like to introduce Bruce Thomas, Quiksilver's Vice President of Investor Relations, who will chair this afternoon's call.

Bruce Thomas

Thanks, Operator. Good afternoon, everyone, and welcome to our Quiksilver first quarter fiscal 2009 earnings conference call. Our speakers today are Bob McKnight, our Chairman, President and Chief Executive Officer, and Joe Scirocco, our Chief Financial Officer.

Before we begin I'd like to briefly review the company's safe harbor language. Throughout our call today items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding Quiksilver's business outlook and future performance constitute forward-looking statements and results could differ materially from those stated or implied by these forward-looking statements as a result of risks, uncertainties and other factors, including those identified in our filings with the Securities and Exchange Commission, specifically under the section entitled Risk Factors in our most recent annual report on Form 104.

All forward-looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward-looking statements. In addition, this presentation may contain references to non-GAAP financial information. A reconciliation of non-GAAP financial information to the most directly comparable GAAP financial information is included in our press release, which can be found in electronic form on our website at www.QuiksilverInc.com.

With that out of the way, I'd like to turn the call over to Bob McKnight.

Bob McKnight

Good afternoon, everyone, and thanks for joining us for our first quarter conference call. I'd like to begin with an outline of the issues we'll be addressing today to provide some context to our prepared remarks. Then we'll dig a little deeper into these topics where we can so that you can better understand what we've accomplished, where we've made good progress, and where we have some additional work left to do. So let's get started.

At the heart of every business discussion these days is the state of the economy and the recession, and for Quiksilver we must keep in mind that these are global dynamics. We face different business conditions within each of our major regions. The first fiscal quarter of 2009 proved to be a very good example of how our three regions have had varying degrees of success in making adjustments in these difficult times.

In recapping our results, we'll show you that our European business remains our strongest performing region, achieving double-digit operating income even in this challenging environment, and we'll also demonstrate why we took the actions we did in January to begin the restructuring of our Americas business through cost cuts that include reducing our work force here and eliminating a number of additional positions.

Then I'd like to speak a bit about our three core brands - Quiksilver, Roxy, and DC  to provide an update on how they are doing. After that I'll lay out our most important company wide initiatives for the fiscal year. We understand that many of you are focused on our balance sheet. We'll show you by reviewing our own priorities that increasing our liquidity and improving our capital structure are highest on our list as well. And in that context we'll provide an update on our progress.

Let's now turn to the high level financial highlights from the first quarter. These results recount the performance of our continuing operations and exclude Rossignol, which we sold on November 12th.

Consolidated net revenues for the first quarter of fiscal 2009 declined 11% to $443 million, but declined only 4% in constant foreign currency. Consolidated gross profit declined by 230 basis points to 46.7% of sales, while expenses during the quarter increased 70 basis points to 45.3% of revenue before severance charges.

Excluding a tax asset writedown that Joe will discuss a bit later and severance charges, our continuing operations generated operating profit of roughly $6 million. As a result, our loss from continuing operations for the first quarter excluding the onetime charges was $9 million or $0.07 per share compared to income of $8 million or $0.06 per share in the first quarter of 2008.

Our performance overall this quarter was in line with the expectations we outlined a quarter ago and also provides a barometer into the relative health of each of our regional businesses.

Our European business after making adjustments to its cost structure over the course of fiscal 2008 generated operating income of 12.1% in sales. That's 130 basis points higher than in the same quarter a year ago. Even though the economics of Western Europe have been hit every bit as hard as the U.S. economy, our European team has had some success in adjusting its operating costs in attempts to keep pace with the declining environment and we are very proud of their performance.

Our Americas business has been the focus of much of our attention over the past several months. This region has been particularly challenged since the beginning of the economic downturn, and the states hardest hit by home foreclosures and unemployment in California, Florida and Hawaii are our most important markets.

In response to the declining retail environment we initiated a number of cost-cutting measures throughout fiscal 2008. In early fiscal 2009 we implemented a management realignment and Craig Stevenson became the new President of Quiksilver Americas. Craig has been with Quiksilver since 1992 and he most recently held dual roles as President of South Asia-Pacific region and Global Brand Manager for the Quiksilver brand. His many years of company experience and his intimate working knowledge of the brands, products, markets and sales process make him uniquely qualified to lead the Americas at this time.

We announced in January that we had reduced planned spending in the Americas by $40 million on an annual basis and that we were eliminating 200 positions in the region. These cost reductions will help us deliver better performance in the Americas over time. Nonetheless, the Americas business suffered an operating loss of approximately $11 million in the first quarter after delivering a $7 million operating profit in the same quarter a year ago. Craig and his team are continuing to work toward better performance and we believe that several opportunities still exist to eliminate redundancy in our global structure and to further reduce costs in the region. We'll keep you updated as those opportunities are fully explored and exploited.

Our Asia-Pacific region has held up fairly well during the downturn although at a lower baseline level of performance. After a couple of years of retrenching in North Asia and a sluggish economy in Australia that's been evident for the past few years, operating income generated by our A-Pac business is virtually flat compared to a year ago. And Japan continues to be the fastest-growing segment in the region.

Turning now to our core brands - Quiksilver, Roxy and DC. Our Quiksilver brand held up fairly well in the difficult retail environment in the first quarter. We continually work to keep the Quiksilver line fresh, new and innovative. As an example, we've introduced exciting new fabrics and technologies to our industry leading board short line over the past several months, and we are very excited our new Quiksilver women's line, which had its debut this past year and has been quite well received. We plan to continue carefully controlling its rollout to provide a stable base upon which to grow this fantastic new line.

Our Roxy business in the first quarter was representative of the difficult market conditions that other brands have recently encountered in the women's and juniors categories. At a time like this it becomes all about product. In that regard, we focused on creating great new interesting product from our own design or through partnerships with others. We're in the process of adding some new categories to Roxy such as athletics and will be announcing in the future some exciting new collaborations. In addition to those projects to look forward to, we're confident that Roxy is well positioned to face today's conditions and we're excited about our entire range of Roxy products for 2009.

And with regard to DC, it's obvious that our flagship shoe line continues to be one of the best brands at retail. With regard to brand extensions, DC's new expanded apparel line has been universally well received and their presence in the snow market continues to grow with a range that now includes not only boots but boards and outerwear. So it's clear that DC continues to evolve into a full-scale lifestyle brand. The growing popularity of this lifestyle provides DC with even more action sports categories into which it can expand in the future.

With regard to our own retail business, we've worked hard on the presentation of our products and the stores look great, and we're very proud of the way they represent our products and our image. However, we're experiencing the same trends as everyone else and consumer traffic has been understandably down. As a result, our comps are down, in line with our peers.

And now I'd like to lay out our most important company wide initiatives for fiscal 2009. First, we must strengthen our balance sheet, reorganize our capital structure, and add a new level of liquidity to the organization. The second of our companywide initiatives is to continue to develop great product and build brand integrity. We continue to apply all of our talents towards the creation of exciting, innovative, high-quality products that consumers can get excited about and to give them products that are interesting to buy.

And our third initiative is to continue to adapt our organizational structure to a challenging world. After years of running our company as a growth engine we have changed our focus towards the realities of a contracting market. And having announced another round of cost reductions in January, we remain committed to evaluating our organization and our cost structure and to make the adjustments necessary to drive operating profit and cash flow.

For example, although price compression has masked many of the gains we've achieved in our sourcing model, delivering further improvements remains a high priority for us. While we have implemented some changes at the regional level, we can go further. And we continue to explore similar opportunities to reduce costs and complexity in the merchandising and design, distribution and in our facilities.

With regard to our most important initiative, increasing liquidity and improving our capital structure remain the highest priority deliverables for our management team and Joe will provide a recap of our progress in a moment. But before I leave this topic I just want to say that from my own personal conversations with bankers and other related parties, the strong value of Quiksilver's brands remains unquestioned.

I want to close my prepared remarks by recognizing the hard work and dedication of our Quiksilver team. When we initiated the mandate to reduce costs and align our business with realities of the economic recession, we saw a very high degree of commitment and execution and I'm very proud of our people. That being said, we remain a force to be reckoned with in our markets. Regardless of the challenges that the retail environment poses, Quiksilver and Roxy are the leading brands for surf and action sports for young men and girls throughout the world, and DC remains a leader and one of the top three footwear brands in the entire action sports industry.

We have long-standing relationships with our customers and we have endured tough business cycles together in the past. We continue to work with them to closely manage inventory, to maximize our sell-through, and to capitalize on the broad appeal of our brands.

Thank you and now Joe will take you through the financial details.

Joe Scirocco

Thanks, Bob. Good afternoon, everyone. I'll be addressing our continuing operations, that is, results without Rossignol, which we sold on November 12th.

Consolidated net revenues declined 11% to $443 million during the first quarter compared with $496.6 million in the first quarter a year ago. Revenues in the Americas were down 13% compared to last year as both our wholesale and retail segments declined, largely due to a weaker holiday selling season. The performance was pretty consistent between wholesale and retail.

At retail, negative comps drove the decrease as we have put the brakes on opening new stores, with no new stores opened in the Americas in Q1 and only three new stores added in the region since the end of the first quarter 2008.

European revenues in constant currency were up about 1%, providing yet another example of our European management's ability to perform in a difficult environment. Retail performed slightly better than wholesale, with a modest comp decline more than offset by sales from new store openings. We opened three new stores in the first quarter and have opened a total of 31 net new shops and concessions over the course of the past year.

On the wholesale side Quiksilver and DC performed better than Roxy as a result of the weaker global juniors market. And as Bob mentioned in his remarks, our European region continues to deliver good performance despite the economic backdrop. Operating income again grew faster than revenues in the quarter, and the business generated a very healthy operating margin of approximately 12%. The economies of Europe have weakened, but we continue to expand our market leading position there and to earn great returns.

Our Asia-Pacific business was driven by a very strong top and bottom line increase in Japan as a result of the repositioning efforts we undertook over the last few years. The Australian business generated flattish sales growth, but a significantly higher operating margin. And in total, the Asia-Pacific region reported an increase in revenues of roughly 10% in local currency.

Our consolidated gross margin decreased by 230 basis points to 46.7% for the quarter largely as a result of price discounting in the U.S. This reflects prevailing market conditions and we continue to prioritize inventory reduction and cash generation at the expense of gross margin.

In Europe our gross margin improved by 70 basis points as spring-summer warehouse margins for Quiksilver and Roxy benefited from sourcing improvements, stronger sales during the January clearance period, and a slight mix shift towards retail.

In our Asia-Pacific business, overall gross margin was higher on the strength of a much healthier wholesale business.

First quarter pro forma SG&A expenses decreased around $21 million or 9%, which was roughly in line with the decline in revenue. The decrease was driven by the cost-saving initiatives we began to implement last year. Even though expenses were roughly in line with our expectations, lower revenues drove expense deleveraging in the first quarter as pro forma SG&A grew by 70 basis points to 45.3% of sales in the first quarter, up from 44.6% a year ago.

Among the items that contributed to the higher percentage of expenses were costs associated with the addition of 41 net new retail shops since the first quarter of 2008, higher costs associated with revenue growth in Japan, and the cost of new infrastructure in Brazil and Mexico.

As Bob mentioned in his remarks, we announced a restructuring in our Americas business in January. A portion of the cost reduction was realized through a reduction in force of 150 employees, for which we incurred a severance charge in the quarter of approximately $6.1 million.

Pro forma operating income excluding the severance charge was $6.4 million in the first quarter, down from $22.1 million in the same quarter a year ago, primarily as a result of lower margins and expense deleveraging in the Americas.

Interest expense was $14.2 million versus $11 million last year, and the increase was due to the reclassification of interest expense attributable to the discontinued Rossignol business.

Regarding taxes, we realized a modest pro forma tax benefit in the quarter of approximately $200,000, but more importantly, we wrote off $50.8 million in the value of our deferred tax assets in the U.S. after evaluating their realizability.

Our pro forma consolidated loss from continuing operations for the first quarter excluding the severance charge and the non-cash charge to write-off U.S. deferred tax assets was $9 million or $0.07 per share compared to income of $7.6 million or $0.06 per share in the same quarter a year ago. This result was essentially in line with our expectations.

I'd now like to turn your attention to the balance sheet for a few moments. Receivables at $373 million are 7% lower than for the same period last year. On an overall basis DSOs increased by 3 days to 72 days this year compared to 69 days in the first quarter a year ago, reflecting a modest increase in the number of slow-paying accounts in this difficult environment.

Inventory at quarter end was $381 million, up 4% compared to the same period last year. This increase in inventory partially reflects the early receipt of some spring and summer goods, and in addition weaker than expected demand in the quarter has led to a temporary buildup of inventory. We are taking aggressive action to liquidate the excess and have already made adjustments to our buys beginning with the summer season in order to bring supply and demand into balance.

We recognize that investors are focused on our liquidity, our debt levels, and our capital structure, so let me give you an update on our current financial condition and our financing efforts.

Under our current business plan we believe that we have adequate liquidity in each of our three regions for the foreseeable future. Nonetheless, the current retail environment is significantly uncertain and we believe that we should further improve liquidity. To that end we expect to decide on a course of action some time between now and the end of June. We expect to increase liquidity either through a sale of assets or by issuing secured debt, as well as to arrange committed credit facilities from our European banks and a new ABL with our U.S. lenders.

Importantly, our European banks continued to demonstrate their willingness to work with us, and they have extended the maturity of the 55 million euro line of credit from March 14th until June 30, 2009. We believe that this extension will provide us with sufficient time to complete the transaction that we feel is best for our future.

It should be noted that we are quite limited in what we can say about the potential sale of assets or other strategic alternatives because of obvious sensitivities, so we'll try to be helpful about financing questions, but we'll need to draw the line in this other area.

I should also mention that in Australia we are quite close to finalizing a bank commitment for a $22 million line of credit, half of which was previously uncommitted.

Without question, our refinancing is a difficult process. However, we have many willing banking partners who remain committed to supporting us, and we expect to succeed in our efforts.

Now let's turn our attention to our outlook. First I'll speak about Q2. Based on current trends, we are modeling revenues down in the mid teens for Q2. We expect a contraction of gross margin by around 150 basis points compared to last year. Interest expense is expected to be around $16 million, and we need to increase our tax rate assumptions for the quarter to the 50% range to account for projected losses on which no benefit will be recognized currently along with certain other tax accounting adjustments.

With regard to foreign currency effects, over the first half of the quarter the euro has settled in the mid to high 120s compared with 153 last year and the Aussie dollar is at $0.65 now compared to $0.92 last year at this time. Given these assumptions, we expect to generate earnings per share in the mid single digit range in the second quarter.

Our outlook for the full year is based on status quo assumptions about the components of our business and our capital structure even though we expect changes to come in one or both of these areas. However, on that basis, for the full fiscal year our best guess at this point is a revenue decline in the low double-digit range driven by continued contraction of the marketplace and declines in the value of the euro and Australian dollar compared with fiscal 2008. I'll just note that for the full year of fiscal 2008 we translated the euro at 150 and the Aussie dollar at $0.87.

Operating margins are difficult to estimate because of uncertain demand, however, it is reasonable to assume continued erosion from last year. Of course we are planning to continue to control expenses, reducing costs further to compensate for worsening business conditions as necessary. We estimate our interest expense to be between $60 and $65 million for the year, again assuming no change in capital structure. We are now assuming a higher tax rate of approximately 40% for the full fiscal year.

As we've maintained for some time now, we plan to open very few new stores in fiscal 2009 and have reduced CapEx budget to around $50 million compared to roughly $94 million in 2008. Depreciation and amortization is planned to be around $55 million.

Hopefully, this set of assumptions will at least allow your full year financial models to be adjusted to reflect the changing characteristics of the marketplace and our business.

And with that, I'll turn the call back to Bob for closing remarks.

Bob McKnight

Thanks, Joe.

To summarize, we are obviously sensitive to concerns about our capital structure and our liquidity, and we've made it our highest priority objective to resolve these issues as quickly as we can. We made significant progress in evaluating strategic alternatives and in considering certain refinancing transactions that will now be given a chance to materialize after having secured an extension to the 55 million euro credit line with our European banking partners.

We cut costs and reduced our work force in the first quarter in the Americas region in response to weakening economic conditions and remain committed to taking further action if conditions continue to worsen.

Our core Quiksilver, Roxy and DC brands remain amongst the most popular marks in the industry, and we believe retailers will continue to rely on us as a market leader in these challenging times. And finally, we continue to believe there are tremendous opportunities ahead of us.

Bruce Thomas

Operator, that concludes our prepared comments. We're now ready for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you so much. (Operator Instructions) Your first question comes from Kate McShane - Citigroup.

Kate McShane - Citigroup

On the last call you had mentioned that you were planning on closing 25 stores, and I think at the time you had closed nine and that the 16 stores would close as soon as possible. Could you update us on that and then also if you're planning on any more store closures for 2009?

Joe Scirocco

I think that year to date we've closed somewhere on the order of seven or eight and that we have three more that are slated for closure in the current quarter.

As you may recall, we talked about 25 stores with 21 of them being in the U.S., however, it is proving very difficult to get to closure on the others without some cash to prime the pump. So we have been as aggressive as we can be as leases expire and that type of thing, but we have not taken the added steps of negotiating buyouts of leases. So we will proceed with the remaining stores in the normal course of things and see how the market evolves and our financing evolves over the next couple of months.

Kate McShane - Citigroup

And do you have any opportunity to renegotiate any of your other leases in the U.S. that may not have been part of that 25?

Joe Scirocco

Oh, absolutely, yes. Thanks for asking. We have been very aggressive in that area. As you know, a number of other retailers are in the same position, so the landlords are not always fully cooperative.

In many cases we've been able to reduce the cash outlay, which will not necessarily show up in our P&L just from the point of view that we're required under GAAP to straight line the rent, so we're still reflecting rent expense, but we've probably cut, I don't know, on the order of $1 million to $2 million in terms of cash outlays during the course of the remainder of this year.

Operator

Your next question comes from Sean Naughton – Piper Jaffray.

Sean Naughton – Piper Jaffray

Obviously a very tough environment out there, but can you talk about maybe specifically in the Americas, obviously, the gross margin was impacted quite significantly there in the first quarter. Can you talk about any of the differences within the distribution channels where your product is sold from? Are you seeing different trends in department store, independent, core or in your direct to retail stores?

Joe Scirocco

Are you talking about margins trends or sales trends or what, Sean?

Sean Naughton - Piper Jaffray

The sales trends initially.

Steve Tully

No, actually the answer is there really isn't a significant difference within the channels. Unfortunately, business is difficult in all of the channels. If we see anything different it might be regionally and that would indicate that, as Bob noted earlier, that California, Florida and Hawaii are very, very challenging. Some bright spots in there, but those tend to be very challenging. But we're looking long and hard, and I can't detect any significant differences in the channels.

Sean Naughton - Piper Jaffray

I think Bob mentioned that there was some price compression happening right now. Is that more directly on the wholesale channel right now or is that in the retail channel as well?

Steve Tully

It's really both. I mean, in an effort to move inventories and keep lean in that area we have been more aggressive than we have historically in our stores and in particular in the factory outlets, so margin compression has probably been the steepest there.

Sean Naughton - Piper Jaffray

And then finally on the cash requirements over the next three quarters, can you remind us what sort of schedules that you have coming due? Obviously you moved one of the facilities from March out to June, but are there any other facilities that are coming due during that time?

Joe Scirocco

It's a complicated question. What I would do is refer you back to our 10K, which is out there now, just to refresh you. At year end we disclosed that we have about $316 million in various lines of credit that mature through 2010, so in answering your question we're really going out over the next 21 months or so. That includes the revolving credit line, the asset-based line that we have here in the U.S.

So just to talk about a couple of the components of this, there is a $300 million face value ABL in the U.S. Only about $120 million is drawn on that and it's subject to a borrowing base, so it's considerably less than the $300 million. We have a 50 million euro bank note which is payable in France in 2010, and a 35 million euro deferred purchase price related to Rossignol. That's also due in 2010. And of course the 55 million euro line which was recently extended through June 30th by our European bank group.

So those are the principal components. There are several smaller components in France that come due over the course of the next year and a half. But again, the full details of this are in the 10K and we will provide - I guess tomorrow we'll file our 10-Q, so there should be some more details on the debt in there for your reference.

Operator

Your next question comes from Brandon Ferro – KeyBanc Capital Markets.

Brandon Ferro – KeyBanc Capital Markets

Joe, I had a question about company retail for you, company owned stores. Just first off, I was wondering what total Quik and Roxy brand revenue as a percentage of total revenue for those brands comes from the corporate-owned stores and the licensed ones as well.

Joe Scirocco

Brandon, I'll tell you for a detailed question like that I'm going to ask you to maybe get back with us or chat with Bruce offline.

But broadly speaking let me answer you this way: In our U.S. business or our Americas business, retail comprises somewhere around 16% or 17% of the total and within that the vast majority of our business is Quiksilver/Roxy. We do sell some DC product through the stores, but Quik and Roxy are the vast majority of it. So maybe that's helpful to you directionally.

In terms of the split between outlets and full-priced stores, it's probably a third of the business or so is coming out of the outlet stores, the balance in full price.

Brandon Ferro - KeyBanc Capital Markets

And then if we backtrack maybe a year to a point in time where you've got a more normalized pricing environment, how would you kind of benchmark the profitability and then maybe the efficiency of the global store network that you guys have versus maybe an industry average operating margin? And if you lag for some reason versus the average, what are some of the things you might be able to do to make the stores more profitable or some of the actions you already have taken?

Joe Scirocco

Well, assuming we got to normalized levels of volume across the U.S. economy, certainly, I think we would still be left with the fact that we have a number of locations that are underperforming. And probably the number one thing we need to do is improve sales per square foot and just productivity in the stores.

As we discussed last time and Marty Samuels laid this out at the time, we have a number of stores that are just quite simply in bad locations. The demographic's not there and that's something we've had to wrestle with. So I think that even returning to normalized levels of business and pricing, we would still struggle with the number of stores in the portfolio. We identified them last time. We said they're sort of on the order of 25 globally, but 21 of those in the U.S., and that we looked to do a better job of opening stores in the future in a normalized environment.

Brandon Ferro - KeyBanc Capital Markets

Going back to the language about potential asset sales, as you think about the potential outcomes there, are we talking an outright sale of a brand potentially? Are we talking about licensing agreements? And if you do pursue an asset sale, should we think about the intention of that asset sale as being directed toward taking care of all your European maturities or Europe and the U.S. ABL as well as you think about 2009 and 2010, what's coming due?

Joe Scirocco

That's a mouthful.

Brandon Ferro - KeyBanc Capital Markets

Sorry about that.

Joe Scirocco

No, that's okay. So in terms of what types of asset sales we're looking at, suffice it to say we've looked at everything or we're looking at everything, but some are more strategic than others and yes, it could include a brand.

But what we're after here in terms of the strategy is really liquidity, improving the capital structure, as Bob has said in his prepared comments. The way to think about it without putting too fine a point on the requirements or what we're looking for from either a sale or a financing is go back again to the $316 million that we disclosed at year end as being due in 2009 and 2010. Essentially that's the short-term situation that we're looking to deal with and to reposition our capital structure around that, get some longer-term financing in there and reposition the business going forward.

Brandon Ferro - KeyBanc Capital Markets

I had two more. The first is just kind of a housekeeping item. Offhand, Joe, do you know the tax basis of DC to the extent that, you know, we're trying to estimate whatever potential taxes might accrue to you guys in the event of a sale of that brand?

Joe Scirocco

Well, I think the public record probably shows what we paid for it. With earnouts it's somewhere on the order of something less than $200 million. But I won't give you more details there because that basically reveals the profitability of the business since acquisition.

Brandon Ferro - KeyBanc Capital Markets

The last one I had, just gross margins. Europe seems to be performing relatively well relative to the Americas region despite the euro. Can you talk about what's driving that consistency and is that sustainable through the rest of the year?

Joe Scirocco

I think one of the things that picked up Europe's business in the quarter in particular was that the clearance period in January was quite a bit stronger than we expected and it was actually stronger than last year, so we had fewer markdowns during the clearance period. And that weighs very heavily on the first quarter for Europe.

Now longer term, they've done a very good job of protecting their margin to the extent that they can through currency hedges and that type of thing. The other factor is that the mix of their business is a little more skewed towards retail than that of the U.S. And their positioning enables them to commend higher pricing.

Operator

Your next question comes from [Unidentified Analyst] - J.P. Morgan.

Unidentified Analyst - J.P. Morgan

Could you provide us with the progression of revenue decline through the quarter by month as in how it was each month? And also by channel, so your own stores versus department stores versus specialty stores?

Joe Scirocco

We'd love to provide you more details. That's really quite a bit more disclosure than we would normally make. I think if you want some color on some components of that, we could probably talk offline, but for purposes of the call we tend to limit comments to the SEC disclosure elements.

Operator

Your next question comes from [William Ruter] - Banc of America Securities.

William Ruter - Banc of America Securities

I was wondering if you could provide what your current liquidity situation is. I think the last we heard it was $100 to $125 million. Is it somewhere in that ballpark still or has it changed significantly?

Joe Scirocco

At the end of the quarter on a global basis it was about $120 million, which is comparable to where it was at the end of fiscal '08.

I have to clarify this however because it's important to know that each of our regions operates within its own credit framework, so each of our regions has its own liquidity considerations. The number $120.9 million isn't necessarily as meaningful to you as to understand the regions.

So based on our current business plans in each of the regions, we believe we have adequate liquidity. However, as I said, we're looking to improve the financial flexibility because we anticipate continued weakness in the global economies.

William Ruter - Banc of America Securities

Could you provide any more detail in terms of the breakout by region or are you guys not going to provide that?

Joe Scirocco

To just do it at a high level, the $120 million we refer to includes cash on hand, which I think we reported about $42 million at the quarter end or we will report tomorrow at the quarter end. And then the balance of the liquidity is pretty much split between the major markets, so it's U.S. and Europe. Smaller amounts proportionately in Japan and Australia.

William Ruter - Banc of America Securities

In terms of the amount of uncommitted financing for the remainder of the year, last we heard that was I think 167. Is that still the same number?

Joe Scirocco

Yes. There's been fundamentally no real change in the uncommitted financing. [Inaudible] we paid some down in the current quarter, but that's just seasonal adjustments.

I did note in the prepared comments that in Australia we're nearly secure, nearly signed a $22 million line of credit on a committed basis, most of which was previously uncommitted. So we're making slow steps and slow progress towards this.

William Ruter - Banc of America Securities

One on the business itself in terms of the severance and the savings associated with that. I think you guys have said that you're going to be saving $40 million annually. Was some of this realized in the first quarter? Could some of this have begun to flow through the income statement?

Joe Scirocco

Some of it did, but it was more - in the first quarter it was more of a natural just, you know, people understanding where we are. People were in the process of working on this exercise. And we all naturally tightened our belts. So yes, we realized a few million dollars of savings in the first quarter.

The $40 million that we talk about will impact us for the remainder of the year. I think, again, to be fair, it's important to say that we've reduced $40 million in planned spending. I think when you look at the Americas SG&A expense year-over-year, the actual savings in the current year will be something less than that, but still very substantial. And as I said, we did cut a number of programs and reduce planned spending by $40 million.

William Ruter - Banc of America Securities

And then just on the severance, are we done with those expenses, the $6.1 we saw in the quarter, or could there be some additional ones in the second quarter?

Joe Scirocco

You know, as we said, we're looking at number of things. We're looking at potential sale transactions or other strategic alternatives. We're going through a refinancing and we're going to keep our eye on business, so I think we don't want to answer that definitively at this point in time.

Operator

Your next question comes from Todd Harkrider - Goldman Sachs.

Todd Harkrider - Goldman Sachs

To follow up on the asset sale route, I don't want to back you in a corner regarding what price you think the DC Shoe brand is worth, but maybe bigger picture have you thought about selling DC Shoes as the right strategic move? And based on the Street's 2009 estimates, do you believe the sale would be a deleveraging event?

Joe Scirocco

Well, to be really clear what we've said is that we're looking at strategic alternatives which could include the sale of certain assets and we've said nothing beyond that. I wouldn't comment on any particular transactions.

Todd Harkrider - Goldman Sachs

And regarding the departures of both the CFO and the President of Quiksilver Americas and the President of Roxy, it seems like the restructuring could have cut into some of the muscle when looking from the outside in. Were all those departures a part of the restructuring?

Joe Scirocco

What we've been hearing from investors is that they want to see better performance out of the Americas region, and so the restructuring was intended to accomplish that. We wouldn't comment about any individuals involved in that, but the reality is that all of the actions that have been taken have been geared towards improving the profitability. I don't think it's about cutting into the muscle. I think it's about adjusting the business to the correct size for the current economic conditions.

The Americas business if look at its history over the past five years has really been a growth engine. There's been a number of stores added, new accounts opened, broader distribution, and obviously the markets have contracted, consumers have stopped spending, and we've got to earn higher profits and generate more cash. It's as simple as that.

Todd Harkrider - Goldman Sachs

And then lastly some of your competitors are substantially reducing their orders to one of the larger specialty retail accounts in the U.S. due to their pricing policies and concerns of their switch to the more value format stores. Do you plan to do the same and, if so, how will that impact Quiksilver? And could you maybe ballpark what percentage of receivables the retailer accounted for last year?

Joe Scirocco

Steve Tully is here, but I would just say we don't generally comment on individual retailers. The estimates that we gave for the balance of the year represent our best estimate or best guess, depending how far forward you look on what we think we can do for the year.

Operator

Your next question comes from Mitch Kummetz - Robert W. Baird & Co., Inc.

Mitch Kummetz - Robert W. Baird & Co., Inc.

Joe, on the Q4 call you mentioned that one of your priorities was to refinance that uncommitted European debt and you seemed pretty confident at the time that you'd be able to get that done by January. What happened there and where does that stand?

Joe Scirocco

Well, Mitch, we made a big step. We didn't get as far as we had hoped to get. The market, as you know, is extremely difficult. All of these banks are going through rather rigorous due diligence, credit approval processes and that kind of thing. The other factor that's going on here is that our borrowing needs have been somewhat uncertain because of some of the strategic decisions that we're making about the business and about what type and the amount of financing that we need. The other element that plays, there's a lot of complexity and interplay between the debt structures in each of the regions, so no one of our regions operates totally autonomously with respect to these decisions.

The good news, though, is that the banks continue to work with us. You saw just yesterday in the 8K that we filed that our European banks have extended the maturity of 55 million euros until June 30th, and we think that that should be ample time for us to make progress on the strategic initiatives we've discussed.

Look, we would love to have had everything done, but the reality is that we have a lot of irons in the fire.

Mitch Kummetz - Robert W. Baird & Co., Inc.

And then, Joe, you mentioned there being some excess inventory at the end of the quarter. Could you say how much that was and is it concentrated in any particular region? Is that in the Americas?

Joe Scirocco

Yes, I think that's fair to say. The way to think about it, to be simple about it, sales were down by 11%, inventory was up by 4%. Would we have liked inventory to be down commensurate with sales? Of course. We have cut the buys for summer and fall going forward, but the good news is that this is pretty even among the brands. In the case of DC we brought some goods in early at the end of January, so our goods are current. But it's pretty even among the brands. We don't have any real out of balance conditions.

Mitch Kummetz - Robert W. Baird & Co., Inc.

And then in terms of your Q2 guidance, how should I be thinking of that in terms of your regions? It sounds like there should be a bigger gap in currency in the second quarter than there was in the first quarter in terms of current rates versus where you were a year ago. And clearly your European and Asia-Pacific performance was pretty good in Q1, with the operating income relatively flat year-over-year. Do you think you can maintain that in the second quarter or do you think that currency puts pressure on that to where you would expect operating income to be down in both of those businesses as well as the Americas? And then just kind of your sales outlook, how would that stand by regions? Again, obviously, currency having a bigger drag on Q2 than Q1.

Joe Scirocco

I think we finished the quarter, we averaged about 153 for the second quarter last year. This year's down quite a bit from that.

I would just say that Europe tends to have its biggest quarter in the second quarter as it did last year, and we would expect that pattern to continue.

Mitch Kummetz - Robert W. Baird & Co., Inc.

And then maybe a question for Steve Tully if he's still there. Can you talk a little bit about how the fall order book is building? I would assume retailers are being very cautious writing orders. And then maybe you could talk also a little bit about what's happened with the spring orders over the course of having started to take those in months ago and whether you've seen many cancellations there.

Steve Tully

Well, Mitch, we're still gathering fall orders, so it's a challenge, as you might imagine, but it's a little premature to comment on the total result.

As regards spring, again, it's a challenge. We did receive increased cancellations in January, as we expected, retailers trying to right size their order files to the poor conditions of business. We think most of that's behind us now, and so we're out there trying to get more reorders in a difficult environment and hold onto the spring order file.

So, again, I think we did experience a greater than normal level of cancellations in January and that has subsided.

Bruce Thomas

Operator, I think we have time for one or two more questions.

Operator

Your next question comes from Eric Tracy - BB&T Capital Markets.

Eric Tracy - BB&T Capital Markets

I just wanted to follow up on the sales. Is there a way to break out the declines based on consumer traffic versus destocking by retailers? Are you sort of able to identify that difference or is that too difficult?

Joe Scirocco

Well, I think, as Steve just said, maybe a few challenges with getting order confirmations in some case on the spring book, but for the most part we delivered what we expected to.

Steve, I don't know how you can -

Steve Tully

Yes. I'm not sure how to add much more color than that. We see the straightforward problem is consumers aren't going into the stores and that has been the case since early spring, so retailers have to fight to right size their receipts coming in.

We're somewhat optimistic that we have a late Easter this year, so with Easter being the 12th of April, spring break's upon us. Certainly we're in a position to try to capture some inseason business which obviously has been difficult for the first few months as well.

Eric Tracy - BB&T Capital Markets

And then just as we think about the independents, have you seen any sort of material liquidations? I don't think there really has been to date, but how shall we think about that? Is there any sort of assumption around potential door closings in your assumption for the year in that channel?

Steve Tully

Obviously we've got our eye on it and we're concerned, as all businesses are concerned, but I think, you know, we've built a conservative plan that would accommodate some of that condition worsening as you mentioned.

I would also just say obviously it's a battle of attrition out there right now amongst the brands and we're very fortunate and very pleased our brands have held their own and we're fighting and scraping to keep our space.

Joe Scirocco

When you look at the Q which we file tomorrow you'll see on a substantially lower base of receivables when compared to October, you'll see a comparable level of reserves. So from a percentage standpoint we're obviously keeping our eye on collections and customer accounts.

Eric Tracy - BB&T Capital Markets

And then, Joe, maybe just for you, as we think about free cash flow this year, you went through CapEx and D&A, but in terms of inventory is it possible to actually be down? I know you're working through it now, but as we think about it for the year is there potential to be down year-over-year and is there any other sort of working capital adjustments that we should think about there?

Joe Scirocco

I would answer you this way. We're forecasting as best as we can a low double-digit decline in revenue on the full fiscal year, so in a perfect world we'd see inventory down a comparable amount. I think that will be a challenge to achieve.

And in a similar way it'll be a challenge to achieve a reduction in accounts receivable commensurate with revenue. So it's an objective for us to get there, but I think being practical we would suggest maybe model a modest source of cash from working capital for the fiscal year.

Bruce Thomas

One more, Operator.

Operator

Your last question comes from David Glick – Buckingham Research Group.

David Glick – Buckingham Research Group

Continuing on that theme, are there any parameters you can give us, Joe, in terms of what you expect for free cash flow for the year? I presume you're still, based on the lower CapEx and also based on the sensitivities you're looking at, that you're going to be free cash flow positive, but any color on that would be helpful.

Joe Scirocco

Without putting a fine point on our earnings estimate for the year, I would agree with you, we should be cash positive for the year. I think we've laid out all of the metrics that you need to know about. Depreciation and amortization, that's $55 million. Remember that we have a noncash charge for stock compensation expense, so you want to take that into account as well. We've given our interest assumption. I would use a 40% tax rate. And you should pretty much be able to get there.

I think the big question mark will be working capital, so my suggestion would be to use kind of a modest source of cash from working capital liquidation over the course of the year.

David Glick - Buckingham Research Group

And then just a follow up at the risk of beating a dead horse, but the decision to defer the repayment of the 55 million euro line is really primarily the complication and timing of a potential sale of assets as opposed to sufficient lack of liquidity in the European region or potentially it's needing more time to renegotiate your committed credit lines. I'm just trying to understand sort of the decision tree and how you came to that, and then is that June a hard stop? Is there some flexibility there if you do not sell any assets?

Joe Scirocco

Well, I don't want to speak for any of the banks, but I think that they have demonstrated great flexibility in working with us throughout this process. We have deferred this maturity from memory two or three times in one iteration or another. This deferral is really intended to help us and the banks find a much better long-term comprehensive solution not only to the question of repaying the 55 but also to the question of how to reposition the company's overall liquidity and its cost structure.

So when you get into the possible sale transactions, you start to talk about what are the expected proceeds, how are the proceeds going to be divided, which tranches of our debt around the world have covenants requiring repayment, all those kinds of things. When you talk about collateral packages, it's complex. There's intercreditor agreements and all kinds of stuff.

And as we said, the banks have their own level of scrutiny these days which is higher than it's ever been, at least in my recollection. I think these things are - it was a natural move for us working with our banking partners to push this off and we think they've demonstrated great flexibility in doing it.

Bruce Thomas

Okay, thank you. That concludes today's call. On behalf of everyone here at Quiksilver, thank you for participating and we look forward to providing our next quarterly update in June.

Operator

Thank you, and once again, this does conclude today's call. The replay for this call will be available.

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Source: Quiksilver, Inc. F1Q09 (Qtr End 3/31/08) Earnings Call Transcript
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