FGX International Holdings Limited, Q1 2009 Earnings Call Transcript

FGX International Holdings Limited (FGXI)

Q1 2009 Earnings Call

May 07, 2009, 08:30 am ET

Executives

Alec Taylor - Chairman and CEO

Anthony Di Paola - EVP, CFO and Treasurer

Jack Flynn - President

Analysts

Douglas Lane - Jefferies & Company

Sam Panella - Raymond James

Mark Miller - William Blair

Bill Chappell - SunTrust Robinson Humphrey

Liam Burke - Janney Montgomery Scott

Chris Krueger - Northland Securities

Eric Tracy - BB&T Capital Markets

Presentation

Operator

Good morning everyone and welcome to the FGX International First Quarter Conference Call. Presenting today from FGX International are Mr. Alec Taylor, CEO and Mr. Anthony Di Paola, Executive Vice President and CFO.

I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. The same language applies to the forward-looking statements that management will make during today's call.

We encourage you to read the company's SEC filings and earnings release, which discuss important factors that could cause additional results to differ from those made in any forward-looking statements.

A replay of the conference call will be available Thursday, May 14, 2009. To access the replay by phone, the domestic dial-in number is 1-888-203-1112, and international the dial-in is 1-719-457-0820. The access code for the replay is 6215420. To access the replay via webcast, please visit www.fgxi.com under the tab Investors.

Now I will hand the call over to your host Mr. Taylor. Please go ahead sir.

Alec Taylor

Thank you, operator, and good morning everyone. We appreciate you joining us for the FGX International first quarter earnings call.

With me today are Jack Flynn, our President and Anthony Di Paola, our CFO. Also joining us is Idalia Rodriguez at ICR, our Investor Relations Firm.

As is our custom, I will open with some overview remarks, following which Anthony will give a more in depth financial review. Thereafter Jack, Anthony and I will answer appropriate questions.

Our financial results in the first quarter of 2009, were at the upper end of our prior guidance which given the core retail environment we are operating in with an excellent performance.

Sales of $61.1 million were up 3% from the first quarter of 2008. Adjusted earnings per share were $0.02 versus $0.10 a year ago due entirely to the $2.9 million incremental advertising spend in the current period versus the corresponding year ago quarter, adjusted EBITDA was $7.2 million.

As a result of the pending disposition of our costume jewelry business which I will discuss in a minute. Earnings on an as reported basis were a loss of $0.03 due to $1.8 million non-cash goodwill impairment charge.

Gross margin for the quarter was 53.1% versus 53.8% in a year ago quarter. This was principally due to the addition of $8.1 million of revenue contribution from Dioptics, where gross margins were just over 50%.

We do expect gross margins to improve throughout the year.

Regarding sales by segment, sunglass and prescription frames sales were up $8.1 million, or 45% from the corresponding year ago quarter. Excluding the $8.1 million of revenue from Dioptics which we did not benefit from in the first quarter 2008. Sunglass and prescription frames sales were flat year-over-year given the economic environment in off season nature of Q1 we were satisfied with these results.

Reader sales were off about $1 million or 4% versus Q1 2008. However, when you take into consideration the $2.1 million of opening price points sales at Wal-Mart which were enjoyed in the year ago period but not in the first quarter of 2009.

Sales of non-prescription reading glass were actually up 4%. We were very pleased with this result again given the economic climate and the inventory destocking experienced in Q4 2008 and continue till the first half of the first quarter of 2009. We now believe the inventory destocking is largely behind us in most account.

Sales of costume jewelry were off $1.4 million or 41% compared to Q1 2008. This continuing weak performance contributed to our decision to dispose off this business. International sales were down $3.7 million or 36% but on a constant currency basis were down 16% when compared to the corresponding year ago period. This decline was principally due to a big sunglass rollout at ASDA in Q1 2008 which was not anniversaried in the first quarter of 2009.

We expect our international segment will again detail on constant currency basis to Q2 which should return to growth in the second half of the year. Anthony will go into greater detail or additional first quarter financial results in a minute, but I did want to briefly address working capital. As we have said before this is a very important metric at FGX and we were pleased to have reduced day sales outstanding by six days in the first quarter of 2009 versus Q1 of 2008. Days on hand of inventory went up by 13 days which at first glance appears disappointing.

However, because of the aforementioned inventory destocking and a general trend by retailers to shift inventory carrying cost to vendors, this increase at days on hand is understandable. That said we are working very hard with our agent suppliers to shorten product, delivery cycles and to find ways to bring inventory levels down.

Turning now to the sale of the jewelry business, as we had reported earlier we have had our costume jewelry business under strategic reviews since the second half of 2008. As it was evidenced by the Q1 results sales have continued to decline at a (inaudible) rate.

Gross margin have also deteriorated and the business had few synergies with our optical business. Thus we have reached the decision to sell our custom jewelry business and have entered into a letter of intent or a transaction that should close in the current quarter. Anthony will discuss the specific to the transaction later. From a strategic perspective this is unquestionably the right decision and it will allow us to focus on our growing and higher margin optical business. Our jewelry team has worked as hard as any group at FGX and I do want to thank them for their efforts.

Turning now to new account, we picked up a significant piece of new business at CVS which awarded us a seasonal sunglass program at 4000 locations for SolarShield product. This is noteworthy not only because it represents $1 million to $2 million of annual revenue that is the first sunglass business we got at CVS. We hope this serve as an entree for more. We also picked that SolarShield's business at two regional supermarket chain worth an additional $1 million to $2 million.

The Dioptics acquisition is proving to be an excellent one as we have added business by cross selling existing accounts and have a number of pending proposals that should result in additional win. We have also achieved substantial synergies and integrating this business into FGX. In short we cannot be more pleased with the acquisition of Dioptics.

Moving now to advertising and marketing. Due to the first quarter we spent an incremental $2.9 million on marketing almost all of which was behind the Magnivision and FosterGrant reading glasses TV campaign. This campaign started at early February and we will conclude in late June. We believe the campaign increased consumer awareness of the category and educated aging baby boomers suffering from presbyopia on the ability to self-medicate.

We also received strong positive feedback from our retailers as this was the first time this category has ever received any television marketing support. We do not have any reader media plan in the second half of 2009 but we will launch a 10 week national TV campaign next week featuring Raquel Welch and continuing the use of, who's that behind those Foster Grant? tagline. This is in the sunglass business. This campaign will be at stronger weight than last year and be on the weather channel as well as the major networks as we benefit from lower media rates. We remain committed to advertising our brands and believe this will continue to drive our market leading position. And over-the-counter reading glasses it added $30 sunglasses. We are confident this will result in the creation of long-term shareholder value.

Moving now to product development, we have increased our focus on new product development at FGX. Our goal is to consistently have a pipeline of new products always in the works and we are beginning to achieve that goal. We reached and we entered this computer readers at Staple and they’ve been a big hit. We are also testing the click reader, a variable lens reader and a polarized sun reader. We believe the successful execution of this strategy will be a key driver of future sales.

Moving now to acquisitions. On numerous occasions we have stated that our goal is to grow the company both organically and through acquisitions. As I have said earlier, we are very pleased with the Diaoptics acquisition the integration of which has largely been completed. We expect to generate over $40 million of free cash this year at FGX, and have a favorably priced revolving credit facility with plenty of availability.

We have been presented with a number of acquisition opportunities in our core optical area and with purchase price multiples having come down we are reviewing several of these. There can be no certainty that we will complete the deal but there is clearly some chance that we will make another accretive acquisition in the second-half of this year.

Turning finally to our outlook for the second quarter in 2009 we remain cautiously optimistic about our prospects. Excluding jewelry due to the pending sale we see revenues in the second quarter of between $74 million and $78 million, EBITDA of $13 million to $15 million and EPS of $0.22 to $0.26. This guidance exceeds Q2 2008 results when revenues were $71.6 million, EBITDA was $13.1 million and EPS was $0.19.

For the year again eliminating jewelry, sales should be at the range of $265 million to $275 million, EBITDA should be $58 million to $60 million and earnings per share should be $0.96 to $1.06.

As is detailed in the release, in 2009 jewelry was budgeted to contribute $18 million to $20 million in revenues, $1 million to $2 million in EBITDA and $0.02 to $0.04 in earnings per share.

The updated guidance simply factors out the expected results from jewelry and once again nicely the full-year 2008 results. We should benefit from strengthening gross margins throughout the balance of the year and for 2009 we now expect gross margins to be approximately a 100 basis points ahead of 2008 levels. And as Anthony will discuss we also expect to see some improvement in our tax rate.

In closing, we were pleased with our results in the first quarter given the economic climate which demonstrated the strength of our core business and brands. We expect this trend to continue, but remain mindful of the strong headwinds that continue at retail. With the sale of jewelry business we will be squarely focused on growing our optical businesses and building value for our shareholders.

And with that I will turn it over to Anthony for a more in-depth financial review. Anthony?

Anthony Di Paola

Thanks Alec and good morning everyone. As Alec has covered the highlight of our results I am going to review a few more P&L items. Our decision is to vest the jewelry business and some additional financial highlights.

We are pleased that delivered result inline with our expectations in the first quarter of 2009, while operating in a challenging economic environment. Sales, earnings per share and EBITDA were all at the upper end of our guidance, additionally we were able to reach a preliminary agreement to sell our jewelry business and anticipate closing the transaction during the second quarter of 2009.

As Alec briefly mentioned and as we expected gross margins declined slightly during the current quarter 53.1% compared to 53.8% for the first quarter of 2008. This was principally due to the company's mix of revenue of sunglass sales which had lower margins in our reading glass segment or greater percentage of the company's overall revenue.

We continue to expect the overall gross margin improvement of about 100 basis points for the full-year 2009 compared to 2008 as we capitalize on lower cost of good and improve freight rate.

We expect to see margin improvement during the second quarter, so that improvement can continue through the balance of 2009 as we take advantage of inflationary factors that first surfaced at the end of last year.

Before we cover operating expenses and the balance sheet I would like to spend a few minutes discussing our decision to divest the jewelry business and the related charges associated with the disposal.

We ventured into a letter of intent to sell substantially all of the assets of the jewelry business for approximately $1.5 million. As a result of our decision to exit this business, we recorded a non-cash charge of $1.8 million or $0.05 per share to impair goodwill related to jewelry. We also expected to take additional charges of $46 million net of proceeds. In the second quarter when we anticipate closing the transaction. These additional charges related primarily to inventory and fixed asset write-offs and cost for incremental product returns associated with the sale of the business.

Our completion of the sale results of the jewelry segment where we presented a discontinued operation in our financial statement. This decision to divest our jewelry business was reached after careful consideration and analysis. We believe this decision allows us to focus on a more profitable branded optical businesses and positions us for future growth in reader and sun categories.

Now for some comments on operating expenses, excluding the goodwill impairment charges we just reviewed. Operating expenses as a percent of net sales were 49.7% compared to 44.4% in the first quarter of 2008.

The increase from a year-ago period was primarily due to our strategic decision to advertise our Magnivision and FosterGrant brand.

For the full-year we expect operating expense as a percent of net sales to be just north of 40% which represent 100 basis points improvement over 2008. We continue to work very hard in controlling expenses and our full-year rate should be reflected in those efforts.

From a tax perspective our reported tax rate for the quarter was 39.5% which was inline with our previous guidance. As we mentioned during our fourth quarter call we are working diligently in reducing our effective tax rate and have identified several tax planning opportunities that we believe will accomplish this goal.

We intend to implement these strategies by the end of the second quarter and hope to report a lower rate in the very near future.

Now for some comments on the balance sheet, accounts receivable of $36.5 million were down $15.8 million at the end of the first quarter of 2009 when compared at the end of 2008. This decrease resulted from improved collections from several significant customers.

Accordingly our DSOs at the end of the first quarter grew to 66 days compared to 72 days for the same period in 2008.

Inventories of $39.8 million increased slightly at the end of the first quarter compared to the end of 2008. As Alec briefly mentioned inventories days on hand increased 13 days from a year ago period. This increase is primarily related to the inventory destocking of retailers that we experienced at the end of 2008.

The trend has been for retailers to push inventory carrying cost to their vendors and we haven’t been spared from this trend. We continue to work with our suppliers and retailers to better manage this important working capital metric and hope to see improvement in the coming quarters.

For the first quarter of 2009 capital spending was $2.2 million which again was inline with our expectations. We continue to invest primarily in store fixtures to support our revenue growth and expect full-year 2009 capital spending in the $10 million to $12 million range.

Adjusted free cash flow was $4.9 million for the first quarter of 2009 compared to $6.5 million for 2008.

Decrease in free cash flow for the quarter compared to previous year was largely due to cost associated with the aforementioned advertising campaign.

Again future uses of our strong free cash flow will primarily be to fund accretive acquisition and reduce borrowing including $15 million of scheduled principal repayments in 2009.

In summary, we enjoyed a good quarter and I am pleased with our results for the start of 2009. Divesting the jewelry business allows us to focus our effort on more profitable optical business. As we look forward to the balance of the year I will continue to mange our operating expenses and expect to improve gross margin to delivering results inline with our previous guidance.

And with that I will turn the call back to Alec.

Alec Taylor

Thank you, Anthony. Operator we will now open it up to appropriate question.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We will take our first question from Mr. Doug Lane with Jeffries. Please go ahead sir.

Douglas Lane - Jefferies & Company

Yeah, hi, good morning, Alec and Anthony.

Alec Taylor

Hey Doug, how are you?

Douglas Lane - Jefferies & Company

And, Jack. Can you give us some sort of a feel for what you think the difference was between your shipments for readers, I mean ex Wal-Mart I guess it was up 4% where do you think the consumer uptick was given the destocking?

Alec Taylor

Well, I think if you look at it, go back and look at our performance over the counter, it probably had what I consider to be a needless performance at retail. I can't tell you any one class of trade was better than another even within classes and trade we had some customer that if business was fairly robust it was below our plan.

From the consumer point of view I think the demand is certainly still there. Keep in mind, we came up Q1 last year, where I think our increases over the counter were in 15% to 16% range and right now we are tracking relatively flat in the last year. We can speculate but we do not really our average price point has held up nearly well. And again this is uneven by customer and by class of trade.

I think the destocking has probably had some minor impact to a level. Some things were delayed some shipments were less than we thought. We got to make some modular changes etcetera, but pretty uneven right with the POS from the consumers' point of view.

Douglas Lane - Jefferies & Company

I know Nielsen does interact the category how much insight do you have? How much POS data do you get from your retailers? What percentage do you think of your distribution you actually get POS data?

Anthony Di Paola

We probably get POS data for probably 90% of our customer right now.

Alec Taylor

We do not see the piece we does have. Doug, we do not see although we think we are 60% plus of the category, so more or less focused the category. We think we are doing at probably better than others in the category, but we have a good visibility just reinforced what Jack says it's interesting to use you look at even, within class we have some account in the drug class are still up, high single low double-digit some other that are almost just pure flat year-over-year.

As you might imagine when the dollar class of trade that has remained strong and it's just been a very interesting again, I think the work Jack has done even he is right. It's hard to draw conclusion that we think the consumer is still out there, we look up 4% extra opening price point. We felt pretty good about particularly given the tough comp from a year ago. But I do think the inventory destocking we are all on a single mind here that if most of that does not all seems to be behind us that now factory shipment at POS or pretty much matching up into the fourth quarter we were shipping factory orders would be a third what POS was that just can't continue. It seems like certainly starting past February for most accounts that seem to begin getting back I think.

Douglas Lane - Jefferies & Company

How do you measure the success of the TV advertising campaigns?

Alec Taylor

Yes it’s hard, the short answer is its hard, its hard particularly when you don’t have Nielsen because you don’t have other accounts to look at say how we do it. We were not represented versus that. We have been on air 8 weeks, we worked 4 on, 3 off, 4 on, we are just finishing another 3 off period it will start back another week, 10 days. Again we can certainly say up 4% would be I think you have to credit with the advertising. It seems to do better during the first four week flight in the second. The first four week flight was slightly stronger rate. We melted our buyers, won it. We know it’s a difference maker when we go in and pitch business, we don’t have the fact that we are on TV.

The last flight that gets started shortly we have made a little revision to the Magnivision ad it had three scenes basically and we have changed the last scene where there was a financial services looking guy, looking at a much of papers and saying take this job on it. Now we go back and we take the women who is the opening scene in the doctor’s chair and we come back with her in the third scene and she says and now I can buy reading glasses for under $30. And then we trust your business the Magnivision, we think that's the stronger message, I think the one thing that we probably perhaps want was we had a super on the screen that says for under $30 but we didn’t call it out.

And if there has been a consistent theme in advertising in the first four months of this year. If you have a value proposition beat the consumer over the headwind that ad so we made a revision to the ad to say that. Net-net I think we think it worked but its hard to have a great management stake and I remind everyone to say this is not going to be if we didn’t expect it to be the sort of inverted hockey stick turn on the TV and off you go is the category that people don't know much about the category, the brand names are not household names. So we think there is a certain amount of education that had to occur and we think that path name and I am anxious to see how retail does during this last four weeks of advertising particularly given the revised message about value.

Douglas Lane - Jefferies & Company

If it is successful would you then advertise in the second half of this year?

Alec Taylor

I don’t have anything budgeted right now. I think the answer is maybe, I think if its strongly successful I think if you really did see retail off take really kind of go hard. I think we probably search around for the money to do it. I think we have viewed, we have always viewed it as, that we would be off air by July, this has been a pretty strong campaign and it has very few people on air, 40 weeks or anything like that. So I think we had always viewed it as the second half of the year would be one when we go back, do some research, see what the consumer, how they react to the ad, and again thinking about the campaign for 2010 but nothing planed right now, but I think its not impossible, we can do some if we had some good feedback from the last four weeks.

Douglas Lane - Jefferies & Company

Okay, thank you.

Operator

We will take our next question from Sam Panella, please go ahead.

Sam Panella - Raymond James

Hey, good morning guys.

Alec Taylor

Hi, Sam.

Sam Panella - Raymond James

Couple of questions with regard to the anticipated improvement in gross margin as we move through the rest of the year, how should we be thinking about in terms of the magnitude per quarter I would assume that a greater portion of that in the back half?

Anthony Di Paola

Yes the right way to look at it and I think we got a modest improvement in Q2 when you compare that to the previous year, but it is sort of back end. As we talk about when we saw those opportunities to do so our cost with our suppliers, unfortunately we are already bought out for the first half of the year. So it is sort of a second half thing but we are bought out now six months out so we are feeling very good about those margin improvement.

Sam Panella - Raymond James

Okay. And then with respect to the business $1 million to $2 million in annual revenue with each one of those, when does that start to impact you guys.

Alec Taylor

I think most will ship at the end of this quarter. I think most of them is scheduled to go out because of our buying window go out some time June. So, POS piece and the replenishment piece we just start to see obviously Q3 and Q4.

Sam Panella - Raymond James

Alright. And with respect to getting near the jewelry business, can give us any sense of how much of that is in your international segment on an annual basis, and as we build out our numbers.

Anthony Di Paola

It's probably a couple of million dollars for the full-year.

Sam Panella - Raymond James

Okay. Any update with respect to Wal-Mart you got any sense of how they are dealing with their opening price point business. And in what percentage of your revenue this Wal-Mart comprise at this point.

Alec Taylor

I think Wal-Mart still overall represents probably roughly a third to maybe 30% of our business on an overall basis I would say the reader business its probably a little less than that because of the strong sales for the drug class of trade I will let Jack take the peak one about how they are doing.

Jack Flynn

Honestly Sam I have to tell you I am assuming its doing okay, seeing from uneven at store level in terms of in stock and replenishment. But I do not share that data, so why we just be speculating, but I would think in this economy that they are probably doing okay with the OPPORTUNITY piece.

Alec Taylor

I think it is significant to know we have seen new modular reset, share goes into affect in July Wal-Mart date, they did not take any more. We have got exactly, same percentage, we’ve got about half the modular as we did before, they didn’t take anymore direct import, no more taking environment label itself. So, people can rest assure that modular presumably stay to have another year.

Sam Panella - Raymond James

Okay, great, guys, thanks and good luck.

Alec Taylor

Thank you.

Operator

We will take our next question from Mr. Mark Miller with William Blair. Please go ahead sir.

Mark Miller - William Blair

Hi, good morning everyone.

Alec Taylor

Hi Mark.

Mark Miller - William Blair

Can you elaborate a little bit on some of the opportunities that you are seeing and then just review with us what your criteria for these acquisitions are? And then, I guess, as we look at Dioptics huge gross margin improvement there. Do you think that opportunities you are seeing have parallel opportunities or was Dioptics just unique, that fits in your business?

Alec Taylor

Yes, I think first of all, we really set the bar high Dioptics today, with a small business sometime that you buy, as I look at the business opportunities great I realize there maybe some issues around one thing or another, we have found anything speak relative done a great job and we would have to run that, we adhere to the great team, great product, it was just bright for this cross sell it just hard back for a minute, I think, Jack and his guys are out cross selling the heck out of their product.

In these couple of nights wins that we had, those were the things we achieved in the first 90 to 120 days. We are in front of numerous major accounts with big opportunities to cross sell that was really what we saw in the business that continued to see, yes we have got something like 500 basis point improvement gross margins.

As we look at other deals, I think we are linking for much same things. We either look for product niches that in optical that we do not have something that need amendment need or something that we think could be incremental to our business. We do not just want to be sloppy our customer from one product to another. So we look at that and we also look at opportunities where you could pick up market share perhaps and we want things that can be integrated into this business. We want things where, the things that we look at I think we would all of those we would see the opportunity for gross margin pick up yet again and some real ready synergies.

So, it's much the same. A little emboldened after having done Dioptics that been successful pass debt. We do not have to do anything there is not any acquisitions built, obviously built into the numbers but I think you could rest assured anything we do will be accretive. And there will be a lot of synergies everything that we look at has those sorts of opportunities.

So, we will see, it's a never a certainty but we definitely want to have both organic growth than growth by acquisitions strategy and we think we are executing on that right now.

Mark Miller - William Blair

Okay. Thanks. And then with the international business first of all on the UK you are lapping that sell in for sunglasses does that continue to be a comparison issue in the second quarter. But then beyond that more broadly what are your top priorities initiatives that you are trying to get that business going there?

Alec Taylor

I think in the second quarter you will continue to see the business down a little bit. The selling last year big sunglass selling that off we still do sell sunglasses there, but it was sort of an usually year last year but when they essentially bought two years worth of sunglasses they want. We knew that would be a tough comparison but it was to get an opportunity last year. First of all we see several interesting things going on there, one is we just got a test for Dioptics products that moves, we have eight to my knowledge.

So we had very little at international direct sales from Dioptics that we through our office at Manchester with a selling effort there we got a tested boots. Boots also has a fine co-op that it operates throughout the European continent and we are getting ready to have intent. We are working on test of reading glasses in Norway which is introduced in the category.

Hudson just come to us and said we are going to go they have got a big effort where they are starting up but a number of international airports, Jack I think it maybe 15 to 20?

Jack Flynn

I think starting with just big one in Italy.

Alec Taylor

In Italy, I think they got four, five major airports in Italy, Hutchison business, Hutchison came to us and said could you handle a reading glass sunglass program everywhere we go in international airports. We said, sure, so we think that creates a nice opportunity. That all said we got to continue to focus on the reading glass business in UK.

Our Canadian business is fine and I guess the last thing I say about the UK would be our set business. The economic slowdown is I think they were three to six months behind us and I think right now they where we were going in November, December last year. POS is just not great but we think again consumers there they will pick it up. We are in the right doors. This is just sort of slow and that’s why we think again it will be a little better in the second quarter. We have pretty high expectations for all these things I just described it will pick up in the second half.

Mark Miller - William Blair

Thanks. Final question Anthony is there opportunities to potentially lower the tax rate for the year. Can you clarify whether that is in the guidance you have today or not?

Anthony Di Paola

It sort of is something that will probably happen at the end of Q2 if all works well it will impact us for the balance of the year. We have talked about working our tax rates, what we are considering is nothing exotic something sort of trying to be and we feel good about it, it will just be a timing of whether we get down to the end of the second quarter.

Mark Miller - William Blair

I mean then just a follow-up to that if the lower tax rate is part of the guidance does that imply that operating expectations are coming down by similar amount?

Anthony Di Paola

Yes, we do expect the operations or the operating expenses that's what you're referring to come down in the back half of the year. I mean again the big spend this quarter was obviously the advertising that will trail off in the second-half.

Mark Miller - William Blair

Sorry what I meant is the overall for the business the pre-tax earnings are you now looking for a lower pre-tax earnings?

Anthony Di Paola

No. We are not. This is all factored into our guidance.

Mark Miller - William Blair

Okay. I’ll follow-up later on that.

Anthony Di Paola

Okay

Operator

Our next question comes from Mr. Bill Chappell with SunTrust. Please go ahead sir.

Bill Chappell - SunTrust Robinson Humphrey

Good morning

Alec Taylor

Hi Bill, how are you?

Bill Chappell - SunTrust Robinson Humphrey

Actually I will follow-up on Mark's question, so the original guidance a quarter ago was assuming that the tax rate would come down this year, is that correct?

Anthony Di Paola

Well we gave overall guidance, the range of earnings that we had the additional 98 to 110, that was within that guidance that we expected the tax rate. So, it's all within that point, the tax rate can move a point or two in terms of improvement but its all within the range.

Bill Chappell - SunTrust Robinson Humphrey

So, it's just a couple of cents here?

Anthony Di Paola

Correct.

Bill Chappell - SunTrust Robinson Humphrey

Okay. Again on the gross margin expectation per 100 basis points, is that all just the divestiture of the Jewelry business or are there other things going on driving that?

Alec Taylor

I think Bill, little bit of evidence is look I have got a, I think the 100 basis points, it’s a minimum we should expect. I have to say, I think we will be able to get that 100 basis point. So I hope this more opportunity that we will see, but you get Jewelry going away, you get input cost, on the reader business that we have negotiated, you get freight rates which are off of third this year from a year ago, you get the Dioptics with 500 basis points of improvement in, it just cost, purchasing cost, pure COGS. So, it's really a mixture of all those, this is the flip side of this bad economy obviously. If these deflationary things we try to have to take advantage of it, I think we are but jewelry is a piece of it but frankly speaking relatively small I would say, just given its volume.

Bill Chappell - SunTrust Robinson Humphrey

Okay. And then back to an earlier question on the, the advertising behind readers, why doesn't it make sense just to have a stable level of advertising throughout the year to just kind of improve the overall consumer education versus trying to use to spot advertising and those types.

Alec Taylor

I think the, it’s a good question. I think the four on three off or four on three off its sort of a tested way that you educate the consumer you give it a little rest, you bring it back, you don't want them to become numb because they are seeing the ad all of the time and they go over reading glass ad and out changed channel. You want to keep them interested. I mean frankly a lot of it is just a question of budget and having the ability to, we just don’t have it at the budget to spend at that level with that sort of pulsing try to think throughout the year.

Again as I said it's not in the budget we wouldn’t do it unless we saw the reader sales is going crazy and we could tie up to the adverting that we just need to keep it up. I do think it is appropriate given it's the first time we've advertised the category, first time these brands have been advertised. For us to when we come off air, with 1st of July go do some consumer research, see how consumers testing say that they would react favorably to it. And if they like it then do the post wave cycle has a whole lot of diagnostics that you would do. That will take couple of months to do that and then I think what you do is you go in to the fourth quarter of the year and you plan your new advertising campaign.

You then get make your wordings and shoot your ad in the fourth quarter and you would be back on air in Q1 and that’s I think fairly consistent with the way I think Rick has done it in the past. But we just want to make sure we got the message right. And if there is any tweaking to be done or changes to be done we can do that, kind of not do it on the run.

Bill Chappell - SunTrust Robinson Humphrey

Got it and just couple of questions for Jack. Are we largely done this year for the Dioptic getting new customer wins, in terms of was that all part of the spring reset or can they win more throughout the year and then can you just give us an update when the CBS Sunglass business comes up for renewal anyways.

Jack Flynn

CBS comes up mid-year, next year, so it really will be for the 2011 season if you will, because their contract goes through I think July or August of next year. So that's one part review in the first part of '09.

Bill Chappell - SunTrust Robinson Humphrey

You mean 2010.

Jack Flynn

I am sorry, 2010, a review of the category, but the rollout want it, if is there any change and we are able to win any portion of that business, will be probably Q4 of 2010 for the 2011.

Bill Chappell - SunTrust Robinson Humphrey

Okay, and then on the Dioptics business?

Jack Flynn

Dioptics, our attitude is there is more opportunity as you go into the Sunglass selling because it really does tie in closely with the Sun business. But it's something we will pitch all year around. And keep in mind, we have got some early wins but right now we are in the starting the process of selling in for 2010 and Dioptic will be big part of that. So we will be selling, this month, next month and for the rollout hopefully a lot of it will be take place in Q4. So we will be selling right on through quite frankly.

Alec Taylor

And Bill one of the nice things about Dioptic, it can often times either go on a Sun fixture that we have, but you only need a display that’s maybe 32 pieces or something like that. So you can go on one of these clip stripes or one of the corrugated displays that can hang on in cap, it’s a program you can get it there more quickly than perhaps others, I mean largely obviously '09 Sun season is pretty much sold. We are hustling out to get the CBS shipment and this grocery shipment may 3 or 4 July up it's a nice program because it's much less these the rest of our Sun business it's because of the size of the fixture you could sell it at and get it up more quickly than you could, if you were shipping into the entire big fixture like you might see.

Bill Chappell - SunTrust Robinson Humphrey

Got it, that’s great. Thanks so much.

Operator

(Operator Instructions). Our next question comes from Mr. Liam Burke with Janney Montgomery Scott. Please go ahead sir.

Liam Burke - Janney Montgomery Scott

Thank you Alec and Anthony, how are you today?

Anthony Di Paola

Great, Liam, how are you?

Liam Burke - Janney Montgomery Scott

Good, thanks. Anthony just a clarification on Alec's comment about the expected cash flow this year, free cash flow of $40 million, is that calculated the same way it is in the release, essentially EBITDA less CapEx?

Anthony Di Paola

Well, I think Alec said with the schedule principle payment down the debt repayment.

Liam Burke - Janney Montgomery Scott

Okay. So working capital was in the function in there?

Anthony Di Paola

No, working capital it's obviously a function of the EBITDA but working capital. From last quarter this quarter it's been relatively flat, our EBITDA will be $60 million this year our principle repayments of $15 million, CapEx $10 million to $12 million.

Liam Burke - Janney Montgomery Scott

Okay. Thank you.

Operator

We will take our next question from Mr. Chris Krueger with Northland Securities. Please go ahead.

Chris Krueger - Northland Securities

Hi, good morning, guys.

Alec Taylor

Hi, Chris.

Chris Krueger - Northland Securities

Hi. First for the Wal-Mart opening price point loss that you have been dealing with last couple of quarters. Can you quantify what impact that had on EPS in the first quarters?

Anthony Di Paola

$0.33.

Chris Krueger - Northland Securities

Okay. Next, we are just looking at this general trend just thinking back maybe all the way back to October through April as far as your sales trends to the retail stores and what you are seeing the sales are after retail stores. If you know what I am saying as far as the inventory shifting and all of that, and just generally how, what are you all looking down next three to six months right now versus what you might have been thinking a few months ago?

Jack Flynn

We are still cautiously optimistic about retail and our retail performance. As we look ahead you know there are lots of changes taking place at retail. There is a destocking and skew rationalization it's going to be an ongoing process at retail. We are trying to work with our retailers, cooperate with our retailers and try to be on the front end of any changes that may take place.

The destocking was really for us a November, December, January phenomenon, but going forward as we mentioned about our inventory we are going to probably carry more inventory here less than store level, lessen retailers warehouse. And as we look forward we are making plans to prepare for that as we go forward. We just have to be more efficiently, lot of that's going to be drawing back on us and as these retailers about to change, I mean we think about it. Wal-Mart is making a lot changes, Wallgreen is making a lot of chances. We just want to make sure we are in sync with what those plans are going forward and more in front of those change that.

Chris Krueger - Northland Securities

Okay. Last question is on CVS, I know that there were new top customers and where you have not historically been in the sunglass business. But what percentage of your reader business does CVS represent roughly?

Alec Taylor

Well I would say probably 15%, of just the reader category?

Jack Flynn

Yes just the reader category.

Chris Krueger - Northland Securities

Okay that gives an idea of how to look at the other category as an opportunity, thank you.

Alec Taylor

Thanks Chris.

Operator

(Operator Instructions) Our next question comes from Mr. Eric Tracy with BB&T Capital. Please go ahead, sir. Your line is open.

Eric Tracy - BB&T Capital Markets

Good morning, hi guys

Alec Taylor

Hey Eric.

Eric Tracy - BB&T Capital Markets

Just a follow-up on the gross margin so to more ex the environment and deflationary pressures and how we should think about longer term given sort of it the mix increased to start in the frame with Dioptics versus cost of jewelry now out, I mean is there opportunity just how we should we think about that longer term?

Alec Taylor

I think one of the things we talk a lot about and get a lot of emphasis. I think we are going to keep pressing on it, clearly getting jewelry out of the mix, mid 30 type of margin. It just squarely in optic either just looking at the optical side, I think we continue to achieve efficiencies there. Bob Grow who runs product development here was just over in Asia over last couple of weeks with guys with similar roles in their factories.

At Dioptics we do not crossover with them much. Products are little different but there are opportunities to continue to bring cost out. We hear the unquestioned volume guys readers and Sun, so long-term I am going to keep pressing for more.

Is it improper, put a number out of what a goal is other than to say I think there is greater opportunity there for Dioptics, we and those guys went negotiated the rates right after we bough that. Gross margins from 50% to 55% and I just write off the back. We think opportunities continuing there, I think this freight thing cannot be, reemphasized too much this year. We were paying, last year we paid something like $0.06 a piece for every unit of product we moved back across this year we are paying under $0.04 piece.

Freight is on sale, I think its going to continue to be on sale, I think a lot of this phenomena that Jack spoke about that are going on at retail, we are going to kind of waive through the whole business. Fewer SKUs at large stores, fewer suppliers and happily we are in a category, where we are in almost all cases the sole reading glass supplier. We sometimes are sold ton we share with one or two other but I think all that bodes well for us and it should bode well or things like gross margin.

The pressure is I think the counter balance pressures will be on inventory keeping inventories down as they try to shift these risks. We have lived with lead cycles of sort of 90 days from Asia. We are pressing our supplier, that’s good enough. We do on 75 days in a week, got to get these lead cycles though people are responding and its long way around to say. I think the opportunity long-term to continue to see some improvements in gross margin opportunity should be there or somebody just do as much volume as we are and it just really now realize inefficiencies from the Dioptics acquisition.

Eric Tracy - BB&T Capital Markets

Great. And then may be just on the Q2 guidance sort of what's embedded in that sales number obviously stripping out I would guess somewhere in the range of $3.5 million to $4 million from the jewelry. Is it the Dioptics kind of increment because it seems like it didn’t really come down much I am just seeing there was something incremental that you are seeing either it be from Dioptics or may be just talk about the Readers and Sun sort of assumptions embedded in that guidance.

Anthony Di Paola

I think that what was embedded in our overall number for Q2 the jewelry business was a couple of million dollars. So it was not a huge number that came down, the balance of this is very much in line with what our expectations were at the beginning of the year.

Eric Tracy - BB&T Capital Markets

Okay. And then may be just lastly this is may be a bit of a rental question but I have noticed the rates contact lens sort of advertising picking up. And I can not remember the brands. So maybe that speaks to not being all that compelling. But sort of talking about what I do recall is that they drove away the readers, that new technology, just kind of curious having any impact is this new?

Alec Taylor

Yes, we don’t think that’s what we've seen it too, I think it’s the Bausch & Lomb product, anybody who wears that product its really difficult because you basically got a contact lens with a bifocal reader at it. People said to be careful of stepping off curves and things like that. It’s a very disoriented product, its funny, then went on, we did some investigation the media spend was very small.

They did have, they have the guy who throws his reading glasses the way they say. We weren't thrilled with that, but we don’t think we see the effect it's expensive its again people though rave about effectiveness, we check the optical channel, we went talk to those guys, we were right around in its one of the big optical show based in they were selling all of that. Many the things, I guess, that struck us was contact lens wears were typically younger, the demographic on the contact lens were is under 40 and obviously the demographic on the reading glass where it is over 40. We haven’t seen much affect, we did see the ad the service you added but I am not even sure there are still spending the ad spend that they had on it was tiny rates where we could find out.

Eric Tracy - BB&T Capital Markets

Okay. Thanks guys.

Operator

Our next comes from Mr. Doug Lane with Jeffries. Please go ahead, sir.

Douglas Lane - Jefferies & Company

Yes, Alec moving over to the sunglasses business, you mentioned it was flat ex Dioptics, it’s a big fourth quarter that you put up maybe borrow from the first quarter?

Alec Taylor

Okay. I don’t think so, I just speak, flat in the first quarter is, whenever I say flat it's acceptable, but I think given the economy and everything else, but no, we didn’t borrow any, we didn't take sales from Q1 and moving back to Q4. Jack would you agree?

Jack Flynn

Yes, I would agree, I mean, over the counter, the fear was, which we tracked and we are tracking to all of the other seasonal businesses it's off a bit to last year, not to be a genius to figure out what's going on and weather-wise we are checking obviously against all of the other seasonal and sun care product, but we work in the similar situation this time last year and then when the weather broke, our replenishment kicked in and we will find, so we didn’t borrow. This last year was not a good year to borrow because nobody wanted pull anything into November and December, so it's pretty much where we plan. We wish POS was a little bit stronger but we are still patient and optimistic that it will turnaround.

Douglas Lane - Jefferies & Company

Is it POS pickup in April and early May with the good weather we had?

Jack Flynn

It was amazing that the good weather stretch we had it went off the charts. And came quickly back down to earth when the weather turned around again thus we had some phase, we were up 30%, 40%, 50%, we track it daily just to know you can predict the weather in terms of the performance though. We know it's there, we feel we are really well positioned. We are in a good stock position, I like what we have out there. I liked our strategy, I liked our pricing strategy. The advertising starts this week so I have to tell you we are ready for the season. I get anxious like anybody else but we are ready as we go.

Alec Taylor

Rhode Island were growing much trends in the New York City.

Jack Flynn

Yes, it's been raining lately but we had a good April. We had some really hot sunny seasonably warm days.

Alec Taylor

As Jack said over that weekend that we had 90 degree weather in April, I mean, it was Katie, bar the door when it came to selling sunglasses. They were fine of the shelf which again gives us reason. It's going to get warm, it's going to get sunny. If the advertising goes on, this was very similar to last year. It kicked in last year about the week before Memorial Day. It just rifts through the summer but actually it has been a late summer. We saw lot of sunglasses through September last year and we have no reason to think it shouldn’t be, we need weather to corporate. But we think as Jack said we are positioned.

Douglas Lane - Jefferies & Company

So you don’t feel like you were loosing any market share in the first quarter?

Jack Flynn

No, we checked it all pretty carefully and we share businesses with some other vendors, so we pretty much know where we spend. Last time in Q1 we drive lot of that Q1 business, you start to think about your sun belt stores and we watch those things by state and Florida has been tough. Arizona tough, Texas tough, California tough, you look at the cost coming out of retail there. We are just a factor of those tough comps in those states and that's what usually drives that early business. It was when the weather changes then we have all the states kicking in and we would expect better results.

Douglas Lane - Jefferies & Company

Now that makes sense. And just finally excluding Dioptics what kind of organic growth where we thinking about in Sun this year?

Jack Flynn

We had a plan for about 4%.

Douglas Lane - Jefferies & Company

Okay. Thank you.

Operator

There are no other questions in queue at this time Mr. Taylor.

Alec Taylor

Great. We appreciate for joining us. Thanks for all the good thoughtful questions and we will look forward to speaking with you after Q2, that call will probably be sometime in early August. So, thanks again.

Operator

That concludes today’s conference. Thank you for your participation.

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