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Executives

Bob McKnight - Chairman, President & Chief Executive Officer

Joe Scirocco - Chief Financial Officer

Steve Tully - President

Bruce Thomas - Vice President of Investor Relations

Analysts

Jeff Van Sinderen - B. Riley

Andrew Burns - Thomas Weisel

Sean Naughton - Piper Jaffray

William Reuter - Banc of America

Grant Jordan - Wells Fargo

Carla Casella - JP Morgan

Todd Slater - Lazard Capital

Quiksilver Inc. (ZQK) F4Q09 Earnings Call December 17, 2009 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) I would now like to remind everyone that this conference is being recorded.

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 the Quiksilver fourth 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 maybe 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 titled risk factors in our most recent Annual Report on Form 10-K.

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.quiksilverincs.com.

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

Bob McKnight

Thanks Bruce. Good afternoon everyone and thanks for joining us on our fourth quarter conference call. Our fourth quarter was again very challenging, as retailers bought conservatively for the holiday season and traffic in our own retailer stores remain sluggish. In that context we were very pleased that our results were somewhat better than we expected.

Beyond the finance results, we also accomplished several important business objectives during the quarter. We introduced a number of innovative items to the market, reinforcing our product leadership. We maintained and even expanded our leading global market positions to brand and product promotion, and relationship building initiatives with our retail partners.

We stays a number of existing and entertaining events further connecting our brands with the broad group of consumers that either participate in or are inspired by action sports. We continued our focused efforts on cutting cost, improving operational efficiency and improving gross margins. We’ll expand on each of these points within our prepared remarks.

As I said retailers bought conservatively for the holiday season and traffic in our own retailer stores remain sluggish through October. Since that time, the holiday selling period as shown a number of encouraging data points, but it’s still a highly promotional environment and we’re not yet ready to draw any conclusions about the holiday season until we’re able to observe our performance through January clearance. In the context of that business environment, let’s now turn to the high level financial highlights from the fourth quarter.

Consolidated net revenues declined 11% to $539 million, consolidated gross profit declined by 50 basis points to 47.6% of sales. While recurring expenses during the quarter decreased by $13 million compared to the same quarter a year ago, this excludes $12 million in special charges that Joe will discuss a bit later. Excluding these items our income from continued operations was $3 million or $0.02 per share compared to income of $42 million or $0.32 per share in the fourth quarter of 2008.

With regard to our full year results, fiscal 2009 revenues from continued operations decline 13% to $2 billion, compared to $2.3 billion in fiscal 2008. Excluding special charges are adjusted earnings was $0.04 per share compared to $0.93 per share in fiscal 2008. There’s no doubt, this has been an extremely challenging year for our company.

Yet, we are proud of several important accomplishments that were critical to positioning our company’s future. These included that completion of the Rossignol sales, the refinancing of our capital structure, which included a strategic investment by Rhone and a new multiyear credit facilities and both the Americas and Europe, as well as the operational restructuring of our business. Having accomplished these objectives, we believe that we’re now much better positioned to operate within today’s environment.

With regard to our restructuring, we streamlined our operation and eliminated duplication of the effort. During prior periods of growth at Quiksliver, we organized along brand lines, in order to provide each brand, the opportunity to maximize growth. However, given the global recession and the anticipated slow pace of economic recovery, we have now transitioned our back offices to be more functionally based.

In this new model, our sales, marketing, sourcing, and production functions have been reorganized to support all of our brands. The Quiksilver team has really come together to make this restructuring happen. We’ve asked many of our employees to take on more responsibility and I’m very impressed by their enthusiasm as we continue to make adjustments to new roles and get use to supporting whole teams of people in a more efficient environment.

Let me take a moment to focus on our brands. I’ll start with Quiksilver. Within the Quiksliver brand, we have reestablished our boardshorts leadership to technically superior products associated with each of our top servers including Kelly Slater, who resigned to a new long term contract earlier in the fiscal year.

Dane Reynolds also, Jeremy Flores, and Julian Wilson, this approach has gained some great early traction as our line of Diamond Dobby boardshorts are now our industry’s best stretch boardshorts and have become a natural extension to our highly regarded technically acclaimed Cypher Wetsuits.

During the quarter, we introduced the Quiksilver Heat Vest, another innovation that demonstrates our ability to produce technically advanced products. This sleek, but affordable battery operated vest helps to keep the active athlete warm, but allows freedom of movement.

We are also including Quiksilver team riders to endorse our denim line in the skate community, which represents a good opportunity for us to gain market share with our improved product offering. We collaborated with three very popular skaters in Reese Forbes, Alec Olson and Danny Garcia to offer our skateboarding collection, which is a core skate range built upon our Coolmax fabric signature denim line designed for skaters.

The core surf, skate and snow shops are the lifeblood of our industry and we continue to connect with these shops in any ways that benefit both us and them. We’ve introduced a segment of product offering within the Quiksilver brand, in which we’re now offering exclusive products to the core shops, which should help to drive traffic to the shops and provide some defense against otherwise necessary price discounting.

We’ve already sold in the core surf and skate collections and our core snow offering is soon to follow. Early indications are that this program is being very well received and core shop owners are delighted to have the added appeal of product that their customers cannot find anywhere else.

To further reaffirm our relationships within the core, we hosted more than 200 of our core retailers at our Huntington Beach headquarters in October for the Quiksilver Ohana Bash in which we introduced our exclusive core product offering and immersed our accounts in key product and marketing information. The event was very well attended and received rave reviews from virtually all participants.

In the retail aisle, we’re seeing that basic items are selling well during the holiday season with particularly strong appeal for t-shirts, fleece and hoodies featuring our basic Mountain and Wave logo. This dynamic is especially gratifying as it reinforces the notion that the brand is as strong as ever and the consumers are connecting with us and our identity even during challenging economic conditions.

It’s also clear to us that we’ve been spot on with several of our products as we begin to encounter the cooler weather of the late fall and winter seasons. In particular, we achieved key price points with our flannel and fleece offerings, which drove solid sell through and we’ve indications that our outerwear line, especially our innovative technical snowboard outerwear, is achieving good early sell through as well.

With regard to Roxy, the juniors market continues to be very challenging. Driven by the poor economy, recent trends in the market toward fast fashion and purely price point driven goods has resulted in share shifts towards companies, whose business models were designed for these dynamics. We are not going to chase the fast fashion model.

However, we do understand the price value equation and in order to improve our ability to respond quickly to changes in the marketplace that we can address without compromising our brand integrity, we have engineered a production path that will allow us to meet the needs of a changing marketplace with expedited fashion forward products.

From sportswear to swimwear, from accessories to footwear to technical outerwear, Roxy’s strength is rooted in the diversification of its product offering. To further build upon Roxy diversity, we’re continuing to make inroads into the fashion sensibilities of our teenage demographic with new unique and innovative products that will hit the market in the spring/summer of 2010.

As with Quiksilver, demand for our Roxy products begins in the core and specialty shop levels. This has held true in these tough times in which our core accounts have really stuck by us. Roxy too will be offering exclusive products to core surf and snow shops as part of a program to create more sustainable margins for us and for our partners.

Turning now to DC, like Quiksilver and Roxy, DC has begun a concerted effort to return to its heritage, which for DC is the skate shop. As part of that effort, we’ve recently re-established a program in which we offer an exclusive product range to skate retailers. Some of the best selling footwear in core skate shops has been shoes with a $39 to $55 price tag made using vulcanized rubber.

We’ve created a line of shoes using this vulcanized material and have received a positive reaction from those in the marketplace that have seen them. This new range of vulcanized product represents a meaningful opportunity to capture market share in a construction that we have not emphasized before now.

In the fourth quarter, we saw strong sell through on our core apparel items such as tees and fleece, along with new styles of footwear that feature black coloring. At the higher end of the market, improved apparel items have performed better than last year especially in premium fleece and outerwear where sell through has been particularly strong across multiple channels.

In addition, we’re seeing a strong demand for our unique and innovative items from our complete range of integrated footwear and apparel with our TeamWorks collection, which features action sports athletes such as our professional rally drivers, Travis Pastrana; and DC co-founder, Ken Block.

Although this product line makes up a small portion of our DC revenues today, it’s an important category for potential future growth and its sell through has been quite strong, generating additional store traffic for us and our partners. I’d now like to highlight just a couple of recent events that had really created a substantial buzz around the Quiksilver name.

In November, the Quiksilver Tony Hawk Show was held at the Grand Palais in Paris. It kicks off Quiksilver’s 40 anniversary celebration. This event which was also sponsored by Sony Ericsson and Orange featured two days of skateboarding, fashion, music and art inside of one of the city’s massive historic monuments, the Grand Palais.

Culminating in a Saturday night final featuring the tallest vertical ramp ever built in Europe, a fashion show featuring 30 Quiksilver athletes from around the world; a famous French graffiti artist, Andre, creating original artwork; a number of positive bands and disc jockeys with iconic roots; and the Quiksilver Tony Hawk Skate Show featuring Tony and some of the world’s best skateboarders.

The sold-out two-day event exemplified the broad appeal of the Quiksilver brand in Europe as 14,000 enthusiastic fans participated and then last week, we held our legendary Big Wave surfing contest, the 25 Annual Quiksilver In Memory of Eddie Aikau at Waimea Bay, located at the North Shore of O’ahu.

As the only event in surfing that brings together the 28 best big wave surfers in the world, the Eddie only runs when big wave conditions occur during the annual three month holding period. As such, this is the first content held since 2004 and only the eight in the 25 year history of the event.

In addition to the huge 30 to 40 foot waves, the fantastic surfing and the enormous crowd of over 30,000 spectators, we were absolutely amazed at the widespread coverage of the event before, during and after. To be clear, we regularly reach out to many different news agencies and publications in preparation for events that we’re involved with and we had arranged for live webcasting of the event and live TV coverage around the world.

We experienced a very high hit rate with the news outlets we approached and we were contacted by many others. Included in the prominent coverage were ABC Television Network News, ESPN, the Wall Street Journal, the New York Times, BBC News, the Australian, the Associated Press, NBC News in Los Angeles and many, many others. On the day of the event, our website logged the most unique visitors ever for a surf contest in a single day with a remarkable 370,000 unique visitors.

In addition, during the 10 day period beginning several days before the event, our website received over 0.5 million unique visitors and an extraordinary total of 3.3 million page views. These statistics reinforce the breadth, vitality and power of our expanding demographic.

Our consumers are guys and gals, they can be found in the U.S. and around the world, they are into action sports and they are now more than ever connected by the internet. We couldn’t be happier about the broad appeal of our brands, especially as demonstrated by these two unique events.

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

Joe Scirocco

Thanks Bob. Good afternoon everyone. As reported, consolidated net revenues declined 11% to $539 million in the fourth quarter from $607 million in the fourth quarter last year. In constant currency, consolidated net revenues declined 13%, note that we translated the euro at $1.42 last year versus $1.45 this year and the Australian dollar at $0.79 last year versus $0.87 this year.

Consistent with our expectations, revenues in the Americas were down 22% compared to last year with contraction in both wholesale and retail distribution. As a reminder, the comparison with the prior year was made more difficult by the 10% growth of the Americas region generated in Q4 of fiscal 2008. We closed the net of 11 stores in the Americas since the end of fourth quarter 2008.

European revenues in constant currency were down 4% for the quarter. Within Europe, the DC brand continued to grow strongly, offsetting order reductions in both Quiksilver and Roxy brands. Also, exceptionally warm weather on the continent limited reorders during the quarter. Our retail business was down only slightly as we opened a net of five new shops and concessions in the fourth quarter and a total of 24 net new shops and concessions since last year.

Revenues in our Asia Pacific region were also down 4% in constant currency. Our business there continued to shift from wholesale distribution to our own retail operations. We added a net of seven new shops in the quarter and 17 net new shops since the end of the fourth quarter a year ago.

Our consolidated gross margin decreased by 50 basis points to 47.6% for the quarter. This decline was driven by a higher mix of wholesale discounts and retail markdowns in the Americas. Gross margin compression was more modest in Europe and in the Asia Pacific region gross margins were up slightly due to a better mix of full price goods.

We continue to make good progress on our sourcing initiatives, negotiating better prices and driving higher concentrations of inventory purchases through our in house sourcing on, although pricing pressure during the quarter primarily in the Americas negated the positive effects of these actions.

During the fourth quarter, we analyzed the profitability of our retail stores and determined that a total of 14 stores, principally in the United States, were not generating sufficient cash flows and were unlikely to achieve desired profitability. As a result, we recorded $10.7 million in pretax fixed asset impairment charges.

To be clear, these are non-cash charges that do not include any costs associated with exiting leases. Lease termination costs would be charged to future earnings upon store closure. Also during the quarter, we recorded a pretax charge of $12.3 million for other restructuring items, principally severance.

Overall, we reduced recurring SG&A expenses in Q4 by $13 million compared to the same quarter a year ago. This reduction was essentially driven by cost cutting measures in the Americas region. As a result of all these factors, pro forma operating income excluding special items was $38 million in the fourth quarter, down from $50 million in the same quarter a year ago.

Interest expense was $21 million in the quarter, up from $9 million a year ago. This primarily reflects higher interest rates related to our new debt structure, to a lesser degree, it also reflects the reallocation of interest on Rossignol’s debt to Quiksilver’s accounts. In fiscal 2008, this was classified in discontinued operations.

Our pro forma tax provision in the quarter of $10 million is unnaturally high, principally because we are unable to recognize U.S. taxable losses. This is a circumstance we mentioned during our earnings call a quarter ago. After interest and taxes, our pro forma consolidated income from continuing operations for the fourth quarter was $3.2 million or $0.02 per share, compared to pro forma income of $41.6 million or $0.32 per share in the same quarter a year ago.

I’d now like to turn your attention to the balance sheet for a few moments. Receivables are $431 million or 8% lower than for the same period last year and down 16% in constant currency. On an overall basis, DSOs increased by two days to 68 days this year, compared with 66 days in the fourth quarter a year ago.

Inventory at quarter end was $268 million, down 14% as reported and down 22% in constant currency, compared to the same period last year. Throughout the year, we successfully reduced inventory bringing supply and demand into better balance. As a result, we expect our margins in 2010 will benefit from reduced levels of discounting and markdowns. Finally, we had approximately $143 million of availability under our credit lines and approximately $100 million of unrestricted cash at the end of the fourth quarter.

Now let’s turn our attention to our outlook. As Bob mentioned in his opening remarks, our visibility on 2010 is somewhat limited as we await the results of a full holiday season at retail. Although our spring/summer orders are already booked, shipments are ultimately subject to how well retailers performed throughout holiday and January clearance.

We have taken a conservative approach to ordering spring and summer goods. Although this limits our upside on potential reorders, we think it’s wise to be conservative until visibility improves. So it’s difficult to project our first quarter outlook with a high degree of accuracy at this point. However, we will try to be as helpful as we can in talking about the business and providing some commentary around both the Q1 and full year outlook.

Because the first quarter is traditionally our lowest volume quarter, minor shifts in sales or margins can have a substantial impact on earnings. Based on our spring and summer orders, we are expecting revenues for at least the first half of the year to be down between 5% and 10%, currently tracking toward the middle of that range. For the first quarter, we expect gross margins to improve by between 300 and 400 basis points; again depending on the results for the full holiday season and the extent of wholesale discounts and retail markdowns.

Operating expenses in the first quarter are expected to be approximately $5 million lower than in the first quarter of fiscal 2009 and we are anticipating interest expense of about $24 million in the quarter and a tax provision of approximately $5 million. This reflects taxes on expected foreign income without the benefit for any losses generated in the Americas operation, which includes corporate overhead and interest on the Americas debt. Summing up the parts, we expect to incur a loss per share in the first quarter of somewhere between $0.12 and $0.15.

For the full fiscal year, we assume at this point that revenues will begin to improve somewhat in the back half of the year, resulting in a full year revenue decline in the mid single digit range. Operating margins for the year are difficult to estimate because of uncertain demand. However, we expect that they will improve along with economic recovery.

We are assuming interest expense of around $97 million and as for income for taxes; we assume a full year provision equivalent to about 35% of all non-Americas pretax profits. With no benefit attributed to tax losses in the Americas and corporate components of our consolidated group. This is significant because the U.S. bears the majority share of global interest costs and our corporate overhead. When taking these factors into account, therefore, our effective tax rate for the full year could approach 90% of consolidated pretax profit.

We are planning to open approximately 32 new stores in fiscal 2010, most of them as concession shops, and have reduced our CapEx budget to around $50 million from roughly $55 million in 2009. Depreciation and amortization is planned to be around $54 million. We plan to control working capital in line with revenue trends as they develop. Obviously the current environment limits our visibility of the business and we will look to update this outlook when we report the results of our first quarter.

With that, I’ll turn the call back to Bob for closing remarks.

Bob McKnight

Thanks, Joe. To summarize, fiscal 2009 proved to be an extremely challenging year for our company, while also representing some very important accomplishments. We’ve continued to produce great products through innovation and thorough understanding of the markets we serve. Through interesting marketing campaigns and entertaining special events, we have created strong appeal for our products and brands.

In refinancing our global business and restructuring operation during particularly challenging times, we have provided improved financial security and the opportunity to deliver substantially better financial performance to the company and its stakeholders. I’m proud of the Quiksilver team and our continued leadership in the action sports markets as we served through our great Quiksilver, Roxy and DC brands, especially during the prevailing economic downturn.

As a company, we are now much better aligned to operate within today’s environment and we’re much better positioned to benefit from our leadership, board sport lifestyle brands once the economy begins to show signs of recovery.

Operator that concludes our prepared remarks, we’re now ready for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Van Sinderen - B. Riley.

Jeff Van Sinderen - B. Riley

Can you guys talk a little bit more about the specific trends you’re seeing in your own retail stores in terms of where you’re seeing relative strength, relative weakness in sell through, the different kinds of product? Then also, if you can touch on promotional cadence, if that’s shifting at all for holiday versus back-to-school, merchandise margins, same-store sales, AUR, UPT, all those good things.

Also, any more color you can add on what you’ve seen so far for holiday? Any changes that are in the works for your retail stores, and then also finally, if you have a new leader slated or how that process is going to find a leader for that business.

Steve Tully

I’ll just make a couple comments. I think Bob covered a lot of the trends in his prepared remarks. On the male side of the business, we’re doing very well with logo driven product, and particularly a great sweatshirt, lightweight sweatshirt we have out there with our logo on it.

We’re very happy about that, as Bob said strength in our logo in these challenging times, but plaid flannel shirts and a great items for us we can manufacture for men’s fleece as that Quiksilver logo products; knit beanies, those kinds of things, but warm weather things, outwear are doing particularly well for us.

He also mentioned some things on the DC side, our basic Continental Shoes doing very well for us. Up tick in that trend lately, particularly in the color black, he mentioned the athlete inspired apparel, the Ken Block product both in signature footwear and in top driven things are great at the holiday season as you know Travis Pastrana, Rob Dyrdek, those things are really trending well for us on the DC side.

The Roxy business as we said candidly is challenged that doesn’t mean that there aren’t things that are selling there. We’re doing particularly well with boots and we have a great sandal business in the front half of the year, but we transition that into casual footwear in the back half of the year.

That boot trend is really happening in the female side and we are capitalizing with that on the Roxy brand. We are selling outerwear of course, specifically in the colder regions and we’ve got some great sweater dresses that are working, so again, I think Bob covered most of that in the remarks and there’s any great surprise there for us.

He also mentioned that there is a highly promotional out there at retail and I think that’s consistent with what we found in different channels of distribution on your question specifically about our retail stores, but to the different channels of distribution as I said, it is highly promotional.

Perhaps the healthiest channel for us right now is in the specialty and the core channel, not that they are immune to the promotional cadence, but it tends to be holding up better than some of the other channels, in particular, department stores and the key national chains.

Jeff Van Sinderen - B. Riley

Then as far as any change in promotional cadence from I know you’ve worked on your inventory to some degree. So, is that letting you pullback a little bit as we are in holiday versus what you were doing in Q4 around back-to-school?

Bob McKnight

I would say maybe I could answer differently that our inventories in our retail channels are inline and much healthier than they were a year ago and so while our retailers we have been conservative in our procurement, retailers have been conservative in their purchasing and so I think that bodes well for how it’s going to end up.

Jeff Van Sinderen - B. Riley

Then how about the overall aging or any more color you can give us on your wholesale inventory, how clean that is at this point and then if you feel like you still need to liquidate some of that and where we are in that process.

Joe Scirocco

Jeff, I think we’re very happy with it overall. There maybe some pockets around the company. It differs by brand and region, but there maybe some pockets of it. We would always like to be a little better, but inventory is in pretty good shape. It’s down rather substantially in relation to last year and I think over the course of the year, we have made substantial progress on that. That’s part of the reason why we are anticipating better margins as we go into 2010.

Jeff Van Sinderen - B. Riley

Then any more color you can give us on at once or fun business for holiday or do you want to hold off until you talk about the whole season?

Bob McKnight

I think that’s probably the better way to go.

Operator

Your next question comes from Andrew Burns - Thomas Weisel.

Andrew Burns - Thomas Weisel

In terms of just looking into 2010, are there opportunities to further streamline your operating expenses or any cost savings that you could maybe highlight for us?

Steve Tully

There are some, but they’re relatively minor relation to all the things that we have done in the current year. I mean if you look at 2009 overall, we have been restructuring around the globe pretty much all of year. We have taken $90 million or so out of SG&A in 2009 compared to ‘08. So we’re kind of shifting our focus at this point, trying to remain disciplined about spending, but at focusing more on initiatives to expand the margin and grow the business as soon as the economy gives us the opportunity.

Andrew Burns - Thomas Weisel

You mentioned DC shoe getting back to the core in the U.S. Could you maybe talk about how you plan to develop the brand outside of the U.S.?

Bob McKnight

There’s plenty of opportunity outside the U.S and in fact, it’s a fact that we have been so prudent in the way that we have grown it, especially in Europe. We have been very careful and disciplined about the growth of DC in Europe. So, in the current year for example, even with all the challenges, DC grew at about 11% in Europe and we see that trend continuing into 2010. There have been a number of accounts over the past couple of years that have been clamoring for it, but we’ve been very protective of the brand as we roll it out. Steve, I don’t know if you want to add…

Steve Tully

The only thing I might add is there will be more opportunity in the structure going forward to add some more locally relevant product in other areas around the region or other areas around the world. That’s going to be a focus for all of our brands.

Andrew Burns - Thomas Weisel

Then you mentioned the promotional environment potentially improving here over the course of 2010. I was hoping you could give some color by region in terms of what you are expecting?

Joe Scirocco

I think that our outlook as we laid it out kind of reflects the spring/summer order books that we already have in hand. So that’s about as much visibility as we have on the front half and we expect some improvement in the back half but the question of when and how strong it will be is still up in the air. It’s a big open question.

Operator

Your next question comes from Sean Naughton - Piper Jaffray.

Sean Naughton - Piper Jaffray

On the gross margin front, you mentioned that you have 300 to 400 basis points potentially of opportunity in Q1. Can you talk about is that more from sourcing benefits or better inventory management?

Bob McKnight

It is a combination of both. We have been aggressive in liquidating inventories over the course of 2009. So margins were adversely affected by the amount of clearance business we did. At the same time, on the sourcing front, we’re really finally kicking in with a number of the global initiatives that we had initiated going back a couple of years ago.

While we had made progress on a regional level, the big improvements that we’re starting to see now come from more concentration of our buying through QAS, Quiksilver Asia sourcing and significantly as we look out to 2010. The percentage of business from the Americas group that we’re putting through QAS is like 2.5 times higher. That’s a substantial improvement. So we’re seeing concentration of product.

The other thing we have done is, as part of this recent restructuring to develop an in-house group that serves as a demand planning group across the brands to try to give our salespeople and M&D people more visibility into the assortments that they’re buying and try to take actions like that to improve initial gross margin as well.

Sean Naughton - Piper Jaffray

Then on the retail front, I can’t remember the exact number of stores you have. I think its hundred 470 plus own retail doors. I know you’ve been closing some and opening a few around the globe. Can you talk about where you would like to see the ultimate size of that business and what the contribution is potentially to the overall organization?

Steve Tully

It’s a little bit of a tough question principally because of the situation in the Americas region. Let me address the other regions first. Within Asia Pacific, that’s moving much more towards a retail model. In North Asia, specifically Japan, probably 45% or 50% of our business is now coming out of retail and when you move to South Pacific, it’s a number like 35%.

In Europe, it’s somewhere in the 25% range and I think that the objective there would be to continue to expand that, particularly in new markets; in places like Germany and Eastern Europe and Russia, places where we do not have the traditional wholesale distribution that we have in Western Europe.

In the U.S., we have 117 stores now as company owned stores and we are planning to probably close on the order of 11 of them during the course of fiscal 2010. We’ve not planned CapEx and are not planning to open any significant number of new stores in the Americas until conditions turn. So at this point, I think it’s fair to say that we would imagine the situation to be pretty static in terms of the percentage mix of our business between wholesale and retail for 2010.

Sean Naughton - Piper Jaffray

Then I guess lastly on the international market a little bit, you touched on Europe, going into a few new markets. Can you just broadly describe what you’re seeing there? I know the revenue was only down 4% on constant currency basis. I’m not sure if it was more of an impact from Roxy than the other two brands, but just broadly speaking, how you’re thinking about that particular market going forward?

Bob McKnight

Well results for the year in Europe were driven by the three major markets France, Spain, and the U.K. Essentially those markets all took the biggest, they are our biggest shares in Europe and they took the biggest hits. In the U.K., part of that is currently related, because of the decline in the pound against the euro.

Outside of the Western European markets though when you get to or Germany grew into both the quarter and the year and the rest of the countries were pretty much flat. In the normal course, we would’ve expected them to grow because they are younger or they are being developed right now and so they had more growth potential on a percentage basis, but the tough economy has kept them pretty flat.

In other words, we’re still very well positioned to grow outside of the main markets in Europe and are going to continue to invest to do that. By brand, I think the toughest as Bob said in his opening comments, the toughest is the juniors business. With regard to Quiksilver and DC as we look out to next year, we see them being more flattish overall. With DC, the one caveat would be that although there may be some minor contraction in the U.S., we do see a strong growth planned outside the U.S. and especially in Europe.

Operator

Your next question comes from William Reuter - Banc of America.

William Reuter - Banc of America

I was wondering, if you guys could provide us with the LTM EBITDA for the Americas for purposes of the Rhone credit agreement?

Joe Scirocco

Although, we’re not going to begin to report it at that level although we have disclosed EBITDA in our press release. So you might refer to that for just some general guidance on it.

William Reuter - Banc of America

Okay so for those covenants and either the Rhone credit agreement or the European credit facility that have some regional debt service or gearing ratios, you’re not going to provide us that information going forward?

Joe Scirocco

That’s not something we would typically break out. We’ll discuss our availability and of course to the extent that we have any disclosures regarding our concerns, we will. This reviewed them with you thus so that people have a perspective on what we’re talking about. So you mentioned the Rhone credit agreements and these are $150 million in senior secured debt. They do have EBITDA tests and we expect to be in compliance.

With regard to the U.S. credit facilities on the ABL, $200 million facility. The covenants basically surround a minimum availability requirement and if we fell below that, we have a fixed charge coverage test to take, but otherwise we should be fine there. I think we’ve reported $99 million or $90 million of availability under that credit agreement as of the end of the year. With regard to the French facilities that EUR268 million facilities there, we have coverage ratios and leverage ratios and again we believe we’ll be okay.

William Reuter - Banc of America

Okay, in terms of the guidance that you’ve provided, the EPS guidance, I have it translating into EBITDA in the range of $25 million to $28 million. Does this sound about right?

Joe Scirocco

Pretty good.

William Reuter - Banc of America

Lastly, in terms of the debt balances for each of your different credit facilities or your different piece of debt, will that be in your 10-K?

Joe Scirocco

Yes it will.

Operator

Your next question comes from Grant Jordan - Wells Fargo.

Grant Jordan - Wells Fargo

My first question you did a really good job of reducing the inventory level on Q4, but we’re able to maintain the gross margin pretty well. Maybe just give us more color around how you are able to do that?

Joe Scirocco

We’ve been working on the initial gross margin, the sourcing margins for the past couple of years. We have improved gradually and it’s a combination of that and just the ability to sustain prices on certain components of the clearance goods accounts for what we did.

Grant Jordan - Wells Fargo

So maybe another way to ask that in a more granular way would be how much did the markdowns search your gross margins in Q4?

Joe Scirocco

I think you have to look at it in comparison to Q4 of the prior year and I don’t have already answer for you in terms of how granular that would be, but I think when you look at clearance in Q4 of last year compared to this year, on balance, we were able to achieve some improvement, as you say.

Grant Jordan - Wells Fargo

You talked about reducing SG&A in the quarter by about $13 million. Just kind of give us some thought as to how that will play throughout the year and when you will start to anniversary some of the operating expense savings that you put in place.

Joe Scirocco

It was a substantial savings for the full fiscal year and you saw in our outlook for Q1, I think we said that we anticipate being about $5 million less. So, that’s a number that you can think about as a general rule for SG&A as we go through fiscal 2010 on a quarterly basis. On the other hand, we have made progress all the way through 2009. So, I think if you take $5 million for the current quarter, we’ll have progressively less savings in each of the out quarters of 2010.

Grant Jordan - Wells Fargo

You gave the debt maturity schedule in the press release which was very helpful. Maybe just comment on your ability to meet that through free cash flow generated from the company.

Joe Scirocco

I think that it’s fine. We anticipate generating for the full fiscal years free cash flow in excess of $50 million. I won’t be more specific than because we haven’t put a full outlook for 2010, but we think we can generate more than $50 million.

Grant Jordan - Wells Fargo

Is that after the $95 million of debt amortization?

Bob McKnight

No, that’s free cash flow from operations net of capital spending. So, when we take that on a regional basis that is really the rough until that the scheduled debt maturities are coming principally in Europe. We have about $86 million worth at current rates that we expect to repay in 2010 and that is factored into the European cash flows we expect to do that. The balance of the forecast reduction in debt for next year would probably be more related to currency than to anything else.

Grant Jordan - Wells Fargo

So, that will be addressed in free cash flow, not additional borrowings since what you’re saying?

Joe Scirocco

Free cash flow and ability under current lines plus cash on hand. As we said, we have about $100 million of cash on hand today and $148 million or so of availability. So we are in pretty good shape.

Operator

Your next question comes from Carla Casella - JP Morgan.

Carla Casella - JP Morgan

One question on inventory, you mentioned inventory is down significantly in the quarter. Did you say what percentage of your inventory today is clearance versus what was clearance a year ago?

Joe Scirocco

We didn’t, Carla and I don’t have a ready measure of that.

Carla Casella - JP Morgan

Okay and then you talked about guidance for the first quarter of sales down about 7%. That’s for the consolidated business, correct?

Joe Scirocco

Correct.

Carla Casella - JP Morgan

So, would it be a significantly larger decline in the U.S. with gains in Europe and Asia just given the currency shifts there or do you think it’s pretty steady across the board?

Joe Scirocco

I think that the decline in the Americas and in Europe, I think somewhat higher in the Americas than in Europe. In particular, retail in the U.S. has been trending worse than in Europe. They have not suffered the same kind of comp store declines that we have and their order books are a bit stronger for holiday and spring than they have been here in the U.S. I think you’ll see probably proportionately more decline in the U.S.

Carla Casella - JP Morgan

Just given the weakness in the economy, has your mix shift changed much by channel, meaning department stores versus specialty versus your own stores this year? Do you expect the mix to change much next year? You talked a little bit about retail expansion, but I guess, I’m thinking more on theme on the wholesale side?

Bob McKnight

I don’t expect it to change dramatically, but you may see some decline in department stores. We had some bankruptcies here in the U.S. as you know and that kind of thing. We are really emphasizing our business with the core shops. What you can see Carla, is in a couple of weeks when we publish the 10-K, we will give a full breakdown by distribution channel with core market shops and specialties and department stores and that kind of thing. So you’ll see all that detail.

Carla Casella - JP Morgan

Then one last one, are you required to repay the Rhone loan ahead of maturity?

Joe Scirocco

We are permitted. We have a currency make whole premium to pay depending on how the euro moves versus the dollar over the next three years, but we are permitted to pay it.

Carla Casella - JP Morgan

So you could excess free cash flow to prepay that in pieces or you could do it all at once?

Bob McKnight

I believe we can do it as we wish.

Operator

Your final question comes from Todd Slater - Lazard Capital.

Todd Slater - Lazard Capital

Just a couple of quickies, how are you planning your inventory levels going in next year? They’re down I guess 22% on a constant currency basis?

Joe Scirocco

We’re just planning to track revenue. So it depends on how the business goes, but we bought more conservatively than we have in the past and we’re planning to run it tight. As Steve or Bob mentioned in his opening comments, one of the initiatives we have is to further develop the supply chain and Quickturn model, So that we can get back into goods a little more effectively than we have been able to in the past and hopefully that will enable us to keep our initial orders or pre-buys to lower levels.

Todd Slater - Lazard Capital

So is it safe then for us to sort of model it down in this 20% range on a constant currency basis?

Joe Scirocco

No, I think you should model working capital in the same way that you choose to model sales. So if you’re forecasting sales down, I think you should forecast inventory to be in step, but 20% is not a realistic objective for further inventory reductions over the course of the year.

Todd Slater - Lazard Capital

So we should actually see that coming up a bit each quarter?

Joe Scirocco

It we’re very lucky and we return to growth towards the end of next year and we forecast well for 2011, we would love to buy more inventory.

Todd Slater - Lazard Capital

Then maybe I missed this, but I was wondering if you could just talk a little bit about the Quiksilver women’s initiative, how that’s going in terms of your expectations and the projections for sort of the go-forward period.

Steve Tully

We are relatively pleased with the Quiksilver women’s initiative in that the most difficult part of the women’s business is the junior segment and we trade more in the young contemporary segment with Quiksilver women’s. So we have had not experienced the same difficulties as we have in juniors. Of course it needs to be said the business is much smaller.

So it is a smaller business, but it’s attaining our growth objectives and that business is a global business for us and has been from the onset. So some of the efficiencies in terms of design and production and so forth are there that we’re trying to accomplish in some of the other businesses. So to summarize, we’re pleased with it, it’s meeting our objectives but it is still relatively small.

Todd Slater - Lazard Capital

What do you hope that business can become one day, I mean in terms of the percent of the total or relative to the men’s business?

Bob McKnight

Without stating a number, our objective there is to tie in with this success of the Quiksilver brand and have a female extension of the Quiksilver brand that I would say as the best case scenario would be at the levels of the Quiksilver business. We may not accomplish that exclusively with the Quiksilver women’s offering we have now.

There are options to do more business, different kinds of business I would say in the Quiksilver brand. So the short answer is that the best case scenario for us someday would be to have a business the size of our Quiksilver business.

Todd Slater - Lazard Capital

Just lastly real quick assuming that the currency remains at the current levels on that type of environment, how would that affect the P&L for you in ‘10?

Joe Scirocco

For the full fiscal year for example, we translated the euro at about $1.37, so European profits would translate into US dollars at proportionately higher or lower in relation to that amount. Then with regard to Australian dollar, we finished fiscal 2009 for the full fiscal year at an average of about $0.75. So any movements from that would affect profitability for 2010.

Bruce Thomas

That concludes today’s call. So on behalf of everyone here at Quiksilver, thank you for participating and we look forward to providing our first quarter results in March.

Operator

A replay for this call will be available starting on December 17, 2009 at 6:30 pm and it will end on December 24, 2009 at 11:59 PM. The phone numbers are 719-457-0820 and 888-203-1112, again those phone numbers are 718-457-0820 and 888-203-1112. Thank you. Have a great day

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