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Quiksilver, Inc. (ZQK)

F1Q10 Earnings Call

March 11, 2010 4:30 PM EST

Executives

Bruce Thomas – VP of IR

Bob McKnight – Chairman, President, and CEO

Joe Scirocco – CFO

Steve Tully – President

Analysts

Todd Slater – Lazard Capital

Sean Naughton – Piper Jaffray

David Glick – Buckingham Research Group

Bill Reuter – Bank of America

Grant Jordan – Wells Fargo

Operator

Good day, 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. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would now like to remind everyone that this conference is being recorded.

I would 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 first quarter fiscal 2010 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 would like to briefly review the company’s Safe Harbor language. Throughout our call today, items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

In particular, statements regarding Quiksilver’s business outlook and future performance constitute forward-looking statements and results could differ materially from those stated or implied by these forward-looking statements as a result of risks, uncertainties and other factors, including those identified in our filings with the Securities and Exchange Commission, specifically under the section 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.quiksilverinc.com.

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

Bob McKnight

Thanks Bruce. Good afternoon, everyone, and thanks for joining us for our first quarter conference call. After two years of hard work, making difficult decisions, forging ahead with the sale of Rossignol and the related changes in senior management, making deep cost cuts, and after globally restructuring our business and our balance sheet, I am proud to say that our efforts are now materially contributing to improved financial results.

Although consumer spending remains at lower levels on a global basis, our business is operating with substantial traction on many fronts and we are delighted that the changes we have made in the past two years are beginning to pay off.

Within our organizational restructuring, we continued to align key people with our most important initiatives. And only some of our progress is reflected in the results we reported today and then our outlook for the remainder of the year. Our team has done a great job of responding to the challenge of developing great products and then reaching out to our customers in new and innovative ways.

As a result of our many changes coupled with our ongoing understanding of and loyalty to the markets we serve and develop, we are in a prime position to benefit from future improvements in the world’s economies and in particular in consumer spending. We are determined and excited yet not overconfident. We still have much to accomplish as we constantly evaluate ways to further improve our operations and respond to changing market conditions.

Let’s now turn to the high level of financial highlights from the first quarter in which we exceeded expectations in nearly every measurable way. We have taken bold steps over the past several quarters to improve our operations and these results demonstrate solid material progress.

Consolidated net revenues declined 2% to $433 million which was roughly $20 million higher than we anticipated a quarter ago. We are quite pleased to report that inventories are in very good shape and the amount of clearance activity has been greatly reduced. Consequently, our consolidated gross profit in the quarter expanded by 460 basis points to 51.3% of sales, which exceeded the high end of all of our estimates.

Recurring expenses during the quarter remained well controlled. Excluding a $3 million charge for severance pay, we incurred a loss from continuing operations of $3 million or $0.02 per share compared to a loss of $9 million or $0.07 per share in the first quarter a year ago. This result was substantially better than we anticipated when the quarter began. These better than expected results won’t be positive unless -- I am sorry, wouldn’t be positive unless we had iconic brands and interesting, innovative products.

Let me take a moment to focus on our brands. I will start with Quiksilver which as you know is by far and away the biggest and most respected action sports lifestyle brand in the world. Within the male side of the action sports apparel market, the highest visibility opportunity at this time is in performance board shorts. This quarter we rolled out our new ad and store window campaigns for our Cypher series board shorts in order to set the table for the upcoming spring break season in the US.

We have reaffirmed our board short leadership through technically superior signature Diamond Dobby products that feature top surfers Kelly Slater, Dane Reynolds, Jeremy Flores, and Julian Wilson. This collection of athletes represents surfers from different age groups and different regions around the world to maximize the reach of the campaign.

We are pleased to report that early selling of the new series has been very strong. And our collection for spring in walk shorts, wovens, tee shirts and accessories are all selling through well. Globally, our Quiksilver offering at retail is very strong right now.

In the first quarter, we launched our Quiksilver Core Surf collection that we spoke of last quarter. This offering is a range of exclusive products that can only be purchased in the best surf shops and select Quiksilver stores. We support this Core selection with unique point of sale visuals and a Core surf collection website that features the products and directs customers to the surf shops that carry them. This concept and the collection of products have received enthusiastic response from the industry.

Turning now to Roxy, which is also the biggest, the most respected and most recognized girls' action sports brand in the world, ongoing trends in the juniors market towards fast fashion and price points driven goods continues to challenge the branded segment of the business for all surf, skate, and snow companies. Retailers are buying substantially less and planning their business in such as a way that allows them to react to in-season trend.

One of the overarching positive aspects of Roxy is a broadly diversified product offering that allows us to compete in many different segments. Overall our ongoing performance in Roxy appears to be in line with market trends and the categories of girls, accessories and footwear, but the sportswear category continues to be challenging at retail.

In the first quarter, we rolled out our comprehensive core market strategy for Roxy and saw pockets of slightly better sales as a result. The plans of this program includes viral marketing, in-store presence, additional marketing, and other consumer-facing initiatives. For the time being, it just may be that the branded girls surf apparel will remain a difficult market and we will remain true to the Roxy brand heritage as we write it out. Meanwhile our customers are eager for alternatives to classic California surf lifestyle that Roxy embodies, and that can address the female side of other action sports.

We believe we have serious potential of new growth opportunities with both the Quiksilver and DC brands in this segment and plan to develop growth strategies around them in the months ahead.

Turning now to our powerful and incredibly popular brand, DC. The addition of DC’s new President Anton Nistl last year was one of the many senior management moves we made within the organization and has proven to be key for that business. Anton and the new management team are focused on using innovation and a key understanding of the skate, snow, and street markets to develop great new products.

We are excited to see the progress that DC has made over the last couple of quarters and have high expectations for this powerful brand. Retailers are very encouraged by the path that DC is on under their new direction and team.

Like Quiksilver and Roxy, DC rolled out a core shop strategy in the first quarter and it’s begun a focused effort to return to its heritage within the skate shop community. With portions of the program dedicated purely to skate and another set of objectives aimed at street wear, we look forward to gaining better traction within this key segment of our distribution.

In retail, the appeal of DC’s new men’s vulcanized shoes has been strong and a number of DC’s new casual styles have outperformed expectations. We continue to see strong demand for products in our innovative TeamWorks Collection. This complete range of integrated footwear and apparel features action sports athletes such as our professional rally drivers, DC co-founder Ken Block and Travis Pastrana.

Sell through has been strong for these items and their ability to generate additional traffic at retailers has been consistent. On an another note with respect to brand, the extreme bout of winter weather that was felt by many parts of the world toward the end of the first quarter drove strong sell through in winter outerwear and related apparel across Quiksilver, Roxy, and DC, as well as for our best-in-class snowboards and state-of-the-art findings from our Mervin brands Lib Tech and Gnu.

We are also experiencing very positive global bookings for next year in these categories. These are early returns on the strategy we are developing to optimize our presence in the colder weather markets what we call our mountain strategy.

Although I mentioned a couple of these events on our last earnings call, I now like to mention a few key events from the first quarter and in the weeks that follow that have created substantial exposure for us around the world.

First, in November, a Quiksilver Tony Hawk Show was held in Paris at one of the world’s most beautiful iconic buildings, the prestigious monument, the Grand Palais, to kick off Quiksilver’s 40th Anniversary Celebration. This rock concert style event featured skateboarding, fashion, music, and art all under one roof.

The sold out two-day event was attended by 14,000 enthusiastic fans and was widely covered by European mainstream and action sports press, exemplifying the broad appeal of the Quiksilver brand in Europe. In fact, the appeal for the event was so strong that Tony – the Tony Hawk Show has been scheduled to tour Europe later this year with major funding provided by co-sponsors.

In December, we held our legendary Big Wave surfing contest, the Quiksilver In Memory of Eddie Aikau on the North Shore of Oahu. It was the 25th Anniversary 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 once again achieved amazing coverage of the event, global TV network coverage, articles printed in major newspapers around the world, and remarkable Internet traffic, all reflect the breadth, vitality, and power of Big Wave surfing and our expanding worldwide demographics.

In January, we co-hosted a capacity crowd at Los Angeles for the world premiere of The Ultimate Wave Tahiti, which is the first IMAX 3D surf film ever created. The film captures Kelly Slater in spectacular cinematography using the IMAX technology in and around the legendary Tahitian surf.

It’s both an entertaining and educational movie that explores the underlying wave formation science that helps the viewer understand the genesis and growth of waves like Tahiti’s Teahupo'o. The film has garnered rave reviews and can be seen in theatres around the world helping even more people to recognize Quiksilver’s enthusiastic roots to the surfing industry.

And in February, we were so delighted and proud that our own Torah Bright, one of the truly iconic Roxy athletes from Australia won the Women's Snowboarding Halfpipe Gold Medal at the Winter Olympics in Vancouver. Torah’s inspiring performance was seen by millions around the world and Roxy received extraordinary exposure of the branding on her snowboard was captured in pictures and video as she was literally dressed head to toe in Roxy winter wear including her headwear and goggles. Torah represented the brand through subsequent interviews seen by millions more globally with the grace and humility that we have always appreciated from her. On behalf of the whole Quiksilver family, we want to congratulate and thank Torah Bright.

We are proud of the broad appeal of our brands especially as demonstrated by these unique events and the athletes who make them so inspiring. So in summary, we are delighted that our hard work and the substantial changes we made to the business are beginning to pay off and has helped us deliver better than expected results.

Joe Scirocco will now take you through the financial details.

Joe Scirocco

Thanks, Bob. Good afternoon, everyone. As reported, consolidated net revenues declined 2% to $433 million in the first quarter from $443 million in the first quarter last year. This total was approximately $20 million higher than we expected quarter ago. More than half of the upside was the result of stronger foreign currencies during the quarter and the remainder represented the shift and the timing of shipments which will come out of Q2. Note that we translated the Euro at a $1.32 last year versus a $1.46 this year, the Australian Dollar at $0.67 last year versus $0.91 this year.

Revenue in the Americas were down 8% compared to last year with contraction in both the wholesale and retail distribution. This result was slightly better than we expected a quarter ago. Although both the Quiksilver and Roxy brands were down in the quarter, DC was up year-over-year. Our own retail store comps turned positive in January, although they have remained negative overall for the quarter. It should also be noted that we closed a net of 14 company-owned retail stores in the Americas since the end of the first quarter 2009.

European revenues in constant currency were down 12% for the quarter and were roughly in line with our prior expectations. Within Europe, the DC brand continued to grow well, partially offsetting declines in both Quiksilver and Roxy. Consumer spending remains particularly challenged in some of Europe’s key markets such as Spain and the UK. However, we’ve retained leading market positions in many European markets and these positions are not threatened by current economic conditions.

Our retail performance in the early part of the quarter was adversely affected by unseasonably warm weather in the region. And for the quarter, comps were down in the low double digits. We opened a net of four new company-owned shops and concessions in Europe during the first quarter and a total of 25 over the last year.

Asia Pacific revenues as reported appeared to be better than they actually were when compared to last year due to sizable shifts in the Yen, the Australian Dollar and the US Dollar in relation to each other. In reality, our Asia Pacific business was down modestly as expected due to the generally weak economy in Japan.

In Australia, new store openings helped our retail business grow revenues in comparison to last year. For the entire region, we added a net of three new shops in the quarter and 35 net new shops, concessions and in-store shops since the end of the first quarter a year ago.

We expanded consolidated gross margins by 460 basis points to 51.3% for the quarter as we successfully brought our inventories into balance with demand and US market conditions improved somewhat resulting in lower levels of discounting than expected. In addition, our first and third quarters of the fiscal year traditionally benefit from higher levels of retail business in relation to wholesale and subsequently we enjoyed a pickup in margin due to the mix. This was particularly evident in Q1 this year with retail comprising nearly 32% of revenues compared to just below 30% in Q1 a year ago.

Our Americas business delivered the largest improvement in margins, while all regions benefited from lower levels of discounting, both wholesale and retail distribution and the reduced volume of clearance sales. We also continued to make good progress on our sourcing initiatives and these are now gaining traction. Favorable currency exchange rates in the first quarter also helped to maintain comparisons -- sorry, also helped margin comparisons throughout Europe, Australia, and Canada.

Expense reduction initiatives that we have spoken of over the past several quarters continue to bear fruits, although some of the reductions are masked by the cost of new store openings in Europe and the South Pacific. We reduced pro forma SG&A expenses in Q1 by $19 million in constant currency. Expenses in all three regions were lower than a year ago, when removing the effects of foreign currency exchange led by the Americas, which reduced expenses by $11 million or 13% compared to Q1 of 2009, excluding special items. Also during the quarter, we recorded a $3 million pre-tax special charge for severance payments.

As a result of these factors, we generated pro forma operating income of $22 million in the first quarter, up from $6 million in the same quarter a year ago. Interest expense was also $22 million in the quarter, up from $14 million a year ago. This primarily reflects higher interest rates related to our new debt structure, although it’s important to note that approximately $7 million of interest in the quarter was non-cash.

Our pro forma tax provision in the quarter of $3.8 million benefitted from a $2 million credit that arose from new tax legislation passed in mid December that was not factored into our prior estimates. After interest and taxes, our pro forma consolidated loss from continuing operations for the quarter was $3 million or $0.02 per share compared to a pro forma loss of $9 million or $0.07 per share in the same quarter a year ago.

I would now like to turn your attention to the balance sheet for a few moments and in particular the strong improvement in our working capital position. Receivables at $323 million or 13% lower than through the same period last year and down 19% in constant currency. On an overall basis, DSOs decreased by eight days to 64 days this year compared to 72 days in the first quarter a year ago. Additionally, inventory at quarter-end was $301 million, down 21% as reported and down 27% in constant currency. Our Americas business accounted for approximately two-thirds of the reduction.

Over the past several quarters, we have successfully reduced inventory on a global basis, bringing supply and demand into balance. And finally, we had approximately $148 million of availability under our credit lines and approximately $150 million of unrestricted cash at the end of the first quarter. This is approximately 2.5 times the amount of liquidity we had a year ago. The impact of our successful financial restructuring is pretty dramatic.

Now let’s turn our attention to our outlook. We expect second quarter revenues to be down high single digits on a percentage basis after accounting for some early shipping that took place in Q1. This estimate reflects our remaining spring and summer order books and the fact that we bought the seasons very tightly, limiting potential upsides in favor of reducing risk. In addition, there has been a sudden fall in the value of the Euro versus the US Dollar that will act as a headwind to our Q2 results.

As we mentioned last quarter, we expect to be able to delver between 300 basis points and 400 basis points of gross margin improvement in each quarter of fiscal 2010. Early indication suggests that we can come in at the high end of that range for Q2.

Operating expenses in the second quarter are expected to be modestly lower than in the second quarter of fiscal 2009. And we are anticipating interest expense of about $23 million in the quarter. Summing the parts, therefore, we expect to generate earnings per share on a diluted basis in the low single digit range.

For the remainder of the fiscal year, we believe that we can still achieve the full-year revenue objectives that we outlined last quarter, although some definite challenges remain, including a challenging juniors market, foreign currency headwinds, and uncertainty at retail.

With respect to gross margins, we continue to believe that we can achieve the improvements we outlined in our last earnings call of between 300 basis points and 400 basis points overall for the year. We expect the SG&A expenses for the full year to be slightly below last year’s level. And we are now estimating that our interest expense will be approximately $92 million for the year, which is lower than prior estimates due to the effects of foreign currency exchange.

Our ability to predict our provision for income taxes in future quarters has been complicated this year by the fact that certain adjustments to accruals for contingencies must be recognized in the quarter in which they occur. Because we are operating so close to breakeven on a net income and EPS basis, these adjustments can affect results more significantly than they normally would. In any case, for modeling purposes, we are now estimating that our tax provision will equate to approximately $8 million to $9 million per quarter for the remainder of the year.

Our current plan calls for us to open a net of 19 new company-owned stores in fiscal 2010, most of them as concession shops and our CapEx budget for the year remains at roughly $50 million. Our D&A is expected to be around $54 million and we plan to control working capital in line with revenue trends as they develop.

Before concluding, let me just reemphasize that although interests and taxes dampen our EPS estimates when modeling the business, it’s important to focus on the significant improvements we are making in operating profits. Taking into account our first quarter performance, our outlook, and our stated assumptions, we now expect our pro forma EBITDA to be approximately 20% to 25% higher for the full fiscal year 2010 compared with 2009. We will look to update our outlook when we report the results of our second fiscal quarter in early June.

And with that, I will turn the call back over to Bob.

Bob McKnight

Thanks Joe. We are delighted to deliver first quarter financial results that exceeded virtually all expectations. We have come a long way over the past two years and have taken bold steps to align our business with the realities of today’s global markets, while keeping an eye on the future.

These steps have positioned us well to deliver improved financial performance and we are poised to benefit even further from any upturn in discretionary consumer spending. Through it all, we have continued to produce great products, through innovation and a thorough understanding of our markets.

I am proud of the Quiksilver team and our continued leadership in the action sports markets we serve through our great Quiksilver, Roxy, and DC brands. And I am especially proud that we have emerged from the last two years of adversity a much stronger company with high hopes for the future.

Thank you.

Bruce Thomas

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator Instructions). First, we will hear from Todd Slater with Lazard Capital.

Todd Slater – Lazard Capital

Thanks very much and congratulations on the improvements. I wanted to just get my arms around a little bit the trends on a constant currency basis. And Asia and Europe look like sales were down 15% and 12%. And I think that was a deceleration from – down 4% last quarter. Obviously the US is improving down 8%. Could you tell us first of all, which is the region that the sales or regions the sales shift occurred?

Bob McKnight

Todd, thanks for your question. The – I am not sure what you mean by the sales shift. I think you are – you correctly pick up that in the Americas our revenue trends are down 8%. This is very much in line with our plan and let’s all remember that a significant portion of the reduction in revenue is coming out of clearance goods and stuff that would otherwise have gone through the off price market. It’s one of the main drivers of the 460 basis point improvement in margins.

The same is true in Europe to a lesser degree. As you know their markets are earlier in relation to their sales periods. So they were burdened with less of an overhang of clearance goods. The 12% reduction there that was very much in line with their plans and the order books that they had coming into spring that’s on a constant currency basis.

And Asia Pacific is difficult for people to get their arms around because of their really volatile currency movements. But let me just try to explain it succinctly. Our South Pacific business was essentially flat, it was down slightly. Japan was down sort of a high single digit number, but the Japanese Yen dropped 24% against the Australian Dollar. So when we reported in constant currency being Australian Dollars, it appears that our business in the region overall was down 14%, sorry 15% as we have disclosed in our press release today. There was a kind of a whipsaw effect then in consolidation.

When we brought the Australian consolidated profits into US dollars for public reporting purposes, we benefited from a 36% improvement in the Aussie Dollar relative to the US Dollar which accounted for the 16% overall improvement that you see. So we tried to lay this out in our – on page eight of our press release. If people are having difficultly with it – with this thing, I encourage you to give Bruce a call and we will walk you through it in more detail, but that’s essentially the effect.

The key messages here are that our revenues were in line with plan all over the globe and that the substantial reduction in volume overall is in large part due to us managing inventories better, having less clearance goods, and you see the results in the margin.

Operator

Anything further, Mr. Slater?

Bruce Thomas

Okay, operator, let’s go to the next caller.

Operator

And next we will hear from Sean Naughton with Piper Jaffray.

Sean Naughton – Piper Jaffray

Hi. Let me add my congratulations on the quarter, too. Nice job on the inventory management.

Bob McKnight

Thanks.

Sean Naughton – Piper Jaffray

Quick question though on the marketing expenses, I noticed a little bit of a reduction. Last year, obviously, I think it was down about 18%. How are you thinking about marketing this year in comparison to last year? Are you looking to manage to a rate of sales or is there a targeted figure that you have in mind?

Joe Scirocco

Yes, marketing in the current fiscal year is budgeted at around a $100 million, that’s down from somewhere around $120 million or so last year. But I think some of the types of market – and I will turn this back to Bob to speak about – we are getting a lot more leverage on some of these events than we have done before.

This Quiksilver Tony Hawk Show in Europe was just a knockout kind of an event, fantastic press, and the same with the Eddie as Bob mentioned. We have co-sponsors on that Tony Hawk tour, which are going to largely pick up the cost of that as it tours around Europe.

I should just turn it back to Bob to talk about marketing.

Bob McKnight

Yes, I think like most companies that have had to do in this environment, especially action sports company as volume has come down a little bit globally, we have had to rationalize our marketing budgets the same as we rationalize all of our budgets. And I would say that we really took a hard look at team riders, at events, at our viral marketing, our book marketing in the core books, all that and just cut and saved and did what we could on the expense side, and then we took our better, best of breed things we had existing and really leveraged them across the platforms globally. So we are just being tuned into the budgets and making sure they are appropriate for the size of volumes we are doing now.

Sean Naughton – Piper Jaffray

Okay. And then I guess on the inventory, obviously the decline is pretty dramatic. Is it due to my brand or is it a specific category or is it geographic based? And then with respect to that, just thinking moving forward, are you seeing, do you feel like you have sufficient products in the stores today for consumers given your much tighter inventory levels?

Bob McKnight

I think much of the – much of the reduction came geographically, came out of the Americas. And no real patterns by brand except that if you recall in the first quarter of last year, we talked about some early receipts of goods for DC and that was a pretty significant number. I remember it being somewhere in the range of $15 million or so. But with that exception, there is no real differential by brand.

In the fourth quarter of last year, we sort of had an adjustment to the orders from some of our larger customers in DC Americas and we have – we have subsequently worked through that product as well.

Sean Naughton – Piper Jaffray

Okay. And then lastly on the backlogs in your – I think in your reports, you had filed that it was down about 15% at the end of November. Can you give us an idea or an update about how you are feeling after the tradeshow season earlier this year for the fall?

Bob McKnight

Sure. Well the fall markets are very much in line with our plans around the globe, it’s fall season here, it’s fall winter in Europe, and we are about 80% of the ways through both of those bookings. So they are very much in line with the outlook that we just cited today.

Sean Naughton – Piper Jaffray

Okay, great. Thank you.

Operator

And we will now hear from David Glick with Buckingham Research Group.

David Glick – Buckingham Research Group

Yes, good afternoon. Joe, just wanted to talk a little bit about the balance sheet and free cash flow and help us think about the pace – what kind of cash flow you think you can generate this year and how we think about that going forward and how quickly you can start to deleverage the balance sheet?

Joe Scirocco

Right. Thanks David. So last time we spoke publicly, we talked about free cash flow for the fiscal year being something north of $50 million. The big uncertainty in our mind in addition to the obvious one being volumes was how quickly we could liquidate excess stocks and how quickly our customers would return to fiscal health and be able to pay their bills faster. So I think that at this point, we are comfortable in taking the estimate up somewhat thinking about free cash flow maybe in the $75 million range on a full-year basis.

We have some scheduled repayments of debt beginning this quarter. Well, actually last quarter we repaid some 14 million Euros or so of debt and we have some scheduled repayments beginning in April. Our forecast would have us the low five times leverage by the end of the fiscal year, pretty significantly below, and we would feel very good about that, and then around four times on a net basis.

David Glick – Buckingham Research Group

Okay, so it’s just the aggregate amount of debt you are seeing coming down this year roughly in dollars?

Joe Scirocco

Well, I am sorry. Can you just repeat the question?

David Glick – Buckingham Research Group

Just the aggregate amount of debt that you see paying down this year and obviously we can calculate it, but do you have a number in front of you?

Joe Scirocco

No, no, it’s on the order of a $100 million.

David Glick – Buckingham Research Group

Okay. And is that a pretty good run rate to think about going forward, just kind of given the trend line you guys are on?

Joe Scirocco

We have a schedule of debt repayment which you can take from our 10-K. I think it amounts to about $100 million in each of the next two or three years each year. Yes, it’s like a $105 million in 2011, $101 million in 2012.

And for those of you on the call that are hearing this answer and you are starting to think about fixed charge coverage test and that kind of thing. Remember that when you take our estimate for $92 million in interest expense that accompanies that, that approximately $26 million of that is noncash. So you can see based on the forecast we have given for EBITDA and for cash flows, we should have ample cash to cover all fixed charges.

David Glick – Buckingham Research Group

Okay, great. Thank you very much. Just one quick follow-up, we are hearing from a lot of retailers that some of your biggest regions, California, Florida are really starting to improve across the country, across a wide variety of retailers. Are you starting to see that? And are your big accounts, your surf accounts in those regions, are they starting to behave a little bit differently about how they approach the business, whether they pre-book versus just kind of waiting to buy in season? Just trying to get a sense for if we continue to see these trends whether perhaps your Q4 of this year and Q1 of next year maybe we could see a bigger rebound in the US.

Joe Scirocco

I think it’s fair to say in our own retail stores that we are seeing some improvements. We did comp up I think sort of January in the US. Overall, we were up around 10% and then in February, kind of a mid single digit number in our own stores. And that was actually led by stores in California, but also we had a pretty good pickup in Canada as well. Steve Tully is here and I will let him speak to if he has any comments relative to wholesale.

Steve Tully

Yes, I might just add this business is best on the West Coast, I think you may mention that and including Hawaii. Haven’t seen quite the pickup in Florida yet, although with our spring merchandize hitting the floor, and the climate, the weather, the cold weather back there, it’s not surprising. But as spring break approaches and the weather warms, we expect to see some pickup in that business.

And I think especially in the Quiksilver brand, we are seeing a resurgence in some reorder business currently. So we are optimistic, but haven’t seen the full fledge of the rebound in Florida yet.

David Glick – Buckingham Research Group

Okay, great. Thanks a lot. And I wish you guys a lot of luck.

Steve Tully

Thank you.

Operator

(Operator Instructions). We will hear from Bill Reuter with Bank of America.

Bill Reuter – Bank of America

Good afternoon guys.

Bob McKnight

Hi, Bill.

Joe Scirocco

Hi, Bill.

Bill Reuter – Bank of America

In terms of your guidance for EPS in the low single digits for the second quarter, I am calculating that translates [ph] into EBITDA of about $46 million to $50 million. Does that math sound about right?

Joe Scirocco

That’s pretty good, Bill.

Bill Reuter – Bank of America

Okay. And is it safe to say that you guys are still focused on debt pay down and at this point probably wouldn’t really be thinking about any sort of share repurchases or – and I guess if you could talk about your ability to do any share repurchases if you felt that that was the right thing to do?

Joe Scirocco

Yes, I think it’s very fair to say we are focused on debt pay down and not on share purchases at this point. Our cash is primarily dedicated to that, so we have some automatic sweeps in place, for example, under the credit lines in Europe. But our agenda is very much to continue to pay down debt, delever the balance sheet, and yes, use excess cash to invest in some of our own internal development. We have a number of things that are on the horizon for growth opportunities.

Bill Reuter – Bank of America

Okay. And then in terms of your guidance for free cash flow this year, what are you assuming for working capital?

Joe Scirocco

Sort of in line with – sort of in line with our revenue trends. So at this point, we have sort of guided to a mid single digits decline in revenue on an overall basis for the year. Bruce, is that correct in what I am saying? Yes, so we are sort of a mid single digit overall. But we will see as we get to the end of the physical year as we come out of it and as we start to book spring, we will start to think about what kind of inventory positions we want to take.

Steve Tully made the point about seeing some pickup in reorders. We may start to take more deeper positions in inventory as the year goes by if we feel that that traction is being maintained.

Bill Reuter – Bank of America

Okay, I will leave it at that. Thanks.

Operator

We will now hear once again from Todd Slater with Lazard Capital.

Todd Slater – Lazard Capital

Thanks very much. We got disconnected unfortunately as soon as you started to answer the question, but I won’t go there, I will circle back afterwards. But the one item I just was curious about I don’t if you mentioned was the shift – the sales shift from 2Q to 1Q, I am just wondering in which region that occurred?

Joe Scirocco

It occurred in the Americas and mostly involved the DC brand. So it’s just a question of timing, we had the opportunity to get some product into the marketplace a bit early and we took it.

Todd Slater – Lazard Capital

Okay, got it. Thank you very much.

Bruce Thomas

Okay, operator, I think we have time for one more call.

Operator

Yes, okay. We will hear from Grant Jordan with Wells Fargo.

Grant Jordan – Wells Fargo

Great. Thanks for making time for one more. One quick question; where did the severance charges occur, which region were those in?

Joe Scirocco

They were primarily in the Americas. And so you see that there was a little tax effect associated with that, but they were in the Americas.

Grant Jordan – Wells Fargo

But have you taken most of the severance charges you expect to see?

Joe Scirocco

Yes.

Grant Jordan – Wells Fargo

Okay.

Joe Scirocco

We have been about this restructuring over the course of the past two years as Bob said. And we are essentially through with it. At this point, we are just turning our attention to the execution and some growth initiatives.

Grant Jordan – Wells Fargo

Okay, and then my second question. I appreciate the guidance of free cash flow and where your leverage is headed. That combined with a relatively strong credit market, what are your thoughts on refinancing the Rhone piece of debt, particularly given that it’s at 15%?

Joe Scirocco

It is at 15% and we would love to refinance that as soon as possible. Let’s bear in mind that half of that interest is pick interest. So as you look at the debt markets and you start to compare it to other alternatives that are out there were a debt for debt refinancing, keep in mind the cash flow implications, plus the fees. So I think depending on the share price, we will look to take advantage of any opportunities to delever through the capital markets rather than immediately consider a debt for debt exchange.

Grant Jordan – Wells Fargo

You are implying that there might be the ability to look to raise equity to delever?

Joe Scirocco

I mean depending on where the shares go.

Grant Jordan – Wells Fargo

Okay. All right, well, thank you.

Bruce Thomas

Okay, thank you very much. That concludes today’s call. On behalf of everyone here at Quiksilver, thank you for participating, and we look forward to providing our second quarter results in June.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.

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