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Quiksilver, Inc. (NYSE:ZQK)

F4Q2010 Earnings Call Transcript

December 16, 2010 4:30 pm ET

Executives

Bruce Thomas – VP, IR

Bob McKnight – Chairman, CEO and President

Joe Scirocco – CFO and COO

Steve Tully – President, Quiksilver Americas

Analysts

Eric Tracy – FBR Capital Markets

Jeff Van Sinderen – B. Riley

Andrew Burns – D.A. Davidson

Mitch Kummetz – Robert Baird

Taposh Bari – Jefferies & Company

Mili Seoni – JPMorgan

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. Instructions will be provided at that time for you to queue up for your questions. (Operator instructions) I would like to remind everyone that this conference is being recorded. And now I’d like to introduce Bruce Thomas, Quiksilver's Vice President of Investor Relations, who will chair this afternoon's conference.

Bruce Thomas

Thanks, operator. Good afternoon, everyone, and welcome to the Quiksilver fourth 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 and Operating 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 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’d like to turn the call over to Bob McKnight.

Bob McKnight

Thanks, Bruce. Good afternoon, everyone. And thanks for joining us for our fourth quarter and year-end conference call. I’m very pleased to report exceptional fourth quarter and full fiscal year results. This performance resulted from many factors, but most important is our innovation, execution, developing and delivering great products. Our creative and impactful marketing efforts; we’re taking good care of our customers; and from the efforts of our teams of employees and reps, these talented people who have worked really hard this year; and from a focused business discipline that we’ve made standard practice throughout the year.

After a full year of executing our business plan more efficiently with our leaner and more energized organization, we are very pleased to again deliver financial results that greatly exceeded our prior expectations. Our team executed well in an inconsistent global economic environment.

Let’s now turn to the high-level financial highlights from the fourth quarter. First, pro forma adjusted EBITDA in the quarter was $59 million compared to $50 million in the fourth quarter of fiscal 2009. That’s 19% higher EBITDA despite an 8% revenue decline. The second highlight is our 590 basis point expansion of gross margin to 53.5% compared to 47.6% last year.

Third, the margin story in our regional businesses was especially impressive, as our Americas gross margin improved 960 basis points over the prior year and our gross margin Europe was 60.2% in the fourth quarter. And fourth, in regard to our much improved balance sheet, net debt at quarter’s end was $608 million, reflecting a reduction of $279 million or 31% compared to a year ago.

From a full fiscal year perspective, we greatly exceeded expectations and dramatically improved our operating condition. For the full year, gross margins improved 560 basis points to 52.6% compared to 47.1% in fiscal 2009. Pro forma adjusted EBITDA improved 34% to $214 million compared to $160 million in fiscal 2009 despite a 7% revenue decline. We’ve reduced our debt 30% from over $1 billion to $739 million at the end of the year.

We did a great job of controlling inventory this year, enabling our gross margin expansion. Inventories at the end of the year, like they are today, were clean and current. And receivables have been managed well, as our DSOs have improved five days compared to last year. There are still areas of weakness in some of our markets around the world, but we believe we are now well positioned and more sharply focused.

We’ve also learned over time how to weather inconsistent markets. It is time we begin to transition our business from defense where we restructured operations and refinanced our balance sheet now to offense. And we’ve taken some more important steps to activate this new strategy. We now have a powerful new five-year plan with a view to achieve a much higher standard for our business.

As you all know by now, we just completed a hugely successful 200 million euro offering of senior notes. We use the proceeds of the offering to repay our European term loans and eliminate their required amortization payment, giving us significantly more financial and operating flexibility. This flexibility will enable us over the next few years to invest in the many attractive growth opportunities that we have identified with our own terrific global brands, Quiksilver, Roxy and DC.

We have come a long way over the past couple of years to produce great results and to achieve a fantastic year. A great deal of hard work has enabled us to reshape the company and put the rough times behind us. Our progress is evident in every aspect of our business. Our products have never looked better. They are instep or ahead of today’s styles and are innovative and well-made.

Our relationships with our customers, especially within the core shop environment, have never been stronger. Our people are working harder wanting it more and having learned to accomplish things more effectively. And put quite simply, we’re winning, just like our athletes are winning. The spirit of Quiksilver and across our terrific brands is that we have accomplished a lot and has just made us hungrier for more success. And to state the obvious, the team demographic is huge and is in fantastic shape.

We are focused on young people, girls and guys, and the global numbers are staggering. Their interest in action sports is growing, and they are helping to grow the sport. And we are – and they are helping to grow the sports. And these teams are connected like no generation has ever been connected, demonstrating the enormous power of social media, which happens to be an area of expertise for our brands, Quiksilver, Roxy and DC. So we are extremely excited at the prospects for our business in the future.

In that context, I’d now like to spend a moment to summarize the company’s major objectives. Our overriding strategic objective is to retain and remain the world’s number one action sports lifestyle company centered on boardriding. And boardriding for us has a broader connotation than just surfing, skating and snowboarding. It also includes the closely related interest of our growing global demographic. BMX, rally, moto, bike, hike, climb, paddle, mix martial arts, and many other growing action sports and activities.

We plan to protect and grow our leading position by focusing on four primary initiatives. First, we will focus our energy and resources primarily on our three major brands. Our principle efforts and major initiatives are directed towards a continual development of Quiksilver, Roxy and DC.

Second, we plan to focus on strategic core marketing initiatives and core athletes. Authenticity, which is at the heart of our brands, was developed and has maintained through our connection to core events and athletes, which drive our marketed initiatives and connect us to our core consumers. Third, we plan to expand through product line extensions, geographical reach, and further channel development. Let me elaborate.

Product initiatives include developing new offerings for juniors, led by our new Quiksilver Girls line, which debuts in spring of 2011. Other initiatives will continue to drive DC's expansion beyond skateboarding into surf, snow, BMX, rally and moto. And we also believe we have a huge opportunity in mountain resorts and colder weather markets within the Americas and Asia-Pacific to replicate the success of our European winter outerwear business.

In pursuing geographic expansion, we plan to more aggressively pursue opportunities in markets where we already have established a presence but have simply under-invested over the past few years. Examples of these expansion opportunities include Latin America and especially Brazil; Russia and Eastern Europe; Northern Asia, especially China and South Korea; as well as non-coastal markets of the United States.

By way of example, in Russia and the Czech Republic alone, we’ve developed nearly a $50 million of solidly profitable business in less than two years. We have about a dozen stores in these markets. By increasing our investments in these locations over the next few years, we expect to accelerate the pace of growth in markets where we’ve paved the way for the industry.

From a channel development perspective, we believe that our ecommerce business can ultimately generate 10% of consolidated revenue where such sales would be represented by business-to-business-to-consumer activity as well as arm-selling our products by wholesale customers in a business-to-business-to-consumer scenario. So we are focusing heavily in this area of the business. We also plan to selectively expand our retail footprint where we can be profitable and develop our business in new and important markets through owned and licensed store locations around the world.

And our fourth focus is the development of incubator brand concepts that can potentially represent opportunities consistent with our culture and areas of expertise. Current examples include our Lib Tech and Gnu brands, along with the Muscova [ph] brand, which we developed in Europe. In addition, a collaboration with Kelly Slater is on the drawing boards.

In order to achieve our strategic goals and drive the business to a higher standard of operating performance, we have established a new set of operating and financial objectives for the future. Our five-year plan establishes higher expectations for our business and defines where we want to be in the future. So now, I have focused everyone in the company on these five-year objectives.

Our first objective is to retain our leadership position in product development, innovation and quality. At the core of our success lies great product, and as you would expect, this is our primary operating initiative. Second, we are targeting a longer term revenue growth in the mid-to-high single-digit range on a percentage basis with earnings growing faster than revenues. Third, we plan to grow EBITDA margins by an additional 200 to 300 basis points.

Next, we plan to reduce and then maintain our net debt-to-EBITDA ratio below in multiple of two times. Our multiple at the end of fiscal 2010 was 2.8 times. A reduction in net debt leverage below two times would strike a balance between the objectives of generating free cash flow, reinvesting in our business, and maintaining financial flexibility for the future.

And finally, we plan to operate at a high level of efficiency in all of our major functions. This initiative is the basis for our decision to implement a global ERP system, which is currently underway. These assumptions reflect a high degree of optimism that within our existing portfolio of brands, we can build our business over the next five years to between $2.5 billion and $3.0 billion in revenue with EBITDA of over $350 million.

Let me now take a brief moment to highlight our brands. I’ll start with Quiksilver, which as you know is by far and away the biggest, the most respected action sports lifestyle brand in the world. With fiscal 2010 revenues of over $770 million, the Quiksilver brand showed us resiliency in maintaining its dominant market share position.

From a product perspective, Quiksilver offers a broad assortment of apparel, footwear and accessories that represent a casual lifestyle for young-minded people that connect with our boardriding culture and heritage. We continually offer the most innovative technical products in the market, validated by our athletes we sponsor who help us develop and who also wear our products both in and out of competition.

We sponsor the world’s best actions sports athletes to maintain our close ties to the sports that inspire us and to help us reach our core demographic. Teenagers today are connected globally through the Internet and their own mobile devices, and we specialize in connecting to them through the same websites and online forums that they use to communicate with each other.

Just last week we held our fall 2011 sales meeting, and the buzz around our Quiksilver fall products was fantastic. Our lines look great and our salespeople are very excited to show their customers what’s in store for next fall. And as we mentioned in great detail last quarter, we are eagerly awaiting the first delivery in February of our Quiksilver Juniors line of modern coastal classics for spring 2011.

The new line was designed to appeal to the 18 to 24-year old girl with a coastal mindset and independent spirit. Built on a classic understated aesthetic with great washes and great fabrics, finishing and set. This line will appeal to a girl with a more timeless aesthetic. Priced in the mid-tier range of the juniors market, this new line will be available at select surf specialty retailers. Quiksilver stores and online retailers were all very excited to be offering this new line soon.

Now turning to Roxy, the younger sibling of the Quiksilver Girl who has got sand in her pockets from her time on the beach, she is fine and alive, daring and confident, naturally beautiful. The Roxy brand is the largest, most respected and most recognized girls’ action sports brand in the world by far at over $500 million in fiscal 2010 revenue.

Despite our position as the clear market leader, we continue to see fast passion and price point driven goods impact the branded segment of the juniors market for all surf, skate and snow companies, although overall we are seeing that juniors’ trends at retail are stabilizing across all channels of distribution. Declines in the Roxy business are moderating, and it appears they will reach the bottom in fiscal 2011.

With its core in board sports, Roxy’s return to its routes was clearly reflected in its spring and summer offerings. And Roxy’s fall 2011 line was presented to the sales force just last week and the early reviews were tremendous. We expect to build momentum through the year as our coordinated marketing efforts continue to connect with Roxy’s teenage audience.

Turning now to our powerful and incredibly popular brand, DC. Focused on innovation and a thorough understand of the skate, snow, street and moto markets, DC continues to impress consumers and retailers with their new products and their ability to attract attention. Generating revenues at about $500 million in fiscal 2010, DC clearly has the most growth potential of our three core brands.

Considering that DC represents roughly one-third of our consolidated revenue in the Americas region and less than one-fifth of our business in Europe and even less in our Asia-Pacific region, it’s evident that the brand is underpenetrated outside of the Americas and has plenty of room to grow.

We believe that DC could reasonably double in size over the next five years and is rapidly developing lifestyle brand all on its own. This terrific brand represents a solid growth opportunity not only regionally, but its overall apparel business in the juniors market in the area of newly evolving action sports and its snow and winter outerwear business.

Behind our financial success on our improved performance in fiscal 2010 is our stable of over 300 athletes that surf, skate and snowboard in the name of our brands. The spectacular performances of some of our top athletes during the past year generated tremendous marketing leverage. Kelly Slater achieved the unthinkable in winning his tenth world title last month, and his exposure to the mainstream audience has skyrocketed, thanks in part to our carefully executed media rollout plan.

Dane Reynolds clearly the most free-spirited rider on the ASP Tour has had a great year, vaulting into a top-five worldwide ranking. Dane has captured the imagination of the surfing world and arguably has the fastest growing fan base on the tour. Most recently, Kelly was number one in the 2010 Surfer Poll Awards, while Dan at number-two was called out as the most influential surfer in the world right now.

Toray Bright, our iconic Roxy athlete, won the Olympic Gold while aerial images flashed our Roxy logo on the underside of her board throughout the Olympics. Rob Dyrdek, whose enduring lifestyle has been captured on MTV for some time and is now appearing in his own current hit show, Fantasy Factory, on MTV, all the while a dedicated DC promoter, has taken skateboarding to the next level of organized competition with the founding of his Street League established head-to-head competition and paving the way for legitimate rankings on the world’s top skaters.

And Ken Block, DC co-founder and professional rally racer, this fall released Gymkhana 3, the most recent viral video installment, demonstrating his unique precision rally car driving skills. This massively popular video, which has been viewed over 20 million times on YouTube since its August debut, joins previous installments that have now gathered over 88 million hits across the entire Gymkhana franchise. They remain among the most widely viewed viral videos of all time. Ken and his Gymkhana driving skill will be featured on an upcoming segment of ABC’s Nightline, generating even more national exposure for DC.

We also had outstanding success generating tons of interest through our signature events this year. The Quiksilver Pro France and Quiksilver Pro Australia surfing contest drew huge crowds and web hits this year. And for the first time since 2004, The Quiksilver In Memory of Eddie Aikau big wave surfing contest had big enough ways to go last December, and the worldwide press was all over it.

The Tony Hawk Show featuring our own nine-time X Games champ went on the row with performances in major cities in the US and Europe drawing tens of thousands of fans at each stop. And the connection of our stellar athletes and world-class events gives us great marketing content and leverage on our marketing spend. All this content is made available and transmitted directly to our consumers through such vehicles as Facebook, Twitter and YouTube. Examples of this reach include Tony Hawk’s 2.3 million followers on Twitter; Roxy recently surpassing 1 million friends on Facebook and DC amassing out 3.1 million Facebook fans.

These athletes and events provide just a brief glimpse of our involvement in the action sports landscape, and we have an amazing track record of associating our brands’ magnetic personalities that attract attention in a broad, positive fashion. In addition, we work hard to handpick the events and projects that we invest in to maximize our reach and position ourselves to benefit from the popularity of the sports as they evolve.

So we are delighted that the changes we made over the last two years to drive businesses efficiently and improve our balance sheet have positioned us well for the next step in our evolution. During this transition period, we are now developing a plan to evaluate all of our many investment alternatives in order to allocate appropriate amounts of capital.

Joe will now take you through our fourth quarter financial details.

Joe Scirocco

Thanks a lot, Bob. Good afternoon, everyone. As reported, consolidated net revenues at $495 million in the fourth quarter were a little better than the outlook we’ve provided one quarter ago, mostly due to the strengthening of the euro in relation to the US dollar. Note that we translated the euro at $1.45 last year versus $1.33 this year, the Australian dollar at $0.87 last year versus $0.94 this year.

In the Americas, revenues were down 7% in the fourth quarter compared to last year with contraction in the wholesale channel being partially offset by growth in our retail stores. Reduction in wholesale revenues was partially the result of our proactively reducing sales in lower margin distribution. Our own retail store comps in the US were again positive overall in Q4, and we were encouraged to see strong in-store gains in the Quiksilver and DC brands for the third consecutive quarter. Note that in the Americas, we closed a net of 11 company-owned retail stores since the end of the fourth quarter 2009, including five stores that we closed in Q4.

European revenues were in line with our prior expectations and down only $2 million in constant currency for the quarter, as growth in DC offset reductions in Roxy and, to a smaller degree, Quiksilver. As much of the world's attention continues to focus on the economies of Europe, consumer spending remains a concern in certain markets, such as the UK, while we are seeing improvements in sell-through at retail in France and Spain.

We opened a net of 10 new shops and concessions in Europe over the last year, and we opened three more stores than we closed during the fourth quarter. Two weeks ago, we conducted our road show in Europe together with members of our European management team. Even in the midst of a volatile bond market there among concerns about sovereign debt, investors really understood the merits of our business plan and especially of our strong European business, with the company-leading margin profile and solid cash flows.

Asia-Pacific revenues, as reported, were down 7% compared to last year and down about 14% in constant currency, primarily due to weakness throughout the region as has been reported recently by some of our competitors. For the entire region, we added a net of nine new shops in the quarter and 23 net new shops, concessions and in-store shops during the past year. Over an extended period of time, our business in the region has migrated to a retail model, which our own stores now contribute approximately 40% of revenue.

We expanded consolidated gross margins by 590 basis points to 53.5% for the quarter, which was a little better than we expected. We continue to control inventories in line with demand, resulting in significantly lower levels of discounting and clearance sales than we experienced a year ago. In addition, we continued to deliver on our key sourcing initiatives. Our Americas business again delivered the largest improvement in margins, 960 basis points, while Europe’s margin expanded 440 basis points to a very healthy 60.2%.

During the fourth quarter, we determined that a total of 15 of our 540 total stores and shops were not generating sufficient cash flows and were unlikely to achieve desired profitability. So you’ll note that we took an impairment charge of $8.4 million related to fixed assets, which were primarily the result of store impairments. Also during the quarter, we recorded a pretax charge of $3.3 million for other restructuring items, principally severance.

Overall, pro forma SG&A expenses, excluding special charges, were $219 million in the fourth quarter, up approximately $7 million from last year in constant currency, and this largely resulted from higher spending on marketing initiatives and incentive compensation.

We continued to focus our attention on EBITDA as a key measure of our performance. So we’re pleased that we generated fourth quarter pro forma adjusted EBITDA of $59 million or 12% of sales compared to $50 million or 9% of sales a year ago. For the fiscal year, pro forma adjusted EBITDA improved 34% to $214 million, reflecting the dramatic operating improvements we’ve made to our business.

Pro forma interest expense, which excludes the write-down of debt issuance costs, was $16 million in the quarter, down from $21 million last year and a bit higher than our prior expectations, due simply to the appreciation of the euro in relation to the US dollar during the quarter. Our pro forma tax provision of $6 million was lower than expected, primarily due to the favorable conclusion of a tax audit that had been underway for some time in Australia.

After interests and taxes, our pro forma consolidated income from continuing operations was $22 million or $0.12 a share compared to pro forma income of $3 million or $0.02 a share in the same quarter a year ago. This $0.12 profit improvement was better than our mid-single digit outlook provided a quarter ago, primarily because of the tax adjustment just mentioned, which added more than $0.02; the impact of changing foreign exchange rates, which also added more than $0.02; and we over-achieved from an operating perspective by an additional $0.02.

I’d now like to turn your attention to the balance sheet for a few moments and in particular to the dramatic improvement in our capital structure. Receivables at $368 million are 14% lower than for the same period last year. On an overall basis, DSOs decreased by five days to 63 days this year compared with 68 days in the fourth quarter a year ago.

Additionally, inventory at quarter-end was $268 million at approximately the same level as it was in the fourth quarter last year. As evidenced by our performance particularly over the past year, we continue to successfully control inventory on a global basis, with the supply and demand approximately in balance.

CapEx was $13 million in the quarter, down $9 million compared to a year ago, with a bit of our planned spending rolling over into fiscal 2011. We have made really impactful recent progress in our capital structure. Early in the fourth quarter, we completed a debt-for-equity exchange with Rhône, in which we exchanged $140 million of secured term debt for 31 million shares of common stock priced at $4.50. In addition to further reducing our debt to $729 million, this transaction reduced our annual interest expense by approximately $26 million.

In October, we refinanced the remaining stub of the original Rhône term loans through a new $20 million term loan in our Americas region at a substantially better interest rate. And subsequent to the end of the quarter, we completed an offering of 200 million euros at 8.875%, and these senior notes are due in 2017.

We used the proceeds of the unsecured notes to repay approximately 190 million euros of existing secured European term loans. Although leverage neutral, this transaction extended our debt maturities, eliminated certain collateral obligations, and relaxed the ring fencing that restricted our ability to transfer cash among our subsidiaries.

We ended the quarter with approximately $197 million of availability under our credit lines and approximately $120 million of cash, restructuring in total liquidity of $317 million. We reduced our total debt by 30% to $729 million. That’s down $310 million compared to a year ago. As a result of our significant progress in improving our capital structure this year, our ratio of net debt to adjusted EBITDA at fiscal year-end improved to 2.8 times compared to 5.5 times at the end of fiscal 2009.

And now let’s turn our attention to our outlook for fiscal 2011. With the full fiscal year 2011, the company currently expects a slight growth in sales from fiscal 2010 although our visibility is limited pending completion of the holiday sales period and fall order books. Nonetheless, at this point we believe we can achieve pro forma adjusted EBITDA roughly in line with that of fiscal 2010.

We are anticipating interest expense for the year to be approximately $58 million, and we currently estimate that our tax provision for the year will be just north of $50 million. With respect to our outlook for the first quarter, based on our current trends and existing order books, we expect Q1 revenues to be down approximately 5% and pro forma adjusted EBITDA to be as much as $10 million lower than in the first quarter of fiscal 2010.

This anticipated near-term period-over-period decline in pro forma adjusted EBITDA is due primarily to increased spending on brand development, including the new Quiksilver Girls collection and also the higher overall marketing spend, as well as the effects of having sold a few minor brands last year and also the effects of foreign currency transaction. Last year, the euro traded at an average of $1.46 during the first quarter compared with about $1.32 today.

We are anticipating interest expense to be in the range of $14 million to $15 million per quarter for the 2011 year after adjusting for the impact of the changes to our capital structure. And we think that our tax provision in the first quarter will be approximately $10 million, although quarterly provisions can vary, as we saw a couple of times during the past fiscal year.

One final note about Q1, when we account for the repayment of our European term loans, we will have to record the write-off of deferred debt issuance cost, which totals about $13 million. These charges will be non-cash, non-operating, and have no effect on our operations or financials.

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

Bob McKnight

We are very pleased with our better than expected results in the fourth quarter and our substantially improved financial performance for the full year in 2010. The significant changes we’ve made over the past two years to align our business with today’s market and to improve our capital structure had us well positioned for future opportunities.

We are now in the midst of a transition ready to invest again in our own brands with the belief that these investments will lead to a resumption and acceleration of growth when the markets truly stabilize sometime over the next year or two. In the meantime, we expect modest revenue growth in fiscal 2011 and similar EBITDA performance to what we delivered in 2010.

For the longer term, we have our plan to grow revenues annually in the mid-to-high single-digit range on a percentage basis in the coming years that will dramatically improve our profitability and further our leadership position as the number one action sports lifestyle company in the world. Thank you.

Bruce Thomas

Operator, that concludes our prepared comments. We’re now ready to start the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And from FBR Capital Markets, we’ll go to Eric Tracy.

Eric Tracy – FBR Capital Markets

Hey, guys, good afternoon and thanks for taking my questions. I guess, Bob or Joe, as we think about the guidance next year, the flat EBITDA assumes sort of the slight pickup in sales, possible to walk through from a Quik, Roxy, DC, how you think about each of those businesses next year and sort of the contribution to that growth?

Joe Scirocco

Sure, Eric. Yes, thanks. I mean, we are looking for the largest growth to come out of the DC brand, which we see as kind of a high singles, low-double digit maybe growth in fiscal ’11. DC, as you know, is significantly underpenetrated outside the US in addition to having many opportunities within the US market. And so that’s our fastest grower. We see Quiksilver brand as kind of a low-single digit growth around the globe. Probably our – in the Americas region, the biggest opportunities there are in the Latin American markets, but also we see growth in some of our more established markets in the US and Europe. And then Roxy, as Bob commented, we think the declines in the juniors business could potentially bottom out in 2011. Our declines are forecasted at kind of a mid-single digit for Roxy. There are some important trends there though in the business doing substantially better in footwear and accessories. So we – there are really pockets of good news there as well.

Eric Tracy – FBR Capital Markets

Okay, great. And then maybe just moving down the P&L to the gross margin, clearly coming off of banner year here and then in terms of executing on inventories on the sourcing initiatives, at all times sort of peak levels, maybe talk to the incremental opportunities as you see them to further sort of push on the gross margin side relative to the very much well discussed product cost inflation, how we should be thinking about that in terms of the potential impact of the business, and then with the levers, be it through the supply chain or from a pricing perspective you might have to offset that.

Joe Scirocco

Nothing has really changed. We’re actively managing our cost pressures. We’re consolidating sourcing through QAS, which is our own in-house agent based principally in Hong Kong and China. To some degree, we are redirecting business outside of China where we can although each market has its own competitive pressures these days. In terms of forecasting on 2011, I would just say, overall we see gross margin being roughly comparable to what it was in fiscal 2010. We have already bought our spring summer goods, so we understand what the pressures are for the back half of the year, but we do have the front half already bought. There are a couple of factors going in our favor to help us manage the cost pressure. For one thing, our European and our Asia-Pacific regions are buying goods in 2011 with stronger local currencies relative to the dollar than they did a year ago. And secondly, we are planning some selective price increases, and it varies by category and brand and geography. So it’s a bit of a complex matrix. But like everybody else, we are looking for selective price increases where we can.

Eric Tracy – FBR Capital Markets

Okay. So as a visibility to the back half cost yet, but feel comfortable with sort of the flattish gross margin for the year?

Joe Scirocco

Yes. I mean, if you boil down all the elements, we think that exposure in the back half of the year would be to cost pressures in the range of 5% to 10%. And as I said, we have a couple of factors and levers that we are pulling that we believe can help offset that to some degree. So we think we’ll be okay.

Eric Tracy – FBR Capital Markets

Okay. And then just last, if I could, on the G&A side, you talked about sort of the investments made to support this longer term sort of reaccelerating growth. Any level you could speak to in terms of what we should think about on a dollar growth basis and maybe the cadence and timing of how those investments should be made, be it ERP to just investing behind the brands?

Joe Scirocco

Well, the ERP will largely be a capital expenditure. So amortization of that won’t hit the P&L until the first phase is go-live probably towards the end of fiscal 2011. SG&A should tick up slightly in the coming fiscal year, and it has to do with some higher marketing spend with the launch of the Quiksilver Girls line, which we’re three or four seasons ahead on design and product development. But we don’t ship our first delivery until February 25th or so. So we have a number of things like that going on. We really are investing in our own businesses, and that’s really the driver for any higher cost. But on a like-for-like basis, SG&A is pretty constant.

Eric Tracy – FBR Capital Markets

Okay. Thank you, guys, very much. Best of luck.

Bob McKnight

Thank you.

Operator

Next we’ll hear from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen – B. Riley

Good afternoon. Maybe I can just follow-up on the question on investment and new initiatives. I know you mentioned the Girls line launch and obviously there are some expenses associated with that. I’m just wondering maybe if you can talk a little bit more about some of the other initiatives that you are working on to reinvigorate the growth of the brands. And then maybe you can just speak to DC and give us a sense of how the DC business has been trending, how it trended in Q4. And then I think that probably would be a good place to start.

Joe Scirocco

I mean, there are a number of growth initiatives that we are pursuing in terms of impact on fiscal 2011. As we said, we are looking only for modest sort of growth. But Bob alluded to the plan over the next five years. And at the outset, we want to emphasize that this is relatively low risk growth from our perspective since it involves our existing brands in existing markets although they are – we have underinvested and the markets are somewhat underpenetrated at this point in time. DC started out as skate, but obviously it has expanded into many other categories. And we are significantly underpenetrated outside the US. If you put it in comparative sense, the European business is only 35% to 40% of the Americas business. We think there is a lot more room there. And in Asia-Pacific, and we see DC as a $1 billion brand basically somewhere down the road.

On the Girls side of the business, going back to the early ‘90s, we never wanted to distract from the Quiksilver brand with the girls offering. So we invented Roxy. But Quiksilver Girls will launch in 2011. We don’t see that as a cannibalizing event. We think each brand is different, targeting a different demographic. And let’s not forget about DC Girls either. So it will be a little edgier, but we will expand that as well. We think that the Girls category is potentially large for us. We look at the cold weather resort – both resorts and colder weather climates around the globe and look at that large central portion of the United States as we move away from the coast. This is something that our guys in Europe have done with great effect, and they have a business there, which is on the order of, I don’t know, $80 million to $100 million or so. We do not have a comparable business here in the US. We see that as a great opportunity for growth, both here in the US and elsewhere, in Asia-Pacific.

E-commerce is a business, which for us is just getting off of the ground. It’s probably under $25 million in volume today. But as Bob said, we see that as eventually being 10% of our total business, some of it that we do directly and some of it that our wholesale customers do. But if we were to capture half of that for our own account, it’s another $100 million in potential top line over the next five years or so. And then Bob mentioned some incubator brands and things we have going on that we’re thinking about.

Jeff Van Sinderen – B. Riley

Okay. So, if we think about DC for a moment, I think you mentioned in your prepared comments that DC in your company-owned stores was actually – I think it’s three-quarters of positive sales trends. Is that correct?

Joe Scirocco

I’m not sure we commented on its performance in our stores.

Jeff Van Sinderen – B. Riley

Okay. Maybe it was general performance?

Joe Scirocco

I’m not sure what you’re referring to here.

Jeff Van Sinderen – B. Riley

Okay. Okay. So maybe you can just give us a sense of how DC has been trending over maybe in Q4. And obviously you are expecting to see growth there in 2011. Is there any color you could give us on that?

Steve Tully

Yes. Hey, it’s Steve Tully. From an Americas perspective, the DC business is very good. We’ve seen a resurgence in the technical footwear and higher price points in our footwear business there. Our casual footwear – moving to the casual footwear aspect, that business has been received very well. Our young men’s apparel business is growing. So there is – pretty much across the channel, the distribution, the brand is performing very well. In particular, of recent with the seasonal weather we’ve been having nationally, DC's – their outerwear, the fleece, thermals, those kinds of things are performing very well. So the brand is – as Bob mentioned in his prepared remarks, with the moto and the Ken Block signature product that continues to trend very well and made a concerted effort, as we have with our other brands, to refocus on core – in this case, core skate with DC footwear and that’s beginning to pay dividend as well.

Joe Scirocco

Yes. Jeff, let me go back. First of all – sorry, I called you Eric. But if we just look back through the script, I realized that, yes, we did say a significant growth in our –significant contribution to our positive comp store sales was Quiksilver and DC. That is true. I wouldn’t put a number on it. Just to broaden Steve’s comments a little bit, DC has a fantastic opportunity in Europe. As I said, it’s about $100 million business there. Two-thirds of it is footwear-related. The balance is apparel. And it’s one of the main vehicles by which we’ll continue the pattern of moving off the coast and into the major cities. It’s widely popular as a brand throughout Europe and even into Eastern Europe.

So, just back to your earlier question but also to elaborate on DC, Eastern Europe is a market which we have entered. We have about a dozen stores in Moscow and Prague. But already we’ve got a business there, which is on the order of $50 million. It’s the kind of the thing that doesn’t get a lot of play among the US analyst community and in the Street, but boy, we really saw when we were on the road Europe two weeks ago that people get it. I mean, they see the visibility of it, the potentially of it is really there. And we have profitable business there within a short period of time, like three years. And we’re first to the market. We don’t have a level of competition there at this point. And we just think – we think it’s a great opportunity.

Jeff Van Sinderen – B. Riley

Okay. Good to hear. And then maybe if we could just drill down a little bit overall on what you saw in your own company – your company-owned stores over Black Friday weekend and then what you’ve seen since. Just any color on that? And then maybe if that’s impacted your promotional strategy at all and then also how you feel about your inventory positioning for the remainder of holiday?

Joe Scirocco

Yes, sure. Well, I mean, starting with Europe, I would say that where that business had been particularly – or the economies there had been particularly challenging with the recession coming a bit later than it did in the US, comps on the quarter to date thus far, including holiday selling season, are flattish. November was a little tough, but December is much better. Even in – and that’s in our own stores. Sales for holiday are much stronger than last year, and we don’t do very much business at markdown. So I would say kind of across the continent, business is stabilizing and actually gaining traction.

And anecdotally, we’re seeing better sell-through in the wholesale accounts in Europe, especially in Spain, which was very encouraging given all the bad news coming out there. In the US, retail comps have been very good subsequent to the quarter-end, and as we get into the holiday selling season, I would say kind of on the order of mid-teens in November, encompassing the Thanksgiving weekend, and sort of high-single digit range at this point. I don’t know if – Steve, if you want to make any comments about the wholesale channel in the Americas region or something?

Steve Tully

The Black Friday was good pretty much throughout the channels. And then there came the predictable slowdown afterwards. Some have recovered more quicker than others in terms of channels. As you know, it’s day-to-day now. We’re in the throws, days matter. We’re in the throes of the Christmas season. We’ve been doing channel-checking all week long. And we found the best – the best channel for sure is the specialty, the surf-skate specialty channel nationally. Not real regional trends that step out, and we’ve had seasonal weather, which bodes well for us because our seasonal products, in particular, things like fleece and outwear and boots and our hard goods from the Mervin brands, are performing particularly well, especially in those shops to transition from surf into snow and outerwear. So, generally speaking, results at that channel up low-single digits. Inventories are in line. The most challenged channel remains the mall-based distribution. Mixed results there, but our products are performing well, and I’d say our seasonal products, in particular for all three brands. Our technical snow-related products are performing very well.

Jeff Van Sinderen – B. Riley

Okay. Good to hear. Thanks very much and good luck for the rest of the quarter.

Joe Scirocco

Thank you.

Operator

Next we’ll hear from Andrew Burns, D.A. Davidson.

Andrew Burns – D.A. Davidson

Good afternoon. Just a couple of quick questions for you. Just curious what the economic assumptions are behind your guidance, especially in the weakness in Australia this quarter. Is that expected for the balance of 2011? Any thoughts there would be helpful.

Joe Scirocco

Well, the assumptions I sort of went through by brand, Andrew, and by the way, we saw you note this morning that you launched coverage. So yes, Quiksilver kind of low-single digit expectations for fiscal ’11; Roxy, down mid-singles, and DC, up somewhere in the high-single to low-double digit range. In terms of what we are expecting in regionally, much of the growth is focused on the Americas region in 2011. We are launching the Quiksilver Girls collection beginning on 2/25. Our first delivery is coming out.

Our Latin American business is ahead turning a real good year in 2010. We did about $100 million worth of business in Latin America. We do that, by the way, through joint ventures in Brazil, Mexico, and a licensed business in Argentina, together with direct distribution to some of the smaller markets. And we do see continued rapid growth in the Latin America market. So these are some areas that are driving the economics for fiscal 2011. And then as Bob said, thinking longer term and really thinking about where we will allocate capital for investment, we have a number of projects focused on the slightly longer-term, which we haven’t fully vetted out yet. But we have opportunities in emerging markets and with the existing brands, and we’re really planning to go.

Andrew Burns – D.A. Davidson

Okay. And you’ve mentioned roughly flat SG&A for 2011. It sounds like this is despite some investments in the brands. Wondering what kind of cost savings there are that are offsetting that.

Joe Scirocco

Well, think about it – just to be really broad about 2011, slight top line sales growth, relatively flat gross margins, and a slight increase in SG&A, mostly related to investment in new opportunities. And that’s why we see we think that we can achieve an EBITDA roughly comparable to what we did in 2010. So if you think about it that way, it’s pretty simple. And there's no real aberrations in terms of the seasonality or anything like that. It’s pretty comparable to 2010.

Andrew Burns – D.A. Davidson

Great. Thank you, and good luck.

Operator

(Operator instructions) We’ll go to Mitch Kummetz with Robert Baird.

Mitch Kummetz – Robert Baird

Yes, thank you. I’ve got a few questions. Joe, just maybe some housekeeping ones to start with, and the first being share count. There have been a lot of moving parts there. So, based on your guidance for 2011, where do you think the shares come in for the year?

Joe Scirocco

We finished the year at 158 basic shares, fully diluted count for EPS purposes was 177, and going forward, we think you can use about 180 to 185 depending on the share price.

Mitch Kummetz – Robert Baird

Okay. That’s helpful. And then also on the pro forma adjusted EBITDA, you’ve got non-cash stock comp as a line item. I think that’s what you called. And that was up 50% year-over-year for the year, I think. Based on your guidance of adjusted EBITDA, how are you thinking about that particular item as it impacts you in 2011?

Joe Scirocco

We think about it – again, depending on share price, we think about it as a number in the range of $9 million to $10 million. Mitch, just to go back for your own edification and just to make sure you remember, on any quarters that you would model at an EPS loss because of the anti-dilutive effect of options, you would want to use the basic share count. That’s why I give you the basic count of 160 in relation to, say, 180 to 185 fully diluted. But stock comp expenses, were we have in the plan at somewhere around $9 million or $10 million.

Mitch Kummetz – Robert Baird

Okay, thanks. And lastly, I just want to drill down a little bit more on the cost side. You said that you locked in spring summer. And then you said back half you’re projecting kind of up 5 to 10 on the costs. So could you say what your cost increase was for spring-summer where you’ve locked in? Could you talk a little bit more? I know you said selective price increases. So, is there any way you could kind of ballpark an average increase that you might be expecting? And then on the gross margin flat for the year, I’m wondering if higher product cost in the back half that you expect – you're kind of expecting gross margin to be kind of flattish across the quarters for the year or do you expect maybe some improvement in the first half and then some pressure in the back half? How are you thinking about that?

Joe Scirocco

We’re thinking about gross margin roughly the same seasonally as last year. And for anybody on the cool who is unfamiliar with our seasonality, just a reminder that the first and third quarters of the year is where we do more of our retail business. So margins are somewhat higher in Q1 and Q3 than they are in Q2 and Q4, which is more wholesale focused. Costs on the spring season were comparable to prior year. So we didn’t really see much in spring. Some in summer, which we compensated. And in the back half, as I said, we have a couple of offsets to the cost increases, specifically outside the US where we have hedging positions on our currencies that enable us to buy at somewhat lower rates. And remember that outside the US, it’s 60% of our business. So when we talk about the impacts of stronger local currencies, it’s material to us and it’s material to offset the cost increases.

Mitch Kummetz – Robert Baird

Okay. So with that said, in your thinking flat gross margin for the year, do you think it actually could be down a little bit in the Americas and up outside the Americas based on those local currency benefits?

Joe Scirocco

Yes. Potentially there is a trade off. But I wouldn’t put too fine a point on it.

Mitch Kummetz – Robert Baird

Got it. Thanks. Good luck, guys.

Operator

Next we’ll hear from Taposh Bari with Jefferies & Company.

Taposh Bari – Jefferies & Company

Hi, guys. Just a quick question. You talked about your five-year plan, trying to get EBITDA margins up in the area of about 200 to 300 basis points. Can you just maybe provide some color on what the core drivers are going to be there? Is it mainly a leverage story? Obviously some questions here on gross margins. How do you see your peak type gross margins evolving? Do you think there is some more opportunity to expand those over that period?

Joe Scirocco

Well, there is couple of things, Taposh. I mean, substantial growth outside the US where we enjoy much higher margins. We see that in our European business. As an example and a reminder, we hit 60.2% in gross margin in Europe for the quarter. So that’s one element of it. The other thing is that it is a leverage story to the extent that in our retail business, which is 24% of our business at about $450 million, while we have been in a negative comp store mode over the past two years, there has been significant deleveraging on expenses. So we think there are opportunities there as well.

And we’ve also been cycling out of the number of underperforming stores. I think we closed 25 stores in the US over the past two years, including 11 in the current year. So, as we get – as the balance of our business continues to emphasize new and emerging markets like Latin America, like Eastern Europe, like Northern Asia where we think there are particularly compelling opportunities, we are already set up there. We have a Pan European and Pan Asian infrastructure that we can leverage significantly, and that’s going to be the driver of EBITDA margins in the next five years.

Taposh Bari – Jefferies & Company

Great. Thanks. And just a quick follow-up if I can ask about just the competitive environment. Can you guys just comment on how you see that evolving into 2011 and how it compares here in the US versus what you’re seeing in Europe?

Bob McKnight

Are you speaking about our competitors or the competitive environment of – what sort of competitive are we –?

Taposh Bari – Jefferies & Company

Just the nature of the promotionality in the action sports category.

Bob McKnight

I see it’s similar to the year we’ve just had. I mean, I don’t see any – anything really different on the horizon there. We continue to compete. We have great products, great marketing. Our customers are very loyal to us. We’re very global. We can withstand certain pressures in certain areas. We’re still going to get big competition from big box and from vertical retailers, but I don’t – we don’t see anything that big and different on the horizon that would change anything there.

Taposh Bari – Jefferies & Company

Okay. Great. Thanks. And by the way, congratulations. Great job on the balance sheet.

Bob McKnight

Thank you.

Bruce Thomas

Thanks, Taposh. I think, operator, we’ve got time for about one more call.

Operator

Certainly. That will come from Carla Casella with JPMorgan.

Bob McKnight

Hey, Carla.

Mili Seoni – JPMorgan

Hi, this is Mili Seoni for Carla. Most of my questions have been answered. Could you just comment on how big DC is now in the US and worldwide?

Joe Scirocco

I’m sorry. How big what is?

Mili Seoni – JPMorgan

DC.

Joe Scirocco

Yes. DC is approaching $500 million in business across the globe. And the majority of that is in the US market.

Mili Seoni – JPMorgan

All right. That’s it. Thank you.

Joe Scirocco

Thank you.

Bruce Thomas

Okay, that concludes today’s call. On behalf of everyone here at Quiksilver, thank you for participating. And we look forward to providing our fiscal 2011 first quarter results in early March.

Operator

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

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