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Executives

Joseph Scirocco - Chief Operating Officer, Chief Financial Officer and Executive Vice President

Bruce Thomas - Vice President of Investor Relations

Unknown Executive -

Robert B. McKnight - Co-Founder, Executive Chairman, Chief Executive Officer and President

Analysts

Grant Jordan - Wells Fargo Securities, LLC, Research Division

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

William M. Reuter - BofA Merrill Lynch, Research Division

Unknown Analyst

David E. Griffith - Roth Capital Partners, LLC, Research Division

Claire Armstrong Gallacher - Auriga USA LLC, Research Division

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Taposh Bari - Jefferies & Company, Inc., Research Division

Quiksilver (ZQK) Q4 2011 Earnings Call December 15, 2011 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I'd now like to introduce Bruce Thomas, Quiksilver's Vice President of Investor Relations, who will chair this afternoon's call.

Bruce Thomas

Thanks, operator. Good afternoon, everyone, and welcome to the Quiksilver Fourth Quarter and Full Year Fiscal 2011 Earnings Conference Call. Our speakers today are Bob McKnight, our Chairman, President and Chief Executive Officer; and Joe Scirocco, our Chief Financial Officer. Also joining us today are Craig Stevenson, our newly appointed Global Brand President and Chief Operating Officer of Quiksilver, Inc.; and Rob Colby, our new Americas region President.

Before we begin, I'd like to 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'd like to turn the call over to Bob McKnight.

Robert B. McKnight

Thanks, Bruce. Good afternoon, everyone, and thanks for joining us for our fourth quarter and year-end conference call today. I'm pleased to report that Q4 was another quarter of solid financial performance, and that fiscal 2011 was a good year for our company despite some challenging headwinds. Most importantly, we improved our business in fiscal 2011 through prudent investment and careful execution to begin delivering on our long-term plan that calls for significant revenue growth and substantially higher levels of profitability. Let me begin with the high-level financial highlights from the fourth quarter. Revenues in Q4 were $545 million, up 10% when compared to last year, reflecting the continued economic recovery in the Americas along with the improvements we made to our U.S. retail business in both product and merchandising.

Additionally, our e-commerce business continued its strong growth trajectory with revenues up 69% on a global basis. Gross margins declined 160 basis points to 51.9% of sales, the result of higher sourcing costs. Pro forma SG&A at $240 million was 40 basis points lower as a percentage of sales than in the same quarter a year ago. The resulting pro forma adjusted EBITDA in the fourth quarter was $57 million, roughly in line with our Q4 last year. I'd now like to take you on a brief tour of our regions, touching on some brand updates along the way.

Starting in the Americas, our business is healthy and continues to show signs of improvement along several measures. Sales in our own retail stores continued their strong run comping up 16% in the fourth quarter. That trend has continued into the current holiday sales period as November also comped up double digits. In the wholesale channel, sales were up 11% in Q4 and Quiksilver, Roxy and DC all grew. Similarly our Americas e-commerce business grew 77% in Q4. Our business in Latin America also continues to do well, particularly in Brazil, where we have decided to open a second retail store in Porto Alegre, as we continue to invest in this growing market.

Both Quiksilver and Roxy experienced strong bookings for spring and summer 2012, and we're excited about their momentum. Additionally, we remain on track with our other major growth initiatives in the Americas as well, of which there are many. Let me give you a couple of examples. We see a large opportunity to expand our addressable market in the middle part of the United States and Canada by adding cold weather outerwear to our product range, much like we've successfully done in Europe. The first step in this strategy is the launch of the Quiksilver mountain division at Outdoor Retailer Show in Salt Lake City in January 2012.

This new Quiksilver line will feature apparel with an emphasis on highly functional performance and reliability for a wide range of outdoor conditions. The product will appear in stores in July 2012 and we're very excited about the line and its long-term potential. And the winter collection of our Quiksilver Girls and Women is currently shipping to our accounts and the response has been fantastic. We look forward to expanding our offering for fall 2012 based on the market feedback we received this year.

Our European region continues to deliver strong results. Our business in France, which represents roughly 40% of our European revenues, is stable despite all the negative press we read. And the region includes several rapidly growing countries where we've been investing to expand our leadership in the action sports category. These include Russia, where we currently have 15 of our own stores, 17 franchised stores and we sell to more than 250 doors in our Russian wholesale business. And in Germany, where we've been historically underrepresented, we now have a fast growing profitable business. The only main country which remains particularly challenging for us in the region is Spain, which still suffers from high unemployment and further recessionary pressures.

We're encouraged by the return to positive same-store sales in our own retail stores for the first time in a long while. We attribute this improvement to the refitting program that has injected new energy into our stores and to our success in creating impactful concept stores in key locations across the European region, such as Boardrider stores located in Paris-Bercy, and Capbreton in France.

In our European wholesale business, Quiksilver, Roxy and DC sales were all up in Q4, and we're especially excited about Roxy's performance. Although the cold weather has only just begun to come in Europe, Roxy's traditionally strong outerwear is selling well. So as we await the results of holiday sales, we are increasingly confident in the growing traction of our collections. While we share the widely held concerns about the state of the major European economies, we're strengthening our relationships with key customers, who see us as a market leader, and we're seeing firsthand that we're taking market share in the current environment.

In the longer term, our growth drivers in Europe remain the same. Geographical expansion in countries such as Germany, Russia and India, where we've recently opened our second store, continue development and channel expansion of the DC business and Quiksilver Women's line, e-commerce, which grew in Europe by 60% in fiscal 2011 and retail where we continue to drive sustainable growth throughout our extensive store network.

Okay. Turning to our Asia Pacific region, where we are expressing great contrast among our many markets over there. Australia's recessionary environment is deeply affecting the entire coastal economy there. Our business, specifically, has been challenged by further deterioration of the retail environment as the Australian consumer remains in a very conservative mindset as reflected by government reports of record personal savings rates and other indicators. In addition, the strong Australian dollar is negatively affecting tourism and the associated traffic that would normally flow through our stores.

Nonetheless, the year ended up on a more positive note from a retail perspective with Q4 full-price comps in Australia and New Zealand being down only in the low single digits. That's quite a significant improvement over Q3 in which comps were down more than 20% compared to last year. This improving trend appears to be continuing into the early part of first quarter as November comps turned positive. In fact, up in the high single digits for the month.

We've encountered a very different business environment in Japan. Q4 revenues in Japan of $25 million are nearly back to pre-tsunami levels, reflecting quicker recovery than we had anticipated after the devastation of the natural disasters and their impact on consumer sentiment. In fact, the performance of our business in Japan turned out to be a highlight for the year, even amid a sluggish market and we feel confident that our new leadership there will drive rapid improvement in profitability.

To summarize our business in Japan, our distribution channel is clean, we forged new partnerships with our major wholesale accounts and we've invested in influential local athletes and turned the business around such as now appropriately represents our brands once again.

Everywhere -- elsewhere in the region, we took significant steps in laying the foundation for future growth in South Korea. We remain confident that we have the right team in place there and that this market can be a successful one if we service it with the right product and invest in educating the market about our brands. In addition, we established operations in China for DC and we're also confident in our new leadership there and we're excited about the possibilities for us in this market.

When I reflect on 2011, I'm very proud of our team's success in growing our top line despite our Asia/Pacific business experiencing a series of natural disasters, which could have a devastating impact. Our diversified business demonstrated its ability to withstand these types of shocks while also delivering growth.

We've pulled together and managed to achieve solid financial results and we made significant progress on several longer-term initiatives such as of the initial implementation of our new global ERP system, the launch of our Quiksilver Girls line, the resurgence of Roxy after repositioning the brand to reflect its original roots coupled with substantially improved products and a continued investment in our e-commerce business that better positions this important channel for continued rapid growth well into the future.

We also made important hires and appointments along our executive ranks in key markets. In that regard, with us today in Huntington Beach are Craig Stevenson and Rob Colby. Craig has recently been promoted to the dual role of Global Brand President and Chief Operating Officer of Quiksilver, Inc. We've tasked Craig with leading our initiatives to increase the efficiency of our global operation, including sourcing and product development, where we plan to expand our gross margin and streamline merchandising and design by increasing the proportion of global product in our lines. And in his global brand role, he'll help to ensure that our brands are consistently represented in product, global marketing and global athlete activation. Rob Colby succeeds Craig as President of our Americas region. To prepare him for his new role, Rob has done a great job as the Americas' Chief Operating Officer.

Summarizing our financial performance in fiscal 2011 for the full year, consolidated revenues were $1.95 billion, up 6% compared to fiscal 2010, and pro forma adjusted EBITDA was $200 million as compared to $214 million in the prior year, with the primary difference resulting from the substantially weaker markets in Australia and New Zealand, a dynamic shared by our peers in that market.

With respect to the brands, Quiksilver grew 5% in fiscal 2011 to $806 million and although Roxy was down 2% for the year to $519 million, each quarter of fiscal 2011 improved for the brand, finally growing 10% in Q4 compared to fourth quarter of fiscal 2010. And our fastest-growing brand was once again DC, up 15% in fiscal 2011 to $545 million.

I'd like to add that one of our overriding initiatives is always to put product first, to continue our tradition of product development through innovation across all of our brands. And in fiscal 2011, our product from all 3 brands looked fantastic. And I'm delighted to say that our ranges for fiscal 2012 are even better. So we expect our great products to continue to help drive our business into the new year.

Fiscal 2011 was also another fantastic highlight year for our athletes, who helped us reach our important core demographic. I'd like to take just a brief moment to mention a few beginning with Quiksilver's signing of young surfing legend and 4-time world champion, Stephanie Gilmore, and re-signing of super influential free surfer, Dane Reynolds. Roxy's Sally Fitzgibbons won the first 3 ASP World Tour events of her career, nearly won the World Title and did win the U.S. Open of Surfing. And of course the biggest news in the action sports world this year was delivered by the incomparable Kelly Slater and his dominant season-long performance and winning his 11th world championship title.

The popularity of these great surfers was on display at last week's Surfer Poll Awards, which recognized these athletes for their skills through the eyes of the voting public. In the men's division, Kelly and Dane took first and second place while Steph and Sally placed third and fifth among all female surfers. DC's fiscal 2011 included the refuse-to-lose attitude of DC team rider, Trey Canard, as he raced his way to AMA Supercross Rookie of the Year and rally driver and DC cofounder, Ken Block, once again generated million contacts with potential consumers with the release of the fourth installment in his Gymkhana series, which has now accumulated more than 140 million YouTube views.

We also enjoyed immense coverage of several significant Quiksilver, Roxy and DC-sponsored events in 2011, including great surf contests in Australia and the Quiksilver Roxy Pro -- I'm sorry, with the Quiksilver Roxy Pro, the Quiksilver Roxy Pro France, the inaugural of the fantastically popular Quiksilver Pro New York and the iconic Quiksilver in Memory of Eddie Aikau at Waimea Bay in Hawaii. In particular, the Quiksilver Pro New York overcame the destructive power of Hurricane Irene and successfully brought tens of thousands of New Yorkers to the beach for a week of spectacular waves while the ASP Tour's elite surfers performed at their very best level. And for the second consecutive year, DC brought Rob Dyrdek's Street League skateboarding competition to life with 4 terrific contests across the country and the world's best street skaters competing live on ESPN and ESPN2.

And in recognition of the outstanding performance of our Lib Tech and Gnu brands, Transworld Business just named Mervin Manufacturing the brand of the year. There are countless more athletes and events that helped us to reach consumers in fiscal 2011 and we expect 2012 will be another year in which our ties to these athletes and events provide as with substantial competitive advantage.

We begin the new fiscal year encouraged by the opportunities in our business and also cognizant of the risks, but it's evident from each of our brands, each of our regions and each of our channels, that there is momentum all throughout our business and we continue to operate at a very high level.

To provide more color in our progress, Joe will now take you through our fourth quarter financial detail.

Joseph Scirocco

Thanks, Bob. Good afternoon, everyone. As we reported, consolidated fourth quarter net revenues at $545 million were up $50 million or 10% compared to last year, and it grew 6% in constant currency. In the Americas, revenues were $250 million, up 13% compared to last year, while European revenues were $213 million, up 6% in constant currency. Asia/Pacific revenues were $82 million, down 7% in constant currency.

Consolidated gross margins contracted by 160 basis points to 51.9% compared to 53.5% in the fourth quarter a year ago. The margin compression was largely driven by higher source and costs. As the fiscal year drew to a close, our European and Asia Pacific regions were able to once more offset a portion of higher input costs with favorable foreign currency hedging contracts.

We recorded $11 million of non-cash, fixed asset impairment charges in the fourth quarter primarily related to underperforming stores in our Asia Pacific region, primarily in Australia. We also recorded $8 million of restructuring charges associated with lease exits and severance. Overall, pro forma SG&A expenses, excluding special charges, were $240 million or 43.9% of sales, which was 40 basis points lower as a percentage of sales than in the fourth quarter a year ago.

Our tax provision this quarter includes a credit of $77 million primarily related to the settlement of a French tax audit and the corresponding release of certain tax liabilities, as well as the release of tax valuation allowances based on the turnaround in performance and outlook for our Japanese business.

We continue to focus our attention on EBITDA as a key measure of our performance and in the fourth quarter, we generated pro forma adjusted EBITDA of $57 million, down $2 million compared to the same quarter a year ago.

Interest expense was $14 million in the quarter, down from $16 million the prior year based on our improved debt structure. Our pro forma consolidated income for the fourth quarter, including interest and taxes but excluding tax credits and special charges, was $11 million or $0.06 per share compared to $22 million or $0.12 per share in the same quarter a year ago.

Now I'd like to turn your attention to the balance sheet. Receivables at $397 million are 6% higher than for the same period last year in constant currency. On an overall basis, DSOs were 61 days, one day better than last year. Inventory at quarter end was $347 million, up 26% in constant currency compared to last year. The increase is due to the early receipt of goods. Prior seasons' goods constitute only 5% of our inventory, while current and future seasons are up sharply.

CapEx was $34 million in the quarter, up $20 million compared to a year ago and included continued investment in our retail stores and spending related to our ERP system implementation, which continues to be on schedule and on budget. We ended the quarter with $638 million of net debt, 5% higher than last year due to the working capital needs of our growing business. Cash on hand at the end of the quarter was $110 million.

As we begin the new fiscal year, we'd like to again reassure investors that we remain focused on our long-term plan that calls for substantial revenue growth and significantly higher levels of profitability. Although we won't be providing specific guidance today for fiscal '12, we would like to share with you some of the important assumptions and drivers for the new fiscal year. With regard to revenues, we expect that each of our brands, Quiksilver, Roxy and DC, and each of our 3 regions, will grow in fiscal 2012. Because we expect DC to be our highest gross brand on a percentage basis and because DC's fiscal 2012 strategy includes a significant back-to-school component, we expect our overall revenue growth to be higher in the second half.

Additionally, we expect several of our new product initiatives to begin generating revenues in the second half. From a gross margin perspective, keep in mind that increased sourcing costs began to impact our margins in the third quarter of fiscal '11 and that we will not anniversary those impacted margins until the third quarter of fiscal '12. Additionally, the hedging benefits that enabled us to offset some sourcing cost increases in fiscal 2011 will not occur in fiscal '12. Therefore, we expect to be buying goods for Quiksilver Europe with weaker euros than in fiscal 2011 throughout the new fiscal year. This is only a one-year phenomenon, however, as we have improved the rate for fiscal 2013.

And with regard to expenses, we do expect some reduction in SG&A spending as a percentage of sales in fiscal '12 compared with fiscal '11. So in summary, our fiscal 2012 plan calls for us to be squarely on the path to achieving our longer-term objectives.

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

Robert B. McKnight

Thanks, Joe. So in summary, we exit 2011 in great shape to deliver improved performance in 2012 in line with our long-term plans. Investments we made this year to deliver strong Quiksilver, Roxy and DC products in both new and established categories helped us to achieve our revenue growth objectives. Additionally, despite particularly challenging consumer environments in parts of Europe and Australia, we continue to see solid growth in our emerging and developing markets around the world. Taken together, we believe that fiscal 2012 will be another good year for Quiksilver and our long-term plan to substantially grow revenues and significantly expand our profitability.

Thanks, again, for participating in our call this afternoon.

Bruce Thomas

Okay, operator. That concludes our prepared comments. We're now ready for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will come Taposh Bari from Jefferies.

Taposh Bari - Jefferies & Company, Inc., Research Division

I guess a couple of questions. First, I wanted to, I guess, get into more specifics around some of your growth initiatives. So I appreciate the 5-year plan that you've laid out for us and it seems like Europe, particularly Germany and in some of these emerging markets like Russia, are pretty nice opportunities for you. I was wondering if you could help quantify maybe those specific markets; where you are today and where you think you can get to over, I don't know, maybe the next 4 years?

Robert B. McKnight

Yes, well obviously, there's sort of like 4 or 5 main initiatives for growth, and in no particular order, but obviously we believe big in Quiksilver Girls and the Women's business, and we think there's $100 million opportunity there in the next 5 years. So we're really focused on that. The initial launch has gone great, better than we expected. We'll probably double the business this year, although it's small, but we'll double it this year on our path to the, like I said, the $100 million objective. The next ray is definitely e-commerce. We believe in the -- that people want to -- our generation of young consumers, they want to buy anywhere, anytime, any place on any device. So we're heavily investing in that area of the business. We've seen double -- very big growth this year in e-commerce and we'll continue on that path. Of course the next one is obviously the DC business, which is if it's mature anywhere, it's in America. But we still have great growth as all over Europe, all over Asia Pacific and as you know, different from Quicksilver and Roxy, it's more aligned with urban culture, city, all that and it's a great really strong logo and it just resonates everywhere in the world for that business and in particularly like sport within the city, urban culture. And then of course the next ray is on our emerging markets. We've spoken about Latin America, particularly Brazil, but yes, Mexico in the mix and Brazil; those are 2 bookends and all the business in the middle. We hold out and there's going to be a big opportunity the next 5 years for that. And then you take a look at China and North Korea and some of the zone in northern Asia Pac. We know that we have a lot of consumers up there that are trying to find these action sports, Western culture brands. We're kind of first-to-market in a lot of those places and we've done a really good job and we will get substantial growth out of those investments. And then talking about the Eastern Europe area, we forged into Russia ahead of any of our competitors. We've done a great job there and you start adding Germany to the mix and some of the countries to the north and the east, and we will do a good job there. So just to quantify these sort of initiatives, like I said, Quiksilver Girls is $100 million in 5 years, e-commerce somewhere in the same area, $100 million. DC brand, another $0.5 billion. As we spoke, we want to take that business to $1 billion in 5 years and emerging markets is a couple of hundred millions more. So again, this is all under our objective of getting the company to $3 billion in 5 years.

Taposh Bari - Jefferies & Company, Inc., Research Division

That's very helpful. And I guess the second question I wanted to ask is if you can comment on your backlog, what you're seeing for spring/summer? If you can kind of either directionally or quantify it by either brand or geography at this point in time? And also, are you seeing any kind of order cancellations out of norm or is it kind of business as usual? Because it seems like your European business is actually really strong in light of some of the macro data points that we're getting out of that geography?

Joseph Scirocco

Yes, to push the -- we will disclose the backlog in the 10-K and as you know it's a little bit -- it can be a little bit misleading just because of the timing of shipping and timing of order flows and that kind of thing. But as we look for the spring/summer seasons in both Europe and in North America, we're looking at kind of mid-single digit growth in those 2 regions in the first half. In Asia Pacific, we're still negative because of Australia's market, so that's still feeling the pain in South Pacific. Japan is up kind of mid-singles. That's kind of how we're coming out of the year. We're looking -- now we're just starting to show product to sales teams, sales reps for fall and winter markets in Europe and North America, and we're getting very good reception, but we're with our own sales forces now. So we'll fill those order books out in the next couple of months and hopefully have more good news to report. And as we said, we have a much bigger play in the back half of next year. One thing to keep in mind in this is that DC's business is -- as a footwear business, is only about 2/3 in the prebook. The -- a large portion of their business is done on an at-once basis. So the order book doesn't always reflect a lot of the initiatives that we have going on, but we're pretty confident about DC going forward and have a substantial growth plan for 2012.

Taposh Bari - Jefferies & Company, Inc., Research Division

And just the final quick question that I had was I appreciate your commentary on November's double-digit growth in the Americas. Do you guys care to comment, I know it's early, but any commentary on what you're seeing so far in December?

Joseph Scirocco

It's about the same. It's kind of like low-teens thus far. But that's a pretty narrow slice as you're in the holiday season. Let's see how the next couple of weeks shape up.

Operator

And moving on, our next question will come from Jeff Van Sinderen with B. Riley.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

I wonder if you can talk a little bit more about, I know you mentioned a few things in Europe, just wondering if there's anything there in terms of what you're hearing from some of your retail partners. I know you said comps turned positive at your retail stores there. And then also any more color you can add on kind of the Australia-Asian region, it looks like the Aussie comps, I think you said, started to turn positive, so are we out of the woods there?

Joseph Scirocco

Well, we don't want to put too much emphasis on the European comps in a single quarter, especially with all of the news that you're hearing. But it is very positive to see that after a number of successive quarters, we turned positive in Q4. So kind of a low-single digit positive comp. We are talking to the major customers now about the holiday, our holiday '12 sales and winter '12 sales. They're very positive on the line. We have not yet met with the multi-brands but we feel very good about the collections going forward. It's a little bit of a late winter in Europe. It's been warm, but we still see -- even with that pattern, we still see the traditional outerwear and Roxy, in particular, selling through. And that's very encouraging to us as we look to book the back half of next year. I think in Asia/Pacific, yes, continued pressure in the Australian market, but it was encouraging to see that we came to a mid-single digit negative comp in the quarter, that's substantial improvement. The wholesale channel remains tough there. But what we're most encouraged about is Japan and the strong position we're now in. We're really clean and well positioned to grow from here. The effects of last year's disaster seem to be behind us. And we're just launching DC in China and all of our brands in Korea -- South Korea, where we've opened a store. So we have high expectations for all those markets around North Asia.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. And I know you mentioned kind of a late start to winter in Europe. Is there anything you can add on -- it seems like a relatively late start here in the U.S. as well, at least on some regions. Is there anything -- any color to give on outerwear or some of the other seasonal merchandise that would be more impacted by that?

Robert B. McKnight

We have experienced really good growth in our technical snow business over the last few years. It continues this year, and holiday selling in the channels that we can see, so our e-comm and retail channels, has been healthy in all of our iconic categories. Fleece is the only category that's really slower than what we're used to.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

And then I know you mentioned you gave some guidelines for the year for sourcing costs and so forth, is there anything to speak to in second half in terms of where we can start to see a benefit?

Joseph Scirocco

Well, beginning in the third quarter of next year, Jeff, we do anniversary the sourcing cost impacts. We will still have a little bit of a hangover because we're buying with weaker euros next -- in the next half of the year compared to fiscal 2011. So I mean overall, we would expect to see some modest decline in gross margin, overall, but in the back half of the year, it should flatten.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

So all things considered, when you think about EBITDA for this year, should we think about EBITDA being up a little bit for this year or flat or how should we think about that?

Joseph Scirocco

Well, I think if you put the pieces together that we discussed, as we said we expect to grow both the top and bottom line this year. The higher costs that come out of the change in foreign currency that will cost us more in dollars to source Quiksilver Europe will impact margins. But overall, we still expect to be -- to have a higher profit level.

Operator

From Piper Jaffray, we'll hear from Adam Engebretson.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Maybe first, and sorry if I'm missed this, but did you say how quarter-to-date trends were tracking in Europe?

Joseph Scirocco

No, we really didn't -- quarter-to-date trends, only to say that it's been warm. It's been a late start to the season, but we're encouraged by some of the sell-through and particularly in the Roxy line.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

And then also whether in Europe or in Asia Pacific are you seeing any increases in requests from your retail partners for vendor support? And if so, are you comfortable extending them currently at this time?

Joseph Scirocco

It's not the same kind of pattern with major U.S. department stores. Unfortunately, we have a very broad distribution throughout both the European and Asia Pac region. So that does not appear to be a major factor in our business and it's not a major factor in our plans going forward.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

And then maybe one last question, just for a modeling perspective, any guidance on what to expect for taxes or interest expense next year?

Joseph Scirocco

Yes, I think that for taxes, you can think about somewhere in the $45 million to $50 million range, and interest should be approximately $60 million to $65 million.

Operator

From Robert Baird, we'll hear from Mitch Kummetz.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Bob, let me start with you. You ran through some of the growth opportunities sort of longer -- immediate, longer-term growth opportunities for the business. I'm curious to get your thoughts on Roxy. The business is down, I think, about $250 million from the peak in 2008, but you guys are obviously seeing some momentum there. We're seeing it with some of the work that we do. I'm just curious as to where you think that brand can go over the next 3 to 4 years. How much of that lost revenue do you think you can capture?

Robert B. McKnight

Well, Roxy is one of the most thrilling things that's happened to us in the last year, as you know. That's in my opening comments because we really have -- we sort of stopped the decline and now it's actually rebounded in a positive way in all regions. So to put some numbers on where the growth goes from here, we really don't know. We're going to have to watch over the next few seasons and just see what kind of momentum we have and what we can sustain. But in particular, we're -- we just -- the bookings in America for instance, the bookings for summer 2012 are up 10% over last year. Now that's an indicator but it's just one little figure in the whole scheme of things. So it's really hard to, like, put our number on it now. We know that now we've stopped the decline in the main markets. We know we have growth in the new markets. All rolled out, there will be growth in Roxy and I imagine, a couple of quarters, we can probably give you a better estimation on where we think it goes over the next 5 years. But it's definitely turned the corner. We've made the line more like what it used to be, more whimsical, fun in the sun for pure juniors, 12 to 16 or something in that age bracket. We've done a really good job with the product and the marketing to seed it back in the core of the market and the market's responding. It's doing well to the pure juniors play and everyone seems to be happy, so it's now rebounded.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Joe, 2012, on the SG&A, you said you can get some leverage there. Are you looking to cut costs or how much of that is just a function of FX where a weaker euro just helps you on the expense side in Europe?

Joseph Scirocco

Well, it also -- a weaker Europe also hurts revenues and consolidation. So it's -- this is really -- what we're talking about is maybe 100 basis point improvement in SG&A over the course of the year as a percentage of sales, and that's the way we talk about it. So we're not affected by currency. That should be back half weighted as well just given the expectations for faster growth rates in the second half.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

And then on your -- I don't want to push it too hard on Europe, kind of, quarter-to-date but I think you gave comp on U.S. and Asia Pac or maybe Americas and Asia Pac, I'm not sure. Could you say what your comp is on your -- I mean, Europe's your biggest retail business, if I'm not mistaken. I'm just kind of curious what your comp there was for November.

Joseph Scirocco

The comp in November, if I recall, was kind of a low- to mid-single digit negative. We think that as we look out for the full quarter, and it's difficult to project because we have the holiday season and the sales period in January, but it's entirely possible that we can reach a positive comp there. What we've been doing, though, is we've been very disciplined in terms of our pricing. So we are generating very strong margins and, I mean, hell, we can turn positive comps rather quickly if we chose to mark down. So I think that things are definitely better than they were for the majority of our full fiscal year and we might hit another positive comp next quarter.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

And then PacSun was out last week with their earnings talking about some accelerated store closings. Any thoughts on that? I know it's a relatively small part of your business now, but does that matter? Does it move a needle on margin or...

Joseph Scirocco

I'm sorry, I missed the first part of your question.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

On PacSun, their accelerated store closings, does that matter much for you?

Joseph Scirocco

Now, listen, I think what's good for their business should be good for us down the road, and we wish them very well recognizing what they have to do so...

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Last thing, if I may, any way to quantify to the overall impact of FX on 2012 when you roll everything up from the sales side to the margin side?

Joseph Scirocco

Well, sure...

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

In terms of its earnings impact.

Joseph Scirocco

You can make your own estimates of what's going to happen with the currency but I think we generated -- I don't know the reported number of operating income that we disclosed in our press release off the top of my head, but it was sort of on the order of EUR 90 million to EUR 95 million in terms of EBITDA. So take your currency effect times that and that would be the potential impact on our numbers.

Operator

And next we'll go to Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo Securities, LLC, Research Division

One thing I just wanted to get a little more color on, it looks like the operating expenses in the U.S. were up a good bit in the quarter. Am I looking at that correctly?

Joseph Scirocco

You are.

Grant Jordan - Wells Fargo Securities, LLC, Research Division

Okay. What were some of the drivers there?

Joseph Scirocco

Are you in New York by any chance?

Grant Jordan - Wells Fargo Securities, LLC, Research Division

I'm on the East Coast.

Joseph Scirocco

Yes. Okay. So we had a little event in Long Beach in the fourth quarter of the fiscal year. We had tens of thousands of people at the beach for our first ever sort of domestic ASP World Tour event and it was a terrific function. But it was a little bit expensive, so that was one thing.

Grant Jordan - Wells Fargo Securities, LLC, Research Division

Would you care to quantify that just so we can think about next year?

Joseph Scirocco

As I said, we think that for next year in SG&A, we can improve as a percentage of sales by about 100 basis points and most of that will be in the back half. So you should see it come through.

Grant Jordan - Wells Fargo Securities, LLC, Research Division

And then were there any borrowings on the revolver at the end of the quarter?

Joseph Scirocco

We had some on the U.S. revolver. We have EUR 75 million of lines of credit in Europe. We had no drawings under those. I think at the end of the fiscal year, we had about $275 million to $300 million of liquidity. So yes, we had some revolver borrowings but not substantial.

Operator

From Bank of America Merrill Lynch, we'll hear from William Reuter.

William M. Reuter - BofA Merrill Lynch, Research Division

The gross margin decline in the European business during the quarter, can you talk about what some of the biggest drivers are there, whether it was the higher cotton costs starting to creep through or whether it was discounting. I guess any color that you could provide there will be helpful.

Joseph Scirocco

Just the normal stuff. I mean, just kind of sourcing and a function of how much of price increases we could pass through and make stick in the context. Also perhaps a little bit of a change in mix between wholesale and retail, which can tend to drive the gross margin in a particular direction.

William M. Reuter - BofA Merrill Lynch, Research Division

So it wasn't due to discounting from, let's say, too much product? It was more either a mix or the not pushing throughout of price increases to offset cotton?

Robert B. McKnight

Right. In Europe, the sale period is in January and so we don't do a lot of markdowns early.

William M. Reuter - BofA Merrill Lynch, Research Division

And then you talked about the 26% inventory increase and that the prior seasons' goods were only 5%, which sounds a good. I'm wondering how you feel about your inventory levels at this point relative how they were at the end of fiscal year 2010?

Joseph Scirocco

Well, we feel they are high but we planned it that way. We did it for a specific reason; to both protect supply and make sure that we were in stock to meet need orders. We think that, that was a good move for us. And as we go into 2012, we would expect that probably by the fall season, that comes back down to maybe a more normalized level. I think also that in 2010, we had a different attitude, which was a lot more conservative, let's say, and so we were probably understocked and missed some business in the snow and outerwear categories, particularly in Europe in the latter part of 2010. So we were probably compensating for that a little bit. I mean, this is an ebb-and-flow kind of thing, but it's not aged inventory. And we have also a good bit of future seasons in stock. So we think it's okay.

William M. Reuter - BofA Merrill Lynch, Research Division

And then just lastly, you talked about the 5-year growth plan for $3 billion in sales. I don't think I've heard about the 5-year plan for where you think EBITDA can be. Do you guys have kind of an estimate where the longer-term growth objectives are there?

Joseph Scirocco

Yes, we would like to double it and we think we can do that.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay, so somewhere in the $400 million range over the next 5 years?

Joseph Scirocco

Yes.

Operator

From Sterne Agee, we'll hear from Rasheed Pari [ph].

Unknown Analyst

Just several questions. One, can you quantify the exposure that you may have in terms of buying goods in weaker euros in 2012? You noted a margin impact, what is your expectation for 2012 in terms of buying in weaker euros?

Joseph Scirocco

Maybe 75 to 100 basis points of sales.

Unknown Analyst

Of sales?

Joseph Scirocco

Yes.

Unknown Analyst

In terms of just your currency risk for 2012, have you hedged out any more of it? Or can you just give us an idea as to where you're hedging, if you are?

Joseph Scirocco

We are, and I think the best way to do this because it's a bit complicated is to just suggest that you take a look at our 10-K when we file. I think at the end of the fiscal year, we had notional value of approximately $400 million, which is represented by forward contracts, euro, with the Australian dollar, with the Japanese yen, Canadian dollar and other currencies. So it explains our program and our mark-to-market adjustments and all that kind of stuff. And then if you have questions about it, just give us a call and we can talk about it.

Unknown Analyst

Sure. And with the regard to the 75 to 100 basis points of exposure, is that net of any price increases that you're expecting to take on in the first half of next year -- or, excuse me, mostly in the first half?

Joseph Scirocco

Yes. Just to be clear, it's not exposure, it's a known higher cost because the rate at which we bought dollars in fiscal '11 was higher than the rate at which we are buying in 2012. So we have a known cost here of about 75 to 100 basis points.

Unknown Analyst

Now with regards to your spring orders, both domestic and I guess specifically Europe, are you seeing or hearing of any order cancellations? And then with regard to just 2012, specifically in Europe, are you seeing any of these -- your retailers taking on a more conservative approach in terms of fall 2012 orders? Meaning units are going to be down more than what you had thought or say more than 2011, can you just maybe give us some color there?

Robert B. McKnight

Sure. As a general comment, I would say that our European customers don't cancel orders. It's more of a -- that can be more of an American phenomenon but they actually adhere to their agreements with us, and so we of course touch wood as we say that, but that's the way that, that works. We have not booked fall of 2012 yet. Yes, we did notice in the spring bookings, which took place a number of months ago, that there was some conservatism by retailers, but we have not booked fall '12 yet so we just don't know.

Unknown Analyst

But when you say conservatism but no order cancellations for spring orders, correct?

Robert B. McKnight

No.

Unknown Analyst

And then 2 more questions. How much of your inventory increase is due to volume versus inflation?

Joseph Scirocco

I think cost increases across the board and it's a very broad comment. Cost increases are probably in the 10% to 15% range. So the rest...

Unknown Analyst

And then lastly, it's great to see your 4-year, 5-year growth plan but just to try to, I guess, hone in on what's going to happen in 2012, can you just maybe quantify what your expectations for 2012 with your growth strategy? But more importantly, to get to these levels in terms of $100 million of e-commerce, et cetera, what type of investments are you going to have to put in place to reach these levels? And have you done so already, meaning is this something that you're going to do in 2012 or is this something that you started in 2011?

Joseph Scirocco

We have started it already. It's been underway in various forms. When we initially launched the e-comm business here, we did it completely through third-party outsourcing arrangement. In 2011 we began a process to build our own front end so we made substantial investment in software, and we're developing our own store. As we go forward, we'll do the same in Europe and elsewhere. We're thinking about this in the emerging markets of Brazil and in Korea in conjunction with store openings. There's a substantial investment also that goes into our network and it kind of ties with SAP in terms of making all of our inventory available for sale on the web and tying it all together. So our CapEx is being shifted to some degree from bricks and mortar retail to -- into e-commerce.

Unknown Analyst

Any idea -- can you quantify what that investment may be in 2012?

Joseph Scirocco

Well, you focus excessively on e-commerce?

Unknown Analyst

No, just in terms of your growth strategy, if you want to call it that.

Joseph Scirocco

I think the way to think about this is if you think about the $3 billion in sales over the course of 5 years, it kind of implies a mid- to high-single digit top line growth rate. And so what we're saying is, we understand that and we believe that we're on track to get there.

Operator

And next we'll hear from Claire Gallacher with Auriga Investments.

Claire Armstrong Gallacher - Auriga USA LLC, Research Division

Joe, I just want to clarify, for the SG&A spend, is there any kind of seasonality to the spending or is it just -- a lot of it was, I believe as memory serves, first-half weighted in '11. So is there any kind of seasonality we need to know about for 2012?

Joseph Scirocco

Yes. So on -- you know that the flow of our business is our retail business is highest in Q1 and Q3. So retail of course tracking a higher percentage SG&A than the wholesale business. You would expect SG&A to be higher in the first and the third quarter associated with retail and I think that, you will find out to be true.

Claire Armstrong Gallacher - Auriga USA LLC, Research Division

So, I mean, that sounds like your normal seasonal spend though, correct?

Joseph Scirocco

Yes, may be a little bit different this year in terms of percentage sales just with respect to second half growth and some of the initiatives and back-to-school, which would affect Q3. So you could see some impacts there as well.

Claire Armstrong Gallacher - Auriga USA LLC, Research Division

And then just quickly, CapEx for 2012, if you gave it I apologize, but if you have some kind of range there? And then expectation for free cash flow?

Joseph Scirocco

Yes. So CapEx, we would say probably on the order of $75 million in capital spend for next year, with free cash flow somewhere in the $50 million to $75 million range. That's our initially thought about it.

Bruce Thomas

We have time for about one more in there, operator.

Operator

Your final question will come from David Griffith with Roth Capital, Markets.

David E. Griffith - Roth Capital Partners, LLC, Research Division

We've seen a really strong footwear cycle, and certainly that's been great for DC, but it seems like Roxy is actually starting to track pretty well in the footwear side, too. Could you maybe update us on that?

Robert B. McKnight

Yes. Roxy has had a great run on the footwear side for the last several years and the trend continues in the Americas in several categories: casuals, boots, we're really building a business in boots and in all channels as well. So as we look at the specialty channel, we're growing there. Department store channel, business is improving, and in the family channel as well. So Roxy footwear is definitely helping drive some of the growth and the turnaround of Roxy here in the Americas.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And internationally, what are the plans on footwear?

Unknown Executive

We're just looking at that at the moment. Europe has quite a solid business with footwear as well, Roxy footwear. There's a bit of a difference between the demographic of the footwear business in both those regions, but all in all, we're looking at consolidating it under one roof eventually and really getting some leverage from that. So we'd expect to get some better margins.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And then, Joe, on the settlement of the French tax audit, it sounds like that primarily is going to be, I think you said, a release of liabilities, so we really should not look for any cash impact, is that correct?

Joseph Scirocco

That's correct. What it does is it basically solidifies our position on over $100 million in net operating losses associated with the Rossignol transaction a number of years ago. There is a cash impact; it's an adverse one, in fiscal '12, and it means that we, as part of the settlement, we do have a cash outlay or taxes. But that is factored into the cash flow estimate that I just gave a few minutes ago. So even absorbing that, we expect to generate strong cash flow next year. But on that big tax credit, there's no cash flow impact.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And then would we be seeing a Quiksilver Pro New York in 2012?

Unknown Executive

We're still looking at that at the moment. We're hoping that, that's a possibility, but we're just working through some insurance issues that we've had with the last event we had in the hurricane and it's a relatively big-ticket item for us from a marketing perspective. So we're just reviewing all of those options now.

Bruce Thomas

So that concludes our call today. On behalf of everyone here at Quiksilver, thank you for participating and we're looking forward to providing our fiscal 2012 first quarter results in early March.

Operator

The replay for this call will be available. We thank you for your participation, and have a great day.

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