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Executives

Robert B. McKnight Jr. – Chairman, President and Chief Executive Officer

Joseph Scirocco – Chief Financial Officer

Martin J. Samuels – President, Quiksilver Americas

Bruce Thomas – Vice President, Investor Relations

Analysts

Jeffrey Klinefelter – Piper Jaffray

Kate McShane – Citigroup

Brad Stephens – Morgan, Keegan & Company, Inc.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

Gretchen Hailey – J.P. Morgan

David Glick – Buckingham Research Group

Bill Reuter – Bank of America Securities

Emily Chang – Lehman Brothers

Quiksilver Inc. (ZQK) F2Q08 Earnings Call April 30, 2008 4:30 PM ET

Operator

Welcome to the Quiksilver earnings conference call. (Operator Instructions) Now I would like to introduce Bruce Thomas, Quiksilver’s Vice President of Investor Relations who will chair this afternoon’s call.

Bruce Thomas

Good afternoon everyone and welcome to the Quiksilver’s Second Quarter Fiscal 2008 Earnings Conference Call. Joining me today are Bob McKnight, our Chairman, President and Chief Executive Officer; Joe Scirocco, our Chief Financial Officer; and Marty Samuels, President of Quiksilver Americas. David Morgan our Chief Operating Officer who also serves the company as interim President of Rossignol would normally participate in this call, but he is currently in Europe.

Before we begin, I’d 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 ‘Risks 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 the non-GAAP financial information, the most directly comparable GAAP financial information, is included in our press release located at 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 Jr.

Good afternoon everyone and thanks for joining us for our second quarter conference call. As you have undoubtedly seen by now in our earnings press release, we’ve moved the entire Rossignol business into discontinued operations including both the Target and its apparel divisions. Both Jo and I will be speaking more about Rossignol in a few moments, but for now let’s begin with the high-level financial highlights from second quarter focusing on our core apparel and footwear brands which now compromise our continuing operations.

We’re pleased with our second quarter results and with our progress on certain initiatives. Net income from continuing operations for the second quarter was up more than 19% over the second quarter of 2007. For our core apparel and footwear business, consolidated net revenues for the second quarter of fiscal 2008 grew 15% to $596 million. Consolidated gross profit grew 250 basis points to 50.4% of sales and expenses during the quarter increased 130 basis points to 38.7% of revenue. Our sales growth and improved gross margins in our core business drove an operating profit increase of 27% to $69 million.

Two things about this performance are particularly noteworthy given the challenges we’ve all witnessed in the retail environment. First, our results benefited from the contribution of our European business which typically has the highest gross margins within our group. Although Europe has its own challenges, our results this quarter illustrate the merits of our highly diversified business. Secondly, we’re pleased to see some early signs of higher gross margins attributable to sourcing improvements which we identified as a major initiative for this year and beyond. It suggests that we are on the right track in this important area of profit improvement.

Nonetheless, I must say that the environment remains challenging. As retailers in our industry have reported before us, some of our key regions are amongst the hardest hit economies over the past several months. In this challenging environment our retailers are understandably cautious and all of us are controlling our inventory levels as we await greater visibility. In response, we’ve taken a more cautious outlook towards the second half of this fiscal year.

With respect to the global expansion of our business, I visited operations in Eastern Europe during the quarter and I was very impressed with our growing market penetration and of consumer enthusiasm for our brands and products. It is clear that action sports and the lifestyle of [inaudible] is quickly spreading around the world. In fact, our local selling California newspaper, the Orange Coast Register, this weekend ran an article with images of skateboarders on Letna Park in Prague, which was formerly a shrine to Joseph Stalin. The boardriding lifestyle is truly a global phenomena and this is the culture of today’s youth. By the way, Quiksilver Europe has three stores in the Czech Republic that each generate sales of more than $2 million annually. In short, our efforts to expand throughout the continent have been working and we feel good about our leadership position in a growing global market.

I’d now like to spend a moment to update you on Rossignol on the process current underway to sell that business. Upon completing the preparatory phase during the latter portion of the second quarter, our initial list of potential buyers has been reduced to a select group of candidates who will now receive a confidential background data. We expect this process to proceed at a reasonable pace and to conclude with a competitively priced sale of this business in its entirety, and because of the sensitive nature of this process, there’s really no more that we can say publicly regarding this matter till the process is complete and a definitive agreement has been reached. Taking the longer view, our brands are really all about the authenticity of a lifestyle epitomized by the athletes we sponsor.

Our Quiksilver Roxy and DC sponsored athletes continued to distinguish themselves this quarter as the very best in their respective sports. Just this last Monday, Quiksilver surfer Kelly Slater won the Globe Pro Fiji for the first third win in the first four events of the year. This is his best start ever on the ASP Tour and has a solid grasp on the No. 1 ranking while Jeremy Flores is currently ranked No. 13 and Dane Reynolds is ranked No. 16. Quiksilver’s snowboarder Austin Smith won Rookie of the Year at the 2007 Transworld Snowboard Rider’s Poll awards in Las Vegas.

Among our female athletes, Roxy surfer Sofia Mulanovich is currently ranked No. 1 in the women’s ASP World Tour while Sally Fitzgibbons is currently the 2008 WQS Tour leader. Roxy snowboarder Torah Bright is on a fantastic run winning the World Superpipe Championship, the Nippon Open Superpipe, the US Open Halfpipe, and the overall Global Open Championship. Roxy snowboarder, Kjersti Buaas won the US Open Slopestyle while Sarah Burke recently won the World Ski and Snowboard Superpipe Festival. And providing some additional exposure for our brands this quarter, five of our DC sponsored athletes were recently featured on the covers of our industry’s leading action sports magazine.

I’d now like to spend a few moments describing a few of the dynamics that are driving increasingly wide acceptance of our brands around the world. To begin with, boardriding and action sports such as surfing, skateboarding, snowboarding, motorcross, and weightboarding have come to represent much more than an activity to a generation of kids and young adults. This lifestyle is growing beyond traditional action sports and represents a movement into new environmental or outdoor sports such as kite, climb, bike, and paddle, just to name a few. Quiksilver defines this lifestyle. Our target customers are part of an enormous male and female demographic. This group is adventurous, curious, and technologically savvy, searching the internet, watching videos on U-tube, posting blogs on My Space, and playing video games over the internet with friends in other countries, and they are connected, connected to the lifestyle, the latest fashion, new music, language, and their own sensibilities. Our reach is growing right along with this demographic. We’re expanding our presence throughout Eastern Europe, into Russia, into Latin America, and into China. Our products are currently distributed on 6 continents and in over 90 countries and roughly 60% of our revenues are generated outside of the United States. Quiksilver Roxy and DC are leaders across the action sports base and are positioned as the premier lifestyle action sports brands in the world.

So in summary, we’re pleased with our solid second quarter financial results and the early progress of our margin expansion initiative. We remain committed to the Rossignol sale process, and as we separate the results of the Rossignol group from those of our continuing core businesses, it becomes increasingly clear that our broadly diversified mix of brands, products, geographies, and distribution channels position us in challenging economic climates such as the one we all face today. Thank you and now Joe will take you through the financial details.

Joseph Scirocco

As Bob mentioned, we now treat Rossignol as discontinued operations which is required by the accounting rules in connection with our sale process. So, the press release tables include Rossignol’s hard goods and apparel business under that classification. We have also provided reclassified data for each quarter of last year so that you can think about the business in consistent terms. During the second quarter, we developed a new business plan for the sale process. This revised plan implied a value below what we used when we last tested the assets for impairment on October 31, 2007. So we were required by the accounting rules to take a write-down. Overall, we are encouraged by our solid performance in the second quarter against the challenging economic backdrop. For continuing operations, consolidated net revenues grew 15% to $596 million in the second quarter of fiscal ’08 compared with $520 million in the second quarter a year ago. Approximately $44 million of this increase was attributable to favorable foreign currency rates. Revenue growth was led by 23% growth in both Europe and Asia Pacific aided by currency movements with the Americas region growing 5%. Gross margins in our core apparel and footwear business increased 250 basis points to 50.4% from 47.9% a year ago. Each of the three regions saw healthy gross margin increases. As Bob said, we’re pleased to see some traction from our sourcing initiatives that have contributed to this improvement. In this early stage of our program, improvements are coming in the Quiksilver and Roxy positions within each region. Gross margins were also helped by favorable currency effects and the overall mix of business.

Again, in continuing operations, second quarter SG&A expenses grew to $231 million from $195 million a year ago. Of this amount, $16 million is attributable to currency translation. As a percentage of revenue, SG&A grew by 130 basis points to 38.7% in the second quarter, up from 37.4% a year ago. A significant portion of this increase is attributable to the opening or acquisition of 91 company-owned retail stores and 12 concession shops since the end of the second quarter of last year. The Americas continue be our most challenging region because of the moderating sales environment and higher number of store openings. The current economic environment is placing pressure on our revenue outlook which poses a particular challenge given the number of new stores that we’ve added. While we are working hard to curtail expenses and increase our leverage wherever possible, the current environment makes this difficult in the near term. At the same time, we continue to invest in our strategic initiatives to expands brands such as the launch of our new Quiksilver women’s line, the extension of DC’s apparel line, the expansion of our Latin American business, and the launch of our new e-commerce website.

Taking these factors into account, the operating margin in our core business improved to 11.6% of revenue this year compared to 10.5% in the same quarter a year ago. Interest expense for the quarter was $13 million this year compared to $11.7 million last year. Our tax rate on continuing operations for the second quarter increased from 23% last year to 30% this year primarily due to limitations on our interest deductibility and changes to our tax equivalents. Consolidated income from continuing operations for the second quarter of $38.7 million or 30 cents per share was up 20% to 25 cents per share in the same quarter a year ago. Although Rossignol was no longer in our continuing operations, I’ll just mention that it performed in line with our expectations for the quarter.

I’d like to now turn your attention to the balance sheet for a few moments. Receivables at $473 million are 12% higher than for the same period last year, but only up 6% in constant currency. On an overall basis, DSOs decreased by one day to 67 days this year compared to 68 days in the second quarter a year ago. Inventory at quarter end was $304 million, up 11% compared to the same period last year or about 4% in constant currency. Inventory is well controlled and the increase is primarily to support our growth in retail.

Let me now address our debt levels, our net debt stood at just over $1 billion at quarter end. Of this amount, $938 million is reported on the face of our balance sheet and $93 million is recorded in the net assets of Rossignol that accounts for sale. As we said previously, Rossignol has historically financed itself or been financed through Quiksilver with short-term uncommitted lines of credit and we have begun to reposition this over the past year or so, although this effort has to be coordinated with the sale process. We envision the sale of Rossignol to be on a cash-free and debt-free basis meaning that we will be responsible for all of the $1 billion in debt. So, we intend to use the entire net proceeds from the sale to repay the debt related to Rossignol whether it is financed directly by Rossignol or through our continuing operations, and any debt related to Rossignol in excess of net proceeds will likely have to be refinanced. In that regard, we are currently evaluating potential financing alternatives that will depend upon the timing and amount of the sale, and we plan to seek some financing prior to closing its transaction. Potential sources of such funding could include our existing lenders whether for short or long-term financing or the broader capital markets.

Now I’d like to turn our attention to the outlook for the full fiscal year noting that visibility is somewhat limited. For the full year, revenues from continuing operations are expected to grow by approximately 10% to approximately $2.25 billion from the revised base of $2.47 billion for the year ended October 31, 2007. This is broadly consistent with the assumption that we discussed last quarter. We would expect consolidated EPS for the full fiscal year ending October 31, 2008, to be slightly below last year’s level of 90 cents per share. And although we don’t give quarterly guidance we should advice you that in the second half sales growth is expected to be stronger in Q4 than in Q3. Our earnings per share in Q3 could be approximately 20% below that of last year. This is entirely due to the timing of our sales plans, deleveraging of the expenses associated with our new store openings, and a higher tax rate.

Here are some other assumptions. Our operating margin from continuing operations was 9.9% last year and we believe this will be essentially the same for fiscal 2008. We have moderated our expectations from the 50 basis point expansion in operating margins that we previously expected reflecting current trends. We expect to incur interest expense in continuing operations of approximately $50 million this year. This excludes approximately $14 million that will be classified with discontinued operations pending the sale of Rossignol. So in the larger term, our interest expense will depend upon how much debt we are able to relieve with the proceeds of the sale. The effective tax rate applicable to continuing operations was expected to be between 32% and 35% for the full fiscal year. With that, I’ll turn the call back to Bob for his closing comments.

Robert B. McKnight Jr.

As we’ve mentioned, the entire business climate certainly presents us with many challenges and there is not much talk these days about any relief in sight. That being said, our solid second quarter performance demonstrated our ability to deliver in a tough environment. And although stores are being cautious with their orders, they are not panicking and the inventories remain well controlled. In our 39-year history we’ve been through challenging times before as we are today. Our portfolio brands is one of the strongest in the industry and we continue to believe there are tremendous opportunities for growth and profitability ahead of us.

We’re now ready for questions and answers.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Jeffrey Klinefelter with Piper Jaffray.

Jeffrey Klinefelter – Piper Jaffray

Joe, first could we just start with sort of clarifying these results and putting them in the context of what would be considered the current consensus estimates out there; your Q2 results before you started splitting out Rossignol is discontinued; what were your results and where they have been compared to the roughly, penny earnings that were out in the first call?

Joseph Scirocco

As we said, Rossignol in the quarter on the basis of its normal business and without regard to any effects of the sale or special accounting was pretty much on plan. With respect to the core business, we would probably have lost a few cents in the quarter that is largely due to some of the pressures on sales than on margin, and in particular, as we made the comment earlier about some de-leveraging in the US business, that would have driven that.

Jeffrey Klinefelter – Piper Jaffray

And so your guidance for the year being slightly below 90 cents would compare to…

Joseph Scirocco

If you want to think about the 58 cents for the full fiscal year… it’s a little bit trickier question, but let me try to explain it. First of all, segment Rossignol sum it entirely because the results are too affected by impairment charge and other kinds of issues associated with the sale process itself. On the core business, if we did not have the de-leveraging associated with expenses and the softness in sales that we’re seeing primarily in the US and also elsewhere in the world, we probably would have been forecasting about 7 cents more.

Jeffrey Klinefelter – Piper Jaffray

That’s very helpful. In terms of, I wanted to get more to sort of the outlook in what’s happening in the channels right now and maybe having Marty jump into that a little bit, but before that, just in terms of some commentary you were making Joe about the debt financing for Rossignol, can you clarify this, in terms of seeking additional financing, what is that related to? Is it related to the transition that you have to go through as part of the sale process or why do you need to refinance before the sale takes place?

Joseph Scirocco

Well, it’s really just a question of timing. I mean, in terms of our leverage, what you have to understand is it gets quite a bit better without Rossignol, even if you assume zero sales proceeds, which I mean of course we don’t do that, but even if you just remove Rossignol from the equation, you get a pickup in EBITDA somewhere in the range of $70 million on an LTM latest 12-month basis. So currently, if you look at our leverage, for example, at April 30th, on a gross basis were at about 4.9 times EBITDA, on a net basis were may be 4.4. If you just take Rossignol out of the picture and look at the latest 12 months, the leverage immediately drops on a net basis to 3.3 times. So, essentially it’s really a question of when will the sale transaction take place? What will the proceeds be? And therefore how do we approach the banks in terms of continuing the process that we began about a year ago to refinance a lot of this short-term uncommitted financing by which we had traditionally financed Rossignol. It is not so much a question of getting additional financing, it’s really a question of working through the transition of this sale process.

Jeffrey Klinefelter – Piper Jaffray

Just a little bit more color on the current environment; I mean, can you share with us anything on, for example, maybe comp trends in your own stores, how you saw that through the spring and how you see it trending through the fall, and then any other feedback from the channels in the Americas and Europe?

Joseph Scirocco

Just some high-level comments, but Marty is here and he should probably take that one as well. I mean, clearly the downtrend was not something that we anticipated at the start of the fiscal year, but it has come. We don’t typically report comp store sales for a variety of reasons, but it won’t be any surprise to anybody to hear that sales in same stores were down in the US, and we’re starting to see some pressure in parts of Europe as well. I’ll let Marty give you a better color than that.

Martin J. Samuels

For our own retail stores here in the US, we have 50% of the store count in California, Nevada, Arizona, and Florida, and as noted by most of the people in the marketplace, those are particularly hard hit with the housing issues and the subprime issues. I would imagine that relative to most other retailers that’s a pretty high percentage of stores in those difficult markets, but even with that as Joe said I think we’re holding our own and you saw the comps that came out today for May, and I think we’re better than a lot and a little worse than some. There really doesn’t seem to be much difference happening from channel to channel. I mean, other than the Buckle who keeps blazing away with 30% plus comps, you see [Zoomies and Paxon] some are experiencing, I think it’s a little bit more difficult for the department stores. I think the department stores were doing quite a bit better than the average suppliers are doing, but it is still challenging. And in the core market, I think they are also probably experiencing sales that are flat to minus 5, but it depends on the markets. I think the East Coast, Florida, and Hawaii have done a little bit better with seasonal products. On the West Coast, I think in the Midwest, it’s been seasonably cold, so I think for those retailers it’s a little bit more challenging.

Jeffrey Klinefelter – Piper Jaffray

You did mention, on your comments on Europe you mentioned that starting to see a slowdown there as well?

Joseph Scirocco

Yes. Between 45% and 50% of our business in Europe is in France, Spain, and the UK, and yes, we have seen same store sales performance down, and in part it’s weather related; hate to blame that, but the reality is it’s been cold, it’s been raining consistently in Europe and so business has been challenging there.

Operator

We’ll go next to Kate McShane with Citigroup

Kate McShane – Citigroup

Can you talk about the promotional environment during the second quarter, how much did markdowns impact your gross margins and did a promotional [Cadence Valley] when comparing department stores and your own stores?

Robert B. McKnight Jr.

Regarding our own stores and our full price stores, historically, we’re never promotional except for the post Christmas camps periods and then the post Fourth of July summer camps. In some of our stores during Memorial Day excluding Canada and Hawaii, we did run a little bit of commercial activity. In our outlook stores I think what we’re finding is that the consumers there are definitely trading down to lower price points. So, there is some margin pressure in our own stores, but its benefit is offset by the initial markup improvements we’d been able to make on our products that Joe and Bob spoke of earlier. The good news in our own stores and in our wholesale business is that we’re controlling our inventories very tightly. I think most retailers, most of our customers, are doing the same as the environment; clearly if you look at the malls, this spring has been incredibly promotional. I think everyone knows Nordstrom advanced the women’s half yearly and kids’ sale. So they bumped the comp for May, but they just talked today about June being double digit down. We’ve all been out in the stores quite a lot and you see all the 50% entire stock signs or take an additional 20% off this and that; so there is a lot of promotional activity and traffic is down. I think that probably the factory outlet retailers are beginning to experience a lot of pressure because of the continued gas price issues, people are on the roads less, they are traveling less, and you can get a bargain at your local mall or strip center; so this may be a little bit less need to get out to the outlet, and I would expect that we are experiencing very strong business in our direct e-commerce business and I imagine that’s happening for a lot of people as well because you don’t have to drive a car to get to our e-commerce sale.

Kate McShane – Citigroup

And I guess in the same kind of context with the US being so difficult, what did drive the top-line growth for the business this quarter then? Was it mostly square footage growth or was it something else?

Robert B. McKnight Jr.

It’s DC shoes. DC shoe brand and both footwear and apparel continues to buckle all the trends. I guess it’s our buckle. There are always some wholesalers and retailers out there that in spite of the difficult environment are [inaudible] and DC is one of those, thank goodness.

Kate McShane – Citigroup

My last question, with DC being so strong, have you seen a significant increase in sourcing pressure on footwear in particular and how are you addressing some of those higher sourcing pressures?

Robert B. McKnight Jr.

There is definitely sourcing pressure in Asia for apparel and footwear, but the way we are facing it is, we’re not giving in, and we are good customers to most of our suppliers and we also have engaged a consultant to help us on the footwear side of our business, develop some new strategic sourcing initiatives for DC and also for Roxy and Quiksilver footwear. So, yes, costs are going up for manufacturers, but we’re fighting that.

Operator

We’ll go next to Brad Stephens with Morgan, Keegan & Company, Inc.

Brad Stephens – Morgan, Keegan & Company, Inc.

Couple of questions for you Joe, can you talk about cash flow now and how you think about CapEx and D&A going forward?

Joseph Scirocco

We should focus all of our attention on continuing operations because cash flow is associated with Rossignol, are really going to be all about transaction. So, thinking about D&A on the core apparel brand business, about $60 million in D&A on the year. We still have stock compensation expense which is non-cash, about $13 million. Our capital spending on the year which was originally planned at somewhere around $100 million to $105 million is now looking a little bit lower, may be $95 million. We were unable to cut more than that because of the timing of store leases that we have signed and other commitments, but on the full year basis, about $95 million in CapEx.

Brad Stephens – Morgan, Keegan & Company, Inc.

In the CapEx, is there earn-outs that are kind of unique for this year?

Joseph Scirocco

This is a separate issue, the earn-outs which related to DC and to a retail acquisition that we made in Australia will cost us or have already cost us about $30, we probably have another few million to go there in connection with the joint venture arrangement that we have; so may be $35 million in total on earn-outs. And in terms of working capital, we think of it largely moves in line with the sales plan, but would say somewhere in the range of $10 to $20 million in usage of working capital on the year. So, in terms of our prior discussions, the only other elements of our cash flow that we had discussed were property sales in connection with the Rossignol business or restructuring costs, or those kinds of things, and obviously, they are not part of this equation. So, taking this all together and depending what net income number you want to use for the full year is in line with our outlook of being slightly below 90 cents, I think you’re looking at about $150 to $175 million in cash flow and that includes, I remind you, about $115 million of cash in the current year attributable to the Cleveland Golf sale.

Brad Stephens – Morgan, Keegan & Company, Inc.

I think you mentioned that you’re unable to exit some leases that you had prior commitments to; as we look into next year, and I know you guys went back to the books and relooked at how your capital spending looks; is there anything we should look as we look at Quiksilver only business in fiscal ’09 from a CapEx perspective?

Joseph Scirocco

A little bit premature to say, I think we can enter the current year and in our 3-year plan we would have had somewhere around $50 million in new store openings planned, that is something that we are definitely revising. Just thinking forward to next year I would say that that should be cut by 50% or so.

Brad Stephens – Morgan, Keegan & Company, Inc.

And then this one last one if you could, if you had looked out this fall, what you think is an acceptable debt to cap ratio and when do you expect to hit that, or was it too premature pre-sale Rossignol?

Joseph Scirocco

It’s too premature.

Operator

And we will go next to Mitch Kummetz with Robert W. Baird & Co., Inc.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Let me start with a question for Marty. Marty, you talked about DC and how strong that business continues to be. So Americas was worth about 5% in the quarter; so what does that mean for Quik and Roxy, were those brands down or was one worse than the other, can you talk a little bit about their performance.

Martin J. Samuels

That was slightly down and neither was worse than the other, they’re both expensing the same trends.

Mitch Kummetz – Robert W. Baird & Co., Inc.

And then Joe, on the sales outlook for the year, you’re saying up 10%, but take the $2.5 million, I think I back out something like mid-single digits in the back half of the year, could you talk a little bit about, first of all the accurate number and then can you talk a little bit about how you expect the sales to play out by region?

Joseph Scirocco

I think that the implied growth in the back half should be somewhere in the high single digits, the 10% range, to get you to that number, and in terms of regional growth, we will really be driven principally by Europe and Asia Pacific, we see low single digit numbers in the US; in Europe and Asia Pacific a lot of currency impacts are still expected. DC is a growing business in Europe, it’s only about 25% or so of the US size, but it continues to remain the driver on the sales growth together with new territories in which Quik and Roxy are expanding; so, I think you should consider most of the digits in the US sort of mid teens including currency in Europe and then in Asia Pacific somewhere on the order of 15% to 20% growth. Asia Pacific in particular is Q4 loaded, for a variety of reasons having to do with their calendar this year and some channel issues that we had last year. That’s probably the reason why I said earlier I think that our sales growth should be higher in Q4 than in Q3 and again so as to not surprise anybody the next time we report we would expect Q3 EPS to be down perhaps about 20% as compared to the prior year.

Mitch Kummetz – Robert W. Baird & Co., Inc.

What kind of year are you assuming in your mid teens growth, somewhere around $1.55 or…?

Joseph Scirocco

Roughly current rates.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Then a couple of last questions, first on the gross margin, you talked about benefits from sourcing, can you quantify what the actual benefit was to the gross margin in the quarter and how you would expect that to trend over the balance of the year?

Joseph Scirocco

I’m going to answer that a little bit indirectly, it’s because the stage implementation of the sourcing initiatives does not affect every region and does not affect every business the same. So, let me manifest for example the initiation with Quiksilver is now moving more into Roxy and similarly in Europe, it is focused on Quik and Roxy. Marty made his comments earlier that DC sourcing, DC is a global business for us, so that benefits there will be a part of this and should improve things globally. I think that an order magnitude for this quarter would have been in the range of 100 basis points of sourcing improvement on those businesses which have begun to implement the local initiatives. That’s principally Quik and Roxy; if not a 100% on our overall gross margin. The rest of the gross margin improvements come from mixed currency and a variety of other things. Over the longer term, we continue to believe in the opportunities that we laid out for sourcing improvements.

Mitch Kummetz – Robert W. Baird & Co., Inc.

But over time you expect more of the businesses to implement it which would improve the gross margin in the overall business right?

Joseph Scirocco

Yes, provided that pricing calls this for. It should improve sourcing margin which is our major initiative in terms of visibility into sales is a little bit more challenging.

Robert B. McKnight Jr.

R&D teams for apparel just got back from their spring trips for Roxy and Quiksilver, and as I mentioned earlier, there is pressure on rising costs; however, they did achieve the initial margin improvements that we had in the plan, and in fact, did slightly better than that.

Mitch Kummetz – Robert W. Baird & Co., Inc.

And then last question, I noticed that the corporate SG&A was down about $5 million, can you talk a little bit about where that came from; I think on the last call you talked about $20 million in expense or cost reduction for the year, are you guys still on a plan to do that?

Joseph Scirocco

I’ll answer the second question first, the answer is yes; apparently, in the context of softness in sales, it’s not fast enough or enough to offset some of that pressure, but yes, we are doing it and as we set budgets for next year, we are planning them conservatively on the sales line and therefore expenses as well. With respect to corporate expenses in the second quarter, that is mostly timing, having to deal with some inter-company allocations and that sort of thing, but over the course of the year, that will normalize. At this point now we’ve had some severances and those kinds of things; this year we also have some items that you might call special items, we choose to not characterize them that way but just to absorb them into our operations. So some of this is just timing, this year versus last.

Operator

We’ll go next to Jeff Van Sinderen with B. Riley & Company, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

My first question is really related to your guidance for Q3, just trying to understand the components of that; did you guys experience an acceleration of orders in DC in Q2 that may be shifted out of Q3 into Q2, may be you can just touch on the components on that, and then also my second question is any impact either currently or going forward you expect DC from [Paxon] exiting the sneaker business.

Robert B. McKnight Jr.

Marty can take the [Paxon] question, but just to give you the overall, the answer is really no; we didn’t have any dramatic shift as you suggest or any dramatic shift into Q2. In the Americas the plan is pretty flat for the balance of the year in terms of consistency and low single digit growth, and I think I gave the numbers [inaudible].

Martin J. Samuels

Obviously when your largest footwear customer decides to stop carrying footwear, there is some impact, but we have a huge pickup in orders with other mall based specialty chains like Chinese, like [Zoomies], and also because we’ve been experiencing tremendous growth over the last year in DC’s apparel businesses and also because we’ve begun another department store distribution channel with DC’s apparel businesses will however offset that.

Operator

We’ll go next to Carla Casella with J.P. Morgan.

Gretchen Hailey – J.P. Morgan

This is actually Gretchen Hailey for Carla Casella, and I’m not sure if you mentioned this earlier, but can you comment on the sales and traffic trends, differences in department stores than in your free standing stores.

Joseph Scirocco

Department stores versus specialty store business is not so much of an issue for us. We are primarily a specialty store business around the globe. We do have some major accounts in the US and in Europe that comprise may be 15% in the US and then in Europe [inaudible] and a couple of others may be a comparable percentage, but not really material for us.

Gretchen Hailey – J.P. Morgan

Can you comment on your European lines of credit, if there is any debt maturing this year or that could mature this year?

Joseph Scirocco

I think in your earlier question we talked about this fairly extensively, but just to briefly summarize, the European credit is largely uncommitted short-term financing. We are in the process of repositioning that and have a plan to do that over the course of the next few months.

Operator

We’ll go next to David Glick with Buckingham Research Group.

David Glick – Buckingham Research Group

Joe just a quick, kind of qualitative question about your guidance, I mean, clearly you’re looking for lower sales growth in the second half versus the first half of your fiscal year; is your outlook for the second half factoring in what you’re seeing literally right now in terms of your comp store trends and your order book or does it assume any improvement from the visibility you have at the moment?

Robert B. McKnight Jr.

I assume there is no improvement to the current trends David.

David Glick – Buckingham Research Group

Thanks for the clarification, I appreciate it, good luck.

Operator

We’ll go next to Bill Reuter with Bank of America Securities.

Bill Reuter – Bank of America Securities

I was wondering if you could give us any color in terms of Rossignol for the quarter in terms of what operating income or EBITDA would have been for that business.

Joseph Scirocco

We said that for the quarter it would have been in line, the second quarter is typically a loss quarter for Rossignol because most of the sales are done in Q4 and Q1; so, this is a quarter of the year in which we’re all about producing next season’s line and there’s very little revenue.

Bill Reuter – Bank of America Securities

So, from an operating income perspective, that might have been like down 10 or can you give us a little more color for where it might have been?

Joseph Scirocco

I am going to have to kind of lend this because I haven’t looked at the numbers recently, but the losses typically in the quarter would have been in the $20 to $30 million range and it’s of that magnitude, that’s not a precise number but just a color for you.

Bill Reuter – Bank of America Securities

That’s useful. In terms of your major CapEx uses for this year, can you give us a little more color in terms of what some of the breakdowns of that might be?

Joseph Scirocco

About half of it is for retail stores, about 25% is for facilities by way of new campus facilities and build-out that has been planned for some time, particularly in Europe in which we’re starting construction on our new headquarters facility, and the balance is miscellaneous things including IT and other maintenance CapEx.

Bill Reuter – Bank of America Securities

It sounds like your retail store growth might be slowing down somewhat, should we still expect to see SG&A as a percentage of sales continuing to be up year over year for the remainder of the year?

Joseph Scirocco

Yes.

Bill Reuter – Bank of America Securities

That’s useful. Just in terms of, [I guess you gave this, may be, I don’t know, from a prior portfolio], but your wholesale sales versus your sales in your own retail stores, one of those either domestically or globally was performing better?

Joseph Scirocco

The retail growth came really from new stores that have been opened over the course of the past year, as we said, about 103 stores and shops last year. But in terms of performance, our own specialty stores are kind of a barometer for us of what’s happening at wholesale and the pattern is similar.

Operator

[Operator Instructions]. We’ll go next to Emily Chang with Lehman Brothers.

Emily Chang – Lehman Brothers

Just a couple of housekeeping items; can you give us what the D&A was for this quarter and also for Q2 of ’07?

Joseph Scirocco

About $14 million this year and about $11 last year.

Emily Chang – Lehman Brothers

And then, did I hear you correctly in your opening comments that the CapEx associated with Rossignol that’s currently, I’m assuming under the liabilities related to assets held for sale line items, is $93 million; is that correct?

Joseph Scirocco

Yes and no. When we report the quarter, we will have a break down of assets held for sale and on that number, you will see $93 million or so which is directly financed by Rossignol; the balance of Rossignol’s debt is financed by various Quiksilver entities. So, in a sense, there is no debt that relates to Rossignol, but is not on their books in particular.

Emily Chang – Lehman Brothers

So what is the all-in debt number that relates to Rossignol then?

Joseph Scirocco

Actually in the context of the sale process, I hope you don’t mind if we don’t answer that one, I don’t want to color the conversation as it might regard any prospective bidders; that’s really an issue for Quiksilver to deal with. As I said, we are responsible for and planning to manage the current billion dollars in debt which includes some debt on Rossignol Sports, but it’s really all on our accounts and our leverage ratios look okay with or without Rossignol in the picture at this point.

Emily Chang – Lehman Brothers

And then if I could just one more and final question, I know in the past, we’ve spoken about you making some progress in terms of moving some of that short-term credit lines into long-term debt. During the second quarter did you move any more of that debt between short-term for long-term as it was under review for this year?

Joseph Scirocco

No, we did not. Pending further progress on the sale transaction, we’ve not had any detailed discussions with banks about doing that. We are sort of in a wait and see mode for a short time until we kind of quantify that enough to know how much we want to refinance.

Operator

That does conclude today’s question and session. At this time I’d like to turn the call back over to Mr. Thomas for any additional or closing remarks.

Bruce Thomas

Thank you everyone for participating in today’s call, and on behalf of everyone here at Quiksilver, we look forward to providing you our next update a quarter from now.

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