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Executives

Blake Krueger - Chairman and CEO

Don Grimes - Chief Financial Officer

Christi Cowdin - Investors Relations

Analysts

Chris Barry - Goldman Sachs

Wolverine World Wide Inc. (WWW) Goldman Sachs 2012 Global Retailing Conference Transcript September 6, 2012 2:35 PM ET

Chris Barry - Goldman Sachs

All right. Almost another over here. So we’re going to continue on with Wolverine World Wide. My name is [Chris Barry]. I’ll be covering the Consumer Small and Mid Cap space at Goldman Sachs. I want to welcome Wolverine to the conference. With us we have Blake Krueger, Chairman and CEO; and Don Grimes, the CFO. Christi Cowdin is also here in the audience from the Investors Relations.

So what I’m going to do is I’m going to pass over to Blake. He’s going to through some slides, then Don going to have some material as well and then we’ll go into Q&A. Blake?

Blake Krueger

Thanks for your time this afternoon. As most of you know we posted some slides for this conference this morning on the internet. And Don and I are going to quickly go through these slides and then we will open it up to any questions. I won’t bother to read the forward-looking statements clause here.

But just I know many of your familiar with Wolverine World Wide, just for those you that aren’t. We’ve been around a long-term since 1883. We headquarter at in Michigan. We last year marketed around 52, 53 million pair of footwear in the units of apparel and about 190 plus countries around the world.

We own our operations in Europe. We own our operations and run them directly in Canada and the United States, and then we operate through a distributor network that we’ve had in place since 1959. So 1959, we took the one-year old Hush Puppies brand international that’s given us 30, 40, 50-year base of partnership and relationships around the world for our brand.

Our vision hasn’t changed in many years fundamentally. We’re focused on innovation as a company, it can be on the apparel side, it can be on the footwear side, it can be on the supply chain side, it can be on processes. But we are focused innovation, moving beyond just footwear and then expanding our international base of business.

This graph which I think on slide three or four shows our brand activity over the last 15 years or so. So the top part of this graph shows the brands we’ve acquired over that period of times, starting with Caterpillar and Merrell and Harley-Davidson and HyTest early on, and most recently with Saucony, Sperry, Stride Rite and Keds. I’ll talk a little bit more about the PLG acquisition in a moment.

Over that same spend of years we’ve moved just beyond the United States and operate directly in Canada. Took over our distributor operations in Europe and recently earlier this year announced some joint ventures. One in India with the Tata Group and then one in Colombia with the long time multi decade partner of the company.

Today we operate within three different branded groups. The first group is the Outdoor Group. This is our largest group in terms of revenue and earnings generated for the corporation.

The Merrell Brand, a brand we bought about 11, 12, 13 years ago now, was about $25 million when we bought it, it’s about $500 million in sales today in about 150 countries around the world, but also within this group Patagonia footwear and Chaco. Chaco was a performance sandal brand we picked up a couple of years ago. Number one performance in sandal brand and the outdoor retail sector in the United States.

Our second group is what we call our Lifestyle Group today, that Hush Puppies brand we invented in 1958. Again, in about 150 countries around the world, Sebago brand we acquired about 10 years ago, probably the most premium brand in our portfolio, especially within Europe, where that brand is strong and then probably the most useful brands in our portfolio Cushe, which focused on action sports serve in that Lifestyle market.

Our third group is our heritage group, again composed of Wolverine brand, the name on our stock certificate, number one a boot brand in USA work, Caterpillar brand, our global Lifestyle brand, but also very important in the USA work market in Bates and Harley-Davidson.

So we recently announced on May 1 and we’ll get some updates today our acquisition of the PLG Group, which is formally the publicly traded Stride Rite Corporation that was bought Payless Corp., Payless Corporation several years ago.

We’re very excited about this transaction. Frankly, we’re more excited today, more enthusiastic, more optimistic today then we were on May 1 or as we went through this small time month process, following the closing of this and Donald have some more details in a minute, following the closing of this transaction, which would take place with the next three -- within the next three or four weeks.

We will be the largest non-athletic footwear company in the world with about 100 million pair of footwear and units of apparel sold in well over 200 countries around the world. I say, largest non-athletic footwear company with all do difference to Saucony and to several collections within the Merrell brand.

When we look at the combination of our current 12 brand portfolio with these four brands, we’re very, very excited. It becomes almost a one stop shopping for many of our international distributors and for many of our retail partners. We cover all genders, all age groups, all distribution channels, all consumer groups. It’s really a very and very powerful brand portfolio, the largest in the world.

When we look at the four brands we’re acquiring, we’re excited. These are brands we known for years and years. Its management teams we’ve known for years. Sperry, tremendous brand, 96% of its sales here in the United States, number one casual brand in the United States today, a brand that’s moved beyond just men’s boat shoes, about 50% of all pairs today are non-boat and over 50% of all pairs sold are sold to women today and that market for women is accelerating.

Saucony, a great athletic brand, true performance, our running brand, number three brand at the all important U.S. specialty run channel, a great brand with about 20%, 23% of it sales currently overseas today. Sperry’s overseas sales today are about 4%.

Keds, a great brand, probably a better brand than a business today, a brand that’s at only 78 or 80 million is only a fraction of what it used to be, but still one of the most important brands in the female consumers mind, tremendous opportunity in the vulcanized market on a global basis. And then the Stride Rite children’s group, a group that’s having a lot of success right now, the dominant player in the better great children’s market here in the United States.

So we like these brands. We know these brands. The brands are of a size we can handle. We also know we can bring some immediate hope to these brands and first and foremost is international expansion.

Overall, less than 10% of the pairs of the PLG Group are sold outside of the United States. About two-thirds of our pairs are sold in about 190 countries outside the United States. So we’ve got a 30, 40, 50-year plus network of international distributors, tremendous upside growth opportunity for these brands outside the United States.

Sperry, Sperry a great brand. Sperry is a brand that’s going to benefit from accelerated store opening, just not by ourselves, but also our international partners and already have some licensed programs in place to turn that into a Lifestyle brand and not just a footwear only brand.

Keds is the work in process under our new management team. It’s been put in place -- has been put in place over the last six months. We’re very excited about the upside potential for Keds.

Just as aside one, we had our international conferences in May, when we have all our international partners come in for all of there brands. I expected very strong interest internationally on Saucony and Sperry. But was kind of surprised that the level of interest from our international partners in Keds. So we’ve got pretty high expectations for Keds.

I’ll also say, the Sperry brand continues to outperform let’s say three or four quarters now double-digit comp store sales increase, double-digit increases in its wholesale business. Again, largely our U.S. brand 96% of all pairs sold here in the United States.

So when we look at these brands, one other things that gives us comfort is our track record. We have a history of adding eight or nine brands to our portfolio, keeping brands a distinct, letting them operate in their own product, marketing sales, silos and yet giving efficient back room support either system sourcing, logistics, whatever.

So over the years we’ve acquired a number of brands. We’ve had geographic expansion within our company, all of these we’ve been able to successfully integrate within the company.

So while on the transaction highlights, this has been the hard work. I’ll turn it over to Don. He can give you an update on where we stand on the closing

Don Grimes

Yeah. Very well. Nice presentation as you can tell, but just a couple of detail on where we stand with the transaction itself, including the financing. On May 1, we announced that we were going to partner with Blum Capital and Golden Gate Capital to acquire collective brands for $21.75 per share.

We cleared some necessary regulatory hurdles on late June with the early termination of the Hart-Scott-Rodino waiting period and then on August the 21, the shareholders have collective brands overwhelmingly 99.5% approved the merger in our shareholder meeting.

As far as the transaction Blum and Golden Gate will retain the Payless shoe source at 4,000 store Payless retail chain along the collective licensing and Wolverine will get the performance and Lifestyle Group which is comprise of the four brands that Blake just describe for $1.23 billion.

We’re expecting the transaction to close the week of October the 1st, we have most of the financing on place, Blake and I will be on a road the last week of September, marketing the last bet which is our $375 million high yield notes offering and we expect the transaction to close the first week of October probably the later part of that week.

We expect EPS accretion and the range has shown on slide here $0.25 to $0.40 per share in 2013 and $0.50 to $0.70 per share in 2014. Although, we did say in our Q2 earnings call back in July that based on the work that we had done on integration and transition planning with PLG, we had increased confidence that we would be at the high end of both of those earnings accretion ranges in 2013 and ‘14.

And we did comment that we expect that the earnings impact in 2012 to be somewhat minimal given the uncertainty of the closing date for the stat period, we expect minimal impact plus or minus for 2012 EPS.

As I mentioned on the financing, we have $1.1 billion of the financing in place, comprised of $550 million term loan A, along with the $200 million revolver that will be untapped at closing and the $350 million term loan B. Both are pro-rata bank financing, the term loan A and the revolver, as well as the term loan B were very comfortably oversubscribed. So it shows the high degree of interest in both Wolverine World Wide, as well as the transaction itself.

The pricing on those is very favorable, term loan A priced at LIBOR plus the spread of 225 basis points and term loan B priced at LIBOR plus the spread of 375 basis points. So, we feel very good about that.

And as I mentioned, high yield notes which we expect will price in the 6.x% range based on the corporate credit ratings we received from Moody’s and S&P, $375 million, our total funded debt at closing will be $1.275 billion, will be about 4.2 times levered at closing and we have projections and expectations to delever as rapidly as possible down to the two range by the end of 2015, based on our projected cash flow and EBITDA.

Turning to some current quarter trends, key macro trends continue to operate in our favor as a company based on our product portfolio, Americana, perhaps heritage, authenticity, credibility, both in the 12 brands we have in our current portfolio, as well as the four brands that we’re acquiring.

Boots continues to be the hot trend, both shoes with the way going Sperry, very important trend that continues in our favor. So we feel like we have a number of macro trends globally that are working in favor of our product portfolio.

However in the third quarter, we gave our revised full year guidance. We announced our Q2 earnings. We gave specific commentary on Q3. We said that we expected Q3 revenue growth to be in the low-to-mid single-digit range and we expected EPS to be approximately flat with the prior year.

We did sight that we expected the European market to continue to be challenging. The last two-thirds of the quarter, last eight weeks of the quarter, the European market has been even more challenging than we expected.

Our quarter-to-date revenue in the broader EMEA region is down double digits versus the prior year. It’s been a combination of tough economic conditions, as well as common overhang from the Olympics, unlike a positive way from the Olympics was actually been a negative as about 1.5 million people kind of left Central London during the Olympics and materials that were there weren’t buying shoes.

And so but they were spending money on something else. But the weather has not been conducive in a broader European market for us and just a very tough go in the European market.

The U.S. market continues to be strong. We’re still strong in Latin America and Asia-Pacific, but with about 25% of our business in EMEA region is struggling at the challenging conditions in EMEA has been a challenge for us for the third quarter.

We do now expect our revenue and earnings to fall modestly below the guidance that we gave in July. We had a number of questions today as what we mean by modestly perhaps not surprisingly.

And for the benefit of those listening in, we were saying that we expect given the quarter is not yet closed, we’re still shipping shoes and what we intend to make the quarters good as we can. We do expect to fall approximately $0.10 per share below last years $0.82 per share EPS, some variability to that, but approximately $0.10 per share below the prior year number.

On a positive note, the U.S. wholesale businesses I mentioned remain solid, a quarter to date revenue in the U.S., this is our largest market, is up mid single-digit with particular strength for Merrell, our most important and most profitable brand, Hush Puppies and Sebago.

Customer direct still delivers positive comp store sales gains and improve profitability versus the prior year and as I mentioned, our other geographies, particularly that Latin America and Asia-Pacific are growing nicely.

People tend to not realize that Wolverine World Wide is the company today, we do fully one-third of our unit volume in Asia-Pacific and Latin American markets. So we are truly a global company from that perspective.

And then Merrell M-Connect, which is a new collection, the most significant product introduction in our company’s history. It will surpass even Merrell Barefoot which launched in the spring of 2011.

But Merrell M-Connect which is an umbrella collection, Barefoot, Mix Master, Proterra and one other collection of shoes will begin shipping in the fourth quarter of 2012 with a full launch in spring of 2013. So we’re very, very enthusiast and very positive about that.

Our 10-year growth trends shows a 10-year average growth in revenue of 5.5%, but the ability to grow our gross margin and leverage our SG&A as such that our EPS on a adjusted basis adjusted for the non-recurring restructuring charge we incurred in a couple of years here is growing more than twice the rate of revenue growth. So we’re $1.4 billion company in 2011 about to become a $2.5 billion pro forma revenue company when we closed the PLG acquisition and we deliver $2.48 per share of EPS.

These results generate significant cash, cash that will come in handy once we have $1.275 billion of funded debt. Again, we intend to deleverage as quickly as possible. I think one of the precious questions for us is our priority to our cash.

In addition, investing behind our 16-brand portfolio to drive organic growth, we intend to maintain our $0.12 per share per quarter annual dividend and we intend to delever as quickly as possible.

We will use all available excess cash flow to pay down our interest bearing debt. That’s the position we taken publicly more than one to position the rating agency depreciated once like and now we’re presenting to them back in May.

And the fact that we said publicly that we intend to delever, it means more than telling them privately without saying the same thing to investors and analyst, and you can see over 10-year period our cash provided by operating activities is over a $1 billion.

So, in summary, I mentioned that $2.5 billion flow from our revenue company. The largest non-athletic company in the world, 16 brands, 100 million pairs a year around the world.

A dynamic portfolio across the 16 brands, some of which are true lifestyle brands and over 200 countries around the world, primarily a footwear company, but with a growing apparel and accessories business, and we sell to a variety of consumer segment and a variety of distribution channel.

So, we think the future is quite bright for Wolverine World Wide. The acquisition kind of changes the game for us. It wasn’t an acquisition. We had to deal with the situation where opportunity met preparation and we are prepared to do it. And we’re quite excited to get through the next month to get the transaction close and to begin talk about the new Wolverine World Wide investors on a go forward basis.

Thanks for your attention and we took about 19 minutes, so Chris, I will turn over to you.

Question-and-Answer Session

Chris Barry - Goldman Sachs

Thanks a lot Don. So I’ll actually, you already answer one of three questions, I’ll ask you another one and then we can get into the audience for Q&A. So, you are about, I guess you, you are kind of given us an update on third quarter. So as it relates to the first nine months of the year that you’ve seen so far? How you’re planning or if you could talk about your views on the environment in the fourth quarter? You’re view on how the environment changes if at all in the fourth quarter and also preliminary into 2013 in relationship to the first nine months that we’ve seen so far this year?

Blake Krueger

Well, I guess, generally taking a step back and looking at the world, we now envision continuing challenges in Europe. The macro economic conditions over there, the level of uncertainty, the conservative nature, the retailers and consumers, we think frankly that’s going to continue in Europe.

We do expect continued fairly strong business here in the United States. We’ve had strong performance in the first two quarters in our U.S. businesses. The footwear in the United States remains pretty robust.

When you look at the FDRA comps store numbers, so far this year over -- around 13,000 shoe doors here in the United States, very robust, very positive. We’re also seeing exceptional strength in Latin America and in the Far East as well in some other international markets. We do expect challenges to continue though in Europe in the near-term.

Chris Barry - Goldman Sachs

If any one in the audience to the question, please raise your hand, and we’ll get a microphone over to you. Behind there.

Unidentified Analyst

Just on that question, are there companies here talk more, maybe Europe stability not necessarily gets better per se, but not a step down or is there something in product categories or more any of the styles that you guys are seeing particular weakness or just generally?

Blake Krueger

We didn’t see it taking a step back looking at. Well, first of all, in tougher economic conditions, we expect footwear to perform fairly well, historically better than a number of other consumer product category. When you look at our European business for historical reasons, the U.K. would be about 40% of our [EMA] pairs overall the U.K. in particular has been hit pretty hard.

This year they had kind of -- you never like to use weather as an excuse, but they did have a double whammy. They had not only a warm fall in the U.K. but they had a very cold and rainy spring in early summer. And that coupled with the austerity measures that frankly they -- to their credit that they put in place some time ago that are having an impact.

They did not get any uplift as Don had said, from the Olympics. I think they were counting on a retail uplift there and just the general macro economic conditions, that’s all had a particular impact on Europe, all of Europe, but especially on the U.K. where we would have about 40% of our payers.

As far as the softness in Europe, we see certain style selling. We see certain -- there are always some hot items in our industry, but the fall off we saw was across country, was across brand. It was a just a general softness, continuing softness across brands, distribution channel and style.

Chris Barry - Goldman Sachs

Can you give us an update as to if you kind of incorporated this, so I have two part questions on Europe, what was your initial expectation for the quarter prior to today as of call it second quarter results, and then what has Europe done year-to-date so far?

Blake Krueger

Yeah. I mean, Europe has been down all year. We didn’t have great expectations for Europe going into the third quarter. But we had thought that frankly the footwear business in that region was kind of on a choppy bottom a little bit. But frankly, it went down a level about the last seven or eight weeks, most of July, latter part of July and in August. We saw softening in footwear across the number of different markets.

Chris Barry - Goldman Sachs

And is it fair to say that, you commented on North American and other geographies performing well. Are they outperforming your expectations or pretty much meeting them at this point?

Blake Krueger

Well, it’s hard to figure out, what expectations already implored but I would say overall Europe and the United States retailers because of the macroeconomic conditions uncertainties, and we have those uncertainties here in the U.S. Retailers are being very conservative.

I think frankly in the United States, Latin America, the Far East, the actual consumer is little more buoyant. The consumer is out there. The consumer spending pretty good, probably not taking those conservative fans as the retailers are purchasing.

Chris Barry - Goldman Sachs

And if you have questions feel free to raise your hand.

Unidentified Analyst

With regard to the brands you purchased and take them into the intentional markets. What is the overlap? If you look at Saucony, do you have existing relationship or do you think you can sell Saucony because that’s new category. So I looked at the current set of brands you are purchasing. If you look at the cross sell opportunity and we look at -- what percent or how much of that you think you’re going to be able to just sell down your existing channels versus the need perhaps develop a new channel because it’s new category?

Blake Krueger

Yeah. I mean right now we’re in the midst of analyzing their international. They have agreements in place in the lot of countries, but collectively their programs are very small less than 10% of their pairs, two-thirds of our pairs as Don noted are sold outside of the North America, the United States.

So there is a big time opportunity for these brands internationally. We know it. We’ve been in that market for 50 years. We know that everybody around the world shops the USA market. All of our international partners know that Sperry is the number one casual brand today in the USA market. They know the potential of Keds. They appreciate Saucony for what it is a true performance athletic running brand.

So we’ve had a lot of interest from our international partners. We will analyze some of their existing partners and there are many of them that are very good that will continue but there is a lot of wide space out there in very important markets for these brands. And a lot of those markets, we either have joint ventures or distributor relationships that go back 20, 30, 40, 50 years that we know we’ll be able to tap into on a very quick basis.

But getting these programs started, it will take two or three seasons before or after they are started, before they begin to build the long-term tremendous growth opportunity here for these four brands for which the international markets are largely untapped.

Unidentified Analyst

I’m sorry.

Unidentified Analyst

(Inaudible)

Blake Krueger

For the benefit of audience, the question I guess sales they are still down to the $0.50 of accretion in -- $0.25 to $0.40 in 2013 and $0.50 to $0.70 in 2014 on slide but is that coming from revenue growth cost taps or a combination of -- is actually coming from both.

The acquisition is not predicated on significant synergies. And we said on May 1st, that we anticipated -- we were projecting annual pretax synergies in the range of $6 million to $10 million. And we were considerably assuming that those synergies didn’t kick in until year after close.

We said in July when we announced our Q2 earnings that knowing to be feel higher confidence. We hit the high end of that synergy range that the synergy would begin accruing earlier than a year post close that’s approximately perhaps. And we feel even more confident today about hitting the top end and surpassing that. But the accretion is PLG is a profitable enterprise today not as profitable as Wolverine World Wide has been on an operating margin basis.

I mean, one of the big opportunities on a go-forward basis is closing the gap between PLG’s EBIT margin where they have been historically and more recently and where we are -- we were at 12.1% operating margin in 2011. PLG retail wholesale, those two reportable severance were about 7% operating margin.

And so we’ll be working quite closely with the PLG leadership team to close that operating margin gap between their business and our business. And we think that’s where some significant value can come from.

Unidentified Analyst

Just kind of following up on that question. So this is to your point that this is one of our revenue kind of unlocking acquisition than it is really one of trying to kind of make this operation more efficient within PLG. So can you walk us through timing of some of those revenues on marketing catalyst?

If we kind of go out over the next couple of season, when do that really start to kick in? When do you really get an opportunity to do a better job then you kind of former owner of those assets?

Don Grimes

I mean I would just start in. But as Blake mentioned on international front, it will take two or three seasons actually start seeing some meaningful results from changes in go to market strategy in terms of changing from one distributor to another or letting distribution agreement that currently expire and bringing those brands into direct operations that we may have in a certain market.

What I said consistently is that I think we also do a very good job of more proactively managing our third party distributor licensees around the world. Holding those distributors accountable for performance, setting targets and holding them accountable for minimum spend, minimum periods, minimum store openings every year. To my knowledge, there are no Sperry Top-Sider stores owned and operated by Sperry distributors around the world

And we have over 650 Hush Puppies concept stores around the world that are operated by Hush Puppies licensees, third-party licensees. They spend their own capital building out those Hush Puppies stores. They sign the leases. They hire the employees but our brand that’s on the banner and we collect royalties on every pair that we sell to that licensee.

We have 150 Merrell concept stores around the world that are owned and operated by our distributor partners. So we hold distributors accountable for performance and we’ll start seeing the benefits of that kind of more proactive management more immediately than three or four seasons out.

So we’ll talk about the revenue opportunity in the brick-and-mortar retail space. We’ll be about 460 brick and mortar retail stores ones this transaction closes, about 360 Stride Rite stores, about 100 stores that we currently have and then I’m forgetting about 20 or 30 Sperry Top-Sider stores, maybe close to 500 retail stores.

But we see a significant opportunity for a multi -- a new multi-brand retail concept that has the most important brands from our 16 brand portfolio that are in this new multi-brand footwear retail concept with apparel and accessories and other things. So we’re working on developing that kind of retail concept now that will likely be put in place in 2013.

And then additionally, the Stride Rite retail stores, 360 children’s retail stores, primarily mall-based. As quickly as possible after closing, we’ll take every brand that we currently own that has kids’ products, Hush Puppies and Merrell, and we’ll have those kids choose in the Stride Rite stores generating an uplift in business for our existing brands. Is there anything?

Blake Krueger

No. But I mean, I would also say a big opportunity for the kids’ brands, maybe a better brand today with a new management team just in place than it is the business today, but a big time opportunity. Many of us can remember when that brand was $450 million. It’s a fraction of that today.

But a tremendous opportunity for that brand which is trend right, popularly price vulcanized footwear that can be made in any range of colors, patterns and fabric. So as I said before, a lot of international interest from our own distributors on the kids brands which frankly surprised me a little bit.

Unidentified Analyst

As you plug-and-play these under penetrated brands into your international distribution network. Can you talk to us about if this is even a risk, the risk of cannibalization or competing with some of your currently existing portfolio?

Blake Krueger

Yeah. I mean, we’ve had some questions here what about Sebago and what about Sperry, for example. Both brands sell boat shoes. Well, that’s correct. We’ve got a number of brands that sell boots. So we’ve got a number of brands here in the United States itself work boots. We don’t mind having more than one arrow in quiver for an important segment of the market.

Today, Sebago is more immense, more premium focus, bigger outside the United States than United States and probably operates within a narrower price range of product. Sperry on the other hand, the way that brand has developed and they’ve done a spectacular over the last three or four years with that brand, a wider range of price points. It’s now faded and trending more women than men’s across the variety of different fashion.

So it has half of its pairs today may be boat shoe or boat shoe derivative, but about half of its pair are other styles of footwear. And the Sebago would operate not only in the premium boat shoe markets, but also in the dress and dress casual into the business on a global basis. So we really like having both of those brands. We see those brands in particular as kind of a one, two punch on a global basis.

Unidentified Analyst

Christopher next.

Chris Barry - Goldman Sachs

You spoke about that less than 10% of apparels currently outside the U.S. for the PLG brands. Where do you think that number over the next three to five year -- where do you think the mix can be in terms of total international for those brands?

Blake Krueger

It’s hard to put numbers with the specific date but I don’t see any reason why their pairs over the medium and long term shouldn’t be where our own pairs is. They would have about third of their pairs here in the United States and about two-third of pairs in other markets around the world. I don’t see anything to stop that kind of progress.

It will take some years but and some brands will blossom internationally little bit faster than other brands. But I don’t see any impediment to mirroring what we’ve been able to do with our 12 brands.

Don Grimes

Also recognizing that we’ve been out for 50 years. I don’t want to temper Blake’s enthusiasm, but to your question about the next three or five years I think a reasonable goal if we can give one-third of PLG’s unit volume outside the U.S. that would be coming from 10% today that would be a good three to five year goal.

Unidentified Analyst

Could you give examples of what you -- when you’ve taken primarily domestic brands before and have been able to increase their international sales with a third of the mix or two-thirds of the mix. Can you -- are there other acquisitions…

Blake Krueger

Yeah I mean, we acquired Merrell when I was 25 million in sales primarily in the U.S. base primarily in men’s hiking boot brand. You look at that brand today 150 countries around the world, 150 still very early in its international growth cycle but 150 Merrell standalone stores around the world, that’s one example.

A small brand that we had acquired, really great product development team, Cushe, the youngest brand in our portfolio, was only about 150,000 pair brand when we acquired it, in less than three years we have that in 100 countries around the world, gaining mass in all of those countries.

So that’s sort of nothing happens in our business overnight. On the other hand, we know we can do international expansion in half the time or a third of the time of anybody else in our industry.

Unidentified Analyst

Cost outlook and then just if you can help us with how clean obviously given the problems in Europe now, I would assume that that channel is now not as clean as you would like and given what happened in the past winter, I would assume that that channel is not clean in the U.S. and in Europe. So if you can help us in cost outlook and then cleanliness of the inventory and how long it takes to clean it?

Don Grimes

You’re very negative, aren’t you? But I’ll get to the cost in a second. I think as it relates to the cleanliness of the inventory channel -- our inventory, we announced earnings in early October and give you our inventory position. Our inventory should be really clean. Although business did slowdown in Europe relative to our expectations.

Unidentified Analyst

(Inaudible)

Don Grimes

Well, I think because sell ins -- our results were based on sell in. Sell in has been weak for us. Sell through has been similarly weak, which is why sell in has been weak. So I think inventory at the retailers in Europe is relatively balanced. I don’t think it’s a bloated inventory or an excessive inventory in retail channels in Europe.

That comment would also apply to United States. So, it’s not a matter of the inventory having built up and that’s resulting and there is not sufficient sell through to cause the retailers to place their once order and order for us to ship in, so…

Blake Krueger

Yeah. I would say that retailers, they read the same papers we do. They are concerned about the macroeconomic conditions, the uncertainty here in the United States, what’s our tax rates going to be? Who is going to be President? What’s going to happen next year? Are we’re going to drive off a fiscal cliff or we’re going to have common sense approaches.

So we have uncertainty here in the United States. There’s plenty uncertainty in Europe and there has been for some time. And I think retailers over the last 12 or 18 months have taken a very conservative approach.

I think generally both in the United States and on the Continent, their inventories are in pretty good shape. They’ve tried to shed some of that inventory risks back on the wholesalers and brand owners. They’ll buy a certain amount. They know they’re under bloat, but they’ll pay. I expect you to have what I need, when I need it, when I come back.

So I think, my impression inventory at retailer right now is pretty good. You might have some sectors like the outdoor sectors, key equipment and some other stuff where we had a poor year last year that might have carried over and impacted some of the retailer inventories. But generally, and consumer soft goods right now pretty clean inventories at retail, but a continuing conservative approach.

Don Grimes

Yeah. As it relates to the cost, factory cost risk, excess of the costs, ex-factory cost we should say. The outlook for 2013 is lot better than it was in 2011 and first part of 2012, we’ve said a couple times that the costs that we’re experiencing in the second half of 2012 are much of benign cost environment than what we’ve experienced in ‘11 or first part of 2012, that will continue through 2013.

We haven’t offered specific comments about percentage increases year-over-year, but it would be in the flat to low to mid single digit range depending on the brand.

Blake Krueger

I would say, we probably are going to have an advantage here over most of our competition as the largest non-athletic footwear company in the world 100 million pair. We carry a rather large pencil. So we certainly have the frontline attention of every factory group that’s out there and we expect in that fair and even hand mannered to use that pencil.

Unidentified Analyst

(Inaudible)

Blake Krueger

Yeah. Maybe, yeah, maybe but you know we’ve done a pretty good job. I mean, it’s been -- the sourcing environment the last three or four years, it’s been very volatile and very frustrating at times, not just for us, but for everybody in the industry. But you have to couple partnering with the right factories with select price increases and focus on your gross margins.

Last year, our gross margins were flat with the prior year. Frankly, we were the only company in our sector. Basically consumer offer to do that in that particular environment. The sourcing environment right now, it’s not the old base, it’s not perfect, but it’s less choppy then it has been in the last three or four years.

Chris Barry - Goldman Sachs

Well, we’re out of time. We’re going to leave at that. I want to thank Blake and Don for joining us today. Thank you.

Blake Krueger

Thank you.

Don Grimes

Thank you.

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