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LaCrosse Footwear, Inc. (NASDAQ:BOOT-OLD)

Q2 2008 Earnings Call

July 21, 2008 5:00 pm ET

Executives

Michael Newman – Investor Relations

Joseph P. Schneider – President, Chief Executive Officer

David P. Carlson – Chief Financial Officer

Analysts

Sara Hasan - McAdams Wright Ragan

Reed Anderson - D.A. Davidson and Co.

Ronald Bookbinder – Global Hunter Securities, LLC

Donald Porter - Dolphin Granner

Thomas Hernburg - Carl M. Hennig Inc.

Operator

Welcome to the LaCrosse Footwear second quarter 2008 conference. (Operator Instructions) I would now like to turn the conference over to Michael Newman.

Michael Newman

Welcome to the company’s conference call for the second quarter of 2008.

During this call, we may make forward-looking statements regarding future events for the future financial performance of the company including and not limited to capital expenditures, stock option expense and future inventory levels. We must caution you that such statements are only predictions and actual events or results may differ materially.

We refer you to the documents that the company files with the SEC including our most recent Form 10-K and Form 10-Q reports. These documents identify important risk factors that could cause actual results to differ materially from our projections or forward-looking statements.

Please note that on this call we will provide you with financial information contained in today’s earnings press release which we have posted on our website at lacrossefootwearinc.com and filed with the SEC on Form 8-K.

We will also discuss historical financial and other statistical information regarding our business and our operations. Some of this information is included in the press release and the remainder of the information will be available in a recorded version of this call on our website.

I would now like to turn the call over to Joe Schneider, President and CEO of LaCrosse.

Joseph P. Schneider

LaCrosse is a leading developer and marketer of premium and innovative footwear and apparel for work and outdoor users sold under our Danner and LaCrosse brands. With me today is Dave Carlson, our Executive Vice President and Chief Financial Officer. Thank you for joining us.

Despite a challenging retail environment, we are pleased with our execution and overall results for the second quarter. The growth in our work business continue to be driven by our success with various branches of the military and we continue to penetrate further in the targeted niche work segments where our products are used as critical tools for the job.

We’ve also continued to improve our gross margins and profitability, better manage our inventories, leverage our operating expenses and generate steady cash flows from operations and last, pay dividends. At the same time, we are continued to invest in our resources to grow our business in the future periods and acquiring a new European sales office and a new world-class distribution facility in the Midwest.

At this point, I’ll ask Dave to cover the financial aspects of the quarter and the year and then we’ll review our recent progress and the strategy going forward.

David P. Carlson

For the second quarter of 2008, we reported consolidated net sales of $27.8 million, up 12% from the second quarter of 2007. For the first half of 2008, net sales were $52.5 million, up 8% from the same period of 2007.

As many of you know, we compete in two markets of the footwear industry, the work and outdoor markets. Our work customers include professionals in law enforcement, transportation, fire fighting, construction, military, and others who require high-performance footwear as a critical tool for the job. The work market typically has more year-round demand. It represented 62% of our total net sales for the second quarter of 2008.

Year-over-year sales to the work market grew at a strong 32% from the second quarter of 2007. The growth in work market sales primarily reflects shipments related to previously announced military orders.

During the second quarter of 2008, we shipped approximately $1.8 million in delivery orders to the United States Marine Corps and the United States Army. In addition to these delivery orders, we continued to penetrate in a variety of targeted specialized work boot markets.

The outdoor market tends to be seasonal with the strongest sales in the second half of the year. Our outdoor customers include individuals active in hunting, winter recreation, rugged outdoor activities. Outdoor sales represented 38% of our total net sales for the second quarter of 2008.

Year-over-year sales to the outdoor market were 11% lower for the second quarter of 2008 compared to the second quarter of 2007. The decline in overall outdoor sales was primarily due to the cautious retail environment in North America. When retail spending improves, we believe that we’re in a strong position to capture at-once demand.

Despite the economic challenges, we did strengthen our year-over-year gross margins. For the second quarter of 2008, our gross margin was 40.4% of net sales, up 120 basis points from the same period of 2007. This improvement reflects price increases in recent periods and a reduction in sales returns, discounts and allowances.

While we continue to work to strengthen our gross margins over the long-term, we do face continuing cost challenges and you can expect our gross margins will fluctuate from quarter to quarter.

We continue to focus on leveraging our operating model. Our total operating expenses were $8.9 million or 32% of net sales in the second quarter of 2008 compared to $8.3 million or 33% of net sales in the second quarter of 2007.

We have grown our sales faster than operating expenses. We continued to increase our investment in sales and product development efforts. Going forward, we expect to continue to strategically invest in core areas of our business.

Our sales growth in strong margins have had a positive impact on our profitability. Net income was $1.4 million or $0.22 per diluted share in the second quarter of 2008, up 47% from the second quarter of 2007. For the first half of 2008, net income was $2.2 million or $0.35 per diluted share, up 40% from the same period of 2007.

Our effective tax rate for the quarter was 36.3% and we expect our full-year tax rate to remain approximately 36% which includes the enactment of the federal research and experimentation credits for 2008.

Our improved financial performance in recent years has significantly strengthened our balance sheet. During the quarter, we paid a quarterly cash divided of $0.125 per share of common stock totaling approximately $800,000. As a result, we ended the second quarter of 2008 with cash and cash equivalents of $13.3 million, up from $10.3 million at the end of the previous quarter. Note that our cash position will tend to decline in the second and third quarters and increase at year-end.

We’re also pleased to see our inventory level down 3% at the end of the second quarter of 2008, compared to the same period of 2007. This reduction in inventory levels not only reflects the sell-through of carry-over hunting boots from the third quarter of 2007 but it also demonstrates our improved inventory management.

Our capital expenditures were approximately $600,000 for the second quarter. For the full year of 2008, we expect CAPEX to be approximately $2 million which is comparable to our planned depreciation for the year.

At the end of the second quarter of 2008, our receivables were $19.6 million, up 7% from the same period last year or $18.3 million. DSOs were approximately 55 days for the second quarter for 2008, down from 56 days for the second quarter of 2007.

While we will not be providing guidance on our financial performance for future periods, we remain focused on growing our sales and market share in specialized work and outdoor markets. You can expect our seasonal sales pattern to continue through our long-term goal to continue to improve our year-round demand and profitability.

In summary, the financial health of the company is excellent and we are positioned to pursue the market opportunities for us.

Now, I’ll turn the call back to Joe.

Joseph P. Schneider

Despite the challenging retail environment, we were pleased with our execution and progress in the second quarter. We continue to focus on targeted markets where great products, innovative technologies and operational excellence create opportunities for sustainable and profitable growth.

Our sustained investment in recent years in strengthening our government channel continues to pay off. During the second quarter, we continue to fulfill delivery orders to various branches of the U.S. military. This includes shipments to the U.S. Marine Corps for our Danner Mountain Cold Weather Boot and the Danner Marine Hot Boot as well as the Danner Explorer Boot for the U.S. Army.

During the second quarter, we also announced an additional $3 million delivery order related to our Mountain Cold Weather Boot contract with the United States Marine Corps which we expect to ship in the second half of 2008.

The Danner Marine Hot, Mountain Cold Weather and the Explorer are all made in our ISO-9001 certified manufacturing facility located in Portland, Oregon.

Our success in this channel reflects our sustained efforts to work closely with our customers and gain a rich understanding of the specific needs under tough combat conditions in all climates and environments. We’re proud to support the dedicated men and women in uniform with premium performance footwear.

In addition to our success in the various branches of the military, we continue to further penetrate into niche work mark segments that are less impacted by the soft retail spending, where our products are seen as critical tools for the job. This includes specialized footwear for railroads, petroleum industry, and a wide range of mining.

In the line with our long-term strategy to diversify and strengthen our sales channels, we recently announced our new European sales office in Copenhagen, Denmark. For $3.2 million in cash, we purchased the assets of our established distributor partner, Gateway Footgear. In order to strengthen our direct sales and marketing support to the customers in Europe, Gateway did an outstanding job in aligning our brand and we look forward to taking our international sales and marketing efforts to the next level. Our new office in Denmark will allow us to further penetrate the Scandinavian countries and allow for additional expansion into other European markets.

As we execute our long-term growth strategy, we continue to invest in our core areas of business that will strengthen service to our customers. During the quarter, we announced our plans to develop a new distribution center in the Indianapolis market. This world-class Midwest facility will allow us to get closer to our customers, increase our speed to market, and improve our operating efficiencies. The new Midwest distribution center will complement our existing Portland, Oregon distribution center. The completion of this project is targeted for the first half of 2009.

In summary, despite the challenging retail environments, we continue to penetrate into government and other niche work segments and believe we’re increasingly well-positioned to capture at-once demand when retail spending improves. With continued strength in our operations and sales channels, grow our sales, leverage our operating expenses, improve our profitability, and generate steady cash from operations. Going forward, we’re encouraged by the positive customer response to our new product and continue to develop and introduce premium products infused with innovative technology and backed by operational excellence. LaCrosse remains well-positioned to continue to capitalize on opportunities for sustainable and profitable growth.

This concludes the formal part of our presentation. Dave and I will be pleased to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sara Hasan - McAdams Wright Ragan.

Sara Hasan - McAdams Wright Ragan

Just looking at the work market segment this quarter, even if you back out the military orders, it looks like a pretty strong quarter. I’m just wondering, was there any pull-through from the third quarter or is there anything special behind that?

Joseph P. Schneider

Again, we continue to make penetration into oil extraction, oil exploration, mining, railroads which is year-round demand. As we’ve been working on this for a very long time, we’re just hitting and trying to get lots of singles. They’re very niche businesses that are sustainable and the jobs are well paying, and footwear is a critical tool.

Sara Hasan - McAdams Wright Ragan

Looking out to fall and the weak demand on the outdoor side from retailers, what spec position are you taking?

Joseph P. Schneider

I’m not sure we take a speculative position, per se. If you look at our inventory build-up last year, a lot of our product is pretty basic and we would certainly like to capture the demand as it comes in, but 20% of all of our employees incentive comp is based on inventory turns. We certainly want to grow our sales but be prudent on inventory turns. So what we’ve seen is a significant shift from advance orders to at-once orders and our at-once orders for the quarter were actually up. We’re well-placed and positioned to capitalize on those at-once orders due to our great systems we have and people and our basic products.

Sara Hasan - McAdams Wright Ragan

On the military orders for the back half of the year, do you have any idea what the split might be between the third and fourth quarters? Is it looking pretty even?

David P. Carlson

That will be about right, Sara.

Sara Hasan - McAdams Wright Ragan

Are there any charges associated with the LaCrosse distribution center closing?

David P. Carlson

Yes, Sara, there is a small amount of cost that we’ve put in here mainly to incent folks to continue to do what they do best back there, which is do a great job in our DCs, but it’s minimal. It will probably be somewhere between $100,000 and $200,000 for this year.

Operator

Your next question comes from Reed Anderson - D.A. Davidson.

Reed Anderson - D.A. Davidson and Co.

Joe, I was curious. Looking at the outdoor side first, what differences are you seeing in how your customers are either ordering, is the softness really uniform across everybody or are you seeing softer in the bigger box outdoors, is specialty a little bit better. I just want to get some color on that, perhaps.

Joseph P. Schneider

As I’ve mentioned, first of all, the inventories at retail are some of the cleanest that are out there, at least in the categories that we are in. We are coming off a pretty cool and long winter. The inventories are in good shape retail.

Having said that, overall the retailers were very conservative in placing advance orders, hence if they sell one, they buy one. So our customer call activity again is up so if you have the systems in place and the product that we have, we believe we are in a good position. However, the macroeconomics is beyond our control.

In going out there in the last couple of weeks, being out at retail, I would say for the most part, universally, it’s soft out there. The consumer is really looking at the products that have unique characteristics and a “buzz” factor so whether it’s a big box or a small box.

Reed Anderson - D.A. Davidson and Co.

Then, a question on inventory. I was looking at last year; I looked at where you exited Q2 in terms of inventory. It was a year-over-year growth; it was a great proxy for where revenues track in the second half. Does anyone think that may not be the case this year as well, you’re coming out of Q2, inventory is down 2% to 3%, does that make sense when we sit here and think about things or has something changed?

Joseph P. Schneider

No, Reed. I don’t think the one thing that has changed is we’re seeing more at-one business so we’ll be timing some of our deliveries to meet that demand. Other than that, we have good inventories, and as we talked about before, we brought them down from where they were which was too much inventory after we exited last fall with the slowness in the weather due to the hunting piece. No, we’re in pretty good shape.

Reed Anderson - D.A. Davidson and Co.

Remind me, what was there in the back half of last year for military business in the third and fourth quarters of ’07?

Joseph P. Schneider

As I recall, we can look it up, but it was just our ongoing business. We announced in the last couple months, reasonable sized orders but, believe me, day in and day out, we’re getting business out there that is below the radar. So there might have been, but I don’t recall any large orders from the military last year.

Reed Anderson - D.A. Davidson and Co.

In the commentary in the release, you talked about the intuitive balance. Obviously, you’ve gotten two price increases now I think, so that’s helping gross margins a little bit, and you also talk about reductions in sales returns, discounts, allowances, that sort of thing. Just curious, was there any change formally in policies or procedures or whatever that would account for that or is it just doing a better job managing it?

Joseph P. Schneider

On the commercial side, the outdoor side, we are seeing more at-once type ordering. Those come with different terms than if we get a preseason order. So we’re seeing a reduction there and that’s a large part of why it’s different.

Operator

Your next question comes from Ronald Bookbinder – Global Hunter Securities, LLC.

Ronald Bookbinder – Global Hunter Securities, LLC

First of all, congratulations on another solid quarter and a nice job of bringing that inventory back under control. I wanted to ask you about this European acquisition of the distributor. How much in revenue was it doing under the previous management?

Joseph P. Schneider

Ron, we can’t disclose that since it was a private transaction on our part. They were growing it. It was an unfortunate circumstance. The former owner passed away suddenly. Our distribution agreement had expired. This was the only brand or two brands that they were distributing. It was the right time for us to put some of our own people over there, to grow the business.

We’re focused in on the Scandinavian countries where our product with the weather conditions, the economy in the Scandinavian countries tend to be doing quite well. So we look forward to growing that business. We will incur some one-time charges of building it up. The money that we get paid for was for inventory, there was no goodwill associated with it.

Ronald Bookbinder – Global Hunter Securities, LLC

Now that you’re going to have direct control and you basically cut out the middleman, should we see some margin improvement or is it just going to be such a small percentage of your business that we won’t see anything right now, maybe something down the road?

Joseph P. Schneider

Yes, Ron, that’s a great way to look at it. It is international is less than 6% to 7% of our business so as the thing grows, it will have a bigger impact, but it will have a marginal impact on the margin side to start with.

Ronald Bookbinder – Global Hunter Securities, LLC

Is there a major competitor in that region that you’re going to be going up against? How will tariffs affect you and the competitiveness of your product in that region also?

Joseph P. Schneider

Most of the product that is being consumed there is made and sourced in Asia or the Eastern Bloc. The products that we compete in, I feel very comfortable with as long as we can continue to develop innovation into our product and we have a team that has been developing product for this market. We’re putting a few more resources into it but again, we’re going to build it out sequentially.

Ronald Bookbinder – Global Hunter Securities, LLC

You mentioned that they carry two brands, were those two brands LaCrosse and Danner or was there another brand?

Joseph P. Schneider

No, you’re correct. I’m sorry, LaCrosse and Danner. Both Dave and I and numerous people here in the office have been going over there for years. We’re very comfortable in the market. My Danish isn’t that great but we have some very capable people that were employees that are going to be working for us instead of our former distributor. So we’re quite excited about the future.

Operator

Your next question comes from Donald Porter - Dolphin Granner.

Donald Porter - Dolphin Granner

I had a question on the military contracts. Where are we in terms of how much has been consumed or how much you’ve delivered?

Joseph P. Schneider

In the first half of the year, we shipped $1.7 million in Q1 and $1.8 million in Q2. We announced an additional order recently for $3 million that we’ll deliver in the second half of the year.

Donald Porter - Dolphin Granner

Is this being driven by, is it the Marine Corps changing strategy of how to produce the boots or are there any drivers here?

Joseph P. Schneider

Yes, the drivers are that the conditions, historically the Marines or other branches of the service used to have one boot for all applications. They’re going to more and more specialty footwear and being more critical or demanding of how that footwear performs. That plays perfectly into our strategy. So most of the business that we go after are very niche segments of the military. We’re not getting the large contracts that are for the general enlistee. We’re again going after niche areas where the soldier is either being trained or prepared for those types of conditions or they’re actually in that.

One thing that we don’t do is dummy down our product so they’re looking for the highest quality footwear and the Mountain Boot we worked with them for years to develop a boot that has a rand around the upper and also built in some other qualities. So it’s in collaboration with them. They have had these out for tests and now are really starting to see the benefit. Therefore, they’re increasing demand for it.

Donald Porter - Dolphin Granner

So you worked with them exclusively for this boot. Do you only sell this boot to them? Is it an exclusive to the Marine Corps?

Joseph P. Schneider

Yes, they would do something with me if I sell it to someone other than the Marines.

Donald Porter - Dolphin Granner

The $3 million order, is that one of many, or is that sufficient for the time being after that order? Is it if we like this, then we are going to keep ordering more and more boots?

Joseph P. Schneider

I don’t know. What we continue to do is invest in the relationship and have a rich understanding of who the end-user is and there’s quite a few Marines out there. We’re not trying to be the biggest; we’re just trying to be the best in supplying them. We’re thrilled to have this one but as our Board of Directors said, “What did you do for me today?”

Donald Porter - Dolphin Granner

In the outdoor market, I know you have mostly all high-end goods. Do you see your customers though at all trading down to maybe a lower price point within your portfolio or products? Do you see that happening at all?

Joseph P. Schneider

I’m sure there’s some of that going on but again, a lot of our product, it’s the individual who is going elk hunting in Montana or they have discretionary income. I’m not sure if I would want to be in the middle price points right now because they’re probably going to the house brands. I don’t want to be naïve. It’s impacting us but probably not the degree that it’s impacting others.

Donald Porter - Dolphin Granner

With the price increases, you haven’t found any resistance there?

Joseph P. Schneider

There’s been minimal but again, all the boats must rise with all the price increases that are going on. The other part is, as long as we continue to develop and innovate new products for the fall season we’ve got coming up, there’s some newness and excitement out there.

Donald Porter - Dolphin Granner

Are those price increases about inline with what you’re seeing your costs go up by?

Joseph P. Schneider

Yes, as Dave likes to say, we take the Swiss approach. So it’s neutral to us.

Operator

Your next question comes from Thomas Hernburg - Carl M. Hennig.

Thomas Hernburg - Carl M. Hennig Inc.

Let me ask you, as far as that inventory is concerned, is any of that work in progress for the military which would actually show a further reduction in inventory?

Joseph P. Schneider

There is about a half of million dollars sitting in raw materials that is about where we were last year to take care of some of that military business.

Thomas Hernburg - Carl M. Hennig Inc.

Do you believe that these military orders are build-up for future troop increases especially in Afghanistan where Obama is talking about 14,000 additional and McCain talking about 20,000 additional or do you believe these boots are going right on our troops as soon as they get them?

Joseph P. Schneider

Tom, I honestly don’t know. We just don’t comment about the end use. The Marines and Army forbid us from saying where we let people know where we ship these products. We do not know.

Thomas Hernburg - Carl M. Hennig Inc.

Thirdly, with some of the bad weather we had, certainly here in Wisconsin and the flooding in Iowa, has that had any positive effect on rubber boot sales?

Joseph P. Schneider

Well, our rubber boot sales across the board, actually across the nation are up over previous years. I’m sure there’s some incremental business in Wisconsin and Iowa and it’s unfortunate. We’ve certainly tried to help those folks out but there’s nothing noticeable.

Thomas Hernburg - Carl M. Hennig Inc.

Do you see an opportunity whereby there is a disaster such as this that you can fill up a semi full of rubber boots and take those down there and sell them off the back of a semi or do you have to go through your deals down there?

Joseph P. Schneider

We’re better at utilizing our distribution network. So we would not look at cutting in on our retailer in that aspect. We’ve got great partners in the retail channels that periodically if something happens, there is a one-time event, whether it be a forest fire out here, or flooding, we try to work with them to let them benefit from a very unfortunate situation.

Thank you for participating in today’s conference call. We look forward to talking to you in another 90 days. Have a great day.

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