Quiksilver, Inc. (ZQK)

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Quiksilver, Inc. (ZQK)

F2Q10 (Qtr End 04/30/10) Earnings Call

June 3, 2010 4:30 pm ET

Executives

Bruce Thomas – VP, IR

Bob McKnight – Chairman, President and CEO

Joe Scirocco – CFO and COO

Steve Tully – President, Women’s Division

Analysts

Todd Slater – Lazard Capital Markets

Jeff Van Sinderen – B. Riley & Company

Jim Duffy – Thomas Weisel Partners

Claire Gallacher – Capstone Investments

Mindy Sioni [ph] – JPMorgan

Mitch Kummetz – Robert Baird

Grant Jordan – Wells Fargo

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator instructions) I’d like to remind everyone that this call is being recorded. I would now like to introduce your host, Bruce Thomas, Quiksilver’s Vice President of Investor Relations, who will chair this afternoon’s call.

Bruce Thomas

Thanks, Nathan. Good afternoon, everyone, and welcome to the Quiksilver second quarter fiscal 2010 earnings conference call. Our speakers’ today are Bob McKnight, our Chairman, President and Chief Executive Officer; and Joe Scirocco, our Chief Financial and Operating Officer.

Before we begin, I’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 Risk Factors in our most recent Annual Report on Form 10-K.

All forward-looking statements made on this call speak only as of today’s date and the company undertakes no duty to update any forward-looking statements. In addition, this presentation may contain references to non-GAAP financial information. A reconciliation of non-GAAP financial information to the most directly comparable GAAP financial information is included in our press release, which can be found in electronic form on our website at www.quiksilverinc.com.

With that out of the way, I’d like to turn the call over to Bob McKnight.

Bob McKnight

Thank you, Bruce. Good afternoon, everyone, and thanks for joining us for our second quarter conference call. Throughout this past two years, we laid the foundation for a new Quiksilver. Our goal was to create a leaner organization that presents the horsepower to expand our global leadership of the action sports industry while providing the flexibility to adapt to changes in the worldwide marketplace.

Significant financial restructuring was necessary to fortify the foundation while substantial changes in senior management and deep cost cuts were key to fundamentally improving the framework of the company. I am proud to say that after successful restructuring efforts and improvements to our capital structure, a new Quiksilver is emerging and the changes we’ve made have enabled new levels of performance.

While making these changes, we were careful to preserve the creative engine that have driven our great brand to their respective market leadership position, and the Quiksilver, Roxy and DC teams continue to develop great products and reach out to customers in new and inventive ways. Because we make great product space on our deep understanding and loyalty to our customers and to the markets we serve, we are in a prime position to benefit from improvement to consumer spending and future improvements in the world economy.

And although consumer spending remains inconsistent on a global basis, and in some places it’s still very tough, our business is operating at a high level on many fronts and we are delighted that the changes we’ve made in the past two years are evident in our financial results.

Let’s now turn to the high level financial highlights from the second quarter in which we delivered better than expected performance in nearly every measurable way. These results demonstrate solid execution and considerable progress driven by the bold steps we have taken over the past several quarters to improve our operations.

The first highlight is in regards to EBITDA, which has become for us an increasingly important measure of our progress. Pro forma adjusted EBITDA in the quarter was $62 million compared to $45 million in the second quarter of fiscal 2009 despite a 5% revenue decline. Next, gross margin improved 600 basis points to 53.2% compared to 47.2% in the second quarter of fiscal 2009, led by 970 basis point improvement in the Americas.

Our third highlight comes from Europe, our most profitable region. Operating income in Europe was 18.8% of revenues, as gross margin improved 320 basis points to 59.9% from 56.7% in the second quarter of fiscal 2009. And fourth, in regard to our improving balance sheet, net debt at quarter’s end was $733 million, reflecting the reduction of $201 million compared to a year ago.

To complete the high level picture of our financial performance, we are also pleased to report that inventories remain in very good shape and the level of clearance activity has been greatly reduced compared to last year. During the quarter, we further reduced SG&A expenses by $6 million in constant currency terms, excluding special charges.

In total, we generated income from continuing operations of $16 million or $0.11 per share compared to income of $7 million or $0.05 per share in the second quarter a year ago. This result was substantially better than we anticipated when the quarter began.

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