Quiksilver, Inc. (ZQK)

ZQK 
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Quiksilver, Inc. (ZQK)

F3Q2010 Earnings Call Transcript

September 2, 2010 4:30 pm ET

Executives

Bruce Thomas – VP, IR

Bob McKnight – Chairman, President and CEO

Joe Scirocco – CFO and COO

Steve Tully – President, Quiksilver Americas

Analysts

Todd Slater – Lazard Capital Markets

Jeff van Sinderen – B. Riley & Co.

Sean Naughton – Piper Jaffray

Mitch Kummetz – Robert W. Baird & Company

Jim Duffy – Stifel Nicolaus

Claire Vondro [ph] – Jennifer Black & Associates

Presentation

Operator

Good afternoon 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 for you to queue up for your questions. If you have difficulties hearing the conference please press star then zero for operator assistance at any time. I would like to remind everyone this conference is being recorded. I would now like to introduce Bruce Thomas Quiksilver's Vice President of Investor Relations who will chair this afternoon's conference.

Bruce Thomas

Thanks, operator. Good afternoon everyone and welcome to the Quiksilver’s third 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 would 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 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 would like to turn the call over to Bob McKnight.

Bob McKnight

Thanks, Bruce. Good afternoon everyone. And thanks for joining us for our third quarter conference call. Over the past two years, we have made many changes within Quiksilver to create a leaner organization that is capable of expanding our leadership of a global action sports industry, while possessing the flexibility to quickly adapt to changes in the worldwide market place.

Dealing with these changes has made us a better company, as we continually strive to make better product and achieve higher levels of operating efficiency. We have risen to the occasion to become sharper, and better. We have become more creative, in leveraging resources and our designs have transformed our vision into innovative new fabrics and constructions. And each season we reinforce our industry-wide product leadership. And despite the economic charge challenges facing the world's economies we're pleased that the action sports industry is very much alive and gaining momentum.

We have seen some great recent examples of action sports becoming more and more prevalent in today's society. Whether it is snowboarding competition, show cased at the Olympics, or Tony hawk attracting tens of thousands of fans in Barcelona, and in Rome during his recent European skate tour, the X Games in Los Angeles, or even the huge crowds at the US Open of surfing here in Huntington Beach, it is clear that the popularity of action sports is growing around the world.

With action sports and the outdoor sports life style as our playing field, we're very pleased to again deliver financial results that exceeded our prior expectations. Our team executed well, in an economic environment that continues to present significant challenges around the world.

Let's now turn to the high level financial highlights from the third quarter. First, pro forma adjusted EBITDA in the quarter was $54 million compared to $44 million in the third quarter of fiscal 2009. That's 23% higher EBITDA despite a 12% revenue decline.

The second highlight is our 560 point basis expansion of gross margin, to 52.3%, compared to 46.7% last year.

Third, operating income in our Americas region, was 11.8% of revenues, as gross margin improved 900 basis points to 46.7%, from 37.7% in Q3 of fiscal 2009.

And fourth, in regard to our improved balance sheet, net debt at quarter's end was $687 million, reflecting a reduction of $183 million or 21% compared to a year-ago.

We're also delighted to report continued substantial improvement to our capital structure especially after completing the debt for equity exchange with Rhone in early August. You know, we were really grateful a year-ago when Rhone offered a senior term debt that we needed to solve our liquidity issues. They saw the value in our business, believed in it and have contributed significantly as Board members.

What they did recently by converting $140 million of debt into equity, at $4.50 per share, was even more impactful. Their equity investment speaks to the confidence they have in our business, and in our management team, and I just want to say how stoked we are to have them as partners.

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