John Wittkowske - Senior Vice President, Chief Financial Officer and Secretary Thomas Florsheim - Chairman and Chief Executive Officer.

Welcome to the Fourth Quarter and Full-Year 2017 Earnings Release Conference Call. My name is Victoria, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I’ll now turn the call over to John Wittkowske. John, you may begin..

Thank you, Victoria. Good morning. Welcome to Weyco Group’s conference call to discuss our fourth quarter and 2017 results. On this call with me today is Tom Florsheim Jr., our Chairman and CEO. Before we begin to discuss the results for the quarter, I will read a brief disclaimer.

During the course of this call, we may make projections or other forward-looking statements regarding our current expectations concerning future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual results – or actual events or results may differ materially.

We refer you to Weyco Group’s most recent Form 10-K as filed with the Securities and Exchange Commission. The 10-K identifies important factors and risks that could cause the company’s actual results to differ materially from our projections. Additionally, some comparisons may refer to non-GAAP measures.

Our SEC filings may contain additional information about these non-GAAP measures and why we use them. Net sales for the fourth quarter of 2017 were $80.3 million, down 2%, as compared to 2016 fourth quarter sales of $82.1 million. Operating earnings were $10.3 million in the fourth quarter, up 17% as compared to $8.8 million last year.

Net earnings attributable to Weyco Group were $8.1 million this quarter and $8.2 million last year. Diluted earnings per share were $0.79 per share in the fourth quarter, compared with $0.78 per share in 2016. There were three significant nonrecurring adjustments that impacted the comparison of fourth quarter results.

The first adjustment, which was recorded in the fourth quarter of 2017 reduced the company’s income tax provision for the impact of the 2018 tax reform bill. This benefit resulted from adjusting our deferred tax balances to reflect the new corporate tax rate.

Additional benefits are expected in 2018, when the lower corporate tax rate is applied to current income. The second adjustment, which was recorded in the fourth quarter of 2016 was a $1.8 million charge for impairment of the Umi trade name. On an after-tax basis, this impairment charge was $1.1 million.

The third adjustment, which was also reported in the fourth quarter of 2016 reversed $3.1 million of deferred tax liabilities on corporate-owned life insurance policies. Without these nonrecurring adjustments, earnings from operations would have been down 3% for the quarter, while net earnings attributable to Weyco Group would have been up 8%.

Additionally, diluted earnings per share, excluding these adjustments would have been $0.65 per share, up from $0.58 per share in last year’s fourth quarter. In the North American Wholesale segment, net sales for the fourth quarter were $61.4 million, compared with $61.7 million in 2016.

Licensing revenues were $724,000 this quarter and $1.1 million last year. Wholesale gross earnings were 37.4% of net sales for the fourth quarter, compared to 34.7% in 2016.

Wholesale selling and administrative expenses, excluding nonrecurring adjustments were $14.6 million, or 24% of net sales compared to 13.6% – $13.6 million, or 22% of net sales in 2016. Without these nonrecurring adjustments, wholesale operating earnings would have been up 7% over last year’s fourth quarter, mainly due to higher whole gross margins.

Net sales of our North American Retail segment, which include our retail stores and U.S. Internet sales were $6.9 million this quarter and $7.4 million last year. Same-store sales, which include U.S. Internet sales were down 3% for the quarter, mainly due to lower sales on the company’s websites.

Retail operating earnings were $1.1 million, as compared to $1.3 million in last year’s fourth quarter. Our other operations, which include the wholesale and retail businesses of Florsheim Australia and Florsheim Europe had net sales of $12 million in the fourth quarter of 2017, down 8%, as compared to $13.1 million in 2016.

The decrease between years was mainly due to a 7% decrease in net sales at Florsheim Australia. In local currency, Florsheim Australia’s net sales were down 9%, with lower sales in both its retail and wholesale businesses.

Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $800,000 for the quarter, down from $1.4 million last year. The decrease between years was due to the lower sales volume. For the year, our overall net sales were $284 million in 2017, a decrease of 4%, as compared to $297 million in 2016.

Earnings from operations were $23.4 million in 2017, up 3% as compared to $22.8 million last year. Net earnings attributable to Weyco Group were flat at $16.5 million.

Without the nonrecurring adjustments discussed earlier, earnings from operations would have been down 5% for the year and net earnings attributable to Weyco Group would have been up 4% for the year. Diluted earnings per share were $1.60 in 2017, compared with $1.56 in 2016.

Without the previously discussed nonrecurring adjustments, diluted earnings per share would have been $1.45 in 2017 and $1.36 per share in 2016. In the Wholesale segment, net sales for the year were $217 million, down 5% from $228 million in 2016.

The decline in wholesale sales was largely due to lower sales of our Nunn Bush and BOGS brands, partially offset by higher sales in the Florsheim Brand. Licensing revenues were $2.5 million in 2017 and $2.8 million in 2016. Wholesale gross earnings as a percent of net sales were 33.6% this year, up from 32.1% last year.

Wholesale selling and administrative expenses, again, excluding nonrecurring adjustments were $52.8 million, or 24% of net sales, compared to $53.4 million, or 23% of net sales in 2016.

Without the nonrecurring adjustments, our wholesale operating earnings would have been up 3% for the year, due to higher gross margins and lower selling and administrative expenses. On December 31, 2016, we froze our pension plan, which resulted in a pension savings of $2.2 million annually.

Also, in 2017, the company retrospectively adopted a new accounting rule that required the company to reclassify the non-service cost components of pension expense from selling and administrative expense to other expense in the income statement.

Accordingly, $1.1 million of the savings was recognized in selling and administrative expenses and the other $1.1 million of savings benefited other expense. In our Retail segment, net sales were $20.9 million, down 5%, as compared to $21.9 million in 2016. Same-store sales, which include U.S.

Internet sales were down 5% for the year, mainly due to decreased sales on the company’s websites. Earnings from operations for the Retail segment were $1.4 million in 2017 and $2.1 million in 2016. Again, the decrease was primarily due to lower website sales.

Our other operations had net sales of $45.6 million in 2017, down 4% as compared to $47.5 million in 2016. The decrease was primarily due to lower net sales at Florsheim Australia. Florsheim Australia’s net sales were down 3% for the year, and in local currency, the net sales were down 6%, with lower sales in both its retail and wholesale businesses.

Collectively, the operating earnings of Florsheim Australia and Florsheim Europe were $1.8 million, down from $2.7 million. This decrease was primarily due to lower sales. Our expense for the year -- excuse me, other expense for the year totaled $248,000 in 2017, down from $1 million last year.

The decrease in other expenses this year was primarily due to the $1.1 million decrease in the non-service cost components of pension expense previously discussed. At December 31, 2017, our cash and marketable securities totaled $47.1 million and we had no debt outstanding on our $60 million revolving line of credit.

During 2017, we generated $33.5 million of cash from operations. We used funds to payoff $4.3 million of the line of credit, repurchased $15.2 million of our company stock, paid $9.1 million in dividends and purchased an additional $4.6 million of marketable securities. Additionally, we spent $1.6 million on capital expenditures.

We expect capital expenditures to be between $2 million and $3 million in 2018. On March 6, 2018, the company’s Board of Directors declared a quarterly cash dividend of $0.22 per share to all shareholders of record on March 16, 2018, payable on March 30, 2018. I would now like to turn the call over to Tom Florsheim Jr., Our Chairman and CEO..

Thank you, John, and good morning, everyone. Our North American wholesale business was relatively flat for the quarter and down 5% for the year. 2017 was a difficult retail year in footwear and apparel and our results reflect the environment.

In the back-half of the year, our wholesale business gained traction due to the strong performance of two of our divisions. While soft goods retail still has its challenges, we feel we are well-positioned to pick up market share in 2018.

BOGS sales fell 10% in the fourth quarter and 9% for the year, and the brand’s performance was indicative of the category. The fourth quarter looked very promising during early November cold snap, which impacted much of the country. Business fell off during a warm December, which lacked precipitation.

In general, retailers are taking a very conservative approach towards seasonal inventory by limiting replenishment in order to end the season without significant markdown liabilities.

While the weather in early 2018 helped to clean up – clean out, excuse me, retailer stock and better position the industry for next fall, it remains clear that we need to continue to focus on diversifying BOGS away from dependency on the timing of winter weather.

We believe we’re making good progress towards this end, but that transition will take time as we further develop our non-seasonal work business and expand our assortment of lightly insulated footwear across all genders. Our Stacy Adams business was up 10% for the quarter, but was down 2% for the year.

The increase was driven by strong sales at retail, especially in the e-commerce and shoe chain trade channels. We feel good about the direction of this business as Stacy Adams has been our most consistent brand over recent years and it has a strong following for both the consumer and retailer perspective.

The next step for Stacy Adams is to more fully develop a casual assortment that incorporates the fashion DNA of the brand. We’re making a concentrated effort to enhance our casual assortment and we should see growth in this area in 2018 and beyond. Our Florsheim wholesale division was up 12% in the fourth quarter and 5% for the year.

The Florsheim business has nice momentum with the number of new product packages introduced in the last year that are selling well at retail. We believe this trend will continue in 2018 with a growing awareness of Florsheim’s performance as a standout within the brown shoe category.

We’re also introducing new platforms that will move the brand further along the casual continuum. Consumers are embracing versatile footwear that can be worn at a work or more casual setting, and the evolution of the Florsheim design aesthetic has mirrored this trend. Our Nunn Bush business decreased 5% for the quarter and 11% for the year.

It was a tough year for Nunn Bush, a brand which has historically been dependent on the vibrancy of mid-tier department stores for growth. In 2017, the struggles of this retail sector weighed on Nunn Bush.

In 2018, we believe that this trend will begin to reverse itself, as Nunn Bush experiences growth in both the e-commerce and shoe chain trade channels. In the fourth quarter, the brand also had a number of successful new product introductions that will carry momentum into the New Year.

We believe that after a challenging stretch, Nunn Bush is turning a corner. Same-store sales in our North American Retail segment, which includes U.S. Internet sales were down 3% in the fourth quarter and 5% for the year. The decline was primarily driven by our e-commerce business.

As we mentioned in the third quarter conference call, our products are primarily sold at MSRP, which puts us at somewhat of a competitive disadvantage in an increasingly promotional Internet space. However, we believe from a brand-building perspective, it is important to establish and maintain price integrity.

Our brick and mortar retail is now at nine stores, all non-outlet stores have been remodeled and serve as brand flagships in key tourist markets. Net sales in our overseas business decreased 8% for the fourth quarter and 4% for the year. Our overseas retail stores were a drag on sales in 2017 and that continued into the fourth quarter.

Both Australia and the Pacific Rim saw declining same-store sales as apparel and footwear retailers in these markets are experiencing some of the same issues that we are in the U.S. We are currently focused on making sure our expenses are in line as we work through this transition.

We believe in the long-term opportunity in these markets and are committed to keeping pace with the changes in overseas markets. Our inventories at December 31, 2017 were $60 million, compared to $70 million a year ago.

As mentioned in previous calls, we continue to manage our inventory levels to make sure that we have stock in our core products, but have decreased our exposure to seasonal product by being more conservative in our purchases.

Our strategy of being more conservative on seasonal items and putting more inventory behind our best selling core styles is paying off from the standpoint of higher margins due to fewer markdowns. Our overall gross margins were 39% in 2017 versus 37.7% last year.

The gross margin pick up was in part due to tighter management of our inventories, resulting in a lower percentage of obsolete products. That concludes our formal remarks. We appreciate your interest in Weyco Group. And I’d now like to open the call to any questions..

Victoria, you can ask for questions..

[Operator Instructions] I’m showing no questions..

Okay, then we thank, everybody, for listening in, and have a great day. Thank you..

Thank you, ladies and gentlemen. You may now disconnect..

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