Welcome to the Second Quarter 2019 Earnings Release Conference Call. My name is [indiscernible] and I'll be your operator for today's call. [Operator Instructions] I'll now turn the call over John Wittkowske, Chief Financial Officer. John Wittkowske, you may begin.

Thank you. Good morning, everyone. Welcome to Weyco Group's conference call to discuss our second quarter 2019 earnings. On this call with me today is Tom Florsheim, Jr, our Chairman and CEO. Before we begin, I would like to 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 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. Our net sales for the second quarter of 2019 were $60.5 million compared to 2018 net sales of $60.9 million. Operating earnings were flat at $1.9 million in both the second quarters of 2019 and 2018. Net earnings attributable to Weyco Group were $1.5 million for the quarter and $1.6 million last year. Diluted earnings per share were $0.15 per share in both the second quarters of 2019 and 2018. In the North American wholesale segment, net sales for the quarter were $46.1 million, up 1% compared to $45.6 million in 2018. Licensing revenues were $637,000 this quarter, compared with $472,000 last year. Wholesale gross earnings were 35.1% of net sales in the second quarter and 33.3% of net sales in last year's second quarter. Wholesale operating earnings rose 27% to $2.2 million this quarter, up from $1.7 million last year due to higher sales and…

Thanks, John, and good morning, everyone. As John mentioned, sales in our North American wholesale segment were up 1% for the April to June time period. Overall, we feel that it was a solid quarter and a good first half. We continue to have a strong core business as well as some nice successes in terms of moving our brands into new categories. BOGS sales were up 48% for the quarter. The second quarters is our smallest volume quarter, nonetheless, we are excited about our large percentage increase, which reflects the momentum in the BOGS business as we are selling more lightly insulated as well as non-insulated product. We also continue to make progress in our work business, which has resulted in strong growth in the farm and agriculture trade channel. The prime shipping months for BOGS start in August and while the brand is still dependent on the timing of fall weather, we feel we are more diversified with proven successes across a range of less seasonal footwear. Sales of Florsheim increased 14% this quarter. As in previous quarters, the brand's growth continues to be driven by new product introduced in recent seasons. We remain focused on leveraging our strengths in the market to expand our assortment of lifestyle footwear with a more casual bet. Stacy Adams' sales were down 6% for the quarter. The decrease was primarily the result of soft department store sales as this trade channel remains under pressure from slow mall traffic. Overall, we feel good about the direction of Stacy Adams as the leading accessible fashion brand in the men's market. Nunn Bush sales declined 20% for the quarter as this business continues to be top. Similar to Stacy Adams, the loss reflected a significant drop in shipments to the department store trade channel.…

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And your first question comes from Sam Rebotsky from SER Asset Management.

Yes, Good morning, gentlemen. With the inventory being carried in the $83 million, to what extent did you increase it relative to the 10% expected tariffs and the tariffs that are going on? And what percentage of your goods are manufactured in China?

I'll answer the first question, the last part of that question first. So it's a little less than 70% in China. I can't break down the inventory exactly. If I'm understanding the question, you're wondering what percentage of the increase is due to bringing in shoes early? Is that correct?

Yes.

Yes, what we basically did was, starting I guess in May when the threat again became evident, we had discussions with all the factories in China and just tried to pull everything for that we could. So I can't -- we were already bringing up our inventories a bit, as we've discussed previously. But I actually don't have that breakdown. But we felt that I think it's being proven out now that it made a lot of sense to bring the inventory in early. So we're positioned pretty well. We have a good part of our fall receipts in. And so we feel that -- I think that our inventory is very clean and we're healthy and then we're positioned well so that we don't get hit with tariffs on a product that we're going to ship this year for the most part.

Thank you. I assume most of the companies that are in your situation, manufacture in China or is it -- is your 70% comparable to other companies? Or are you higher relative to China?

We're pretty, yes -- no, I mean, 70% is pretty much where a lot of companies are. You see in the product world, the Nike's and Adidas have moved more out into other countries. And that's something that the whole industry has been working on for years. We have a big presence in India. We make shoes in other countries like Vietnam, but obviously we're still pretty heavily weighted in China. And we have long, good relationships with factories in China, where we're getting some really good footwear. So you just want to be very careful when you're thinking about moving your supply chain out, that you're not going to do anything short term that's going to hurt. I think long term, everybody can obviously see the writing on the wall, and so we're definitely feel -- we definitely feel we that we need to be more out of China, more diversified. And so that, that's the strategy going forward, but we're going to be very cautious as far as how quickly that happens, we don't want to disrupt what we have going, which is a very dependable, very efficient supply chain.

Okay. Are they willing to reduce any of the prices to you relative of the tariffs? Or are the firm on the prices that you pay prior to tariffs?

No, we have been working with our factories in China, a week about that regard. And yes, there is flexibility, people, we have very long-term relationships, as I just said. And the factories in China want to work with us. They understand the situation. And so there we will be able to achieve some price reductions from the factory base. Absolutely.

Okay. And one thing relatively, I think your shoes are basically not, style changes all the time, your shoes are more stable relative to maybe some other shoe manufacturers. Is that a fair assumption?

That is a fair assumption, where we have a lot of what we call core products that will continue on for several seasons. And so you see some brands where they almost start over every season. We're kind of the polar opposite of that, where we introduce seasonal styles, but the biggest part of most of our brands will continue for many seasons.

Okay. Thank you. Should I ask more questions? Or is there anybody else in queue?

That I don't know. But you can go ahead. Overall, we're happy to answer your questions.

Okay. Now as far as, I mean, you've been very financially sound, you've been, your brands have been well known. Your balance sheet is always strong. You've made acquisitions where it seems desirable. Are you looking at anything else to acquire? Or is there anything that appears of value to you at this present time?

We constantly are evaluating potential acquisitions. I can tell you right at this time, there's nothing that's really out there that we're looking at. But that doesn't mean that something might shock next week that we would look at. We're very disciplined in our approach in evaluating these acquisitions. And one thing that we've run into last few years is there's a lot of money out there chasing these brands that come up for sale. So we have certain multiples that we stick to. And so I guess the quick answer is, there's nothing on the horizon immediately. But we have built what we think is a very good platform here. And we would wait to over the years to add brands.

In this Stacy Adams, which has been a fashion, you have a licensee that manufactures clothes under the Stacy Adams name or how does that work?

Right. We manufacture the shoes and then we have a number of different licensees in Stacy Adams for different accessories like belts, hats, jewelry, suits, ties. There's a couple I just missed in that list. But yes, we license that, we license there basically everything but the shoes.

Is there any room for women's to license that product? Or put that name on a woman's brand? Or is it solely the men?

It's much more of a men's brand. We actually tested the waters there before. And I think that the women's business in the U.S. is extremely competitive. So you really have to have a unique niche to do well. Our Stacy Adams men's has an extremely unique niche. So, I mean, that's a conversation that we would have, but right now, we're really focused on the men's business.

Okay. Thanks, thanks. Okay, I've been, for a long time. Thank you. Okay. Bye.

We appreciate the questions.

Thank you.

[Operator Instructions] And we do have a question from John Thresher from Pinnacle. Your line is open.

Hi. Thanks for taking my questions. Regarding the inventory, I was just curious, I know a lot could happen between now and year-end. But you anticipate being back to inventory levels that you had in December 2018 year-end, I think $72 million or $73 million or what you're thinking in terms of inventory by year-end?

I think that we may actually end up a little higher than that, because we're going to continue, we're going to continue to bring in shoes as early as possible. Because even though the date right now that we've heard, it's not in the federal register yet, September 1st on these tariffs. There is talk that they could get ratcheted up higher. And so, we're going to continue to bring in inventory. So I do think it's going to be a little bit higher at year-end. But as we discussed in the questions with the last caller, most of our inventory is core. So what we're doing, I think it's important to understand, is bringing in core products. We're not inflating them out of seasonal product, we're not buying more of that. We're focusing on shoes that are going to go on for the next three, four seasons. So we don't feel that we're bringing in anything that's perishable and that it is basically working at the cost of money, which is relatively inexpensive right now versus the cost of these tariffs, the additional tariffs, which could be relatively expensive. So we think that it's prudent to continue to bring the inventory in.

And in terms of the customer base. Are there any customer you referenced lower sales to department stores and national shoe chains? Are there any customers that you're perhaps pulling back from at this point in terms of credit? I'm thinking, JC Penney, for example. Are there any other ones that you're monitoring from a credit perspective?

I'm going to let John answer that.

I don't think we've got anybody on a -- we're always watching it, of course, but there's no one that we've highlighted right now, that we've changed terms with significantly at this point in time. I mean, we know we had a situation way back with Sears. And we had seen that coming in, so we changed our business with them. And and so we don't have anything in that realm right now that we see.

Okay, so you're comfortable with the credit quality of your...

Yes, we keep we keep a close eye on it, however. And the situation with China obviously will affect the retailers. And so it's something that we are monitoring very carefully.

Okay. And finally, you bought back one $1.8 million of stock, I think during the quarter. Could you remind us again how much is left on the buyback program?

It's about a little more than a $0.5 million.

Yes, it's in that range $600,000 or so. I'm just actually looking at it.

And that buyback was in the first half, not just the second quarter.

Okay, first half.

And the numbers that we gave.

Right, that's total, that's first half. We have certainly more -- I'm just looking to see if -- strikes me of on the top of my head that it's around the $500,000 to $600,000 share number right now. I don't it right.

Okay. And $1.8 million was about how many shares at this point?

Let's see. That would be about -- I'll give you that number. I'll give you that number right now. Here we go. It's really about 60,000, 65,000 shares or so.

Okay, gets you to the $1.8 million. Okay. So, I mean, if you have 600,000 shares left, I mean, that's a pretty big appetite, assuming the price is right.

Right, that's correct. And we are careful with that. As we said in the past, we'll buy the stock back when we feel the price is appropriate, given the timing. And we think it's a good use of the cash. And I think over time, it's proven to be a good investment of our excess cash. So we're just monitoring that right now.

Okay. Very good, thanks very much.

Thank you.

[Operator Instructions] And we did have Harry Shchein of [indiscernible]. Your line is open.

Yes. Hi, guys. How are you guys doing?

Good morning.

I just had a quick question following up on what was said earlier, 70% are from China. You said India and Vietnam, can you give me the percentages on that? And also, you said you were gonna reduce the China exposure for the tariffs. Any possibility of bringing back any manufacturing back to the United States? And what's the timeline of reducing that China exposure, assuming these tariffs are still in place for another year or two? With that, what would be the guidance on that? How long would it take basically, if we reduce that realistically?

Yes. Okay. The first, the first answer I'm going to give you is regarding the U.S. manufacturing. You know we were 100% U.S. manufacturers going back 30 years. And so we know quite a bit about manufacturing in the U.S. and there is very little possibility about bringing it back here. I mean, there are just, there aren't any component makers, you can't buy shoe boxes in the U.S. And so that, that we don't see happening. I mean you have few people that continue to make shoes here, that are the very high end shoes. But it is, I don't think this country really wants to make shoes. So while there is some talk of that, something like 2% of the shoes sold in the U.S. are made here. And so it's a, that's a very difficult prospect. As far as the percentages in other countries, these are ballparks because I don't have those exact numbers. But I'd say that India is close to 25% and Vietnam is probably about 5%. And we still make a little bit in Europe, we make a little bit in the DR, Dominican Republic. And as far as the moving, diversifying out of China, one of the things that we've been doing is talking to our factory base in China about moving some of their operations into other countries where they have relationships. And so that would be the first thing that we would do. And so, in other words, if we're making shoes in a town in China with a factory we've done business for a long time, they're working out plans to move some of that production to Vietnam, to Cambodia, where they can do that fairly quickly. And so they would still control those operations and which is what we are, which is very appealing to us. Because they've been very good, dependable suppliers. And so as opposed to starting with new people in Cambodia, we would much prefer to do the business with our current partners in China, but in other countries. And so that can happen over a, say a year two year time period, fairly quickly that we could get our percentages down in China.

And we have no further questions.

Okay, we thank you for your questions and your attention. And we will speak to you next quarter. Have a great day.

Thank you, ladies and gentlemen, this concludes the conference. Thank you for participating and you may now disconnect.