Good morning, and welcome to the fourth quarter and full year 2019 Earnings Release Conference Call. My name is Zanera, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. John Wittkowske, CFO. John, you may begin.

Thank you. Good morning everyone, and welcome to our fourth quarter conference call. On this call with me today are Tom Florsheim Jr., our Chairman and CEO; and John Florsheim, our President and COO. Before we begin to discuss the results of the quarter and for the year, 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 events or results may differ materially from these statements. We refer you to Weyco Group's most recent Form 10-K and its other SEC filings with the SEC, which identify 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, including why we use them, and reconciliations to the corresponding GAAP data. Net sales for the fourth quarter of 2019 were $86.9 million, down 3% compared to last year's fourth quarter net sales of $89.6 million. Operating earnings were $11.5 million in the fourth quarter of 2019, down 3% from $11.9 million in the fourth quarter of 2018. Net earnings attributable to Weyco Group totaled $8.8 million this quarter, a decrease of 8% from $9.6 million last year. Diluted earnings per share were $0.90 per share in the fourth quarter of 2019 and $0.93 per share in 2018. In the North American wholesale segment, net sales for the fourth quarter were $68.8 million, down 3% compared with $70.8 million last year. Licensing revenues were $1.1 million this quarter and $734,000 last year. Wholesale gross earnings were 40.4% of…

Thank you, John and good morning, everyone. Our North American wholesale business was down 3% for the quarter and up 4% for the year. It was a positive but somewhat mixed fourth quarter for our wholesale business. Overall we performed well, as we picked up share in the markets where we compete. At the brand level, we had a wide range of results that in part reflected both our strengths as well as the opportunities in our business as we enter 2020. Our Florsheim wholesale division was up 9% in the fourth quarter and 17% for the year. We believe that this is an outstanding result, especially considering that this increase is on top of the 20% sales growth the Florsheim brand registered in 2018. Moreover, as it primarily address a dress casual brand, Florsheim achieved this growth in a category that shrank over 5% according to market statistics. The brand has performed extremely well in terms of developing new product that resonates with consumers and is recognized for the value it offers relative to some higher-priced competitors. As we move forward, Florsheim is doubling down on the expansion of its casual assortment in order to take advantage of brand momentum and address the need to diversify its assortment to align with fast-changing lifestyles. BOGS sales were down 5% in the fourth quarter and up 8% for the year. We believe that warmer temperatures and lower precipitation across large parts of Canada and the United States resulted in a slower finish to BOGS year. Apart from the fourth quarter sales decline, we are pleased with our strong single-digit increase in 2019 and the progress we continue to make towards becoming less weather-dependent in the future with more casual lifestyle-oriented footwear as well as footwear in the work category. We continue…

Absolutely. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chris von Hammersmark [ph]. Please go ahead, your line is open.

Yes. How are you guys doing?

Hi, Chris.

So I have two questions. The first one, you mentioned the coronavirus. Is there any specific details about that? Like, are there any like factories that are in Wuhan or other factories around China that have actually been shut down? Where the supply chain has been cut off? And then the second question is the stock buyback. You mentioned, I think, two quarters ago how many shares you guys were going to buy back? Can you tell us, like, what's your stock buyback program looking like over the next six months to a year? Thank you.

Sure. Sure, sure. This is Tom. I'm going to take the first question and then I'm going to turn the second question over to John Wittkowske, our CFO. So regarding the factories, we don't have any factories in Hubei province. We do have factories around -- in several different provinces around China. I think it's important for everybody to know that during the Chinese New Year period, the factories typically shut down for a month. And so we planned for that. And so, this year Chinese New Year was January 28. And so the factories basically shut down, no matter what, regardless of any kind of virus, January 15 and then people come back around February 15, because most of the workers at the factories in China come from other provinces and they go home for Chinese New Year. So they take a month's vacations basically. So, this year, with the coronavirus, the government in China, extended the Chinese New Year vacation by one or two weeks and so basically, the end of February. And we've been getting reports -- I've been talking to China almost every day -- communicating with China every day I should say. And almost every single factory that we make shoes in is open again. And the challenging part is getting all the workers back because they have very -- they've put in restrictions, so that when people come back from their provinces, they can't just start work the next day. They put them in kind of a quarantine for a couple of weeks, but our factories have 50% of the workers back to 90% of the workers. And so, we're making shoes again. We're getting shipments again. So, as long as things stand or control in China, we actually got back to work sooner than I thought and we're seeing some good progress. And -- so does that answer your first question?

Yes, yes.

Okay. So John, do you want to answer the stock buyback?

Sure. And is your general question on the stock buyback, what are we doing currently? Is that what you'd like to know?

I'd like to know, what you have in place. Because two quarters ago, you had mentioned in the conference call, you said an amount -- a share amount. And you said a share dollar amount that you had in place. And also, has there been any changes in that?

There's been no changes in that. And we are active in the market right now on our stock buyback program, given the price of the stock we feel is very attractive and we are in the market on an active share buyback program. The global amounts have not changed from the amounts disclosed in every quarter. Every quarter, there's an update in the 10-Q and the 10-K and there will be one in the 10-K that gets filed tomorrow. There's always an update on the amount of shares that are available to be repurchased under our plan and how many we have repurchased, so that will be in the 10-K. There's been no increase, nor decrease in the global amount that we have authorized to buyback. And we are actively in the market. Now, there are limitations on how much we can buyback based on our trading volume that's set by the SEC and we're buying those.

Thank you. Our next question comes from John Deysher. Please go ahead. Your line is open.

Good morning everyone.

Good morning.

On the share buyback, just to clarify, you said you repurchased $5.6 million worth. How many shares is that?

Let me see, if I can get that number.

Let me see, if I have that right off the top here. I can -- give me one second. Where's the 10-K.

Here John. Here's the 10-K.

Give me a second. I'll tell you that number.

[Indiscernible].

Let's see. It's right here. Okay. We bought back 223,000 shares in 2019.

And what was the average price? That was the question. Do we have that?

No. He asked how many shares. Do the math to get the average price. Yes. The average price is about $24.

Okay, fine. And the status of that buyback will be disclosed in the 10-K tomorrow?

Yes. It will have a summary of -- well again 223,000 shares have been repurchased. So that's -- it's kind of giving you the number. You'll see that and it will show that there are -- what the additional total number of buyback shares are authorized.

I had that number. Through -- I mean, as of March 5, we're authorized to buyback 412,520 shares still under our buyback program, which is -- which gives us plenty of room.

Right.

Okay, good. That's helpful. Regarding China, last year what percentage of wholesale shipments came from China? I think it had previously been around 70%. And what do you anticipate it to be this year? Because who knows if the tariffs could come back or not. And I was just curious how you're doing with the migration to get away from China?

Yeah. I mean, we anticipate that that percentage will go down, although it's going to take a number of years for us to really move that number a lot. So you may see it go down to maybe the middle 60s, maybe low 60%. Our position on this is that we've started production in other countries. We've already had a long-term relationships with many other factories in India and we're increasing production there. We've been in Vietnam for a while and we're continuing there. We opened a new facility in Cambodia. We've ramped up our production in the Dominican Republic, but some of our very best factories are in China. And we have long-term relationships there. They have been very good partners through this whole situation with the tariffs and we believe that it's in our best interest to move production very slowly, because we're seeing competitors honestly move production very quickly, like overnight saying we really don't want to be in China anymore and picking up their production and just moving it very quickly to other countries. That is a recipe in our opinion for disaster. We have developed over the years great resourcing in China. Some of our best shoes are made there. And the last thing we feel is good for a long-term health is -- in our brands is to have quality issues. And so first and foremost, we're making sure that we are able to maintain our quality standards. With that said, our long-term strategy is to get our dependency down to China -- in China. We're not sure where that number is going to pan but our guess would be 50% or maybe a little bit less would be a lot healthier. But one of the things that you're seeing right now and this is just kind of indication of how interconnected all of these countries are is that people that moved their production to other places like Vietnam, quality manufacturers that moved their production to Bangladesh they're having interruption now, because a lot of the components or raw materials still come from China. And so the answer to insulating yourself from things that happen in China is not necessarily going to be having production out of there. While we feel that it is best to diversify over the long-term, we're just going to be very methodical about it.

That makes total sense. So last year was still about the same, 68% to 70% that came out of China. And you see that perhaps going down to 60% over the next several years. Do I have…

Yeah, the lowest -- I would say the low 60s -- the low 60s in 2020, yeah. And then more -- like -- I would -- I'm guessing here because there are so many things in play right now with -- our production obviously has gotten a slow start after Chinese New Year and we also brought in a lot of production from China in 2019 trying to beat the tariff. So I would guess it will be this year 63%, 64%. And then in 2021, we're going to continue this movement into other countries. And so I would guess it would be -- it'd be 60% or a little bit lower. We'd start breaking into the 50% range. And the plan is over several years to get that down to around 50%.

Okay, good. That makes sense. Talking about Australia for a second, I was a little surprised at the magnitude of the operating loss of $3.5 million. Now I know that includes Europe. But my guess is most of that came from Australia. And I'm just curious, are we where we want to be in Australia at this point? Or is 2020 going to be another transition year for us?

John do you want to add anything...

Yes. I mean, I think we're going to make good progress in 2020. It's Australia, it's also the Pacific Rim because we had to deal with the forecast in Hong Kong, which had an impact on us and also now with the coronavirus, which is affecting 2020, obviously. And – but in Australia, we took over 100% joint – 100% ownership. Previously it was a joint venture. And we ended up seeing a lot of things we didn't expect once we took that over. And part of that was a fair amount of obsolete inventory that was mentioned in the conference call script. And I think it's been mentioned in previous conference calls as well. And we've worked through that in 2019 to a significant degree. We've got still a ways to go. So there will be some residual impact in 2020. The good news is, we've hired new management. We're really happy with the new President we have in place in Florsheim, Australia, Damian Walton. He's hired a new team of people. We just feel we're on the right path. So the performance not – might not be exactly where we want it to be in 2020 but it's going to be significantly better than what it was in 2019.

Okay. That's encouraging. How many stores did you end up with in Australia at year-end? And how many do you think you'll have at the end of 2020 in Australia?

Do you have that exact number?

Low 30s. Yes. And we're reviewing the store network. What we've done is we've gotten out of some of the most unprofitable stores. And then in analyzing the store network, we're seeing where we have gaps like we didn't have enough outlet stores for instance. And from a geographic standpoint, where there's opportunity. And we're – from a business model perspective, we're not entering into leases unless we feel that we can make money in store. And so I think there's more discipline around how our total approach. One thing that we ran into at the end of 2019 is the loss of a significant wholesale customer in Australia. And so we're very focused on rekindling that relationship and also expanding our Australian wholesale business, which will help overall with the total operation.

And one area where we had good success in 2019 is in the e-commerce trade channel.

Yes.

We've really grown our own website significantly and we're seeing that growth continue into 2020. And so that is going to help contribute to overall profitability down there.

Some of the tools that we use in the U.S., where we've had significant growth, I think we had growth back-to-back years in the U.S. of over 20%. We moved those down to Australia. And we feel given the Florsheim's market position in Australia, there's a lot of upside with e-commerce.

Okay. Good. And then finally – go ahead. Go ahead, John.

I was going to mention that the 33 you asked the number of stores. We had mentioned 33 stores in Australia, the exact number for you. And as I mentioned on the e-commerce side, we've seen significant growth in e-commerce there, 70% last year. So we're encouraged by that.

Okay. And the loss on the wholesale customer was that on price, on selection? Where did that wholesale customer go?

It was – well, I'd say, it was on the terms of the business. And so it was a business that wasn't profitable. And we basically tried to negotiate terms that would be favorable to both. And it did not go as we had hoped but the conversation continues. And so, it's an account that we were one of their biggest brands for many, many years. We performed very well there. And I think that long-term, we're hopeful that we can, as John used the word rekindle, rekindle the relationship. And so we'll see how that case. But it was just -- we're basically applying the same disciplines to the business in Australia that we've applied for literally ever in the U.S. And so with our wholesale business here, which is the majority of our business, we've always been able to run profitable businesses. And so we're applying those same standards down there. And so it's going to take us a little bit of time, but we feel that we have a model that is profitable in the U.S. And that over time that model will be profitable in Australia.

Okay. That makes total sense. And then finally on the U.S. retail side, how many stores did you end the year with? And will you be closing any stores in 2020?

We ended the year with eight stores. And in 2020, I think there's one more lease coming up and that store will close. And then -- yeah, I mean that basically I think answers the question.

Seven is where you want to be on the retail side?

No. I think that we're going to continue to evaluate it just like we're doing in Australia as these leases come up. In the past, the power in the leasing arrangement -- in the lease terms has been very much on the side of the mall or the person that's leasing the space. And so in some cases in the U.S. just like in Australia, we entered into leases that when we look back at it are not favorable to us and especially given that mall traffic continues to decline. So as each lease comes up, we're having discussions with the lesser and trying to negotiate better terms. If those terms allow us to make money in a location then we'll keep that location open. If those terms do not allow us to make money then we're going to make the business decision to close. And the power has shifted though because in a lot of the malls as leases come up retailers are leaving. And in many cases retailers are leaving before that because they're going out of business. And so the shift -- there's been a shift in power. So we'll see how that goes. In the U.S. in particular, we're a very small -- we have a very small retail presence, so we don't have a tremendous amount of power. But we're going to -- we believe that marketing -- there's a marketing benefit to having some Florsheim stores but only if they can make money. So we're going to close the stores if we -- if it doesn't look like it's going to be a profitable measure.

Great. That makes…

Hello?

Hello?

Yeah. Thanks for your comment.

Okay. Thank you.

Thank you. [Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to the host.

Thank you. Thank you, everyone for your questions. And we will talk with you after the first quarter. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.