Ethan Allen Interiors Inc (ETD) 2009 Q4 法說會逐字稿

Welcome to your earnings release conference call. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to introduce your host for today's program Mr. Farooq Kathwari. Please go ahead, sir.

Yes. Thank you. I'm Farooq Kathwari, Chairman and CEO of Ethan Allen Interiors. I'm joined by David Callen, our Vice President of Finance and Treasurer. Today we are reporting the results for the three months and the 12 months ended June 30, 2009. I will provide a very brief summary. Dave will follow with our financial information, and I will then discuss our initiatives and open for questions or comments.

The challenges of fiscal 2009 provided use in the opportunity to restructure various elements of our business that while reducing our expenses and costs by $150 million, has also enabled us to introduce many innovative initiatives to grow our business and profitability. As we mentioned in our press release, that our cash position has grown do $63 million from $52 million at the end of June 2009. During the fiscal year, we reduced our inventories by $29.7 million. We also stated in our press release that while business conditions remained very difficult, that the severe declines that we saw in the first six months of this calendar year compared to the previous year were substantially reduced in July. For the fourth quarter, our EPS tried restructure and losses was $0.23 loss, and for the full year we ended with a loss of $8.9 million or $0.31 ex restructuring. At this stage, Dave will provide you with the financial update.

Thank you, Farooq. Please note in the earnings release issued last evening and in the course of our prepared remarks, reference has been made to certain non-GAAP information, which excludes the effects of restructuring and impairment charges recorded during the quarter and full year ended June 30, 2009, and comparable prior year. A reconciliation of this non-GAAP information to the most directly comparable GAAP measure was provided with the tables attached to the press release. As an added reminder, comments from this call should be considered in conjunction with the Company's reports, filed with the SEC. Discussions containing forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect management's current expectations concerning future events, and results of the Company, and are subject to various assumptions, risks and uncertainties. Accordingly, actual future events or results could differ materially from those contemplated by the forward-looking statements.

The Company assumes no obligation to update or provide revision to any forward-looking statements at any time for any reason. Net sales for the quarter were $138.7 million compared to $235.9 million in the fourth quarter last year. The retail division's net sales were $102.3 million versus $176.5 million last year, with comparable design center delivered sales, 43.5% lower than in the prior-year quarter. Written sales in retail decreased 38.3%, and comparable written sales decreased 40.8%, versus the prior-year quarter. Full sales, net delivered sales were $85.2 million in the quarter, compared to $147.7 million in last year's fourth quarter.

Consolidated gross margin for the quarter was -- excuse me -- 48.7%, compared to 54.2% in the prior-year quarter, but improved from the 47.1% in our third fiscal quarter this year. Gross margin was negatively impacted in the quarter by lower sales, downtime in our manufacturing plants, the rewards program and discontinued product sales in the retail division. We also recorded $12.9 million or $10.2 million net of tax of restructuring and impairment charges for the actions previously announced to consolidate excess capacity in our upholstery and case goods manufacturing as well as to consolidate retail logistic service centers into larger Company-owned locations. Consolidated operating loss was $20.4 million versus operating profit of $19.1 million in the fourth quarter of last year.

Included in this total was $12.9 million of restructuring and impairment charges. The prior-year third quarter also included $2.8 million of restructuring and impairment charges. Interest and other income decreased $1.1 million from the prior year due primarily to the write-off of deferred financing costs on the terminated revolver, and lower interest income with lower average invested balances and lower interest yield. The effective tax rate for the quarter was 26.3% compared to 37% in the prior year quarter. We recorded $1.5 million in reserves against certain deferred tax assets in the quarter as a result of our retail legal entities being in a full-year loss position. These reserves negatively impacted the tax rate benefit in the quarter by 6.7 percentage points .

Diluted loss per share for the quarter was $0.58 compared to diluted earnings per share of $0.39 in the prior-year's fourth quarter. Excluding restructuring and impairment charges and the tax reserves booked in the quarter, the net loss per diluted share was $0.23 compared with earnings per diluted share of 45% -- excuse me -- $0.45 in the prior-year fourth quarter, also excluding restructuring and impairment charges. For the ended June 30, 2009, net sales were $674.3 million, compared to $980 million last year. The retail division's net sales were $508.6 million versus $724.6 million last year, and wholesale net sales were $403.4 million compared to $616.2 million last year. Consolidated gross margin for the fiscal year was 51.5% as compared to 53.7% in the prior year. Gross profit was $347.3 million.

Consolidated operating loss in fiscal 2009 was $72.8 million or $5.8 million excluding the goodwill impairment recorded in the third quarter and restructuring and impairment charges recorded during the year. This compares to an operating profit last year of $96 million or $102.8 million excluding restructuring impairment charges incurred last year. Interest and other income decreased $4.5 million from the prior year due primarily to lower interest income with lower average invested balances and lower interest rates, plus the prior year included a nonrecurring gain from the sale of real-estate, and the current year includes a write-off of deferred financing costs related to the terminated revolver. The diluted net loss per share for the year was $1.83 or $0.31 excluding the impact of the goodwill -- restructuring and impairment charges. This compares to the prior-year diluted EPS of $1.97 per share or $2.12 excluding restructuring and impairment charges.

As Farooq mentioned, we ended the year with $53 million in cash and equivalents and now have $63 million on hand after receiving our tax refund mentioned last quarter. Inventories have been taken down by $29.7 million since last fiscal year end. As a result, we generated $21.9 million in cash from operations this year despite financial losses and a significant cost to overhaul the business in this challenging economic environment. We have invested $22.5 million in capital expansions and $1.4 million in design center acquisitions this year, but also realized $6.4 million in cash on the sale of properties. We have not repurchased any of our common stock this year, but have paid $23.6 million in dividends to our shareholders.

We completed our new $40 million asset based revolving loan facility, which has expansion potential up to $60 million, and provides significantly more flexibility than the old unsecured revolver. As you know, we never drew against the old revolver, and do not plan to use the new one for other than support of our $12.5 million in letters of credit outstanding. This new facility provides us the real insurance we believe is prudent in these challenging times, and we are pleased to have the backing of stable and well-positioned lenders. We continue to be confident in liquidity and capitalization of the Company. We are also happy with the progress made on the significant initiatives in all areas of the business to position Ethan Allen for profitability, even at lower sales volumes. Now back to Farooq for his

Yes, thanks, Dave. As I stated earlier, our main objective in fiscal '09 was to reduce our operating cost structure and also implement many programs to position us to grow the business. We have made many difficult decisions, including reduction of associates in every facet of our operations to counter the sharp decline in sales. From January 2008 -- that is when we started taking these initiatives -- we have reduced our headcount by 32%. And from June 2008 -- that is in this last fiscal year -- we reduced our headcount by 26%.

During the fiscal year, we have consolidated several of our manufacturing facilities, two each in case goods and upholstery. We have consolidated several distribution and retail warehouses. We have reduced the cash compensation of our management associates, and we have paid no cash bonuses. We have reduced our cash dividends from $0.25 per share to $0.05 per share currently. We have also reduced many other operating costs. The net result was an operating expense reduction on an annualized basis of $120 million, most benefit floating through in the first quarter of fiscal 2010.

We also reduced other operating costs of about $30 million relating to the consolidation of manufacturing. Most of them will start benefiting from the second quarter of fiscal 2010. We also expect that about 50% to 60% of all reductions in expenses and costs are permanent, and will give us an opportunity of taking our business -- of sales back to about $1 billion. We have also taken many steps to grow our business, including maintaining a strong network at retail, both with our independent retailers and the Company operated retail division. We are pleased that while our independent retail network has operated under very difficult conditions, they have continued to manage their business as well, and 95% of our receivables are current. We did assist our retailers during this period by extending our payment terms from 15 days to 30 days.

159 design centers are operated by the Company, and independents operate 134, totaling 293 at June 30, 2009. At June 30, 2008, we had 295 design centers, a reduction -- a net reduction of two during the fiscal year. We are fortunate that during the last 10 years, we and our independent retailers have repositioned our retail network. Half of our design centers are less than six years old, while 30% are less than three years old. Because of these investments, our capital expenditures will be much lower as we move forward. In fiscal 2009, our capital expenditures were $22.5 million, while fiscal 2008, we spent $60 million. For fiscal 2010, we expect to spend less than $15 million.

We have successfully migrated an interior design solutions based enterprise, substantially all our associates in the design centers are professional interior designers. We have enhanced the style of our products. In fiscal 2009, we initiated the migration to custom in our case goods manufacturing. This is a major undertaking. Our objective is to make each order one at a time, as we do upholstery manufacturing and offer more finish and other custom options, and also offer them all of these products at great values.

To achieve this, we needed a change in the paradigm of the last 77 years of manufacturing. This initiative provides an opportunity to make our U.S. manufacturing viable and a competitive advantage. We are converting two warehouses next to our manufacturing facilities in Vermont and North Carolina to what we call SMPs or supermarket of parts. Each warehouse has over 200,000 square feet of space dedicated to the SMPs. We launched the custom case goods in selected dining rooms collections, last week on August 7. We plan to expand to media programs in September, October, and continue with other programs and complete within about a 12-month period. We are supporting these introductions will have strong marketing programs.

We recently also announced a new initiative which we'll refer to as an IDA program. That is an interior design affiliate program. This is to offer an affiliate membership to independent interior designers to bring in their clients to Ethan Allen design centers, work with our associates and receive compensation from us. There are thousands of qualified interior designers who provide their services to their clients as independent business operators. Many of these designers, over time, have asked us to work with them. We believe this is a time -- that the time is right, and we have a good plan to achieve this.

I'm also pleased to provide you with some additional information. Our gross margins in the fourth quarter, as Dave said, were impacted by major downtime in our plants. In the fourth quarter of fiscal '09, we took 56% shop days of downtime, compared to 37% in the fiscal '08 fourth quarter. We expect lower downtime as we move forward, especially from the second quarter of fiscal 2010. In our first fiscal quarter of 2010, we are completing the consolidation of one upholstery plant and two case good operations.

Also in the fourth quarter, gross margins were impacted by lower volumes and also due to the impact of the rewards program that Dave mentioned. Our inventories were reduced by $29.7 million or 16% during the fiscal year. During the fourth quarter, we reduced them by $17.8 million or 10.2%. Our plans are to continue to make reductions in our inventories in a sensible way. We continue to maintain a strong national television program. We have directed most of our regional advertising to national television. This has also assisted our independent retailers as they were able to reduce their advertising spending. And at this stage, I would like to open for any questions

Certainly. (Operator Instructions) Our first question comes from Brad Thomas. Your question, please?

Good morning, Farooq. Good morning, Dave.

Hi. Good morning.

Farooq, wanted to follow up on some of the comments in the press release, talking about the July results getting better. Could you share a little more color of what it is that you're seeing and maybe quantify the improvement that you have seen?

Well, as you know, we have sort of had an unprecedented decline. Almost sort of amazing what has taken place the last six months; and as you know we decided that for us to counter the liquidations of big discounting, and the fact that we are already on an everyday best pricing gives us some limited opportunities to counter the major discounting and advertising that was taking place, so we went through this period and had some sharp declines. Now in July, there were a number of things we had seen. One is that overall we are starting to see some improvement in confidence. Secondly, we have stronger marketing programs, even offering up some special values, all tied to these new initiatives, and what we have seen. And the third factor is that last -- now we are comparing also to somewhat of a lower volume that was taking place last year. You have to keep that in mind also. We were running at the rate of 30 -- our declines, as you see are approximately 38% to 40%. Half of them declined in July. Still a decline, but half of what was running in the earlier months.

Okay. So if you were to sort of adjust for the easier comparison and think about the seasonality of your business, do you feel like you've seen a little bit of a pickup sequentially?

Yes, absolutely.

Okay. Great. And then just a follow-up on -- you alluded to promotions. I know that during the last quarter, you offered some discounts through your rewards program on your website. Could you talk a little bit more about how successful this program was; and, would you think about repeating it in the future?

The program was successful, because this is a time when most people were coming in and talking to our folks and asking for what are we doing at Ethan Allen; and for us just to say that we have an everyday best price was not enough. So the rewards program gave an opportunity for our design associates to talk to their clients and say yes, we are doing something. So it was successful. It was relatively a small amount. It was a 5%, that by becoming a reward member, they would get a 5% lower price. It was successful. Now, again -- but in terms of getting a major amount of traffic and getting into loss of sales that did not take place -- but that -- we understood that would not happen.

In addition to that, we also started offering some special incentives on our new programs. For instance, in the June and July period -- and, in fact, that also had something to do with the July period we offered a custom upholstery. All of our upholstery is custom, and there we introduced 86 fabrics at great values. In fact, we have grade A, which is our lowest grade. We took fabrics that run in grades HF, FH, HG and up, and offered them at A. A lot of it also was due in fact that we were able to work with our suppliers, that they were able to offer us great values. We pass them on to the customers at savings.

Now we are continuing to do that. In fact, right now in August and September period, we are offering 200 colors of fabrics which we are able to introduce and again work closely with our partners, and all of them at grade A. Which provides an excellent value, anywhere from $1,200 to $1,500 for a custom-made Ethan Allen quality sofa. People see that. We are starting to see some results. Secondly, we are introducing this customer in our dining and we're starting with -- the custom designing, custom and case goods. We are starting with four of our domestic case goods programs, and we are also offering an incentive of about 10% to consumers. So giving some incentives, it's going to have some impact; but overall, we believe that it is manageable.

Okay. I mean, it seems like a smart decision in this environment where the consumer is very conscious of promotions and value. So as we think about sort of the impact to your gross margins going forward, would you expect it to be perhaps a similar rate of impact as what we saw this past quarter.

Well, if you take a look at -- just to give you perspective, in our third fiscal quarter, our gross margins are 47.1%. In the fourth quarter our gross margins were 48.7%. So we improved our gross margin from the third to the fourth quarter. Our gross margins were more impacted by downtime than this -- this -- what we're doing at retail, and I think, as we go forward, as we get our downtime back, the impact -- the impact on our gross margins are going to be less. Also, just keeping on with that, if you take a look at our third quarter and the fourth quarter, in our third quarter, we had $140 million of sales; and we had an operating income loss of almost $19 million. In the fourth quarter, we had $139 million of sales. Approximately the same as third quarter but we reduced the loss to $7.5 million. This is after all restructuring and impairment charges; and all of that came in by an increase of 1.6% in a gross margin, and $10 million reduction in operating expenses.

Great. Thanks so much.

All right. Thank you. Hello, Jonathan?

Oh, I'm sorry. Our next question comes from John Baugh.

Hi, John. Good morning.

Good morning, Farooq and Dave. Could you tell us with some detail how the IDA program works? And I guess my question is, how the compensation arrangement -- obviously I understand how you're going to make money if they bring in a new customer to purchase furniture from you; but I'm just curious how it impacts the in-store designers and how you've worked through those issues.

Yes, John. This is public; and, it's going to go out to a lot of interior designers, and so this information -- all this information of compensation of all of that is not going to be confidential, so I'm happy to share it. The way it is going to work is -- first of all, let me go back to the Company retail division, and then I'll also talk about it with our independent retailers. Obviously, we've had a great amount of decisions internally with our independents, with our designers, we have advised them and informed them. So as you know, all of the initiatives -- I spent time discussing it internally first before we launched it externally.

The way it's going to work, is in our Company operated division, as you know we have the team concept which we instituted last year. Our teams operate on a salary -- each individual person has a salary; and then if the team operates, goes over a certain goal, they start getting an incentive. The IDAs are going to be paid between 7% and 10% of the business they bring in. For the first $100,000 it's going to be 7%, anything incremental of 7% annually will be at 10%. All this business sales that they will bring in will be added to the goals that our teams have. So it will help them achieve their goals, and they will also be able to achieve their incentive. We want this to be a win-win situation, and this is -- this will make it happen.

And it's the same for the independent life--?

It will be. Some of the independents are on a commission structure; they're not converted to the team, but we are also working with them. So they also have an equitable way of rewarding their own associates from the business that is being brought in. Because if we don't make it in a win-win situation, it will create an issue.

And then I think I heard you say you only spent $1.4 million in 2009 fiscal in acquiring licensed dealers. Is that correct number one? And then would you have a guess as to what that number might be in 2010? And I guess an indirect way of saying how are you dealers doing? Are they struggling? Are a lot of them offering to hand the keys to you?

First thing is, it is correct. 1.4 is correct. And the second is that almost everybody in this world is struggling. John, I don't know anybody who's not struggling, unless you are perhaps in the healthcare or some other related businesses. Now, our dealers have really held up very, very well. It is an amazing factor how well they've held up. It's a challenge. It's touch and go. I think this change in some of the business in July has helped them. Their attitudes are better. I think, if we got a few more months like that, the chances are we will not have many folks wanting to give their keys to us. So I think at this stage, we don't have -- we don't have any number of people waiting to give their keys to us.

In the incremental 15 days, what does that mean in terms of incremental capital that you're deploying?

Approximately $2.5 million to $3 million.

Okay. And then my last question is, when we look at the case goods business before the custom, what were the options there? What were the choices, and what are they going to look like a year from now once you're fully implemented? What's the real change, in other words?

A lot of changes from this impact on the way we sell the product. It has an impact on our opportunity to give more custom options. For instance, the dining room we just introduced. If you go on our website, you'll get some of the perspective. Obviously we're starting with more manageable options; and as we go forward, we will increase the options. Initially, what we have done with the dining rooms is offer more finish options. But as importantly is the fact that we are converting our manufacturing to making parts rather than making finished goods. So that when an order comes in similar to our upholstery, we will get the parts, assemble them. To do this we have to -- and we are still in the process of finalizing it and working it out as a whole new information system, configuration in our case goods manufacturing similar to upholstery where our case goods now realizes, from a systems point of view, that they're going to collect parts and make the item. So it's a tremendous amount of implications.

Now, the other important thing, as we go a year from now, a year and a half from now, right now our case goods are made in our plants, then they go to our distribution centers, then from there, they go to a regional service center. They open them up, prep them, and deliver them. In the new system, like in our upholstery, we'll make it in the plant; then with the final inspection, it will be packed appropriately, go to our distribution, and then we deliver it to the client.

And so is the primary -- so the consumer just -- you might have six or eight finish options as opposed to one or two. Is that the big difference, or are we talking about -- I don't know how you measure it in terms of SKU count or -- and whether this has a lower inventory or higher inventory commitment on your part to service it? Any color there? Thank you.

In inventory what we initially are about the same, because we end up making parts. We will still have some finished goods in inventory as we go forward. Overall I think the inventory may be somewhat slightly lower. But that is not what's driving it. What's driving it is the fact -- our inventories are under control anyway. But what's driving it is the fact that we will be -- we would not end up with any excess unsold inventory. From that point of view, I think it's important -- even with our best of forecasts, everything we do, we do -- we're always left with unsold inventory. This will not have any unsold inventory. From that point of view, it is a very, very beneficial thing, as is in our upholstery programs.

Thank you.

Okay.

Thank you. Our next question comes from [Pelly Gill]. Your question please.

This is Maggie.

Yes.

Good morning, Maggie.

Farooq, I'd like to carry that question a wee bit further. How is this going to affect your operating efficiency in the manufacturing plant? And second of all, how do you see it affecting the balance between imported goods and domestically made, and will you carry on making domestic goods and line cuttings, or how is that all going to work?

Maggie, those are very, very good questions. And, this is such a tremendous paradigm shift. I mean, this is changing 77 years of the way we have operated our business. And we have to learn -- suddenly it is -- our manufacturing would love for us to give them 200 or 300 items to make in a cutting, they put in a box and it is out. We know that.

Right.

So this will create operating issues from an efficiency point of view. But we are putting all of our heads together. We want to make it work, as we do in upholstery, and I am pretty confident that by the time we are through, we are going to learn how to do it right. Now, the other thing we've done is, we've consolidated our manufacturing to two major plants, plus a rough mill and a saw mill, and this gives an opportunity of consolidation so that we are able to become more efficient from that point of view, so we'll take those efficiencies and put it into making this thing work. But you're right: If you take a look at it from the perspective. It is harder to be efficient this way than making long runs. We would have more -- what we are going to have is, all of the -- as I said, there will be parts. When an order comes in, the parts are going to be come. And we already have today run very efficient finishing. So when these are assembled and go to the finishing and we finish whatever the customer orders, overall it's a very efficient system. While there will be some inefficiencies in manufacturing; but the overall efficiencies throughout our whole channel of distribution is going to be -- is going to make it up, and more than make it up. As for imports are concerned right now in case goods, we have approximately 50/50. Maybe 55/45 domestic imports. And I think, at the end of the day, this will end up by between -- between 65% and 70% domestic, and 35% to 30% imports, and we'll maintain that balance.

Thank you.

Thanks, Maggie.

Thank you. Our next question comes from Joe Feldman. Your question, please?

Yes, hi. Good morning.

Good morning. How are you?

Thanks.

Also, again, another follow-up on that, the custom operation. How will it change the time to deliver? I mean, if I walk in today and order, say, a new dining set and want a few different -- a different finish -- is it the same six to eight weeks that I would normally receive the product?

No. It will change. Right now, our upholstery -- 90% of our upholstery last month was shipped within 30 days. That's an amazing feat, keeping in mind that three or four years back, we shipped -- we did not ship a single piece within 30 days. Now, we shipped, at that time, approximately 60 days or more, was when we shipped our upholstery, maybe between 60 and 90 days.

Our case goods, if you order them, if it is in stock, and let's assume you're in California. It would be shipped within that week, and you would receive it at the client within about three to four weeks because it's got to get through our distribution channels. This most probably will take two more weeks. That's our objective. But you're going to get custom, handmade for you, approximately two more weeks than we do currently.

Thank you. Our next question comes from [Frank Bugatch]. Your question.

Hello, Budd, good morning.

Good morning. How are you?

Fine. Thanks very much.

I would like to talk a little bit again about the cost actions you've taken and the impact on the upcoming quarters. You talked, I think, earlier last quarter, if I remember right, it was about $100 million of overhead actions that you have taken, and I think you saw $10 million of benefit this quarter. Is that correct?

On the operating expense line, yes.

Operating expense line, and now you're talking $120 million. So I take it there's an additional $20 million. Are we going to see if -- are we going to see about $30 million a quarter, and is all that in the expense line, or how is that going to break out?

Yes, $120 million is on the expense line, which is approximately $30 million a quarter. In this next quarter, maybe it might be -- it will be closer to $25 million -- $23 million, $25 million the second quarter fiscal year, $30 million.

$30 million. So that's the incremental. And I guess, when we get to the fourth quarter, you're target to lap that $10 million that you've already experienced. Now, you've said 60% of that is fixed. So I take it that there is some level of which volume starts to increase that you have to add back maybe, some of that volume -- some of that expense back; is that correct?

That's correct. But again, as I said, about 60% of this is going to be permanent there. These cost reductions and savings.

Okay. So $38 million or $48 million would be variable. Now, on the $30 million at the manufacturing level, obviously, there's a lot going on with the change to custom case goods. How do we -- how should we think about that, and when will that start to show up?

It will start showing some in our first quarter, but most in the second, because the three manufacturing plants will be consolidated in the first fiscal -- this quarter in the first fiscal quarter of 2010.

So that I take it is a permanent reduction from the consolidation of plants, not just because of what's going to go on with the move to cellular or lean or however you want to phrase the custom case goods operation?

Well, most of it is based on consolidation. Some is also due to initiatives. But I would say 80/20.

80/20. Okay. Now as you look at those initiatives and there have been a few questions from Joe and before on that, you talked ultimately of going from 65% to 75% domestically produced. Is that because you're now going to introduce more domestic patterns, or are you going to bring back some of the patterns offshore, onshore?

It's a mixture of the two; but we believe that this going into custom creates a competitive advantage. Think of this. How does one maintain manufacturing in the United States? The reason we are successful in upholstery is because it's custom. Even then we had to set up a plant in Mexico to provide us [cut and sew] which we are doing very successfully. In case goods, even though we have millions -- almost $100 million over the last 77 years invested in manufacturing, it is hard to maintain manufacturing in the United States, unless you create an environment which gives you a competitive advantage. Custom does that. Now fortunately because our system of a vertical integration helps us to make it happen.

So for us, having manufacturing, having saw mills, having plants in Vermont and North Carolina is a competitive advantage, but only if we are able to turn it in our opinion it into custom, and I think we'll successfully be able to do it, and I believe it will give us an opportunity to build the business, because we will provide -- we will provide a competitive advantage; and on top of it, we have got to have good values. By consolidation and technology that we've been putting in, we believe it's going to help us.

Okay. Well, I take it when you look at the SMPs, what you're going to do is the rough mill and the saw mill are going to really feed parts into the SMPs; is that correct? And the SMPs will then be able to pull parts from the SMPs into the two plants?

Substantially there's one more. In between is the machining, so it goes from the saw mill to the rough mill to the machining, and then it goes to the SMPs, yes.

And all of that is not going to be on the cellular. All of that will be simply putting the stock parts that can be drawn into the--?

That's right. That is not cellular because in this, you don't need cellular, what is going to be at the end of the day, where the cellular is, to some degree, is basically the assembly of it. The parts coming from the SMPs will be assembled and will go into finishing, and be packed. Once it is packed, and inspected then it's open at the customer's home. In 77 years we haven't done it.

Now, two other questions on that. One, the custom work primarily will be finish options, I would suspect they're not mainly sizing options. Like you wouldn't size a dining table larger because a client wants it sized? Is that an option you're going to give?

Not to start with.

So it's really finish options as opposed to sizing--?

It is finish. It's hardware. It is also changing some doors and things of that nature. But we are starting with finish.

Okay.

And we will start adding other options. This is such a major transformation, we just got to manage it.

Okay. And another question I had was on a promotional side of the business. You obviously have seen with needing to go to celebrating American innovation and the rewards program and the upholstery promotion some really benefit of going back into -- going away from everyday value pricing. You did -- you were very successful, years ago, of promoting, if I remember, about 12 or 13 times a year and having different sales events. Are you planning to go back toward that kind of promotional environment?

No, that is not an objective. In fact, almost all of the promotions we have done have a certain -- have also a strategic objective. For instance, we are right now offering some values in our dining, but it is also tied to going into custom. So we are doing two things at the same time. In our upholstery, we were able to offer special values, but it's also tied to getting new products and fabrics, I mean, at very good values, which we passed on to the customers. So from that point of view, we were able to bring something new and offer a great value. And then we will make it permanent, those values, at least half of them, in our programs. So all of these promotions, as you call them, are tied to giving values -- better values at a time when consumers are demanding it, but we're also tying it to transforming our business.

Okay. But you had used a rationale before of going to everyday value pricing for level loading the plants; but since you're going away from cuttings and the case goods, you can now level load basically to demand on a one-piece flow kind of operation. So I would think that using promotional vehicles actually is more viable in that kind of environment. Does that not make sense, or--?

What you don't want to do is this. The issue becomes -- it promotes only certain items is, then you got to back it up with inventories. Even if they're parts, or even if it's fabrics. At the end of the day, however smart you are, you're left with 30%, 40% that you got to then figure out what to do with it. That is a great thing of the everyday best price, is the fact that we don't have much left over. So we are balancing it, and what we are going to do about it is offer all these options, but what I don't want to do is end up having to project four, six months from now. That's what we used to do. End up with 20%, 30% of products that are either excessive inventory or we have delivery problems. So we are managing it. I would just continue with what we are doing. And these are difficult times. I think we have now these special, you might say, values in place, tied to introduction of our conversion into custom -- right after the spring of next year.

All right. Well, we'll be very interested to follow your progress on that conversion. It's a challenge, but I think it's a very interesting concept. So good luck on it.

Thanks, Budd.

Thank you, sir.

Thank you. Our next question comes from Barry Vogel. Your question, please.

Hi, Barry, good morning.

Good morning, Farooq. I would like a little more color on the annualized savings answers. Just a little bit more. I wrote down on a little table that for operating expenses, you probably would have savings next year, but due to the new fiscal year, about $115 million in actual savings hitting the P&L, and you had $10 million in the fourth quarter of fiscal '09. For fiscal '09 were there any other actual savings that hit the P&L besides the $10 million in the fourth quarter? That's the first part of that question.

Well, on an operating expense line, you had $10 million. There was some benefits; but on the other hand we had lots of other costs up above the line that's in the cost of goods, which is sort of complicated, because at the same time we are consolidating, same time we have downtime and all that stuff. But I think what we know is $10 million was an actual saving of operating expenses in the fourth quarter versus the third quarter of fiscal '09.

Right; but if you look at fiscal '09 to fiscal 2010, and again I know you didn't -- you don't have the numbers perhaps, it looks to me like you would benefit on the operating expense line by at least $100 million?

Yes, absolutely. I think that if you're taking a look at operating expenses of fiscal '09 versus fiscal '10 we would have closer to at least $110 million, Barry.

On the manufacturing side did you actually have savings that affected positively your P&L on the $30 million in fiscal '09?

Not much. Because while we did have savings, but we -- end of the day had also so many other cost of consolidations. So end of the day we didn't see any of those.

So do you think that $30 million will hit the P&L in fiscal 2010 to manufacturing savings?

It will, but it will start from the second quarter.

Does that mean you won't have $30 million for the year? You'll have somewhat less for the year?

Yes, you can -- if you want to you can take $30 million and -- I think, what is it approximately? $25 million or so.

So those two items, and again, I'm trying to pinpoint it, could overall give the P&L a positive $135 million swing?

Yes, Barry, the bottom line of this is our objective is to break even at 30% less sales. That's what you are getting at and that's what we have done.

Congratulations on your being whole at this time.

I knew what you were getting at.

And still taking risk with initiatives.

Thanks, Barry, take care.

Our next question comes from [Joel Havert]. Your question please.

Thanks, Farooq. I'm sorry if missed this, but did you make a comment or did I miss a question perhaps -- there were a couple of possible gains on the table for fiscal 2010. There was a tax refund opportunity and I believe you had some real estate that was still out there. Could you update us on that please?

Already in July, this fiscal, we have -- we did receive about $8 million of taxes and that's why we adopt $63 million. We did also -- we also got about $3 million in the sale of a property. So we did get $9 million from the taxes and the sale of a property.

The $9 million is tax effected?

$11 million. I'm sorry, $8 million and $3 million is $11 million, yes.

Okay. And so you will have booked those in Q1?

Yes, that's right. We would have.

Thank you so much. Good luck, guys.

Our next question is a follow up from (inaudible). Your question please.

Hello. (Inaudible). Dave, are you on. Jonathan, we can move on.

Our next question is a follow up question from Joe Feldman. Your question please.

Hi, Farooq, another -- just to drill down on the expense issue one more time. The $120 million and the extra $30 million. I guess, what are the offsetting investments that will reduce that? Because I think the prior question made it sound like if you just take last year's SG&A slap -- take out $100 million, $110 million and you're good to go. And I didn't -- I got the sense that there's a lot of other things you're doing to invest that are going to offset some of these savings. Or did I hear that wrong?

No, I think -- it also depends on how much of volumes we do. If our volumes remain at the current level, then we're not going to be having too much other expenses. So if at current levels of volume, this would be the savings, Joe.

Okay. Okay. That's helpful. Thank you.

Okay.

Our next question comes from [Dan Beamis]. Your question please. Your question please.

Hello.

Hi, Farooq. Yes, just again clarifying, to make it completely clear to everybody, if you could state what the base is that you're discussing in terms of the cost, the operating cost that you incurred in fiscal 2009, and if there were not a significant change from what you're looking at now, what you would anticipate those operating costs to be in fiscal 2010? Now, I think that would just end all further questions on that matter.

Dan, on fiscal 2010, on an operating expense level, we would get the benefit of anywhere between $115 million to $120 million -- $110 million to $120 million, the full benefit we'll get in 2010.

And that's on a base of about what? $354 million, $353 million worth of sales if I combine selling and G&A expenses?

On our expense line -- $350 million, yes.

That's remarkable. I mean, you're going to cut out one-third of your costs?

Well, this is what it is now. We are basically -- where we started with it was our operating cost of $420 million. Now we have reduced it by $120 million. We will end up with approximate cost of $300 million. Operating expenses.

So you're including the goodwill impairment, restructuring impairment charge?

No, I'm not. We had operating expenses when we started a year, a little over a year back, of $420 million. In the last year with all the initiatives we've taken, we're now on an ongoing basis have an operating expense level of $300 million.

That makes it much more clear. I think people were looking at the $350 million level as the base and subtracting -- at least that's what it appeared to me from the discussion, just looking at the full-year fiscal '09 as the base. But really, you're going back a little bit further?

Yes. We are basically starting really with our total operating expenses, you might say, in January of '08. We are at an annual basis of $420 million. That's when we started our initiatives. We have reduced from that on an annual basis $120 million. So going into this next fiscal year, we'll be operating at approximately $300 million of operating expenses.

That's extremely helpful. Thank you very much. That's the other question I had. Thank you. One other question, actually. Are you still there?

I am.

Normally there is some seasonality from the June quarter to the September quarter that results in a sequentially lower sales in the September quarter; isn't that right?

In the past that is the case; but, we have run such a low number in the last quarter that I don't know whether we can use that as a basis.

Right. So there's likely to be an actual reversal and have a positive sequential result?

So far, Dan, it looks like the consumer confidence is somewhat better. It looks like people are starting to come in. But, with all of the news that is taking place, it goes from month to month.

I see.

So we are cautious in giving any kinds of projections right now. All we can do is just have great initiative, manage our costs, which we are doing, have cash in the bank, and be ready for the next -- the next cycle of the economy; and I think we are -- we are very ready for that.

Okay. Fantastic. Thank you very much.

Thank you. (Operator Instructions)

I think, Jonathan, we should be ending it now. I forgot to say, we're going to end it at 11:45. It's 12:00. That's okay. I don't think we have any more questions; is that right?

That's correct.

All right. Well, thank you very much. If you have any questions or comments, please let us know.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.