La-Z-Boy Inc (LZB) 2002 Q4 法說會逐字稿

La-Z-Boy. Good morning. At this time I would like to welcome every one to La-Z-Boy's fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q & A session. If you would like to ask a question during that time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Mark Stegman, Treasurer of La-Z-Boy, Incorporated. Please go ahead, sir.

Thanks, Jeff, good morning. I want to thank all of you for joining La-Z-Boy Incorporated's investor conference call. With us on our call today, will be Jerry Kaiser, LaZ-Boy's President and Chief Executive Officer, and Dave Risley, La-Z-Boy's Chief Financial Officer. Our Chairman, Pat Norton is also with us this morning. The purpose of today's call is to discuss La-Z-Boy's financial results for the year ended April 27th, 2002. As usual, we will begin with some prepared remarks by Jerry and Dave about our business, and the outlook, and then we'll open it up for your questions. Let me mention once again in the interest of giving everyone on the call an equal opportunity we ask you please limit yourself to one initial question and one follow-up question. After everyone has had a chance to ask his or her initial questions, we'll entertain additional questions from anyone. We would like to end the call by noon, but we'll be happy to extend it if there is still questions at that point in time. This call is being webcast live and a replay will be available on our website beginning this afternoon. A telephone replay of the call will also be available beginning early this afternoon and will remain available for the following week through next Thursday. These quarterly investor conference calls represent our primary vehicle by which to provide guidance to investors in the investment community about La-Z-Boy's current operations and future prospects. And finally, we will be making forward-looking statements during this call. I'll repeat the caveat that these statements reflect the best judgment of management at this time. However, they are subject to certain risks and uncertainties as detailed in our regular filings with the SEC, and they may differ, materially, from actual results. We undertake no obligation to update any forward-looking statements made during this call. With that, let me now introduce our Chief Executive Officer, Mr. Jerry Kiser.

Thanks, Mark, and good morning. We appreciate the opportunity to speak with you again about La-Z-Boy. I believe this will be our seventh quarterly investor conference call since we started doing them back in November of 2000.

In terms of performance, this past quarter was probably the most satisfying of the seven, and it was definitely the most satisfying quarter since I became La-Z-Boy's CEO last July. I'm going to let Dave Risley enjoy most of that satisfaction when he reviews the financials in a few moments. But I would like to make a couple of general comments. I am extremely pleased with the progress La-Z-Boy has made in the past year or so, in a number of different areas. I'm very happy to see this progress starting to be reflected in our performance numbers. And along with the rest of our management team, I'm eagerly looking forward to continued progress and further improvement in our new fiscal year.

I'd like to spend most of my time this morning reviewing where we have been this past year, and what we have done to better position La-Z-Boy for the future, and then I will comment briefly on what we see ahead for the company in the coming year and beyond.

As you know, one of the most single biggest challenges confronting our industry is offshore sourcing, aka imports. This has been an issue mostly in the case goods or wood furniture segment, up to now. It may be starting to become more of an issue in upholstery as well. In the last few years a huge volume of residential case goods sourcing has switched from the U.S. to the Far East, and China, in particular. As a result, domestic manufacturers have dramatically restructured their U.S. operations and downsized their domestic capacity. In the past three years alone, nearly 60 case goods manufacturing plants have been closed by various U.S,. furniture manufacturers, including La-Z-Boy.

Imports are a major strategic issue for us. We believe it is vital for us to strengthen our relationships with offshore manufacturing partners and we have been working hard to do just that. It is their ability to produce low cost, high quality, high value product for us coupled with our styling, our ability to deliver superior service, and our distribution capability that will give La-Z-Boy a significant competitive advantage, which brings me to our recent restructuring actions. We have not stood idly by watching the import tidal wave sweep inland, although it has been painful, we reduced our domestic case goods manufacturing capacity and head count by approximately 45% during the past 12 to 18 months. We have done this by closing our converting a number of our plants.

Since September of 2000, when we closed Pilliods, Alabama plant, we closed, sold, or converted a total of 10 case goods plants and one upholstery facility. These 11 manufacturing facilities represented a total of 3.2 million square feet of production space. These figures include our two recently announced plant closings in Chilhowie, Virginia and Granite Falls, North Carolina. Both of the plants are still operating, but will be shutdown by the end of June. And as we said at the time of that announcement, it is our best judgment that this completes our restructuring program for the foreseeable future. We believe our case goods restructuring moves, and the moves we have made to outsource the leather supplies for our upholstery segment have been logical and evolutionary rather than extreme and sudden. These steps have allowed us to gradually blend our domestic manufacturing capabilities with imports to bring high value to our customers. And we have been able to maintain our manufacturing flexibility, and our profitability while simultaneously building up the logistics and management infrastructure necessary to support our growing import volume.

The closure of the upholstery plant in Florence, South Carolina, which was completed this quarter, was permitted by the success of the La-Z-Boy residential divisions, investments in equipment and systems in recent years. That division can now produce more product in less space, and still have room to absorb the growth anticipated over the next several years. I would also like to comment briefly on our contract business at this point.

If you thought things were pretty bad in the residential furniture industry last year, take a look at two of our contract markets. Lodging and office furniture. Those two industries have experienced very close to depression type conditions because of the September 11th terrorist attacks in the case of the hospitality industry. And because of the soft economy, and the virtual collapse in the tech sector, in the case of office furniture. A bright spot is that our furniture for the office division targets mid-market companies. Firms with 100 or fewer employees. While the smaller companies have certainly not been immune to the U.S. recession, they have generally done quite a bit better than the BIFMA, the Business and Institutional Furniture Manufacturers' Association numbers. We've managed our lodging and office furniture business very aggressively, taking out costs and reducing head counts as necessary.

The Chilhowie plant closure being the most dramatic recent example. We have leadership, brand name entities in both of these businesses. And we think we are in excellent position to make good profits here once the inevitable recoveries get under way in these two sectors. In the meantime, we are running a very tight ship.

On the other hand, our healthcare business has done very well recently, and our assisted living business seems to be picking up at this point.

Last July, we announced a fundamental change in La-Z-Boy's organizational structure. We divided our business into two major segments, upholstery and case goods. Prior to that, La-Z-Boy was a highly decentralized organization, and it had a well embedded decentralized culture. That is in the process of changing. The advantages of this new organizational structure are obvious. It gives us more direct accountability on the part of the individual divisions, improves cohesiveness among the divisions, and better overall control of the strategic direction of our business. All of our division managers need to take advantage of best practices throughout our company as appropriate for them. And they must also be ready to capture the synergies that are available in the broad areas of purchasing, manufacturing and marketing.

Our new reporting structure encourages this broader, more comprehensive view of our business and its challenges. As one example, Bill Johnson was named Vice President of Case Goods Manufacturing, a new management position for our company, early this year. Two of Bill's current projects involve a combined rough lumber mill for American Drew and Lee and the consolidation of all of our veneered wood paneled manufacturing into a single North Carolina facility. Bill is also looking into the possibility of producing all of our vertical wall units in a single facility as well.

Another major change during fiscal 2002 was our management team itself. We have a large number of new players on the team today compared to a year ago at both the corporate and divisional levels. Some of the previous occupants of these jobs were promoted, and some left to pursue other opportunities. But the main point is that we have a truly different team of La-Z-Boy managers today than we did just 12 months ago. And I believe I can speak for all of them when I say, again, we are really excited about the potential we see ahead for this company.

Two of the main reasons for that excitement is certainly the La-Z-Boy name and our strong proprietary distribution system. Together, we think they give us a tremendous leg up on our competition in this highly fragmented, highly competitive industry of ours. Quite simply, the La-Z-Boy name is the best known brand in our industry, period. Beyond that, it is the fifth best known household consumer brand, according to the latest HFN Magazine Brand survey. In that survey La-Z-Boy ranked ahead of such other well-known consumer names as Maytag, Whirlpool, Kenmore, Hoover and Seeley. Given the large number and diversity of manufacturers in our industry, and the virtual absence of dominant players who can afford to spend the really big bucks it takes to build a nationally known consumer name, a recognized, trusted brand such as ours is truly an invaluable asset. We intend to keep on building that brand, and we are going to keep on looking for intelligent ways of leveraging it and making it work for the La-Z-Boy Incorporated divisions as well.

Proprietary distribution is also a huge advantage in our business, and we have arguably the strongest proprietary distribution system in our industry. We are working hard to continue building and strengthening that system, and I'd like to now give you a brief update on what we are doing here.

We currently have 297 stand-alone La-Z-Boy Furniture Gallery stores in place, along with 317 in-store La-Z-Boy Galleries. Together these 614 retail outlets represent almost six million square feet of retail selling space dedicated exclusively to promoting and selling the La-Z-Boy brand. The Furniture Gallery stores with nearly four million total square feet of selling space, currently average a little over 13,000 square feet of show room space each. Our objective going forward is to make these stores bigger, better, and more numerous. In terms of target markets, the vast majority of our current Furniture Gallery stores are located in trading areas with populations of 200,000 plus.

We have identified over 150 highly attractive new store locations, and we have identified another 50 potential store relocations and 200 remodel candidates. So, as you can see, we are talking about a tremendous amount of growth potential here. Most of our new Furniture Gallery stores relocations and remodels will be the exciting new generation of new format stores we have discussed at length in recent conference calls. Next month that program officially celebrates its first anniversary since the first new generation store opened in late June of 2001 in Sterling, Virginia. We currently have 12 of these new, larger stores in operation. So far, they have exceeded our expectation. The new generation stores are doing significantly more sales per square foot than our traditional stores. Their consumer traffic is higher and their average ticket is higher. We don't want to get anymore specific with that at this point until we establish a longer track record with this new program.

We are on pace to open 25 new generation stores this calendar year, of which seven have already opened, and 30 more in calendar 2003. In addition, we have five store relocations and four store remodels already slated for this year, and 11 currently on the drawing board for calendar '03 with more anticipated. So, as you can see, we definitely have our work cut out for us in building out this network in the years immediately ahead.

Our first new generation remodel is scheduled to open in Greensboro, North Carolina, next September, just in time for the October International Home Furnishishings Market. That will give us an opportunity to present it to our existing dealers while they are all together at the Market. And if any of you haven't seen our new generation store format yet, we would love to have you stop by the Greensboro store while you are in town for the Market in October.

In addition to La-Z-Boy residential, we have significant other proprietary distribution throughout our company. Our England Unit, for one, has been actively building an in-store gallery system from a total standing start only 18 months or so ago, England now has 100 in-store Comfort Center galleries in place, with a total square footage in excess of 400,000 square feet. And they are planning to open another 30 or so Custom Comfort centers in the coming year. Their experience to date has been that sales of England products have increased about 30%, on average, for those retailers who were already England dealers. And then added Custom Comfort Center galleries.

Our Clayton Macus Upholstery unit has over 200 in-store galleries which account for roughly one-third of that Company's sales. They are in the process now of getting commitments from their dealers for larger galleries and are also going through an aggressive remodeling phase.

Pennsylvania House and Kincaid both have strong in-store gallery distribution systems. Kincaid is also building up a group of independently owned, stand-alone stores with 12 currently in place. And they are planning to open six more by the end of this calendar year. In addition, they have another 17 new in-store Kincaid Furniture Galleries in process. Pennsylvania House is planning to add at least 20 new in-store Collector's Galleries in the current year. Eleven of which are in progress and should be up and running by July 4th.

Lee has scored a major coup with this La-Z-Boy Youth Collection Program. These in-store displays average a little over 1,000 square feet each and productively exhibit at least six different Lee Youth Furniture groups, permitting the retailer to substantially increase his or her youth furniture sales per square feet. Lee has currently 105 of its dealers signed up for the La-Z-Boy Youth Program, representing over 250 retail sales floors. Currently, our sales through all of these channels represent close to 40% of our total volume. It is our intention and our goal to continue pushing this percentage higher as we move forward.

I won't go into a lot of detail on the April Furniture Market since it ended well over a month ago, but I would note that we were extremely pleased by the enthusiasm of our dealers, which was displayed about the anticipation of continued improvement in business conditions. And we were very satisfied with their overall reception to and acceptance of our new product lines.

I would note that while we continue to expect a decent recovery for our industry, business in the last month or so has been somewhat spotty, depending on which retailers you talk to. So I'm sure the recovery will probably have some fits and starts to it rather than tracing out a smooth, upward sloping curve, as nice as this would be. Our financial objectives are simple. We want to grow our top line faster than the industry. And we want to significantly increase our profitability, especially as measured by our operating profit as a percent of sales. Our strong and growing proprietary distribution system is going to be a major plus factor with regard to achieving the first objective, and so will various cross marketing efforts either already under way or under development.

Several examples of this are Hammary and Kincaid supplying ecclectic wood accent pieces and other occasional pieces for the La-Z-Boy Furniture Galleries.

Lee's recent rollout of the new 1,000 plus square foot La-Z-Boy Youth Collection by Lee displays at leading furniture retailers around the country. The pilot project was a huge success and dealer demand of the program has been outstanding, as I indicated earlier.

Sam Moore's development of a limited line of high fashion chairs specifically tailored for the La-Z-Boy Furniture Galleries. And, as we have mentioned previously, England and HickoryMark supplying signature leather sofas and love seats, and signature leather upholstery to the La-Z-Boy Furniture Galleries.

On the operating margin side, we have taken a lot of cost out of our business over the past 12 months plus. More to the point, I have been heavily emphasizing our improved profitability goals to my management team throughout the La-Z-Boy organization. And to reinforce this message, we have realigned our management incentive programs accordingly. We have historically been less profitable than some of our competitors, and we are going to change that. Our operating margin this past quarter was close to 9% before the $9 million restructuring charge we took in the quarter. That's getting toward the kind of level that we think La-Z-Boy should be generating routinely in normal conditions. Our official operating margin target is 10%, and we think we will be moving in that direction this year and next, especially if our industry improves as expected. In combination with our 9% plus overall market share of the residential furniture manufacturing industry, and our nearly 16% share in upholstery alone, I think those kind of performance numbers might just make some happy people out of our shareholders. Now, I would like to turn things over to Dave for him to cover some of the additional financial information.

Thank you, Jerry. I'm just going to cover some highlights. Needless to say, we are pleased with the fourth quarter performance of 50 cents a share before the 9 cent restructuring charge. I guess Margaret Weiland's crystal ball is working pretty well after all. If you recall she is the only one that did project the 50 cents and as a matter of fact, I kidded her at the last conference call for being a little aggressive. Congratulations, Margaret, I hope you continue to project us well.

Sales for the quarter finally exceeded year-over-year comparisons. As you all recall that quarter last year was the beginning of the industry downturn. As you saw from the segment data, the sales activity was very strong in the upholstery segment which was up 10.6%. That was led, of course, by the La-Z-Boy brand name products, particularly through our proprietary store system which was up over 13%.

Our England and Bauhaus units also continued to see very strong record gains in their businesses. The sales gains allowed us to increase our operating margin to almost 11% in the segment for the quarter. And as you recall from the last quarter, one of our concerns coming into this quarter would be the inefficiencies that we might incure in closing down the Florence, South Carolina, plant. Well, that plant conversion went very, very well in converting to the other facilities. And we avoided some of the potential disruption costs. And that certainly helped our margin during the quarter.

While we won't promise 11% every quarter, we do believe the margin in upholstery will continue to be favorable to prior year comparisons in the near future. Our case goods segment continues to suffer volume woes. It's learning to live with those and still make money. That's obviously very important.

The 5.2% margin for the quarter, before restructuring, represents continuious improvement on a quarter-over-quarter basis. We have definately stopped the bleeding and I think we are very much poised to return the business to a respectable margin. Certainly a little help from the volume will be greatly appreciated. The issue for the year is pretty much the same. Volume is off 4.2% with about half of that due to the sale of Pilliod.

Upholstery sales were up almost 4% and maintained its margin on a year-over-year basis.

Case goods, while down almost 20% did show a slight margin improvement and certainly as we noted here was picking up in the latter half of the year.

Given the way the year started out in a whole, and the fact that La-Z-Boy generated only 5 cents in the first quarter, we rose to the occasion and finished with $1.23 before the restructuring charge, and that certainly, I think, is a very, very significant accomplishment. We made a lot of very hard operating decisions, and we delivered the results. As Jerry indicated, we have a very different organization than we had a year ago and they are truly committed to performing.

In terms of cash flow, we generated $133 million of operating cash flow for the year. Included in that was a reduction of inventories by almost $50 million of which $10 million was related to the restructuring efforts, but $40 million was through improved asset management.

Cap-X finished the year at about $33 million, which was slightly higher than we had expected, and as we indicated earlier there were no real huge expenditures of any note in those numbers.

Debt to total capitalization is now at 16.6% after debt reductions of $74 million for the year. We continue to repurchase our stock during the quarter, a total of 1.2 million shares, $31 million at an average cost of $26.30 a share. For the year, we repurchased a total of 1.6 million shares, $38 million or about 29.5 cents a share. 23.5 I think. I think I said that correctly. We still have authorization to buy up to 3.6 million shares, and I would suggest to you that we would continue to be opportunistic in our repurchase program, but we are not committed to any particular number at this point in time.

Well. it's been a good year under the circumstances, I'm sure you are all really more interested in what next year's all about. As indicated from our press release, we are providing guidance that our first quarter is expected to be in the range of 22 to 27 cents a share and the full year of $1.60 to $1.75. Those numbers of course are, ahead of what the consensus numbers are currently.

In light of the words of caution that Jerry did note, we have achieved, I think, a degree of momentum on our margin front, and we have a management team, as I have noted that is dedicated to the results. In addition to the full benefits of restructuring and general belt tightening, we also expect to see benefits from our group organizational structure which is focusing on the synergies and the best practices that can be obtained within each of those two groups. The combination of a more favorable import versus domestic mix, better buying practices, more efficient manufacturing processes and a stronger sales and marketing effort will all yield results in the coming years.

Other assumptions for your models should include a, I think, a constant debt level. A tax rate of 39% again this year. No amortization of intangibles relative to goodwill and trademark so it would be a nominal amount for other intangibles, and a Cap-X in the range of $35 to $40 million. Somewhat higher than it was this year, but, again, no necessarily big projects in those numbers.

That's really all I have. I'll turn it back to Mark for questions.

At this time, Jeff, if you want to go ahead and get rolling on questions. Again if you would just ask one question and one follow-up so everybody has a chance, I would appreciate that.

At this time I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from Jason Putnam with Credit Suisse First Boston.

Good morning Jason.

Hi, good morning. Congratulations on a quality quarter.

Thank you.

Thanks.

First question looking at SG&A, obviously it's been a little bit higher, I guess, with percent of sales than it has historically been over the last couple of quarters. Just wondering, you did talk about the operating margin target of 10%. Where does SG&A go? Is it possible to get down to, you know, below 18% in fiscal '03 or is that more of a longer term target? Where does it go? I mean, back in 2001 it was below 17%. Is that still a feasible target?

Jason, we've got a different comparison today. Certainly volume will help that number, but prior to this past year, we were stating the retail numbers actually below the line, and they were not included, really, above the line in our sales volume, nor in the SG&A expense column. And somewhat like our friends at Ethan Allen, with that mix of retail becoming a little more significant, retail in general runs at a much higher percentage of SG&A costs, so we will see some negative impact of that. I guess the -- I think the overall number was about a 1.5% impact or effect of retail on the overall SG&A.

So I think that, you know, again with the improvement in the economy and the improvement in sales, we will see some reduction, probably not getting back down to levels that we were back in 2000 with some additional acquisitions that we'll probably be forced to make on the retail side, and that part of the business growing.

Just quickly. Can you quantify the benefit from FS-142? Is it about 10 cents per share that's going to benefit in '03?

It's closer to about 9.5 cents. It's a little over $9.3 million that we had for the year.

Okay, great. I'll defer to my colleagues. Thank you.

Your next question comes from John Bau.

Thank you. Likewise, just a terrific quarter. Great operating margins.

Thanks, John.

My question pertains to the case goods side. You mention the volume, I guess was off 14 in the quarter and the operating margin of five two. I assume -- do you have a contract in that, or is that just a residential number? Can I be clear on that, first?

Contract number is in that.

It is. Is there any way to give us a flavor for how the residential wood business looked in terms of volume, and margin for the quarter or year? Exclusive of contract? And while, maybe you are fumbling for that, give me some color, I think you have guided first quarter revenues to low single digits. How you would expect the upholstery number to compare to the wood number? I assume wood would still be down, but maybe less so than this 14 experience, but you tell me.

Let me just look at my numbers for a minute. We would still expect the case goods numbers to be below the prior year. Of course part of that is still Pilliod was in there through November of last year. You would see improvement in upholstery.

I'm sorry, even excluding Pilliod, the impact of Pilliod, let's take Pilliod out from a first quarter a year ago.

Are you expecting wood to be down still in the first quarter, year-over-year?

Yes.

Okay. But I would assume less than the 14% rate?

Right.

And what would be your expectations for upholstery?

Well, we think upholstery will be up in the first quarter over the prior year. In that slot, you know, probably in that mid to low single digit figure.

Okay. Any feel for the wood performance last year, residential versus contract side?

Well, we were probably down in the high single digit if you take the American of Martinsville and the La-Z-Boy contract numbers out of the upholstery side of that. But if you take, really, just the AOM number out of the case goods, it definitely would be a little less than the 10% without Pilliod.

Okay. Great.

And lastly, on that, any sign of order patterns in the residential wood business getting better sequentially? Obviously the year-over-year comparisons get easier as we go forward. But any sign sequentially that Drew or Pennsylvania House, or Great American K, whatever are seeing some improving order trends?

We have seen some increase in backlog since the April market. The only thing I would qualify that a little bit, in that the flow of imports has gotten stretched out a little bit, and probably if we had some of that product, we could ship it, and have more normal backlogs. And I think that appears to be improving some, and that we should see a better flow of those goods in late June and early July. So hopefully some of that will get into this first quarter.

But the gross order number hasn't changed appreciably?

It's running about the same as it was in the fourth quarter.

Great. Thanks so much Jerry.

Huh-uh.

Your next question comes from Pam Singleton.

Good morning, everyone. I'll try to keep it to one question and one follow-up. But, Jerry, you talked about the business being a bit spotty. I guess you are talking about May. Could you give us an idea of whether it's centered in upholstered or case goods? Is it regional, or is it across the board? And what do you attribute it to?

Well, I think that, you know, it depends on what part of the country you're in getting some comments from some of our Presidents in the last couple of days, for example, you know, some of the department store business on the west coast was not that strong over the Memorial Day weekend, but then when you get back out east, the numbers and the activity was much better. Some of the stores down South that maybe depend a little bit more on the tourism with people traveling over the Memorial Day weekend and then swinging by and shopping for some furniture while they were out, appeared to be kind of dead over the weekend which maybe indicates not as many people were traveling out there. I think it's probably a little more significant in the case goods, and I think the thing we have got to be careful about here is that we don't confuse the normal slowdown --

Yep.

-- during this time of the year going into the summer months as a real significant change in what's taking place in the market place. But especially, you know, the higher ticket items, probably suffer a little more where La-Z-Boy's business, in general, maybe always runs a little stronger, you know, through Father's Day with the, you know, kind of item business and the promotions that are run in conjunction with those kind of holidays, and our backlogs are definitely, you know, a little firmer in the upholstery side of the business as we go into this quarter.

Okay. The second question, I would just like you to talk a little bit about, you said you are way much more efficient with one less plant in upholstery and you'll be able to grow the business from the current base. What would you think that your capacity was at this point in, I guess you are talking about the La-Z-Boy division, and how much incremental growth do you think you could realize out of existing facilities?

I think, really, and we do have some opportunity to manufacture some products in other factories outside of just the La-Z-Boy operation, in particular, but we have several plants in the La-Z-Boy stable of nine facilities that are not running second shift operations, and we have successfully run second shift operations in that division. So I think we can crank up second shift operations in several of those facilities if the need be, we can call on some of the other major upholstery facilities to manufacture product. So I would feel very comfortable in saying that we have about 15% of room there today.

Great. Thanks very much.

Your next question comes from Margaret Weilan.

Hi. Good morning, everyone.

Good morning, Margaret.

Good morning.

Congratulations on the quarter.

Thank you.

David, so how did you get to the 50 cent number that was different than what you are expecting?

I'm sorry, I didn't quite catch that.

How did you get to the 50 cents? What was different than what you are expecting?

Well, I think, you know the volume turned in a little bit better. But more importantly, you know, the margins improved, I think, from the benefits of the restructuring and the timing of those. And like I said, we had expected the Florence, South Carolina, facility to have some disruption costs as we transferred some of the production from Florence to the other plants. We still have to produce the same number of chairs, those other plants had to hire new sewers, new upholsterers. There's a training process in there. The process has gone very smoothly. We were able to avoid some of those disruption costs.

Margaret, quite frankly, we weren't able to gear up in a couple of the locations as quickly as we thought we would so we didn't have quite as big an impact from training. We ran probably more overtime in that division, which increased the productivity.

But probably hurt the margin a little bit so it might even have been better than this?

Right.

Oh. Okay. David, would you just tell us about your -- what assumptions are you making for the guidance that you have given us in terms of revenue and margins for next year?

Well, I think, you know, I can't get too specific because there's certainly a range there, Margaret. But as we have indicated in the release, and as Jerry said earlier, you know, we are in the lower single digits for the first quarter in terms of the sales improvement with upholstery being up and case goods still being somewhat down.

Yeah.

And with an improvement, particularly in the case goods section in the latter half of the year, not in great numbers certainly, but an improvement in sales volume there.

So you think we could get to the 10% margin run rate by the end of the year? Is that the goal?

Well, I don't think we are going to be there as a Company for awhile yet. We are going to make some significant improvement in there. At the $1.75, if we reach the end of the maximum range there, for the year, you can put the numbers together very quickly. You probably already have.

Yeah.

But that gets you somewhat close to that 8% number.

Yeah.

For the total corporation on a 12-month cycle.

Mmmm-hmmm.

But I think there should be momentum in each quarter.

Great. Okay. And then just a question for Jerry. Would you just talk a little bit about the import strategy, and how that's developing and what's going on at the moment.

Well, we continue to look at the potential opportunities that are out there. I think we have indicated that we probably see that growing, at least 50% this coming year. Which would put our overall number probably at 30 to 35% of our total volume coming in from offshore sourcing. We are also looking at opportunities on the hospitality side to supplement in the case goods arena.

Have you already enough capacity for that or would you be closing more plants?

No, we have taken that into account, really, with the closing of the Chilhowie facility. Hopefully in the last half of the year we've got some dollars included in their numbers over the third and the fourth quarter with product coming in from offshore. So, you know, we continue to develop and build our organization over there. We have several people on the ground over there today. We just have had a group of our upholstery management return from a trip to China. We had about nine members of the top management team in the Far East looking at opportunities there. And one of the things that we are going to be doing is trying to make sense of how we can leverage this knowledge that has been built from a case goods perspective, and tie that in from an overall corporate perspective with both upholstery and the case goods side of the business.

And what were there are findings versus what they might have expected going over?

Some of them had never made the trip. So, needless to say, they were quite surprised, and even the ones who, it had been 15 months since they were over, were still somewhat shocked with what was taking place.

Yep.

Still some opportunities, and certainly anybody that survives in this business today is going to have to deal with that.

Yeah. All righty, thank you very much.

Your next question comes from Keith Hughs.

Thank you. First question. Where do we stand now in terms of how many of the stand alone stores are company-owned at this point?

Keith, the number today is 23.

That's been fairly consistent over the last few quarters, has it not?

Yes.

Okay. And I assume, as you -- you have some aggressive plans with renovations and relocations and things. Do you think that number will remain in the low 20's near term?

We have just purchased Boston which was not in that number. And that's three stores and we are in the process of another one, potentially, this quarter that would add another two to that.

Most of these cases, you just don't in these specific geographic areas just don't have a good, independent person to run it, or what's the thinking behind the slight increase in numbers?

It's a combination of that, Keith. I think long-term we think from a philosophical standpoint as we help some of these original operators develop an exit strategy out of markets in these major metropolitan markets that have probably somewhere three stores or more, that it's going to be increasingly difficult to find an individual entrepreneur who can make that kind of investment and really get our job done, and it will have to be more aggressive in taking a stance of ownership in some of these areas.

That's not to say that, given, you know, our preference, is still to find that guy who is there and lives and breaths the success of that store operation on a day-to-day basis and is that individual entrepreneur. Some of these areas that have six-plus stores it's going to be hard to find that kind of individual today to take on that kind of load. We will probably continue to take a more aggressive stance in ownership of those kinds of operations.

Okay. And just to check one number you had said 40% of the sales, currently at La-Z-Boy. Is that through the, both independent or stand alone stores, as well as the Gallery programs?

That's the independent Gallery programs and the free standing stores through the entire Company not just La-Z-Boy residential.

That's what I thought. OK. thank you very much.

At this time there are no further questions. Do you have any closing remarks?

Thank you for joining today's conference call. Have a great day.