La-Z-Boy Inc (LZB) 2004 Q1 法說會逐字稿

Good morning. My name is Jeff and I will be your conference facilitator today. At this time I would like welcome everyone to the La-Z-Boy first quarter operating results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like ask a question during that time simply press star then the number one on your telephone key pad. If you would like to withdraw your question press the pound key. Thank you. I would now like to turn the conference over to Mark Stegeman, treasurer of La-Z-Boy Incorporated. Please go ahead, sir.

Thank you, Jeff. Good morning, I am Mark Stegeman, treasurer of La-Z-Boy, and thank you for joining our fiscal 2004 first quarter conference call. Before we begin I want to apologize in advance for having an incorrect replay access code in yesterday's news release. To make sure everyone has the correct code, it is 169-5940, for that replay. With us this morning are Gerald Kiser, La-Z-Boy's President and CEO, and David Risley, our Chief Financial Officer, as well as our Chairman, Patrick Norton. Today's primary subject is the financial results of our July 1 first quarter and, as usual, Jerry and Dave will begin with some prepared remarks about La-Z-Boy's performance for the quarter as well as the current business environment and what we see ahead at this point. We would like to try to end the call by noon but we will be happy to go as long as there are unanswered questions.

This call is being web cast live and a replay will be available on our Web site beginning this afternoon. A telephone replay of the call will also be available for a week beginning early this afternoon at the replay number that I announced earlier. These regular quarterly investor conference calls are one of our primary vehicles for providing guidance to and communicating with investors in the investment community about our current operations and our future prospects of La-Z-Boy Incorporated. We will be making forward-looking statements during this call so I will repeat our usual caveat. While these statements reflect the best judgment of management at the present time they are subject to various risks and uncertainties as detailed in our regular filings with the SEC and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statement made during this call and with that let me introduce our President and Chief Executive Officer, Gerald Kiser.

Thanks, Mark. Good morning. As you know we reported our first quarter operating results yesterday morning. So I am sure all of you had plenty of time to look over them. Our annual shareholders meeting and directors meeting took up most of the day yesterday which is why we have a one-day delay this quarter between releasing our results and conducting the conference call. We followed the same schedule last year at this time, also.

I will let Dave Risley get into whatever detail he wishes on the results. In general it was a very challenging quarter for the furniture industry and La-Z-Boy. Consumer furniture demand remained mostly lackluster during the summer despite what most in the industry feel was a very good Memorial Day Weekend sales period. This weak consumer demand basically reflects low consumer confidence levels and an economy which is continuing to lose jobs. Even as indications of an economic recovery are increasingly beginning to surface here and there, our sales for the quarter were down from a year earlier in both upholstery and casegoods and our total sales were off 9% compared against a very strong July 2002 quarter. As noted in the news release we took much more than the usual amount of plant downtime during the quarter and were successful in controlling our inventories. However, we paid the price for this in terms of lower profit margins. Our operating margin for the quarter was less than half that of the year earlier period. While there hasn't been a substantial improvement in our business at this point, we continue to believe that we will see at least some of the usual seasonal pick up in demand as we enter the fall selling season. But regardless of when business does pick up you should know that we are working very hard to improve our productivity and profitability throughout the organization.

In that context I would like to spend some time reviewing our casegoods group reorganization which we announced in early June, as well as give you some insight into our offshore sourcing initiatives and what we are doing there. As I am sure most of you know, the casegoods reorganization has several main points. Number one, the appointment of Bill Johnson as president of operations for our casegoods group with responsibility for all product sourcing, whether that be domestically manufactured products or imported. And, number two, the formation of a formal international sourcing organization, La-Z-Boy Global Limited. La-Z-Boy Global is being headed by Lamont Hope, former president of our Lea Industries business. The appointment of Jack Richardson as president of Lea in addition to Jack's continuing responsibility as president of American Drew. The American Drew and Lea product lines will continue to be designed and marketed as distinct, independent brands but we have taken a block of business that previously had two presidents, five sales managers and a non dedicated sales force and made it into an organization with one president, consolidated sales management responsibility and a sales force that is dedicated to selling these two La-Z-Boy casegoods lines and only these two lines. And number four, the additional rationalization of our casegoods facilities. We are closing our two Lea casegoods facilities in Morristown, Tennessee, and our Pennsylvania House upholstery plant in Monroe, North Carolina. The closures are expected to be completed before the end of calendar 2003 and this production will either be moved to other La-Z-Boy plants or sourced offshore which fits our strategic model of blending domestically sourced and internationally sourced products. These plant closures will eliminate about 405 jobs net. We expect annual savings in the range of 5 to $6 million once the transition is completed, beginning around the start of our April 4 quarter, i.e., in the December, January time frame. We are taking a pretax restructuring charge of $10 million, or 11 cents per share after taxes. Of this amount, 7 cents was taken in our just ended July quarter. Most of the balance representing severance and relocation costs will be taken in our second and third fiscal quarters. Following these latest plant closures, we will have nine remaining domestic casegoods plants with a total employment base of about 3,000 people. And we have another 29 domestic upholstery plants which employ about 13,000 people. As I'm sure you know we get 75% of our total sales from upholstery, and 25% from casegoods. Of course the reason for this reorganization is that our industry is being inundated with imported furniture, predominantly from the Far East. This has mainly affected the wood side of the business so far. However, leather upholstery is also increasingly being brought in from the Far East, and this trend seems likely to continue. In order to compete effectively within this environment and provide increased value to our customers, we've developed a substantial import capability ourselves over the last several years and that has required downsizing our domestic casegoods capacity.

Before I discuss La-Z-Boy Global, our new international sourcing organization, let me just remind everyone that we current produce about 70% of our casegoods in our own domestic plants and in the current FY even though we project another strong increase in imports, we still expect to build about 60% of our casegoods in our domestic factories. So while we have a tendency to spend a lot of time talking about imports, I think it's very important to keep that perspective in mind.

In our domestic manufacturing operations, we are doing a lot of things under Bill Johnson's leadership to improve our efficiency and profitability, thing such as combining our lumber purchasing and processing operations. Consolidating a number of major functions including procurement, human resources, product quality, manufacturing operations management and manufacturing services. Capitalizing on benchmarking and the implementation of best practices throughout the organization. Needless to say, one of the best things that could happen to our casegoods efficiency and profitability would be a solid pick up in sales. Our industry has been in the doldrums for nearly three years now except for a brief spurt in the Spring of last year. And we do anticipate that consumer furniture demand will get back on track sooner or later, but to repeat what I said a moment ago, we are working as hard as we know how to be as successful as possible within the current environment.

Let me now give you a brief overview of La-Z-Boy Global. One of our to remain unnamed competitors talks frequently about how many foot soldiers they have on the ground in the Far East. And it's a pretty big number. We don't have anywhere near that many people involved in our import operations. One reason is that while our import business is substantial, it is significantly smaller in dollar volume than that competitors’ and our ratio of casegoods to upholstery is also much smaller. But even so we have 43 employees today who dedicate the majority of their time to monitoring and managing our imports, working both here and abroad, and we fully expect that number to increase further as our import volume expands, although not at the same rate, of course.

Some statistics on our casegoods imports. We sold over $160 million of imported products last year, up from about 120 million in fiscal '02, and we expect to sell something on the order of 200 to $210 million of imports this year as a guess. We buy from 13 foreign countries. We buy from 35 agents, the top seven represent over 70% of our business. We receive goods from, let's just say two many foreign factories last year but the top 20 of these represented over 70% of the total. And we’re currently using about 5500 containers annually in our import operations. Our primary objectives in the import area just as in our domestic production are to improve our quality, improve our delivery, reduce our inventories, leverage our overall buying power and eliminate cost redundancies. Lamont Hope just returned from a sixteen-day trip to the Far East with several key purposes. Exploring locations for our La-Z-Boy Global offices, continuing the process of identifying those suppliers with whom we hope to build our long-term relationships, explaining La-Z-Boy Globals plans to our current factory and agent base and further implementing our team in Asia. I am very pleased to report that everyone of our major suppliers has signed on to our plan going forward. That plan calls for us to have our own people in place in each of our suppliers factories to expedite demand and keep our product quality where it needs to be. And perhaps most importantly, to do lots more business with fewer factories. Speaking of La-Z-Boy Global, I also want to briefly state La-Z-Boy's view on the antidumping action against China that's being brought before the U.S. Department of Commerce and the U.S. international trade commission by a group of U.S. wood manufacturers. La-Z-Boy's basic philosophical position is that we believe in and support free and fair trade. But we feel very strongly that it should be both fair and legal. Right now the 27 U.S. manufacturers who are on board this action very well over the 25% market share they need and in fact are nearing the 50% market share needed for fast track action. After careful consideration based on both information supplied to us by the committee for free and legal trade, and some additional research of our own, we got the indication that at least in some instances fair and legal may not be the case. Therefore, our casegoods divisions and subsidiaries that produce and market wood bedroom furniture will be joining in signing the petition in support of this effort by the U.S. manufacturers.

Now let me give you an update on our proprietary distribution network one of our major competitive strengths. When you add up all the in-store galleries and stand-alone stores of our individual business units, we have about 1900 outlets representing a little over 9 million square feet of retail floor space that's dedicated exclusively to marketing La-Z-Boy products. It is our goal to continue growing and strengthening that distribution base and leveraging the La-Z-Boy name as appropriate, because that name is another major advantage that we have over almost all our competition. The heart of that network, of course, is our La-Z-Boy Furniture Gallery store system. At the end of July we had a total of 317 furniture gallery stores in the system. 29 of the stores are company-owned and 52 of them feature the larger and more productive new generation format that we began rolling out a little over two years ago. The total showroom square footage of the furniture gallery store system is currently right at 4.3 million, or an average of 13,400 square feet per store. The new generation stores average 15,000 square feet and are doing a substantially more sales per square foot than the old format stores. During the last 12 months, we added almost 300,000 square feet to the furniture gallery systems, net of closures, and our current goal is to add ten to 12 new stores each quarter, including relocations and remodels. Of course we will also be selectively closing some of the less productive and or poorly located stores. When you add the furniture gallery system, our 320 in-store galleries, you get 637 dedicated La-Z-Boy upholstery retail outlets with slightly over 6 million square feet of retail selling space. A number of our other companies also have active in-store gallery programs and two have some stand alone stores as well. In total this represents another 3 million square feet of dedicated retail sales space, bringing our grand total to a little over 9 million square feet in more than 1900 locations. We are leveraging the marketing expertise at La-Z-Boy with several of our other companies. We have two other consumer brands in our stable of companies in Kincaid and Pennsylvania House and we are investing more heavily this year in advertising and marketing to build their consumer brands awareness. Kincaid has three new stand alone stores in progress in addition to its 17 current stores. And both Kincaid and Pennsylvania House are actively seeking to expand their in-store gallery distribution, although that's a tough sell in the kind of business environment we've been in recently.

We are just now beginning to deliver some of the exciting new casegoods products we introduced at last April's International Home Furnishings Market. Obviously it is more important that we get as much of this product as possible into our dealers floors in time for the very important upcoming fall selling season. I am talking about such collections as American Drew's new Bob Mackie Home Classics Collection, the New Standards Collection by Pennsylvania House and Kincaid's new Coltswold by Laura Ashley that has begun to ship in the last 30 days.

Now with that I would like to turn thing over to Dave Risley. Dave?

Thank you, Jerry. You all have the details so I am just going to cover some of the highlights. Needless to say our first quarter earnings of 18 cents, or 11 cents after restructuring, was certainly not as good as last year. Sales for the quarter declined over a year ago by 9.2%. Last year at this time we were coming off a very strong sales quarter, the fourth quarter of fiscal '02 with a resilient backlog that was really unusually strong for our first quarter of '03. As you will recall the first quarter of '03 upholstery segment sales were up 19%. The backlog not only generated additional sales but also kept our factories busy and, therefore, had a very positive impact on last year's earnings. Obviously the economy has struggled in the first quarter of this year which is historically also our slowest time not only for us but for the industry. By comparison, however, I think we held our own.

Casegood sales were down 11.2% for the quarter and that segment of the industry especially at the higher price points continues to struggle. We continue to face price pressure from imports. There continues to be significant discounting in this segment. New sales volumes and higher inventories force us to extends our summer shut down period by almost a full week at many of our plants. Our operating profit margin this quarter as we expected was penalized significantly by taking this additional downtime. On a normalized basis it fell to 3.9% before the restructuring charge. We announced the charge would total about $10 million, or ten cents per share, in order for us to further reduce our domestic casegoods capacity. This quarter we incurred the bulk of this primarily non-cash charge of 6.3 million, or seven cents per share. The remainder of these charges will be incurred over the next quarter.

Commenting on the segments I would like to say I was pleased with the upholstery groups operating profit margin at 6.8 for the quarter. The volume was down by 8.5. I think it shows that the upholstery group has done a pretty good job of shifting their cost structure to a greater mix of variable costs. So that even in spite of the decline I think we held up reasonably well. Our casegoods group continues to struggle with an operating profit margin for the quarter before restructuring of just .9%. The volume is continuing to shrink. Additional downtime obviously killed the progress we were making in our margins. We have taken corrective steps to improve our margin but the top line trends is troubling. Business continues to work toward a respectable margin and certainly a little volume will help.

This year we made a lot of very hard decisions, operating decisions, and are continuing to challenge our management to think outside the box and we have a very different organizational culture than we had a year ago and they are truly committed to performing. We are in the process of implementing several strategic initiatives that will assist us in retaining our stature as an industry leader and proving our overall operating leverage.

In terms of cash flow, we generated 16 million of operating cash flow for the quarter, included in that were decreases in accounts receivable of 44 million, which is mostly attributed to the sales volume and also a reduction of inventories by 10 million. Offsetting that was a $51 million drop in our accounts payable and accrued expenses which is mostly a timing difference which will recover as we go forward this year. CAPEX for the quarter was 7 million, and there were no significant items of note in those numbers. Our debt to total cap is now at 27.1. We continue to repurchase our stock during the quarter, a total of 629,000 shares were repurchased using approximately 13 million of our cash flow. We still have authorization to buy 3.5 million shares. And I would suggest to you that we will continue to be opportunistic in our repurchase program but we are not committed to any particular amount at this point in time. We did pay out 5.5 million in dividends last quarter and yesterday the board declared our 127th consecutive dividends of ten cents per share. Our stock dividend, our dividend currently yields 2% return. I'm sure all of you are more interested in what next quarter is all about. As indicated from our press release, we are reinstating guidance but we are only comfortable at this point in going out one quarter. At this point we are not seeing any strong positive trends but it is still fairly early in our August period. Therefore, our top line guidance is down in the single digit range. With volume down and incorporating pricing pressure on the casegoods side of the business we see earnings before any remaining restructuring charges in the next quarter to be in the 40 to 45 cents range.

That's all I have. I will turn it over to Mark for questions.

We would ask that you try to limit your questions to just one and we will circle back after everybody has had a chance to ask one. Jeff, you want to go ahead and repeat the procedures?

At this time I would like to remind everyone, in order to ask a question please press star then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Chuck [Grom].

Good morning. I appreciate the color on imports and primary strategy. I just wanted to ask a question for same store sales for La-Z-Boy Furniture Galleries, I think last quarter it was down by 6%. I was wondering if you could give us the number for the first quarter and also how did it trend during the quarter?

Okay, Chuck. One thing we want to keep in mind here and one reason we haven't stressed that as heavily as we might have in the past is that there is a little bit of light down here in that the numbers we report on the La-Z-Boy Incorporated numbers are certainly delivered sales and then when we look at our proprietary store system, the La-Z-Boy Furniture Galleries business, this is on the written sales from these stores. So you can't really take totally into account the flow of inventories and an exact comparison there. So there's a little difference in comparing apples to apples.

This also reflects what the whole store system does, not just our own stores, our own stores are very small.

We only own as we mentioned earlier the 29 stores. But to give you an idea, the same store sales for the fiscal quarter which again is on written business were up 1.16% for the May, June, July time frame. So we consider that almost flat. And really the increase for all stores during that same period was an 8.39% increase.

Okay. How did that trend? Did it improve through April and May and into June?

Now, that was May, June, July numbers. It was almost, same story was almost equal for the three months as far as the increase.

So all stores were up about 8%?

Right.

Okay. Thanks a lot. That's great.

Your next question comes from Margaret Whelan.

Hey, good morning, guys. I have a few short questions because I have to run out to the airport. The first one is the information you gave us on the dedicated distribution, what percent of your sales are through your dedicated distribution?

Okay. If you take into account our primary form of proprietary distribution, about 40% of that number is through our total sales.

That's including the galleries?

Yes.

Is that up or down over the last couple of years?

That's continued to increase.

Is that a target there?

We would eventually like to see that more than 50, thinking probably at some point in time in the 60% range.

The other thing is you say you don't think upholstery is going to move to China yet we are hearing the pricing on the pricing is coming down 40 to 60% in retail but I think at some point [inaudible] will move there and other fabric [inaudible] are moving there already. How do you feel about it now are you over there aggressively trying to work with manufacturers or do you think it's not going to happen?

We are certainly looking at any opportunity that presents itself but I guess we still feel very strongly that there are some limitations. If you take a store program like we have where 40% of the business that's done through there are custom orders and a consumer has a choice from 1300 to 1400 different fabrics when they go into one of hour locations, then it gets much more difficult to manage a fabric program from that kind of distance than it is for a leather program. Also when you look at the bulk of an upholstered product especially like a sofa and loveseat, the number of those that you can get on a 40-foot container that's fully upholstered, especially with current freight increases like we've seen in the 700 to $1,000 per container range, all of a sudden you are looking at $5,000, $4,000 to $5,000 for a caner.

How many seats would you squeeze into a 40-foot container?

You may only get 20 to 30 sofas and in a 40-foot container. So all of a sudden you've lost all of your advantage from a labor perspective if you have that kind of break cost per unit, getting it to the West Coast.

That actually goes into my last question which is on labor. What percent of your cost is labor on wood and upholstery at the moment? Your COGS?

It's very similar between the two. Casegoods is a little higher but it typically runs in the 12 to 14% as a percent to this price.

As a percent of the sales?

Yes.

Okay. And then upholstery is slightly lower than that?

Yes.

Great. Thank you.

Your next question comes from Jason Putman.

Hi, good morning. Could you spend a little bit more time on margins? Maybe walk through the segments? I guess this quarter, can you tell us what utilization rates were and how you expect that to improve the next quarter?

Well, utilization rates in the summer are always very low just because of the summer kind of lull period that we have. And as I mentioned, it was a lot lower this year. And we are getting to a stage, of course, with our casegoods operation where our utilization was obviously not very good which forced us into the restructuring that we did have. Like I said, we took additional almost a week of downtime in our other plant. Prior to the restructuring we were probably looking at utilization rates in the low 60s at some of our wood plants and our normal range is probably only in the mid 70s during the summer in upholstery operations.

How does that improve with the casegoods plants coming out and also how much square footage? I think you had 4 million or so square foot of casegoods? How big were those two plants that came out?

Well, where we are going to be and certainly to Dave's point, the percentage of utilization during the quarter does not reflect those facilities coming out of there yet. But once we get these plants closed, one of them will end operations by the end of this month, the largest of the three. Of the nine casegoods facilities we'll have left we have a total square footage of 2,705,000 square feet, and of the 29 upholstery facilities we have 8,200,000 square feet. So we have almost 11 million square feet between the 38 facilities that we will have left. We also even in head count, our head count was down 2% in July from the prior month, and was down almost 9% from the prior year. So were we've not sat here and continued to run at the same head count levels as we did in the prior year. And this year with really the upholstery business being a little weaker, maybe even significantly weaker it was more reflective with the current business trends we had an additional 7 days of downtime just within the upholstery plants during that time as well so quite a significant amount of un-absorption of overhead.

What are you thinking in terms of margin improvement as these plants drop off? Can you talk about roughly assuming the normal seasonal pick up in business, is the operating margin for casegoods get back to a 4 %, 5% range the next quarter and improve from there as the other plant comes out?

It's going to be dependent on what the mix of business is between domestic and imported product. We continue to have a mix issue there. If the mix is adequate, we will be back toward that middle single digit performance range.

It will take a little time. There will be some disruption as you begin to move some of these new products into the other facilities. We have five cuttings of, first time cuttings of some of the Lea product that's going into some of our other facilities and you normally have a little bit of a learning curve when you start interjecting new products into other factories. As we said we won't really begin to see significantly the benefits of this consolidation, probably until we get more into the third and fourth quarter of this year.

Just real quickly on the inventories related to utilization, do you feel like you've taken enough downtime now and inventories are in good enough position where you don't have to take more downtime? They did improve sequentially but on a year over year basis they were still not quite in line with sales?

We are not where we want to be on the inventory side. It's going to depend, downtime is going to depend a lot on what happens with retail, on the retail front. But we dropped, we still loft about a half a turn on our inventory level [inaudible] and we still have some casegoods, finished goods that needs to come down some more and we will be working toward that end.

Okay. Thank you.

Your next question comes from Laura Champine.

Good morning. I was pleasantly surprised that you sited the growth in written orders at your store at the La-Z-Boy stores and I was wondering with that in mind if given the 9.2% revenue decline in the quarter, that would indicate that La-Z-Boy might be losing share at independent retailers?

Well, again, it's important for you to understand the way we preface that remark, it is written business throughout the store system. It is not necessarily reflective at the same time of what our deliveries to that system are.

So that might indicate that sales trends are actually accelerating?

I think it indicates that it's relatively flat and they probably worked through a little of their inventory. And we'll have to wait and see how it picks up.

We have five other upholstery company rather than La-Z-Boy.

Let me ask it in a different way. Do you think that you are gaining square feet at independent retailers or that that's a net decline year over year?

I think it's relatively flat. I wouldn't say that we feel that we've lost position but I certainly won indicate to you that we've gained significant position as well. I certainly think that we've held our own with the La-Z-Boy brand.

Okay. And two quick questions on theory restructuring. Are there any buyers for your casegoods plants that you'd like to sell and can you comment on what exactly the inventory write-downs involved in the restructuring casegoods represents?

Well, we have a program on the sale of the facilities. We have an agent who is representing us in marketing the properties and that is proceeding on course. There are a lot of factories for sale these days in the industry. So selling it as a casegoods facility is probably not in the cards. So there's alternative use for those facilities but we are proceeding accordingly.

On the right down of the inventory, it's approximately $2 million [inaudible] from there. And that probably results in the combination of determining what additional products you want to market going forward and that taking out some of the fabric and frames and design

So the other products you will not continue manufacturing?

Yes, this is a very good time to take a good look and purge some of those poorer performing skews. You don't want to move those to another manufacturing location. So it's a good time to take a look at skew management and not transfer those kind of items. So to Dave's point we did reduce of the approximately $11 million that we reduced inventories to this related to the restructuring.

Okay. Thank you.

Your next question comes from Todd Schwartzman.

Could you give us some numbers comparing the new generation stores with the older format be it in terms of either average ticket size or sales per square foot and also let us know what those numbers were Q1 of '03 and for Q4 as well?

Well, today and again you've got to qualify this a little as well. We would like to think it's all related to the new format that you've got to remember that this is a 13 years old program now, and some of the 52 stores that we have out there over that thirteen-year period of time probably moved from being an A. location to a C. location. So as we get some of these stores relocated, it's not only because of the format of the new generation stores but it's also getting them back into the right locations which is extremely important as you know at retail. Typically we see about a 25 to 30% increase in the performance of the newer stores, both related we think to the format as well as to the change in location.

So to cite average ticket would not be meaningful for that reason?

I don't think so. I agree.

Okay. Thanks.

Your next question comes from Jason Rogers.

Good morning, Elliot Schlang from Lynch Jones Ryan. A few questions if I may. Would you comment on the status of the margins of the La-Z-Boy Global relative to your expectations?

Well, the La-Z-Boy Global margins are significantly better than the domestic margins. If you can't create that value there's certainly know point of doing it. And we use a rule of thumb that probably GM boss of a number of hidden costs that are in the whole process need to run at least in the 15% additional GM range to justify taking it offshore. So we continue to see those kinds of numbers in our sourced products.

So you are getting, it is living up to your expectation on the margin side?

Very definitely.

And given your comments on casegoods, are you feeling that you are losing market share within that casegood market overall?

I think all domestic casegoods have lost some share. I think especially at the upper middle price points and the lower upper end price points, that there has been some accretion so no do you understand that the entire industry who really competes in that segment of the market day in and day out has probably lost some share.

Are you losing market share to other domestic companies?

I don't think so. There's always a case of a company here or there who made the right decision on product over the last year that might have a winner, but as a rule I think if you look at the domestic manufacturers and marketers of product and look at all their numbers, the majority of them are down some percentage, near as that double-digit range.

Last you mentioned that those restructuring charges will continue into your second and third quarter. You didn't mention the fourth quarter. And I'm wondering what the chances are for additional restructuring charges above and beyond what you presently outlined. Is this something that we should expect into next FY as well or is this it?

I don't think any of us have that type of crystal ball that we can say for sure that this is it because I think we've indicated all along that we continue to move toward a more blended strategy and where that will eventually evolve to, whether 50% of our domestically produced, or our produced casegoods are 50% domestic and we are sourcing 50, or it's 40, 60, and some of it probably depends on some of the current dynamics that are taking place in the industry. But we are going to continue to look at all of these operations and subsidiaries and divisions and insure that we are maximizing the utilization of the assets that we have.

I guess for many years the company had no restructuring charges and then all of a sudden there seem to be so many of them that I was interested in whether we should expect this to continue. You've answered the question. Thank you.

Your next question comes from John Baugh.

Good morning. A couple of things. One I want to touch on leather. Where are you producing your leather? Are you doing any cut-and-sew? What's your price per unit experience been for La-Z-Boy there and what is leather roughly as a percentage of your total upholstery sales in dollars?

Well, we are today probably running corporately somewhere in the 20 to 25% range as a percent of our upholstery business that's being done on the leather side and we continue to see that grow. And we are as we said earlier, again, getting a significant amount of cut and sewn leather from several different places in the world, not just out of China. And I think you've got to do that today to be competitive. But I think there also could be some of the same issues that face the upholstery segment that face the casegoods business and we have also been taking a hard look at that in relation to whether there is in our opinion some unfair advantage that they may be establishing looking at some of those things. So I think we've got to be careful about how we commit to that kind of a program based on some of those same issues.

Price per unit in leather, has it gone down for you?

Yeah, some.

Are you bringing in any finished leather upholstery or just doing cut-and-sew?

We are bringing in some items in some of our different divisions, both in some share products and in some fully [inaudible] sofa, love seat type of product.

I'd like a little help with the 5% revenue down. Could you break it down between upholstery would be versus casegoods? And then secondly you made a comment I think in your Q about backlog and upholstery being down 30% year over year at the end of April. Last year you worked through a lot of that backlog what it would be at the end of July, do you have that figure?

La-Z-Boy residential today is down 33%. I don't have the exact number of the total upholstered group. We can certainly get that number and get back with you.

So that would imply that it's in line with what it was even a quarter later year over year?

Right.

Why won't that number be narrowing or improving given I recall last year your incoming orders in the July quarter weren't that good. You had a big backlog going into the quarter. You shipped a lot of that. I would have thought the backlog, particularly with orders written sounding like they are decent, would be narrowing a little bit.

I would say it's almost consistent, the incoming business today is almost consistent with where it was this time last year.

On the mix of the sales decline we would expect that casegoods would be a deeper decline than upholstery relative to the next quarter.

Okay. Great. Thank you very much. Good luck.

Your next question comes from Keith Hughes.

Thank you. I want to do ask a question about casegoods. Is there any way you can quantify in the quarter how much of this decline was price versus unit.

No, not really.

Do you have feel pricing in the last three, four months has gotten worse or is this the same trends that we've seen over the last couple years, on pricing?

I don't think it's gotten extremely worse. I think you've got the issue that again we've seen essentially seven to a thousand dollars per container increase in freight costs. And at this stage we haven't been able to pass all of that freight increase on. So if you start looking, I mentioned that we are looking at 5500 containers on an annual basis and if you figure $1,000, that's $5.5 million that you have to come up with in some form or fashion. So at this stage we haven't been able to pass as much of that on as we would have liked. But the pricing as such has not changed dramatically. I think it's been a continuation of the same.

Your retail customers that are buying some casegoods direct from Asia, how are they hand like this container increase? Are they eating it or are they trying to get price increases on selected items?

I would think with the trends that we've seen at retail that they haven't done a heck of a lot of increase.

They are as you know just happening to eat it?

Right.

Okay. Thank you.

Your final question comes from Joel Havard.

Well, good morning or good afternoon, guys. I'm slow on the dial, I suppose. If I am the final question I may ask more than my one allotted, at least put a follow up in there.

I think some of the others had one or two.

When we look at the various working capital components, you all have addressed most of those individually. If we wrap those up and realize that we are going from the seasonal slow to a stronger seasonal quarter, is the working cap to sales ratio likely to improve as much as a couple hundred bits or do you really see sort of working through the inventory issues keeping it in this kind of 13ish, I'm sorry, 24ish percent of sales?

Well, relative to working capital we would like to be able to hold the inventories, we would like to be able to see a little bit of an up tick here. But certainly receivables will go up. But always also as I said we had a timing difference on the payables and accruals. So that would be I think an offset there. But I think overall will you probably see some improvement.

Would it overstate it to think that a couple hundred bits would be a seasonal boost in line volume.

I would hate to narrow it that closely because I really haven't calculated it that closely.

I understand. If we do presume that that's going to have some demand on working capital commitment, do you all typically swing that off the revolve he recall or is it going to be more LLC related because of the growth in imports?

Well, cash is not a problem for us as you well know. To the extent that we have working capital increased there, we can always offset versus our repurchase program.

And the 1.2, almost 1.3 and other income, was that real estate related?

No. We've got interest income on some receivables.

Okay. I'm presuming that there are several properties for sale out there. Do you have any hopes of realizing any gains on that, this year?

Most of the properties that have come available for sale as a part of our restructuring have been on the market when they have sold they haven't been too far off of our initial number. So, I don't expect it to be a significant upside gain from other activity, flat.

Going back to the previous [inaudible] working capital cash relationship do you see interest expense kind of flat with Q1 for Q2, [receding over the second half.

Pretty flat.

Maybe receding in the second half, is that reasonable?

It would probably stay pretty flat. Of course we rescheduled the debt a year ago. We will come down a little bit the seconds half because our swap in early December.

That's all I have. Thanks, guys. Good luck.

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Thank you, Jeffrey.