La-Z-Boy Inc (LZB) 2004 Q2 法說會逐字稿

Good morning, my name is Tanya and I will be your conference facilitator today. At this time I would like to welcome everyone to the second 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'd like to ask a question simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key.

I would like to now turn the call over to Mark Stegeman, treasurer of La-Z-Boy, Inc. Please go ahead.

Thank you Tanya. Good morning. I'm Mark Stegeman, treasurer of La-Z-Boy, Inc. and thank you for joining our fiscal 2004 second quarter conference call. We're having this quarter's call earlier than usual so I apologize for the early hour and I hope all of you have had a chance to get your cup of coffee or tea this morning.

With us on this call are Kurt Darrow, La-Z-Boy's president and CEO and David Risley, our chief financial officer. Pat Norton is with us also.

Today's subject is La-Z-Boy's October second quarter operating results. As usual Kurt and Dave will begin with some prepared remarks.

We'll try to end the call by nine a.m. this morning, but we'll be happy to extend beyond that if you have unanswered questions. This call is being Web cast live and a replay will be available on our Web site this afternoon. A telephone replay of the call will also be available for a week beginning about noon today.

These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles for providing guidance to, and communicating with, investors and the investment community about the company's current operations and future prospects.

We will be making forward-looking statements during this call so I'll repeat our usual caveat. While these statements reflect the best judgment of management at the present time, they're subject to numerous future 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 statements made during this call.

And with that let me introduce La-Z-Boy's president and chief executive officer, Kurt Darrow.

Kurt?

Thanks, Mark and good morning to everyone. It's my pleasure to host my first investor conference call as the new CEO of La-Z-Boy Inc.

I want to share with you this morning my thoughts and observations about our company and how we plan to address our future challenges and opportunities.

At the outset, I think it's important to stress the fact that La-Z-Boy is a strong and fundamentally sound organization, with three major core strengths. Our brand, our store system and our strong financial position.

My predecessor did an excellent job of rationalizing our manufacturing infrastructure and making some tough decisions during the past three years. As a result, La-Z-Boy is in better shape today than it would have been otherwise.

However, downsizing domestic production is only part of the answer. We have been flat on the revenue side at around $2 billion annually for about three years now and we need to begin growing our business aggressively and profitably.

Although our full detailed vision and strategy for La-Z-Boy is still a work in progress at this point, I do know the foundation of which that strategy will be built. After spending time discussing our strategic vision and plans with key executives throughout our company, I've come away absolutely convinced that we need to focus intensely on three key areas.

First, leveraging and extending the power of the La-Z-Boy brand.

Secondly, accelerating the expansion of our proprietary distribution system.

And finally, relentlessly driving towards supply chain excellence.

I'll provide more detail on these subjects momentarily.

We reported our second quarter operating results yesterday, after the close of trading on the New York Stock Exchange. I hope all of you have had a chance to look them over.

I'll let David Risley get into more details on the financial results, but I would like to make some general comments. The primary issue being that we are not pleased with these results. La-Z-Boy should be performing at a higher level than this and we intend to make that happen.

Our sales were down in both upholstery and casegoods and our total sales were off 9%. Upholstery sales, which account for three-quarters of our business declined 7% compared against a strong October 2002 quarter. And our casegoods sales were off 16% from the prior year.

One piece of positive news was that we were successful in controlling our inventories, despite these lower sales. But we again paid the price for this as our operating margins for the quarter fell to 5.3% from 8.4% in the year earlier period.

We are determined to get our operating margins back to the 8 to 10% plus range as we're able to get if revenue side of our business moving in the right direction again.

Looking to the future, the first thing I addressed as La-Z-Boy's new CEO was the establishment of a strong and energetic leadership team with the talent and experience to successfully guide and direct our 14 business units as we move forward. And I'm very pleased that we were able to do this totally from within the company.

The veteran management team we now have in place is one of the strongest in our industry. In our upholstery segment John Case is managing the La-Z-Boy branded companies while Rod England is in charge of the non-La-Z-Boy branded upholstery companies and Steve Kincaid is now responsible for all of our individual casegoods businesses.

All three gentlemen have spent their entire careers in the furniture industry. Two with family-owned businesses that subsequently became part of the La-Z-Boy family, and all of them are highly respected throughout the company and the industry.

Importantly, each of them will also continue to be responsible for his individual company. So they will remain close store customers and live the day-to-day industry dynamics.

I am totally confident that together we can get this company back on the road to profitable growth in the coming year.

I want to talk for a minute about the three strategic essentials I mentioned at the outset our brand, our proprietary distribution and our supply chain management. First, the La-Z-Boy brand is unquestionably the most powerful asset at our disposal. For example, we recently jumped two spots to achieve the number three consumer brand position in the home, according to Home Furnishings News 2003 Biannual Household Brand Survey.

In advancing from number five to number three, we moved ahead of two convenientable and important brands Maytag and Kenmore. This survey of 150 brands conducted independently by HFN magazine measures both consumer familiarity with the brand and which brands are the favorite of consumers. The next best furniture brand in the survey ranked 35th and declined two notches since the 2001 listing.

According to another independent survey InFurniture Magazine survey of specifically furniture brands which also measures consumer familiarity and brand preference, La-Z-Boy is the most familiar and the favorite home furnishings brand among all age demographics, all income levels, and all regions of the country. Importantly, all the other brands see significant drop-offs in both awareness and preference among younger survey respondents.

We intend to leverage and extend the power of that brand aggressively and extensively. Our goal for the La-Z-Boy brand is simple - we want La-Z-Boy to become the number one brand in the home, period.

I should also note that we're leveraging La-Z-Boy's marketing expertise at several of our other companies. We have two other well respected brand names in our stable of companies, Kincaid and Pennsylvania House. And we're investing more heavily this year in advertising and marketing to build the consumer brand awareness of both names.

But back to the La-Z-Boy brand. A few years ago we recognized that our future growth would be challenged if we could not attract a new customer to La-Z-Boy, a younger female consumer. We needed to supplement our well-known brand attributes of comfort, quality and value with one of style. And the perception that we are a complete upholstery provider.

We initiated our new look of comfort advertising campaign in late 2000 and it's proven very successful in convincing young female consumers to look at us in a different way. We intend to continue to attract these new customers to the La-Z-Boy brand by finding ever more compelling ways to deliver our style message.

On that note one of the most exciting things for us at this past October's home furnishings market was our introduction of the Todd Oldham by La-Z-Boy collection, bringing together two very strong brand names. The affiliation with Todd Oldham impacts a younger demographic than we've dealt with in the past, primarily young women, ages 20 to 39 and this is a group that really represents the future for our industry

As I just alluded to, InFurniture magazine's recent survey showed us that the La-Z-Boy brand is surprisingly well known to female consumers in this age bracket and we are way ahead of all other competing furniture brand names.

We believe this is partly a function of our sustained efforts over the past several years to promote the new look of comfort and reach out to younger, more style-conscious consumers. The next logical step in this process we feel is to draw these younger consumers into our stores and Todd Oldham is the perfect vehicle for this in that he's a proven success in this demographic group based on the collections he's done for Target and others. He designed all the furniture in the Todd Oldham by La-Z-Boy collection, along with some really great and unique fabrics and the accessories.

The collection is unique for another reason. It is the first time La-Z-Boy has offered a total collection of furniture, including occasional tables, rugs, lamps and tabletop accessories. These products will all be sold from our dealers from La-Z-Boy.

The Todd Oldham by La-Z-Boy collection was a big success at the October furniture market with both the press and with our dealer base. The press coverage of our line since market has been nothing short of amazing, with major articles featuring the line in the Chicago Tribune, the Washington Post, the Wall Street Journal and the Dallas Morning News and countless other papers across the country.

We believe this is a great indication of the cord we struck with this line and the desire of consumers for something different and more stylish from traditional furniture companies.

From a dealer perspective, we sold this collection to a substantial number of our existing dealers and have also had significant interest from many new dealers. The line will be available at retail in early 2004 and will be accompanied by a strong national and local marketing launch.

We are also working to leverage the power of the La-Z-Boy brand into categories where our La-Z-Boy brand equities are relevant. A great example of this is the La-Z-Boy youth collection by Lea, our youth furniture subsidiary.

We have increased our retail floor space with this collection and increased sales 20 to 30% in these gallery presentations. We now have over 200 La-Z-Boy youth collection displays on dealers' floors across the United States. We signed up another 70 at the October market and are continuing to develop ways to improve the use of our brand in this important category.

We are also in discussions with a number of companies regarding opportunities to license the La-Z-Boy brand into non-furniture categories for the home where comfort and style are key attributes.

Shifting gears now, I mentioned accelerating the expansion of our proprietary distribution system as the second of our three primary focus areas. The heart of our distribution system of course is our La-Z-Boy furniture galleries store network. We currently have a total of 318 furniture gallery stores in the system of which 30 are company-owned and 59 are the larger and more productive new generation format we began rolling out a little over two years ago.

We began our La-Z-Boy show case shop program in 1975 then moved to a larger and better display show case shop store format in 1982. Then in 1990 we started replacing the show case shops with a much larger La-Z-Boy Furniture Gallery Store format.

As I just mentioned a moment ago, within the past two years we've begun upgrading the store system once again. My point is that La-Z-Boy has been around at retail a long time. We know how to run a successful and, most importantly, profitable store program. And we are intent on continuing to improve the program and making our stores even more successful and more profitable. Our store owners really appreciate the fact that we offer them a profitable and sustaining format.

One other point that bears mentioning in regards to La-Z-Boy's distribution system is this: Most of our competitors have an either/or distribution system. In any given market they either have dedicated stores or they have general dealers. But not both. La-Z-Boy is the only furniture maker that has been able to successfully distribute its products to both dedicated stores and general dealers in the same markets. In fact it's our plan to significantly grow our sales through our general dealer and in-store gallery system at the same time we are expanding our proprietary store system. Our stores and independent dealers can do and will continue to successfully co-exist in the same markets.

Looking at the troubled history of U.S. furniture retailing over the past five years or so, you might come to the logical conclusion that this is a terrible business to be in. But that's just not the case. Furniture retailing can be a very satisfying and profitable enterprise, just ask Mr. Buffet or Mr. Haverty. But it is a business that absolutely must be managed correctly with the proper disciplines in place.

We currently have a total of 4.3 million square feet of showrooms space in our furniture gallery system, or an average of 13.5 thousand square feet per store. The new generation stores average 15,000 square feet and are doing substantially more sales per square foot and by definition per store than the old format unit.

We have three main goals with regard to our La-Z-Boy furniture gallery system. First, to accelerate the opening of new stores. Second, to increase the rate at which the older stores are converted to the new generation format. And thirdly, continue to increase the productivity of the stores.

Our current goal is to add as many as 25 new stores each year and remodel or relocate another 25 annually. Needless to say, we'll continue to selectively close the less productive or poorly located stores. When we are successful in achieving these initiatives we'll have more than 400 stores in our system and the overall system should be doing an estimated 1.7 to $2 billion in annual retail sales versus the current levels of slightly over $1 billion.

At a recent investor conference I mentioned we're prepared to be more aggressive in our store ownership than we have been to this point. I want to be very sure that this comment is correctly understood. First, please keep in mind that our first preference is to have individual entrepreneurs as dealers. But this may simply not be possible in certain markets. Some of our dealers who have been with us from the beginning are nearing retirement and have approached us about selling their businesses. We have worked with an investment bank in developing a formula to provide a fair valuation for each dealer involved.

That being said, my second point is that we have some dealers, not unlike Ethan Allen dealers who are perfectly content with the status quo and are unwilling to make the additional investment needed to convert their stores to the new generation format. This is unacceptable from our standpoint.

So what do I think our company-owned store profile will look like five years or so from now? Well, we have 30 company-owned stores today as I mentioned earlier. I can easily see that number doubling or tripling in five years, depending on our dealers' position and appetite for growth. And as I mentioned at the investors conference, these would primarily be multi-store operations in major metropolitan markets.

In other words, the vast majority of our new and converted stores over the next five years will be in the largest population markets. We currently have 150 stores in the top 30 markets and we believe we need to have almost half again as many stores in these cities to accomplish our market penetration objectives.

We also have significant proprietary distribution at several of our other companies as we noted in the past, largely in the form of in-store galleries. In addition to the La-Z-Boy youth collection, program I mentioned earlier, Kincaid has 17 stand-alone stores and 146 in-store galleries with a total overall retail presence of nearly a million square feet.

Additionally, England, Clayton Marcus and Pennsylvania House have another 1.8 million square feet of in-store gallery displays. Our third primary strategic initiative is to do a much better job at managing our supply chain and focus on dramatically shortening lead times, improving supply reliability and increasing the global integration of our operations.

We were definitely behind the curve in hour casegoods business from an import perspective. But with the formation of La-Z-Boy Global this past summer we're now coordinating our international sourcing activities in the areas of vendor selection, quality and cost control and consolidating logistics with a focus on delivery time and costs.

We are not finished here by any stretch of the imagination, but we have made big strides. We are also intensely focused on accelerating and improving the reliability of our upholstery supply chain, with a meaningful piece of that resting with our La-Z-Boy Residential business. We intend to significantly reduce the amount of time consumers and dealers must wait for product, whether it is a custom order or an order for dealer inventory.

We will also continue to improve the reliability of our promised delivery times. We are in the mode of questioning everything about our existing and traditional supply chain processes. It is our intention to create a lean system based on world-class approaches and technologies. I plan to provide more detail on this particular initiative when we are further along in the process.

Now let me turn to another matter that has garnered a lot of media coverage lately. That is the anti-dumping action against China being brought before the United States Department of Commerce and the U.S. International Trade Commission. The initiating group of U.S. Wood Bedroom Manufacturers include four of our casegoods companies, American Drew, Kincaid, Lea and Pennsylvania House.

As we've said in the past, we believe in, and support, free and fair trade. But we also feel very strongly that it must be both fair and legal. At this point no one's best interests are going to be served by a heated public debate on the subject. There is a legislative process in place and underway that is addressing the merits of this issue. A decision is mandated by law to be forthcoming fairly quickly. When the ultimate decision is reached, we'll all live with it and move on. And I think it's fair to say we all hope the process will not prove to be too divisive for our industry.

Just to keep this matter in perspective, the amount of wood bedroom furniture that La-Z-Boy is currently importing from China, which is the specific subject of this anti-dumping initiative is around $50 million on an annual basis or about 2.5% of our total sales.

My final comments relate to the recently completed October International Home Furnishings Market in High Point. Dealers attending the market were quite optimistic even though retail business has been generally slow from mid-September up until market time.

Traffic was relatively flat overall, with the exception of international visitors, who returned to this market with a vengeance after several very slow years. We enjoyed good order writing activity throughout our various business units and had a number of notable new introductions, in addition to the Todd Oldham by La-Z-Boy collection I've already mentioned.

Pennsylvania House's new Courtland Manor Group and Kincaid's new Yardley (ph) Square Collection were both very well received at market and both groups were designed to take advantage of our domestic production facilities.

In addition, both companies enjoyed their best upholstery markets in a long time, benefiting from existing new product looks in each case. Clayton Marcus's new Nantucket Pine Collection drew a strong response from the company's dealers.

And Hamry's introduction of four new collections combining stationary leather upholstery with occasional furniture and wall systems, all displayed in room settings led that company's strong market activity.

England garnered a new SKU or two on almost all of its dealer's sale floor and drew rave reviews for its new introductions. Each of the other La-Z-Boy companies also had very solid fall markets.

Overall, we were very pleased with our market results and we believe we are in excellent shape to take advantage of these new products and sales floor placements if retail business strengthens as we head into 2004.

With that, I'll turn things over to David Risley for his comments on our financial performance.

Thanks, Kurt. In terms of the quarter just ended you should all have the details at this point so I'm just going to cover some of the highlights. As Kurt said, we were not pleased with the results. Sales for the quarter were down 9.3% and our diluted EPS for the quarter was in line with our recently reduced guidance at 28 cents, which included a 2 cent charge relating to our most recent plant closures.

As Kurt referenced earlier sales volumes for the upholstery segment was down 7% for the quarter, and casegoods, over 16%.

The upholstery change, however, belies the real condition of this segment, however. Orders received during the quarter were almost flat, down about 0.8%. The difference in volume year to year resulted from the shipment of backlog last year.

On the casegoods side, volume continued to slide as we were obviously losing some market share in the residential furniture portion of the business and contract hospitality seems to have no recovery in sight. We do believe our product offerings in style and value are improving and we should be bottoming out, however.

In light of lower volumes and promotional pricing programs, the gross margin fell as expected. Until we get an uptick in volume, we may not see significant improvement until the fourth quarter when the restructuring benefits should provide some positive impact in casegoods.

Our SG&A dollars were relatively flat but rose as a percent of sales. While we work diligently to flex expenses with volume, we did maintain our advertising with the quarter. Additionally new owned retail stores versus the prior period added proportionately more SG&A expenses.

The net result of the operating line was only 5.3% consolidated, with 7.6% for upholstery and a break-even 0% for casegoods. On the balance sheet, inventories were reduced another $4.4 million as we continue to bring them in line and they're down about $15 million year-to-date. But we have further to go.

We've also reduced our debt by about $17 million and repurchased almost $29 million of stock. Our debt to total cap ratio was therefore reduced slightly to 26.1%, which is in line with our targeted leverage.

Our cap ex for the quarter was slightly under $8 million and will likely not exceed $30 million this year. As Kurt indicated earlier we may acquire retail stores in the future. We have more than enough adequate ongoing cash flows to absorb the size of these expenditures that we are anticipating, and would flex our repurchasing activities to maintain our leverage ratio.

Guidance for the third quarter reflects a cautious approach to reading the marketplace. We, like others in the industry, see some upside potential. That's been true in the recent past as well, however, only to peter out in the end. Our volume projections calls for middle single digit decline, heavier in casegoods than in upholstery.

With lower volume and continued promotional pricing, margins will decline versus last year, which should improve slightly over the most recent current quarter. EPS is expected to be in the 26 to 30 cents per share range.

With that, back to you, Mark.

Great. Tanya, will you please review the instructions for asking questions.

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 keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Charles Grom.

Good morning. I was hoping you could provide some clarity on your business outlook. While you commented that business -- you didn't witness a seasonal pickup in demand you did state that upholstery orders in late October meaningfully improved. I was wondering if you could clarify the disconnect there.

Well, yes, I think it's a matter of there's not been a sustained movement forward in a while. Everybody looked at Labor Day as a great uplift and it petered out almost within the week. While there's some good news on jobs and other areas, there's just not enough sustainable good news to get overly optimistic at this point.

All right. Second question.

I would also add to that, in this coming quarter, we do have two sets of holidays, the Thanks Giving Day period as well as the Christmas period, which is not a great furniture period. Our third quarter is usually our third worst performer.

OK. And with regards to your guidance, I was surprised to see your third quarter sales guidance down so much, particularly given that you have much easier comparisons from last year. Where is the bulk of the decline coming from? You mentioned upholstery. But can you give us some clarity on that?

And also what do you think the fourth quarter might look like as we try to model this out?

Thanks.

Well, it's a continuation of where we've been. And that's our best guess on the third quarter. I wish I could give you a little bit more of a crystal ball. It is a little easier comparisons, we agree. But we just don't have enough evidence to get bullish yet. There's some positive signs, and could we do better? Yes. Hopefully we don't do any worse.

Relative to the fourth quarter, I think there's some very positive things that are happening, particularly in La-Z-Boy. We had the Todd Oldham Collection which should be coming out in January. We introduced a cut and sole leather collection that was very well received and that should be also giving you some uptick to the first part of the year. So fourth quarter, I think, our people are more optimistic that things will start picking up. But we're only going to go out one quarter at a time on our guidance.

OK. Thank you.

Your next question comes from the line of Richard Diamond.

Good morning, Richard.

Good morning, gentlemen. I have two questions. One, when you use the terminology flex our buy back, should I interpret that to mean step back from the buy backs or, gee, we'll do buy back according to, A, opportunity and B, cash flow?

The latter is probably the best definition. We've been consistent that we want to keep our leverage in the mid-20s, and we have done so. Our buy-back variability has gone up and down in the quarters, depending on cash flow to keep it in that range. So if we make some acquisitions, that would probably reduce the amount that we would spend on buy-back.

The other question is in regard to your vulnerability to direct Chinese imports that are impacting other casegoods manufacturers or lack thereof. Could you provide some granularity as to casegoods manufacturing capacity utilization after closure? More specifically, what percentage of your casegoods manufacturing will be taken up by products that cannot be economically manufactured in China?

And secondly, what will be your, after this round of closures, what will be your capacity utilization in your casegoods operations?

Well, I'm not sure I know how to answer your question entirely. You know, our mix of imports last year was a little over 30%. We expect that this year it will probably be a little over 40% and continuing in that direction. We have had excess capacity. It's obviously the reason why we've taken down these plants. It has been a transition, as we've moved more to the imports.

And we've also improved productivity at our remaining plants because of the concentration of volume. Are we at full capacity? No. But with the volumes having fallen like they have. We continue to lend our production requirements as Curt mentioned two of the groups, our domestic groups. The rational for picking where it's going to be made, obviously we want to produce as much domestically to keep our plants going, but it's got to be volume that could be done cost effectively. Generally that means maybe they're not quite as ornate and carved (inaudible) et cetera. There was i.e. less labor involved for domestic production than it would be for Chinese or other sourced product. Does that answer your question?

Actually, I thought approximately 60% of your casegoods capacity was made up of products such as cherry woods which could not be economically manufactured in China. So really the percentage is more vulnerable. It's more vulnerable as the 40% and you're actually reducing that by closing plants.

I don't pretend to be the manufacturing operations guy, but in many cases the overseas imports have bought cherry wood from here. There's other species that qualify over there as against Asian cherry or whatever. So I think you're misinformed.

As a point of clarity two of our casegoods companies are both solid wood, both Kincaid and Pennsylvania House. That's the bulk of their product. Our other casegoods companies are much more heavily into the veneered products than solid wood.

Thanks very much.

Your next question comes from the line of Laura Champine.

Good morning. Actually this is Anand Krishnan for Laura Champine. I wanted to check upon the inventory situation, you did mentioned in your prepared remarks that additional work needs to be done. I was wondering if you are looking at increased of down time during this coming quarter.

We normally have downtime during the Christmas holiday period anyway. But no, we are not taking additional downtime to reduce inventories. My comment is more to the fact that we think we should be running leaner and delivering faster anyway. So there's more work to be done in that regard.

We prefer to get our inventory down by more sales than less downtime.

And in terms of your finished goods inventory, on a sequential basis I did see it increased by close to 2%. That's in spite of the increase promotional activity and the additional downtime you took in second quarter, so are you comfortable with your finished goods inventory situation currently?

Well, like I said, we're never satisfied with it. With the imported product there's always going to be probably a little bit heavier inventory requirement than there would be with domestic, because you don't have the same reaction time. So there's a little bit of a trade-off there. But overall we want to continue to reduce our inventories and yet increase our delivery capabilities.

And just to follow up, can you comment on inventory turns in terms of your two segments like the upholstery and casegoods?

Just one second here, Anand. Well, the casegoods has a lower turn rate than upholstery. Upholstery tends to be in the six, seven, eight churn range while casegoods is in the three to four turn rate.

And in terms of returning to more normalized operating margin in your casegoods segment, what kind of capacity utilization enhancement do you need to really achieve to reach that 8 to 10% operating margin that you are mentioning?

Well, the 8 to 10% margin targets that we have is for the business overall. And a combination of the last restructuring we took to downsize our casegoods manufacturing over the last 2.5 years we've closed 13 casegoods plants. A combination of bringing the capacity down and also increasing our business will start the margins heading in the right direction.

But do you have an estimate as to how much your capacity utilization has to improve, primarily in the casegoods side? Because in the 10-Q you did mention that on a year-over-year basis your capacity utilization was lower by 23%. So it probably increases from 20% from the current levels, do you see more normalized operating margin level?

Certainly any increase in the capacity utilization is going to help improve our margins. I don't know that made a distinct calculation in that regard. I haven't thought about your question quite that way. But we certainly have to -- now that we're down to basically five plants in the U.S., we think we can start bringing the volume back and we'll see where the mix of that comes out. The customer ultimately chooses what product he's going to buy. And as he buys the domestic product our volume will go up. It tends to provide the imported product, our volumes will, capacity levels will be affected.

OK. Thanks a lot.

You're welcome.

Your next question comes from the line of Bud Dugott (ph).

Good morning. Just a couple of questions. The company-owned La-Z-Boy volumes, I think you said you own more this year than you did in the comparable quarter. Can you kind of give us an order of magnitude what impact that was?

It was relative of the impact on SG&A. We have only one new store in total, although two of them are ramping up last year. We also have two new sites where we've signed leases and have not opened the stores but we obviously included the cost of that pre-opening cost in the ongoing rent. So there was an impact as we move forward. But the gross margin and the SG&A expenses are dramatically different retail of course than they are in the manufacturing segment.

I understand that. That's kind of the genesis of my question. I was trying to get some numerical quantification of that. I'm not sure I got that.

It was about a third of the increase.

Third of the increase. Of SG&A?

Yes, percentage-wise. If you take the difference in percentage increase, about a third of it is attributable to retail.

And the gross margin by segment, the impact of the year, of the volume decline, can you kind of quantify that for us?

We don't provide that information, Bud. I think you've tried to get that in the past.

And I won't stop.

So we're all consistent.

Let me ask this question. You do talk a little bit about it in the queue. FIN 46 has got some pretty ugly ramifications. And I know it's been extended at least one quarter. What do you see about that? And am I right about that?

Certainly it has some unusual implications to it. Even our auditors would admit that they don't quite understand what they're getting after these days. There's a need for a lot of clarification on what FIN 46 means. I've heard some pretty wild interpretations. But we certainly feel that there shouldn't be anything in that that would affect us. We don't have any strange, unusual relationships.

Well, that's not actually what happens according to the interpretations I've seen. Even if you have no, none of those that might require you to consolidate a non-owned, a private customer. And that would be very misleading, I think.

Well, you hit the target, Bud. I've heard that one, too. We've had discussions with our auditors about that. That certainly doesn't make any sense, you don't control those people. You don't even have access technically to their financial information, even on an updated basis.

And that would absolutely make no sense at all. But in this day of over reaction, I guess nothing is outside the realm of possibility.

Suffice it to say, obviously, if that were to come about, and I think that chance is very, very remote, we just have to live with it and report on it separately so everybody understood what the implications are. But I think you, like most of the street, would probably ignore those kind of implications.

I just wonder if we can find them. That's the problem.

Lastly, on the guidance going forward, on the 26 to 30 cents, are there any more expected charges to be included in that? I would expect that your EPS number would include that, your EPS guidance number includes that, if there are.

Yes, as we've indicated I think in the 10-Q, we still have -- we expect the total restructuring to be about $10 million. We've got about 1.8 left. I'm not sure all of it will finish up in the third quarter. So we're talking one to 2 cents.

So that is included in the 26 to 30 cents?

Yes, it is.

Thank you very much.

You're welcome.

Next question comes from the line of Margaret Whelan.

Good morning. It's actually Susan McLayerry (ph) for Margaret. Can you tell us about your capacity utilization where you are now and where are you in wood versus upholstery?

Well, the capacity in upholstery tends to be in that 85%, 80 to 85% range. We also, particularly in the La-Z-Boy side, that is based on two shifts as opposed to one shift in many of the other businesses.

In casegoods, we're probably still only in that 60 to 70% capacity utilization, as we take down -- we still have one more plant to complete a closure on.

OK. And given these lower rates of capacity, and of the lower sales volume that you're expecting over the next quarter, how do you expect to get your margins back up?

We're not going to get it up if we keep bringing our sales down. Because as related we're going to be putting a lot of effort into growing that top line. And we think we have some reason to believe that we may be very close to the bottom on our casegoods. But time will tell.

We've also had two very important introductions that we introduced last April in our casegoods group. Steve Terrell Collection from Pennsylvania House and the Bob Mackie Collection at American Drew are both beginning to ship now. We have high hopes for both of those collections to rejuvenate our top line business in the casegoods segment.

OK. And can you talk a little bit about any benefit that you're already starting to see from the cost cutting that you've already done? It doesn't seem your margins have improved much. Can you just quantify if there's anything that has already started or what we can expect?

We just finished closing them. To some extent the loss of volume will mask some of the benefits that get absorbed through the reduction in volume. But we should start to see again most of it starting to hit after the first of the year and into the fourth quarter.

With any normalization of our volume and hopefully with any pickup of our volumes you'll start seeing the efforts of what's been done to materialize. But if you're dropping volume 10 to 15% per quarter, it's hard to keep your capacity downsizing in concert with your volume drops. And that's what we've been facing the last few years.

OK. That's all. Thank you.

Your next question comes from the line of Jason Putnam.

Good morning, guys.

Good morning, Jason.

First question I'll approach this a little different way and hopefully we can put an end to it. If you look at the casegoods business and you focus on just the import side, which you said is going to approach 40% of your sales this year, is that portion of the business profitable and maybe could you quantify it in the range of like 8 to 10% or above, as you look going forward?

We don't give out specific profitabilities on each of our business units, but a couple of our companies are a lot more import-driven than others. Obviously the margins are better there for us. Some of our companies are blended. Some of our companies are still primarily domestic.

So we look at the total -- we look at the total mix, Jason, and we even have groups that part of the group is domestically made and part of the group is imported. And we average the margins on the group in total. So it's a difficult question to get a specific answer to. You have to look at it in it's totality.

But obviously the imported margins are much better than what you're producing in the U.S.?

On balance, yes.

OK. The second question, you mentioned the three brands, obviously La-Z-Boy, Kincaid and Pennsylvania House that you're going to focus on, increase the marketing on and try to build the brands. What is kind of the focus of the remainder of the brands, is there going to be a consolidation we're going to see going forward or what's the strategy there?

Well, we draw a distinction, Jason, between consumer brands and trade names. And a lot of our companies have still strong trade names within the industry and are very meaningful to their dealers, and a handful of our companies come to mind. But there's a difference in appeal when you start talking about consumer brand names. And we think we have to focus our resources on a few of those brands. We can't make consumer brand names out of all 14 of our divisions.

So we're making a fundamental decision on which ones we're going to try to create awareness on for the consumer and the other ones will remain to be strong trade names within the industry.

But there's no consolidation in the works in terms of trimming brands or consolidating brands?

Not at this point.

OK. Next question, a little bit more on the retail front. You said you're going to look at owning more stores. And this is just more of a broader term question. I guess would you consider, given the import situation and the retail situation, owning maybe a regional retailer, you mentioned like the [inaudible] companies like an Art Van, I don't know, is that type of business something you could do in light of the retail store program that you already have?

Obviously it could be a possibility. But not one we've considered. We've got a lot of potential. A lot of untapped finished potential with our current store programs. And we want to maximize the performance of that before we consider any kind of other alternate retail program.

And then lastly, I just noticed in the Q, the warranty costs were up pretty significant. I think over 30% from a year ago, even despite the decline in sales. Is there anything strange in that number and what can we expect on that going forward?

No, we've put in a new system that helps us accelerate our serviceability, and quite honestly that's given us a little catch-up in there in terms of our expense.

So this is more of a one or two quarter adjustment and then it should level off?

Yes.

Thanks a lot, guys.

Your next question comes from the line of Adam Wise (ph).

Good morning. If I look at your last two quarters, your revenues are down $100 million year over year and your SG&A in dollars is flat. Why is that?

Well, we mentioned a couple of the reasons previously. I'll make a comment and let Dave add anything he wants to. But number one, we do have the expenses of our retail business that are included in the SG&A.

And number two, we've continued to spend the money on the marketing side of the business. As I mentioned earlier, we think the La-Z-Boy brand is one of our greatest assets. And even as sales are declining, we do not want to cut back on our commitment to keeping the brand out there and making sure it stays as important as it can with the consuming public. So our advertising as a percentage of sales has gone up. But that's a conscious decision on our part.

David?

Yes, and certainly there's the fixed versus the variable piece of that. The fixed as a percent goes up when the sales decline. But there are a number of issues that are in there. We do -- we are spending some money on systems, which at the current time runs through the P&L and through the SG&A.

There's been certain outside services that we've been using to help us modernize some of our practices. So there's nothing specifically wrong. We think we're spending good money for value for our future. And sometimes that means you take a little bit more of a hit now in order to get to the benefit later on.

Are you reevaluating how you're spending those dollars to see whether or not you're actually getting the kind of sales return for those dollars?

We certainly do.

OK. And can you comment on raw material costs, what the trends have been? There's been some commentary in your Kback in the summer about foam prices and wood prices et cetera.

Foam prices have eased off a little bit versus what some of the expectation was, but currently plywood prices have gone up quite a bit, which is a factor of the war in the Middle East. And so plywood prices have come up and will be putting pressure on raw material.

Could you quantify what the gross margin impact has been from raw material inflation?

No, I really couldn't, to tell you the truth. I just don't have that currently at hand.

And just to clarify for the January quarter, you're looking for actual margin improvement even though the revenues look to be down sequentially?

Well, margins with the volume off about 5%, it would fall below what we had in the current quarter in terms of volume. And yet the EPS is going to be approximately the same range. So if that means margins have got to go up.

And that's from mix, you think or?

It will from a variety of issues. There's past utilization in part. It will be some mix. And other internal issues that we think we have a handle on.

And one last question, how many upholstery plants do you have currently?

41.

OK. Thank you.

You're welcome.

Your next question comes from the line of Joel Havard.

Good morning, guys.

Hello Joel.

Good morning, Joel.

OK. First one I'll limit it to two. First one is really more for David. You all have done just a great job on the working capital side. Can we look for a flat line as we look at inventory receivables and payables from here, David or do we need to -- have we had some sort of adjustment here that needs to come back to more normal levels?

Well, you know, inventory will tend to move as a general rule, I'm not talking about specifics right now, will generally move up in the fall and fall off come springtime, as you head into the weaker season. We had more than enough inventories as we've talked about.

So we've tried to hold it even. As the imports increase, finished goods inventories should increase relative to that portion which represents imported product. At the same token, with the fall of domestic production, your raw and work in progress should decline.

So there might be some degree of offset there. But receivables are going to be a function of your volume. Payables are going to be a function more of your inventory levels and production levels. So I'm not -- I always, from the financial side, I'm always looking for leaner is better. And as Kurt indicated, we need to get better on our delivery capability. When we do that, our inventories, our working capital should follow accordingly.

I'm just eyeballing it maybe you aren't giving retail dealers a little bit more room to play with, maybe a week or two on interprets. Is there anything like that going on?

No, there's no special ( terms on a longer term basis. Some of our companies may offer a particular special, but it's a short-term situation.

OK. Thank you. Secondly, more for Kurt, anything you all want to brag about on the progress at La-Z-Boy Global. You talked about supply chain excellence earlier in your remarks.

Well, I think, Joel, we're still in the initial stages of getting all of our people on board, getting our systems proven out. Really this market will be the first time we've taken new product over there under our global arrangement.

So to date it's been work on current products, deliveries, quality, things of that nature. But we think that we still have far too many suppliers that we're dealing with. We want to narrow that down. We want to be important to fewer people, and we think just by getting a concentrated effort, both with casegoods and upholstery, we'll think we'll have better control over the process and more reliability.

So it's early in that process do you think maybe a year two years before you hit your stride with that sourcing?

I think we should be in good shape by next summer, within a year. I think we'll have had plenty of time to get -- you know, we had agents over there and we just don't want to change out quickly overnight and interrupt service so there's a gradual change over going. But we don't have two years to get it right, Joel. We'll get it right faster than that.

Thanks, guys. Good luck.

Your final question comes from the line of Keith Hughes.

Mr. Hughes has withdrawn the question.

Thank you for participating in today's La-Z-Boy second quarter operating results conference call. This call will be available for replay beginning at 11:00 a.m. Eastern time today through 11:59 p.m. Eastern time on November the 18th. The conference ID number for the replay is 3278006. Again, the conference ID number for the replay is 3278006. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you, Tanya.

You're welcome.