La-Z-Boy Inc (LZB) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the La-z-Boy fiscal 2010 second quarter conference call. At this time, participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Incorporated. Thank you, Ms. Liebmann, you may now begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us to discuss our fiscal 2010 second quarter results. Present this morning are Kurt Darrow, La-Z-Boy's President and CEO and Mike Riccio, our CFO. Kurt will begin today's call and Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions.

As is our custom the time allotted for this call is one hour. A telephone replay of the call will be available for one week beginning this afternoon. These regular quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the Company's current operations and future prospects. We will make forward-looking statements during this call so I will repeat our usual Safe Harbor remarks.

While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings 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 turn over the call to Kurt Darrow, La-Z-Boy's President and Chief Executive Officer. Kurt?

Thank you, Kathy, and good morning, everyone. Yesterday afternoon, we reported our second quarter results for fiscal 2010. In the midst of continued challenges pervasive throughout our industry, where the consumer remains reluctant to make discretionary furniture purchases, we were pleased to report our third consecutive quarter of profitability. Our results speak volumes about the work we have done to our operating structure. Over the past several years, our team has been executing against many strategic initiatives and these projects are now bearing fruit. Coupled with the benefit of these initiatives, our performance also reflects the significant cost cutting measures taken throughout our Company beginning last November following the collapse of the credit and financial markets.

Undoubtedly we are still facing a challenging sales environment; however, within the confines of that environment we are focused on doing what we can to drive the top line and ensure we operate as efficiently as possible. Innovation, lean business practices and a strong committment to marketing the brand are at the corner stones of our efforts. We believe our Company has four strategic pillars that help to differentiate and strengthen our competitive position.

First, the La-Z-Boy brand is the strongest brand in the furniture industry with consumer awareness at nearly 100%. Just last week, the 2009 Home Furnishing News Brand Survey was released and again La-Z-Boy is in the top 10 of all brands in the home increasing to number 7 from number 9. We are once again the only furniture Company included in the top 10 which reflects the excellent name our Company has built over its long history as well as our continuing strong focus on marketing and building the brand. In difficult environments such as the one we are now in, people trust brands and tend to come back to them when there is perceived value and quality.

Second, we have a vast network of branded outlets which includes 311 standalone La-Z-Boy furniture gallery stores and 487 comfort studios. This translates into more than 7 million square feet dedicated to selling our product.

Third, we have a strong, efficient and lean domestic manufacturing footprint totaling more than 5 million square feet and that domestic capacity gives us a speed to market advantage. In other words, the ability to deliver custom ordered furniture to the end consumer quickly. Today, La-Z-Boy is operating from a cost effective platform with a renewed focus on the core growth engine of our Company, the La-Z-Boy brand and we are confident we are positioned for profitable growth once the industry strengthens.

Sales for the second quarter were down 9.4% compared with year ago levels. We posted net income attributable to La-Z-Boy of $5.9 million or $0.11 per share. This compares with a loss in last years second quarter of $53.7 million or a loss of $1.05 per share. This quarters results include a $0.01 restructuring charge. Mike will walk you through that charge as well as those recorded in last years second quarter in just a few minutes.

Before discussing our segment performance, I'd like to take a moment to comment on our balance sheet. For more than 80 years La-Z-Boy has had a conservative mind set with respect to its balance sheet and today that philosophy remains intact. Clearly, the uncertainty over the last year has reinforced the importance of liquidity and the ability to be nimble in this operating environment. Accordingly we have worked hard to reduce our debt level and increase our cash position. Today with our cash exceeding our total debt level, our net debt is a negative number. Also during the quarter we increased the availability on our credit line to $87 million. Now, let's turn to our results for our wholesale operating segments. First, upholstery.

For the quarter, we more than tripled our operating margin performance compared with the second quarter last year. In this years second quarter we turn in an operating margin of 10.9% compared with 3.4% in the prior years quarter while sales in this segment declined by 6.1% or $15 million. These results clearly demonstrate the efficient operating platform we established as solid and capable of generating positive results even in a low volume environment. In addition to reducing our cost structure last Fall, we are realizing the benefit of cellular production, a strategic initiative that required a $20 million investment and two and a half years to implement but one that is making a significant contribution to our results today.

Once we have fully transitioned our cut and sew operations to Mexico, we will realize additional efficiencies in the upholstery segment. Today we have over 800 people working at our Mexican facility making cut and sew kits for our custom business which represents about 35% of our orders. As we have said in the past, with its close proximity to the United States, we are able to take advantage of the lower cost structure inherent in the Mexico operation while ensuring 48 hour transport of cut and sew kits to our domestic base facility. This allows us to deliver on our brand promise to the consumer, custom furniture delivered in 30 days or less; however, at this time, with dual cut and sew operations running both in Mexico and in our domestic plants, to ensure we operate without service interruptions, we are not yet realizing the cost benefit of Mexico. Once fully operational, we expect our move to Mexico will save us approximately $20 million on an annual basis. We will realize a portion of the savings in the fourth quarter of fiscal 2010 with the remaining flowing through our results over the first nine months of fiscal 2011.

On the case good side of our business we essentially broke even on a 23% decline in sales. During the quarter we continued to pair down our non-productive product lines and SKUs. Although there was some higher than usual targeted discounting to reduce our finished goods inventory, the discounting trended downward sequentially from prior quarters. We also completed the consolidation of our North Wilkesboro, North Carolina operation into our Hudson, North Carolina plant and started up production of all product lines.

While there were not many service interruptions to our dealer base, manufacturing variances associated with a start up of new product affected the segments profitability. For the most part, these inefficiencies are behind us and we do not anticipate there being any further significant impact to our results going forward. As part of our consolidation, we previously announced that we would vacate at least warehouse in Statesville, North Carolina in April and move that operation to the Company owned North Wilkesboro facility. The combination of these moves based on current volume levels is expected to result in annual cost savings of 5 million to $6 million. We will start to see some of the savings from the plant consolidation in the second half of fiscal 2010.

On a positive note at the most recent furniture market in High Point we had several successful launches of new collections across our case good companies. The one that received the most attention was Lees introduction of Nickelodeon My Room the new development in cooperation with Nickelodeon Viacom Consumer Products featuring the top rated most popular characters from Dora the Explorer, Go Diego, Go, Sponge Bob Squarepants and the iconic graphics from the network signature Slime. We received major commitments on this collection from a wide range of independent dealers and major regional chains and believe the line has significant potential in a category that is exhibiting more stability. We will begin to ship this new product in January.

Now let's take a few moments to talk about our retail operations. Sales in the segment were down 3.7% compared with the prior year period, yet we decreased our operating loss by $5.1 million to $5.3 million. This is the fourth consecutive quarter where we significantly reduced our operating losses on lower volume. While we cannot control the challenges the microeconomic, the macroeconomic environment brings to the consumer, we are working to ensure that we turn as many store visits into sales and have established an improved follow-up mechanism to circle back with the customers. At the same time, our team is focused on providing the consumer an excellent and professional shopping experience and although floor traffic is down, our sales team is improving its close ratio and increasing the average ticket. Importantly, our in home design business is trending upward and we believe this service presents us with great growth potential particularly once the economy strengthens.

In the meantime, we have maintained our marketing efforts and believe we have been more effective with our media spend as evidenced by our same-store sales figures for our entire system compared with that of the overall retail industry. I'm going to turn over the call to Mike now to discuss our financials for the quarter. Mike?

Thank you, Kurt. This quarter the $0.01 per share restructuring charge was primarily associated with the consolidation of the Company's case goods facilities and the previously announced store closures within the Company's retail segment. Last year's second quarter included a non-cash $0.74 per share charge for evaluation allowance against our deferred tax assets and a $0.04 per share restructuring charge primarily related to the closure of the La-Z-Boy Tremonton, Utah facility and our United Kingdom operation. We believe that we have made great strides in our operating results over the last several quarters, but we're still facing various macroeconomic headwinds as well as challenges with our dealer base. Although our bad debt expense is somewhat stabilized this year, we are still being prudent and are not overextending credit to our dealers; however at the same time we are ensuring that we satisfy our consumers orders. We continue to focus on reducing our effective tax rate for the year by accelerating expenses for tax purposes where applicable. This resulted in our quarterly tax rate reaching almost 40% down from the mid 40 percentage rate that I noted in last quarter's conference call.

As Kurt mentioned earlier we remain focused on improving our liquidity to allow us the greatest level of financial flexibility. During the quarter, we generated over $22 million in cash from operating activities, including a net $13 million income tax refund. We reduced our debt only slightly this quarter as our debt to equity ratio is at a sufficient level and there are no significant debt maturities in the near future. We also increased our cash and equivalence to $59 million leaving us with a negative debt position and as previously stated, our availability on our revolving line of credit increased by $16.5 million to $87 million.

As we reported we entered our credit agreement almost two years ago, our excess availability fluctuates based on our outstanding borrowings, eligible receivables in inventory and among other things such as outstanding letters of credit. We are still estimating our capital expenditures for fiscal 2010 will be in the range of 12 million to $14 million, primarily related to IT upgrades, our cut and sew center in Mexico, transportation equipment, and our ongoing maintenance of our facilities. Depreciation and amortization is estimated to remain in the 23 million to $25 million range. I'll now turn the call back to Kurt for some closing remarks.

We are encouraged La-Z-Boy has experienced a sequential reduction in year-over-year sales, although we do not believe our industry is out of the woods yet and analyzing our business, our cost structure and growth potential our team has outlined and executed against the plan of initiatives within its control. We attacked our cost structure last Fall to ensure we would operate profitably within the confines of a low volume environment and importantly have continued to implement a series of strategic projects to ensure we improve our manufacturing and retail efficiencies.

At the present time, we remain focused on driving the top line of our business through innovation, marketing, merchandising, R&D, and providing the consumer with a positive experience in our branded outlets. To ensure that our Company will achieve profitable growth when the economy strengthens. The fact that we have some 800 branded outlets provides us with an advantage to capitalize on the return to the consumer and increase our market share particularly as the distribution landscape has contracted and changed. In the meantime, we have been asked to give some direction on our margin expectations or incremental contribution levels as we go forward, assuming volume begins to recover. This is a difficult process to outline given the number of moving parts. As a starter, sequentially from the first quarter to the second, we had about $38 million more in volume and approximately $8 million more in operating profit which equates to about a 20% contribution on the additional sales. The problem with this calculation is that it assumes everything stays the same quarter to quarter and that rarely happens.

So going forward over the next 12 to 18 months, we believe we will capture savings and improvement from our Mexico strategy and the case goods consolidation plans under way. Conversely, there are some other things that could impact the benefit of those initiatives including potential raw material price increases, the reinstatement of certain employee benefits, and other factors and specifically for the third quarter, our advertising spend tends to be higher in front of the holiday season and our manufacturing operations work fewer days during the quarter due to the Thanksgiving and Christmas holidays. So at the present time, we are not comfortable with quantifying the contribution number until we see more stability in the operating environment and have a better understanding of how the many variables may change over the next 12 months.

In closing while we are making great progress, we are not satisfied with all aspects of our business and are working diligently to make improvements in numerous areas. Clearly the landscape remains challenging and we continue to manage the business tightly. I firmly believe the operating environment will indeed improve and that the strength of our brand and vast system of branded outlets coupled with the strength of our balance sheet has positioned our Company to capitalize on the return of the consumer. We have every confidence our Company will grow profitably and we will be able to provide a positive return to all of our stakeholders. We thank you for your support and interest in La-Z-Boy Incorporated and with that, I'll turn the call back to Kathy to begin the question-and-answer period.

Thank you, Kurt. We will begin the question-and-answer period now. Please review the instructions for getting into the queue to ask questions.

Thank you, Ms. Liebmann. (Operator Instructions). Our first question is from the line of Budd Bugatch with Raymond James.

Good morning, Kurt, Mike and Kathy. This is actually Chad filling in for Budd.

Good morning, Chad.

Congratulations on a very solid quarter despite the difficult economy. I think, Kurt, you mentioned floor traffic being down at retail but ticket increasing. Could you maybe clarify or give us some more color around ticket, are we seeing year-over-year increases? Is it increasing sequentially, what color can you give us there?

Good question, Chad. I think what is driving this is our new retail team has really focused on the selling process, we made a number of changes in our field management, there's more accountability in the sales process than there was before, and I also think because there is less traffic our sales teams have more time to spend with each customer and try to get a bigger share of their wallet so trying to complete the full sale and not just sell the upholstery but get the tables, lamps, accessories, everything that goes with that sale is something we've been training on, coaching on and trying to do a better job of and we're seeing some evidence of that happening.

Okay, is there any way you can quantify for us what traffic is looking like, are we down low single, down high single, have the declines moderated?

I don't have that in front of me, Chad, and it's different by market so to give you a general statement I don't know would be that accurate. Some markets are having more problems than others with traffic such as Florida, while other markets are doing better but I don't have our traffic counts here handy to give you. We could follow back up with you if you thought that was necessary.

Okay, great. You also mentioned, Kurt, as we think about contribution margins going forward, the possibility that we could see some of the temporary cost reductions come back, like the reinstatements of employee benefits and some other things. Is there any way for you to give us kind of a sense of I guess how you're thinking about that given the fact that profitability is so much improved and the Company's financial position is also so much improved or just give us a sense of maybe the timing and potential magnitude of any temporary cost increases?

Chad, we have not concluded on our definite plans but the thought process has been as the Company continues to improve a lot of the credit goes to our team and a lot of the credit goes to the employees of the Company who have made sacrifices during this period to help us improve our performance and we want to share some of our success going forward with them, so the magnitude of what we do, when we do it, how we do it, we're not, we're still working on our plans and have not finalized them, so I don't want to give some idea to you before I talk to my own employees so I'm not going to quantify it but suffice it to say if we continue to make progress the next couple quarters like we have the last couple, we would begin to reinstate some of the benefits that have been suspended a year ago.

Okay, and just two more quick ones if I could. I think in the Q, you quantified raw materials as being about a 300 basis point year-over-year benefit to gross margin, if we think about it sequentially, is it relatively stable relative to the benefit you had this quarter, is it starting to tick down or how do we think about that for the next quarter or two?

Well, I would answer it this way. I would not say we're getting anymore decreases sequentially. Year-over-year, obviously last year at this time, things started coming down so the third quarter probably won't be as influential as the second quarter was but we don't see this getting any better. Our thought is some of these prices will probably start going back up again especially in poly, so that's probably the best information I can give you in looking at the future.

Okay, and could you give us an update on how many of the stores Companywide and systemwide & Company owned are in the new generation format right now?

Out of the 311, I think it's 217-- we're looking it up, hang on just a second.

Okay.

223 out of the 311.

Okay, well thank you very much guys. Congratulations again, and good luck for the balance of the year.

Thank you, Chad.

Thanks.

Thank you. Our next question is from the line of Matt McCall with BB&T Capital Markets. Please proceed with your question, sir.

Thanks, good morning, everybody.

Good morning, Matt.

So I'll follow-up on a couple of the previous questions so you talked about potentially the next couple quarters some of the costs coming back, remind us of the total range of the costs that are temporary?

Remind you? So you think we'll give you more information on the same question than we gave Chad?

No, I thought you'd given that before. Am I misremembering?

Well, there's a number of issues, Matt. I was just kidding with you. There's a number of issues about if we turned them all back in to the fullest extent if we stagger them, there's also the issue about management bonuses but those have to be earned before they'vere paid. They aren't a fixed cost if you add back in increase, wage increases, so the number I think we've said before is between some of the employee benefits is between 7 million and $9 million but it wouldn't be our intent to flip the switch and turn everything on to the fullest extent at one-time.

Okay, I thought there was a number tied to it. I just wanted to make sure.

Good memory.

So you teased us a little bit, I thought I was going to get more on the contribution margin side, that's okay, I understand but you have talked about in the past a certain level of top line improvement in the retail environment to get that part of the business to breakeven. Can you remind us of where that kind of stands?

The increase in volume today the way we're operating under the current circumstances, it would take us 20 to 25% more volume than we're currently doing to get above the breakeven line in our retail business. At one-time our retail business performed at that level but given what's happened economically and to our industry, it's dropped but that is the number that's needed to get it to a profitable level.

And so you said that's based on where things stand today. Can we assume that you're working to continue to bring that breakeven level down or are we kind of tapped out as to what we can do before we get some volume?

Well, our philosophy, Matt, is we're never totally tapped out. We're finding things every day. I believe in, particularly in our retail business we have Garnered most of the low hanging fruit and achieved a number of the big dollar savings as evidenced by our performance on the last year by reducing our losses by over $20 million on less volume so there's not the same kind of magnitude going forward but there's always some cost containment, some less spending that can be done and there is some potential on the gross margin level. There's always a balance between the volume and gross margin but we cannot because of the high occupancy costs we have with our stores, we cannot cut enough expense out to be profitable. We have to get some volume.

Actually, when I asked about that occupancy expense, Kurt, I assume there's got to be some opportunity right now to maybe improve that number a little bit. Have you had much success or is there some opportunity?

There is some opportunity. We have been meeting with a number of our landlords. It depends on the timing of leases, it depends on the condition they're in, it depends on how the center is doing, in some cases we're getting some deferrals and in some cases we're getting straight rent reductions as certain of our locations come up for renewal, the, the leasee today has a lot more strength today than the lessor and so all that's been going on on a constant basis and yes, I would think the rents paid for commercial real estate over the next few years are going to be substantially less than what they were a couple years ago.

But Matt I just want to caution you the difference in cash, we're able to save cash wise, the accounting standards which I guess I'm not allowed to call them FASBs anymore, since now I have a quantification, but FAS 13 requires that we amortize the lease expense over the life of the lease so if we get, let's say we get six months of free rent and I have a 10 year lease, I have to take that six months of free rent and take that benefit over the 10 year lease, not over the next six months that I have so you don't see the immediate impact of every dollar we save in our current year financials, because the accounting standards requirements.

Kurt in your comments you talked about some of the seasonal patterns, seasonal items that impact Q3 ad spending, maybe fewer or number of manufacturing days, also noticed that the corporate overhead number moves up, looks like it moves up every year in Q2. Can you remind me what's behind that seasonal pattern and should we expect it to ease as we move through the end of the year and is there anything else besides those three items that we should think about from just a pure seasonal perspective?

Historically, Matt, we have, until last year, we have always done more business in the second half of our fiscal year than the first and it's ranged from a stretch of 45% in the first half to 55% in the second to 48, 52, last year was the first year in a long long time that we ever did less business in the second half so obviously the comparison are pretty weak going forward here and we would expect a traditional normal seasonal pattern happening in the next two quarters and there's an ebb and flow of our advertising expenses based on how many holidays are in each quarter and as I spoke about the down days so there's nothing unusual. I'll ask Mike to comment on the corporate charges in the second quarter. There's only one issue there that we noted in our 10-Q, Matt, when you have a chance to look at that.

There's a $700,000 difference in gains on properties that we had last year versus a loss this year. So $700,000 of the differential is mainly due to property gains and losses. And then that seasonal pattern through the back half of the year, what should that look like?

Well, our corporate expenses are kind of evened out throughout the year. We don't have that much seasonality in any given quarter unless we have some issues relating to professional fees. There's no seasonality to the corporate expenditures.

And just a further reminder again, Matt, and let's hope we're headed back to normal times, our l fourth quarter has been always our largest quarter, and our second quarter has always been our second largest in terms of volume, part of that is the demand sequence that happens but part of it too is in the first quarter we take a week's vacation for the summer holiday and the third quarter we take a week's vacation for the Christmas holiday so it also has a reflection of the number of production days that we actually work each quarter.

Shipping days.

Got it. I'll revisit those numbers on the corporate overhead. Thank you.

Thank you. Our next question is in the line of Barry Vogel with Barry Vogel & Associates.

Good morning, ladies and gentlemen.

Good morning, Barry.

Kurt, on the retail side, I know you're talking about volume, I know you did have a volume gain sequentially, very slight, and you're still losing $5 million a quarter. I know you've talked about most savings have been realized and you need a certain amount of volume to breakeven and you mentioned before a 25% increase in volume could get you to breakeven. But other than volume, can you lower your quarterly loss in your opinion? Your quarterly losses in retail sequentially in the third and fourth quarter this year?

I think there's two things to keep in mind, number one, we can, what I mentioned is we can't do it to the same magnitude that we've done the trailing 12 months but we have every intention even on flat volumes to continue to lower the loss but I didn't want to leave that in perception we can cut our way to total profitability. The second thing we've been talking about for the last couple years is you have to look at our business on an integrated retail model and we're making the 10.9% this quarter on the wholesale side of selling to our own retail business and we look at the aggregate of the two in determining the cash generation or cash drain and the long term impact that that would have by carving out the separate retail segment, so I think you've got to look at it in its entirety, you got to look at the alternatives if we didn't have retail stores, how would we get business out of those various communities, how would the position of all of the other costs associated with supporting that happen, so we're going to continue widdle down these losses, increase our volume and we're positive that the integrated retail model is a correct one for our brand.

Now in terms of -- staying on the retail subject for a second, I know you have loans to dealers and I believe, Mike it's in other long term assets, is that correct?

The long term portion of that, yes.

Could you tell us at the end of the quarter what the loans to dealers outstanding were?

We don't break that out, Barry. In our filings, I mean it's part of other long term assets. It's part of our receivable number for the current portion and we don't differentiate the difference.

Have you had any losses with dealers going out of business recently?

Well bad debt reserves this quarter was a little over $2 million. $2.2 million this quarter so we adjust our bad debt reserve based on the current risk associated with our dealers, whether they go out of business or not. Most of the time by the time they go out of business we've fully reserved our exposure with that Company and then we get a tax deduction and we actually write the bad debt off.

Okay, now can you tell us what the effective tax rate for fiscal 2010 is going to be?

Right now, based on where we're at right now we're at about a 40% rate. That would be my best guess for right now, depending on how the rest of the quarter plays out. We're always striving to lower our rate based on what we can find as deductions. This new law they passed on November 6, will have some impact on our rate. It just came out a week before we filed. We really haven't had a chance to assess the extent of whether or not we can go back a couple more years and take some of our credits or losses that we haven't utilized yet. It's not that much but it will have some impact on our rate so I don't know that answer yet, so it's not going to be 10, 15% or anything, but we'll have some effect on our rate based on the new law that passed by Congress.

Now could you tell us what your current interest rate is on your debt?

I think in our 10-K, we give average interest rate which is around, I don't know that number. We'll have to get back with you on that one, Barry. It's in our 10-K, I think Footnote 13 or something like that but we'll get back with you on that.

And now Kurt, I have a question to ask you about the costs of operating this Mexican cut and sew facility. Obviously, you have duplicate manufacturing expenses as you've outlined in the last couple of conference calls and am I correct that overall, because you're doing this right now, you've had net costs associated with that in the first and second quarter.

That's correct.

I don't know why you don't give us some idea of what they are because it would be very helpful, and you said that you expect some contribution, I would infer from that that it's a positive effect in the fourth quarter so if you can give us some idea of what the overall net cost would be in fiscal 2010, we can understand you would have an improvement next year considering what you said about your $20 million cost savings which you've kept to that for quite a while.

We'll think about whether or not we want to do that going forward, Barry. It's a good question.

And because I think considering you're doing so well transparency is your friend. I really believe that, and by the way--.

We think we're very transparent.

Okay, and so I want to congratulate you on your saw superb results. You've done a great job.

Barry, just to conclude, it's note 8, not 13, my memory's not that good and we give a of what our interest rates are but I would say it's our average on our $50 million in debt is probably 4 to 5% on range on average.

Thank you very much.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Ms. Liebmann for closing comments.

Thank you, everyone, for participating this morning. If you have follow-up questions I will be available, please give me a call and have a great day.

Thank you, all.

Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.