La-Z-Boy Inc (LZB) 2016 Q2 法說會逐字稿

Greetings, and welcome to the La-Z-Boy Inc. second-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications for La-Z-Boy. Ms. Liebmann, please go ahead.

Thank you, Kevin. Good morning, and thank you for joining us to discuss our FY16 second-quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President, and Chief Executive Officer; and Mike Riccio, our Chief Financial Officer. Kurt will begin today's call, and then 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. A telephone replay of the call will be available for one week, beginning this afternoon. Slides will accompany this presentation and are available for viewing through our webcast link. 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 remark. 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 Chairman, President, and Chief Executive Officer. Kurt?

Thank you, Kathy, and good morning, everyone. Yesterday afternoon we reported our FY16 second-quarter results. We were pleased with our consolidated operating margin of 8.7%, the highest posted in any quarter in more than 12 years. We also increased sales and earnings, generated $20.2 million in cash from operations, continue to strengthen the performance of our Company-owned retail segment, purchased 10 independent La-Z-Boy Furniture Galleries stores, and yesterday our Board voted to increase our quarterly dividend 25% to $10 per quarter (sic - see press release, "$0.10 per share"). And with a solid pace of business throughout October, we entered the third quarter and fall selling season with momentum. We continue to execute our multifaceted growth strategy, including the 4-4-5 store build-out plan, acquiring independent La-Z-Boy Furniture Galleries dealers as we increase the size of our Company-owned retail segment, increasing our business through other distribution channels, as well as expanding our share of the stationary upholstery market.

Now let me spend a few minutes talking about our three operating segments. Let's get started with Upholstery. For the quarter, sales in the Upholstery segment increased 2.9%, to $305.8 million, versus last year's second quarter, and we achieved a 12.1% operating margin, an increase from 11% in the comparable quarter last year. Our ERP system implementation throughout the La-Z-Boy branded facilities is behind us, and we are seeing the benefit of the new technology in terms of increased visibility and improved scheduling and flow. In short, our people have better tools with which to work that are providing enhanced disciplines throughout the operation. Also during the period, the segment benefited from supply chain savings, which included increased manufacturing efficiencies in addition to procurement savings; a positive change in product mix, with increased sales in our power furniture category; and a strong performance from England, our sister upholstery Company.

Two weeks ago, we launched our new website and e-commerce platform. The new site provides the consumer with a more dynamic and intuitive digital experience with the new La-Z-Boy.com, and allows us to be more powerfully connected with our customers. Three years in the making, some of the improvements integrated within the new site include: one, increased product details to educate, engage, and excite consumers; secondly, enhanced search engine optimization features; three, increased exposure of dealer promotions; and, finally, availability of inspired shopping options by either room or style navigation. There are other enhancements to the site, as well, all designed to make the shopping process easier for the consumer.

Written same-store sales for the La-Z-Boy Furniture Galleries system increased 3.6% for the quarter. For the FY16 year-to-date period, written sales for the store network are tracking at 4.2%. Providing we stay on this pace for the next two months, we believe we will achieve the $4 million target set for the average revenue per store in our 4-4-5 strategy for calendar-year 2015, which is actually two years ahead of our original target.

Turning to the 4-4-5 strategy, we are about halfway through our store build-out program, and ended the quarter with 330 La-Z-Boy Furniture Galleries stores, with 75 of them in the new-concept design. For FY16, across the network, we are planning for more than 30 projects -- with 15 net new stores, plus14 remodels to the new concept design format, and 1 relocation, translating to about 30 additional stores in the new concept design by the end of the fiscal year, compared with the previous year. As we have spoken about before, changing out old-format stores to the new concept design format is an integral component of our strategy. The new concept design format is performing at a higher level than our other two formats, so upgrading the network as a whole, in addition to increasing its size, is critical to driving increased volume. And as our La-Z-Boy Furniture Galleries store system increases in size, the volume associated with that growth will benefit our La-Z-Boy manufacturing operations where we will be able to leverage the fixed cost structure of our plants and improve our operating margin performance in the wholesale upholstery segment.

Now let me spend a few minutes on our Casegoods business. Over the last two years, we have made many changes to our Casegoods business. With a peer-import model, fewer brands, and more collections focused on transitional and lifestyle looks, our Casegoods business is turning in improved performance. For the quarter, the Casegoods segment delivered a 9.3% operating margin, compared with a 10.4% margin in last year's second quarter. However, last year's second quarter included the benefit of a $2 million reduction to the LIFO reserve for domestically manufactured inventory, which improved operating margin by 7 percentage points last year, and $1.2 million in sales of hospitality furniture, which represented about a 4% of the quarter's sales for the segment. So, stripping out those two items, you can see that we are performing at a much higher level today.

With respect to our product line, the new groups offered by Kincaid are gaining traction on retail floors and are performing at a higher level than the lines they replaced. Additionally, we have caught up on most of our inventory issues from last quarter and are in a much better in-stock position for the fall selling season. We were also pleased with a positive response to new collections offered by American Drew at the recent High Point Furniture Market in October, and our occasional business at Hammary is doing very well. All in all, we believe our Casegoods segment is very well positioned to turn in steady and improved performance going forward.

Now moving on to Retail. Our Retail segment continued to perform well during the quarter. We increased sales 14.1%, to $96.5 million, versus last year's second quarter, and posted a 5.9% operating margin, a 34% improvement over last year's performance in the comparable period. On the 96 stores included in the last-year second quarter, delivered sales for this segment increased 1.3%. With increased sales, we've been able to leverage the higher fixed-cost structure associated with the Retail business, primarily in the occupancy area. We also increased our gross margin during the period as a result of increased in-home design sales, an increase in the average ticket, and strong performance in the power category. And to put our Retail segment's performance into perspective, for the first six months of FY16, we have made $10.4 million in operating income. For all of FY15, the Retail segment made $11.5 million in operating income, so you can see how our integrated retail model will benefit the entire enterprise as it continues to grow and improve its performance.

During the quarter, we acquired 10 La-Z-Boy Furniture Galleries stores from three independent dealers -- 2 stores in Wisconsin; 2 in the Carolinas; and 6 in the Cleveland, Akron, and Canton markets. As we have discussed in the past, one of our key growth strategies is to grow our Company-owned Retail business through the acquisition of independent dealer stores that make sense for the Company based on the opportunity for growth. We believe that, when we are done with our 4-4-5 build-out strategy, the Company's ownership of the entire network will increase to between 40% and 50%, based on new stores and those that we may acquire. To give you some perspective on the expected contribution to our Company-owned Retail segment of the 10 stores acquired, they generate about $36 million in revenue combined, and collectively, they are more profitable than the average store in our Company-owned segment today. And based on our ability to streamline various costs across the markets, we believe we can increase their profitability further. Now I know for your modeling purposes, the wholesale volume associated with those stores was already accounted for in our wholesale Upholstery segment. We will however, pick up the retail volume and related profitability in our Retail segment.

I would like to take a moment and thank the three independent owners of the La-Z-Boy Furniture Galleries stores we acquired for their dedication and commitment to La-Z-Boy Inc. All three ran solid businesses over a long-term period, and we wish them all the best in their retirements. Our Company-owned Retail business is on track to continue to grow and deliver results. And we believe our integrated retail model, where we control the wholesale and retail side of the equation, provides a great stack margin opportunity where we are achieving a blended margin in the mid-teen range.

I will now turn the call over to Mike to speak more about our financials. Michael?

Thank you, Kurt. Consolidated sales for the FY16 second quarter were $383 million, up 4.7% compared with last year's second quarter of $366 million. For the quarter, consolidated operating income increased 11%, to $33 million, compared with $30 million in the FY15 second quarter, with the consolidated operating margin increasing to 8.7%, as Kurt noted earlier. The Company reported net income from continuing operations attributable to La-Z-Boy Inc. of $21 million, or $0.41 per diluted share, compared with last year's second quarter net income of $19 million, or $0.36 per diluted share. Our consolidated gross margin improved 2.6 percentage points in the quarter, compared with last year's comparable period.

During the quarter, our Upholstery segment benefited from higher unit volume, favorable changes in mix and supply chain savings, which includes efficiencies at our manufacturing operations, in addition to procurement savings. We also recorded a 0.5 percentage point benefit related to legal settlements and cost of sales. And our Retail segment contributed to our gross margin increase, particularly as it's becoming a larger percentage of the overall business. As we have talked about in the past, the Retail business has a higher gross margin associated with it, so as it increases in size, our consolidated gross margin will increase as well. Partially offsetting the contributions from wholesale Upholstery, and Retail was a lower gross margin in the Casegoods segment due to a $2 million reduction to the LIFO reserve for domestic manufactured inventory in last year's second quarter.

Selling, general, and administrative expenses for the quarter as a percentage of sales increased 2.2 percentage points versus last year's comparable period. During the period, we had a 0.4 percentage point increase in incentive compensation due to improved performance against targets versus the prior-year results. We also had a 0.4 percentage point increase in advertising due to promotional calendar shifts, a 0.3 percentage point increase in warranty expense due to higher replacement part costs and labor associated with our more complex products. Also during the period, we incurred higher professional fees related to the ERP system, our new e-commerce platform and website, and other matters, as well as increased expenses associated with our new world headquarters. And, finally, as I mentioned a moment ago, with our Retail business continuing to grow, it carries a higher SG&A, primarily due to occupancy costs, than our wholesale operating segments.

Now let me turn to the balance sheet. For the quarter, we generated $20 million in cash from operating activities. We ended the period with $75 million in cash and cash equivalents, $32 million in investments to enhance returns on our cash, and $9 million in restricted cash. During the quarter, we invested $19 million to acquire the 10 independent La-Z-Boy Furniture Galleries stores Kurt discussed earlier. As he mentioned, those stores combined have about $36 million in annual revenue at retail.

Moving forward, we plan to continue to make acquisitions of independent La-Z-Boy Furniture Galleries stores. But with the third quarter being the busiest selling season at retail, we will most likely delay any further acquisitions until the fourth quarter. We also had capital expenditures of $7.4 million, and expect CapEx for the full year to be in the $25 million to $30 million range, down somewhat from the range we gave you at the onset of the year. We paid $4.1 million in dividends and spent $9.3 million to purchase 300,000 shares of stock, which leaves 5 million shares available for purchase in our program.

Moving forward, based on cash flows, stock market conditions, and other uses for cash, including making investments in the business to drive growth, we will be opportunistic with respect to our share purchase program. As for the dividend, we reinstated it in 2012. Over the past four years, we have consistently raised the dividend steadily and believe, at its current level, it provides investors with a reasonable return of our earnings, with future increases based on earnings and cash flow considerations for the business.

And, lastly, our effective tax rate for continuing operations for the quarter was 36.2% compared with 35.3% for the second quarter in FY15. Our effective tax rate varies from the 35% statutory rate, primarily due to state taxes, less the benefit of US manufacturing deduction, and foreign earnings in jurisdictions with lower tax rates than the US. For the full year, 36% is a good range to use for the modeling purposes.

Before turning back the call to Kurt, I would like to remind everyone that FY16 is a 53-week year, with the extra week occurring in the fourth quarter. Kurt?

Thank you, Mike. We remain optimistic about our business and positioning in the marketplace. Our messaging, our product offerings, our merchandising, and branded distribution channel are strong. Our operating platform is lean and efficient, and we continue to make strategic investments in the business to drive growth and profitability, with our four strategic growth initiatives working in tandem to achieve our performance objectives.

I want to thank all of you for being on the call this morning, and we will turn things over to Kathy to have the Q&A started. Kathy?

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

(Operator Instructions)

Brad Thomas, KeyBanc.

This is actually Jason Campbell standing in for Brad. First off, you talked about trends accelerating through the quarter. Just a little bit more color on where you exited the quarter, what you've seen over the last month-and-a-half now, and then if you can also talk about what you're seeing in Texas and maybe some of these other oil markets.

Our view on that is we've given you the same-store sales growth for the quarter for the furniture gallery network. And suffice to say, October's business was above that level. We don't quantify by month, but certainly it was higher than the average of the three months. We're trying to control the things that we have influence over. Obviously, what's happening in other markets, what's happening around the world with the geopolitical things going on is way out of our control. It does have us some concern going forward. But we are today pleased with the pace of business, have an aggressive plan for the holidays selling season, and we'll see what happens to the greater economy on the whole.

You've had a lot of IT investments over the past at least 12 to 18 months. Now you have the ERP system behind you. You've launched your website. Is this something that we should start to see some of those cost going down, or is this just may be redeploying those dollars to some other IT projects?

I wish your first statement was right, Jason. I would have hoped a few years ago that IT costs would be able to be leveraged a little more than they are. But the fact of the matter is, the world of IT is changing so much and if you want to stay relevant, you have to continue to make investments. And it may not all be the consumer-facing investments. It could be in cyber-security, it could be in a lot of places. But I'm not very optimistic right now that we are going to reduce our IT spend any time in the near future.

So you think roughly flattish, or do you think that there's -- it's just going to keep ramping up here for the next couple of years or so?

Well, if you could tell me what new things they're going to come up with that make your business better or make it easier to communicate with a customer, I could answer that question. But the one thing you don't want to do, which is where we were, we were behind the curve. We had a lot of catch-up to play in all of our systems, and we don't want to get in that position again. So we're going to manage it prudently and make sure the investments give us a return. But I think the pace of change in technology the next 10 years is going to be quite a bit more than it was the previous decade.

Lastly, I wanted to touch on you talked a little bit about the casegoods segment and then some of the improvements you've made. Just how you feel about the segment today, both in terms of businesses that you have right now. I know you've exited a lot. The product line up, is that where you need to be? And then what type of growth should we think of for that business going forward?

We have made all the structural changes and changes with our various brands that I think we're going to make in the near term. We've got a platform now that we're comfortable with. It's starting to show improved results. It all depends on the merchandising and styling that you come out with, and you could appeal to the various segments of our customer base. But our casegoods businesses has some momentum. It will show up as we go forward in a lot of areas, and we are very happy with the three remaining companies we have. They serve different niches in the segment in the industry, and we would expect continued growth, which I'm not going to quantify, but we would expect continued growth and high single-digit profitability from this segment.

Budd Bugatch, Raymond James.

Good morning, Kurt, Mike, and Kathy. This is Bobby actually filling in for Budd. I appreciate you guys taking my questions. Kurt, could you maybe provide a little bit more color on your in-home design and custom orders program? How is the penetration of those programs today versus maybe a year or two ago?

In each of those categories, we continue to get on a long-run basis, so on an annual basis, we keep doing a higher percentage in each category. So we do a little bit more in-home business every, as a percentage of our sales, every quarter, and the same way with custom. The fact that we have so many custom options that we can deliver the furniture fast because of our domestic platform and our Mexico cut and sew situation, those are two advantages we feel we have against our competitors and something the customer wants. And so I don't have the actual numbers in front of me, Bobby, to answer that's statistically, but I do know that each year, the percentage of our business done both in in-home and custom are going up.

Maybe just to touch on that advantage that you referenced there with the cut and sew there in Mexico, what is the typical lead time for you guys for a custom order that could give you the competitive advantage?

Well, having it go through our system is typically four to five weeks. Then there is transportation time and the time for the dealer to get it to the customer. So most of our retailers are quoting five to seven weeks to a customer, but that includes a lot of transportation time, not manufacturing time.

Okay, I appreciate that. Mike, should we expect the legal benefits to continue here in the fiscal third and fourth quarter? If so, will the magnitude about the same as we've seen in the first two quarters?

I commented last time that we were done with our legal benefits and we were. Some excess funds came through that we were surprised by. So we don't expect any more, but like with any other legal environment, some things we just don't control. I don't expect any more. I didn't expect them this quarter, but we did get some.

Okay, I appreciate that color. Lastly, for me, can you maybe just touch and provide a little color on how the implementation of the sales and order management component of the ERP system is progressing so far?

It's progressing well. There's a lot of parts that are being touched on this, because it's dealing with the customer and how our dealers interface into our system. Once they get in, it deals with almost every part of the E1 system that we've already implemented. We are going through this, and just like we've done everything else, we are making sure that we don't do the Big Bang theory on this. That we're taking little parts at a time so that we can ensure the stability of the system as we integrate the new product of the sales order management. And we'll continue to do that for the next six to eight months is what we're really shooting at.

I appreciate the color and thank you for answering my questions, again. Best of luck through the remaining portion of the fiscal year.

Matt McCall, BB&T Capital Markets.

I'll hit this, let's start with upholstery segment margin, 12% versus 11%. I think you guys threw out procurement, efficiency, ERP, and I think those things might've been related. And then obviously leverage. The incremental there was like 40%, so how do we look at the impact of ERP going forward, the impact of efficiency going forward? Procurement? The comp was -- I think your contribution margin comp gets easier as we go through the year. Is there any reason to think that incremental margin is going to decrease?

There's a lot of moving parts there. I don't -- we are getting benefit from E1, and we'll continue to do so, but I don't think it increases to the pace that it does the first time we start using it. And so, you can't say in the future it's going to give us three more points of operating margin, but it's certainly helping us here in the beginning. And right now, Matt, this is certainly, with the commodity market the way it is, this is certainly advantageous to American manufacturers. How long that lasts is anybody's guess. Yes, if we can get additional volume, it's all about the extra volume going through the plants with our fixed costs. There was not something that was so unusual this quarter that we couldn't repeat. So no predictions about the next few quarters, but it was just a very solid execution from our manufacturing team and some benefits that we got this quarter that may or may not be the same a year from now.

Okay, is there anything in the seasonal pattern? It looks like you talked about Q3 is the strongest shipment quarter. Is there anything that would keep it from being the strongest margin quarter this year?

No. Q3 is not our strongest shipment quarter. Q4 --

I'm sorry, --

It's the best selling season, but the fact that we have a great level of activity after Christmas, and what I just talked about with custom and everything, a lot of that after-sale period does not get delivered in the third quarter; it all delivers out in February. So February -- the fourth quarter still -- it's changed a little bit with this because of our retail component, but we still expect the fourth quarter to be the highest volume quarter.

Okay. But margins the same?

I don't have that crystal ball, but like I said, there was no special item that caused us to earn 12% in the second quarter. So if the dynamics stayed the same and we get more volume, we would expect similar results.

Got it, so the casegoods margin, I think you said, Kurt, that you expect a high single-digit operating margin there. I know you've got at least one public period that does something, the double digits. Is there any reason you can't get there, something structurally different about the two businesses? Or is it just where you see things today?

It's where I see things today, and we've been a little conservative to make sure that we hit our targets, but we been operating in the mid-single digits, so close to doubling that. Let us achieve that for a few quarters and I'll give you a new estimate.

Okay, that's fair. Utilization at the factories. You talked about it in the past, and you've given some growth rates that you've been able to achieve without any additional bricks and mortar. With the addition of ERP, does that number change at all? Does your utilization stabilize, even with a little bit of growth because you are unlocking some opportunities in the factory?

Here's the way we look at it: so we've been growing let's just say for conversations sake, 5% a year, and thinking we would grow into our capacity utilization if you compound that over four or five years. But each year, our efficiencies and our productivity are increasing 3% to 4%. So the real capacity utilization we haven't cut into that much. So we're still confident that we have that $250-million range of additional manufacturing product that we could do if all things stay equal.

The final question is on the revenue per store. You said you're going to potentially reach that by the end of this year, two years in advance. The obvious question is, what does that mean from a goal perspective? Are you going to see that number, the goal tick higher, or is there some impact from some of these new stores from a revenue-per-store drag?

No, I think the entire network is continuing to perform well, and obviously, we're going into some new markets that have given us great sales conversion. But my comment on that would be this: we may beat the -- one of the fours, do more than $4 million a store. But we may not quite get to the 400 stores. I have talked about the difficulties in some of the expensive markets. So let's just, for argument's sake, say we get to 385 stores and they are doing $4.2 million a store. We would deliver the same economic value of our plan, but everything wouldn't be perfect.

(Operator Instructions)

Kristine Koerber, Barrington Research Associates.

First, can you just talk about the -- what you're seeing with regards to the overall consumer and their willingness to spend? Is it getting any better?

Well, we were pleased with our same-store sales for the quarter. And we are having a drag in both our wholesale and retail business with a strong US dollar as it relates to Canada. So Canada is, of our upholstery business, wholesale business, Canada is somewhere around 10% of our overall volume. And our -- because the same product today is costing the Canadian consumer 25% to 30% more, we've seen a slowdown. And even with that slowdown, we had both the results that we had in wholesale and retail. And while they're being able to charge -- they're getting the price on the retail side, their unit volume has gone down significantly, and our wholesale business in Canada was off in excess of double digits. So we have not seen a pattern with a change with the consumer. As I said earlier, we are geared up for an aggressive holiday season, but we can't control all the things that are going on right now around the world and whether the events of last weekend are going to change people's habits in the next 60 days. I don't have a crystal ball on that.

Okay, and with regards to -- just a follow up on the Canada business, because I believe that you have some of your strongest performing stores in that territory. Any concerns there with the slow down? Or do you just think it's all due to the strength of the US dollar?

I think it's 100% relating to the exchange rate. A year and half ago the Canadian dollar and US dollar were in parallel, and now it's 25% to 28% differential. I'm not of the opinion that's going to last for a long time, but it's very relevant right now.

That's helpful. As far as the stationary category, can you just give us a little more color on what's going on there, the traction that you're gaining in the category and what the long-term opportunity is?

I'll start with the last part first. The long-term opportunity is La-Z-Boy has the highest market share in its business categories in recliners. And it is the dominant player in the world and it's what our historic strength has been. But recliners are one of the smallest parts of the upholstery business. Our next strongest category is motion furniture, and I believe we have a leading share in that category as well. But combined, the motion furniture business and the recliner business is still not quite as large as the stationary upholstery business. And so our market share in that category is nowhere close to the other two, but we think we have a lot of room to grow and a lot of room to gain share over a long period of time in those categories. And the more in-home we do, the more custom orders we do, and the more that our marketing is effective in teaching people that La-Z-Boy offers so much more than motion furniture, it's a pretty wide open space for us that we are optimistic about.

The Urban Attitudes still helping to drive the stationary category?

We believe it is, and we introduced a couple of new styles to that collection in October that were well received, and that's been a big boost to our stationary upholstery business.

Lastly, you indicated in the press release that the store pipeline for FY17 is building. Talk about the markets you are going into. Are you going into any new markets?

We're not going into a lot of new markets. It's more filling out the markets that we are already in. We have two stores in Minneapolis right now. We expect to have four over the next year-and-a-half. We're adding a second store in Richmond. We're adding stores in Baltimore and Southeast Michigan. So it's more of getting our footprint in the larger markets at a more mature level.

Brad Thomas, KeyBanc Capital Markets.

I just wanted to get a few other follow-up questions in, if I could. Kurt, I just want to ask a little bit more about eCommerce and see if you could give us a little bit more color about your -- from your early observations of the new website and maybe what the next upgrades or iterations could be down the road?

It's really, Brad, too early to make any judgments. It's been two-and-a-half, three weeks, and we don't have the mobile site up and operating yet. So it would be premature to comment on any change there, but you will find it easier to navigate. You will find more tools to help you design your room. I'm proud of the team that worked very hard in the last three years to put this together, and -- but I can't tell you what the next evolution is going to be. But I know your website is viewed against millions of other websites that are out there competing for the consumer dollar. So we have to be competitive not only in the furniture space, but we have to be competitive with our website with all other sources of media that the consumer has a chance to look at. So I'd like to say this upgrade will be good for us for another five years, but I don't think that's the case. I think you've got to continue to reinvest in technology today.

With the website upgraded, updated, could you talk about maybe how marketing may change to maybe drive more traffic to the site?

Not only -- that will happen. We will continue to do all the other -- pull all the other levers to have people do that. The other thing about the capabilities of the new website is we believe for the first time we'll be able to track the traffic that comes to the website with some correlation of how many of them actually visit one of those stores. So that will be a great connection to find out the interaction between brick-and-mortar and the website.

That's great. Thank you, Kurt. If I could follow-up on inflation in raw -- or deflation in raw materials, what are you all assuming as we look forward in terms of input costs? And could those potentially start to be a beneficiary for you all?

Actually, they've been a beneficiary and they change -- they've changed quite a bit in the last quarter, quarter-and-a-half. We're fairly confident about our input costs remaining the same or even improving in the next six months, mostly because most of our contracts are at least six months in duration, We've been through these cycles before; that doesn't remain forever, but right now, the commodity costs are a benefit to us.

Great, and with the cadence in your business, do you feel like you'd prefer to maybe pocket some of that rather than maybe reinvesting in lower prices, or how does that affect other decisions you might make about your pricing or marketing levels, for example?

It puts us in a great situation, Brad, to make those choices. As the benefits we get from those type of things, there's other costs in our business that are going up, and so we have to look at it in totality and make decisions about do we spend more in marketing? Do we offer a few more promotions at different prices? And we're constantly doing that, but you have to be careful about not going too far because the commodity thing could change quickly, and you don't want to stretch it one way or the other and be caught short.

Sounds great. Thank you so much, Kurt, and good luck in this quarter.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comment.

Thank you, everyone, for participating in our call this morning. If you have follow-up questions, please reach out to me. Have a great day. Bye.

Thank you, that does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.