Furniture Brands International, Inc., Q3 2008 Earnings Call Transcript

Furniture Brands International, Inc. (FBN)

Q3 2008 Earnings Call

October 31, 2008 8:30 am ET

Executives

John S. Hastings - Vice President, Communications

Ralph P. Scozzafava - Chairman of the Board, Chief Executive Officer

Steven G. Rolls - Chief Financial Officer

Analysts

Budd Bugatch - Raymond James

John Baugh - Stifel Nicolaus

Jeremiah McWilliams – St. Louis Post-Dispatch

Unidentified Analyst

Maggie Gilliam – Gilliam and Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Furniture Brands’ earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today’s conference, Mr. John Hastings.

John S. Hastings

Good morning everyone. Welcome to our third quarter call. With us today are Ralph Scozzafava, Chairman of the Board and Chief Executive Officer and Steve Rolls, Senior Vice President and Chief Financial Officer.

During our prepared comments and the question and answer session that follow, we will be making statements expressing the beliefs and expectations of management regarding future performance. Any such statements are forward-looking statements which reflect our current views with respect to future events and are based on assumptions and are therefore subject to risks and uncertainties. These risks, uncertainties and other factors may cause our actual results, performance, or achievements to be materially different from those expressed or implied by our forward-looking statements. These risks and uncertainties include without limitation the risk factors set forth in our most recent annual report on Form 10-K filed with the SEC. We do not undertake or plan to update these forward-looking statements even though our situation may change. Therefore, you should rely on these forward-looking statements as representing our views as of any date subsequent to today.

As is our custom, we plan to limit this call to one hour. In order to give everyone an opportunity to participate, we ask that you give us your single best question and then we will move on to the next participant. If you have any additional questions or a followup, please reenter the queue and we will address it time permitting.

Thank you, and I will now turn the call over to Ralph.

Ralph P. Scozzafava

Good morning. We appreciate you being with us again today. This morning, I’ll make a few brief remarks about our performance for the quarter, and then Steve Rolls will speak to you about our results in a bit more detail.

We issued our full financial statements for the quarter yesterday afternoon. Net sales declined 17.6%, and we reported a net loss of $0.86 per share. That loss includes pre-tax charges related to the closure of a number of unprofitable Lane retail stores that had been a drag on our earnings for quite sometime. We also have had to endure some factory down-time costs that totaled $4 million in the quarter. We’re reducing our overhead with two plant closures which will minimize the down-day costs in the future; however, these costs will likely continue into the fourth quarter.

We are identifying those and other items in our reported results because they impact our investors’ ability to assess Furniture Brands underlying operating results. Some of the items are clearly non-recurring over time, like the completing of the implementation of our shared services organization. The remaining line items represent charges and temporary costs that stem from steps we’re taking to strengthen our staying power in a very tough economic environment. Although, the dollar amount of the special items is large, the cash impact is much more manageable at $8 million in cash use during the quarter.

Now, our internal team has heard this quite a bit and they know that I’m a big believer in controlling our controllables. For Furniture Brands, the key items that will determine our future over the next 12 months and beyond are cash, expenses, and our strategy of using consumer insights to drive our product development.

Managing our cash position will be our No.1 priority over the next several quarters. In the time that I’ve been on board, we’ve reduced debt by $100 million and increased cash by nearly $20 million. During that time, we also funded a number of strategic initiatives that will drive improved financial and operating performance such as the move to shared services, closing unprofitable retail stores, and reducing our manufacturing overhead.

Going forward, we’ll continue to manage our cash position through better management of our working capital, our inventory, aggressive sale of slow-moving inventory to be specific, and by re-investing our dividend internally. Our year-end cash forecast of $80 million to $95 million keeps us in a solid position while expanding our Indonesian manufacturing plant and transforming our upholstery operations at our Pacemaker facility in North Carolina.

Closely tied to maintaining our solid balance sheet is managing our expenses. We’ve done a good job scaling our manufacturing back to meet declining sales volumes. Gross margin excluding the special charges improved 70 basis points from a year ago, even with an 18% decrease in sales.

We’ll continue to focus on costs within our supply chain and also make some key decisions on the SG&A side. Our non-production costs don’t match our projected sales levels, and we’ll make cuts in the coming months to lower those costs. Some will be in the form of corporate expense cuts, and some will be in the form of headcount, although some of the headcount reductions are already a part of our shared services program. Right now, some functions have duplicate staffing, and those redundant legacy programs will begin to close out in the fourth quarter as our shared services are beginning to come online in a phased approach. This phased approach is necessary to maintain customer service levels out in the field. The savings will be achieved and we’ll begin to see the benefit of the shared services in our second quarter of 2009.

Another factor affecting our SG&A in the opposite direction is that we now have a larger retail store component in our mix in SG&A than a year ago. Steve Rolls will discuss this in more detail in just a bit.

Our third key controllable is product innovation. We’re maintaining a commitment to give our customers the best products and value in the industry. This is an $80 billion industry and consumers will continue to purchase furniture. We have many initiatives underway to make sure that our products meet the needs of the consumer. Our work on pre-testing products with consumers before we bring them to market not only eliminates unproductive costs on our side, it gives our retailers a higher level of confidence in putting our products on their floors.

We also support our dealers with national programs and promotions to drive traffic to the stores. At last week’s high-point market, we unveiled a new campaign that positions Lane as the leader in home entertainment, and it was very well received. We are partnering with Samsung on the national mobile marketing tour that will drive traffic to our dealer stores. That’s the kind of commitment that few of our competitors can provide, and we believe it will position Furniture Brands as a preferred partner in this tough retail environment.

This Lane campaign though is just one example. We’ve got major product, customer, and marketing initiatives across our brand portfolio that will enable our dealers to be successful with our brands.

At this point, I’ll let Steve take us through the financials, and then we’ll close with some comments and take some questions.

Steven G. Rolls

As Ralph indicated, sales for the quarter declined about 18% from the third quarter of 2007. Sales for both periods exclude the operations of the Hickory Business Furniture unit that was sold in March of this year. The primary reason for lower sales is the continued weak macroeconomic retail environment for home furnishings compounded by tighter credit and lower consumer confidence. As Ralph said, we’re taking aggressive steps to manage our way through this period of unprecedented market turmoil.

Cost of goods in the 2008 quarter includes some unabsorbed capacity cost that will come out of the system when the Broyhill pacemaker plant comes on line in early 2009 as well as some other plant costs that have been eliminated.

Excluding these costs, gross margin improved to 21.7% this quarter versus 21% a year ago. Excluding the items detailed in the press release, SG&A increased by nearly $3 million. The biggest single driver of growth in SG&A is the net increase of 13 retail stores to our system since the third quarter of 2007. We’ll manage SG&A costs with targeted headcount reductions and allocating more of our advertising spend to projects like the Lane Mobile program that Ralph mentioned where we contract a more direct link to increase sales.

SG&A for the quarter includes 2 non-cash charges. We’ve added $13.6 million to the receivables reserved this quarter with a goal continuing to stay ahead of our customers’ credit issues. The second non-cash charge is primarily related to a calculation mark-to-market spread between the contract lease terms of closed stores and the current market rates for each specific location.

As we noted in the press release, this non-cash accounting entry represents $6.4 million of the $9.9 million charge. The $3.5 million cash portion represents operating losses of the closed stores and the impact of buying out future lease obligations at certain stores. The 34.4% effective tax rate for the quarter reflects our guidance of a 28% tax rate for the year with the additional impact of a tax asset impairment charge.

I’ll reinforce Ralph’s comments that managing cash and expenses are very high priorities for us. During the quarter, we recorded a charge against our finished goods inventory in anticipation of aggressively liquidating slow-moving items from our stock. We estimate that over the next 6 months we can generate cash proceeds between $10 and $15 million through this program. We’ll also incur savings from reduced warehouse costs and logistics charges.

I’ll close with some comments on the revised 2008 guidance. We’ve lowered the full year sales forecast to a range of $1.7 billion to $1.75 billion. In light of the current economic environment, we’ll record additional charges in the fourth quarter as well as we work to exit Lane retail store obligations and shrink our SG&A costs. We provided an estimated range of $56 to $72 million for these charges, which will also likely include charges and cost for severance, plant closures, inventory reductions, and factory down-time combined with our strategic plan initiatives that are on track to generate run rate savings of $55 to $70 million by mid 2009. We believe that we can have a balance sheet and expense structure that can bring us through this economic crisis.

With that, I’ll turn the call back over to Ralph.

Ralph P. Scozzafava

We’re anxious to take your questions, so I’ll close with two quick comments.

The past 90 days have been unprecedented in this or any other industry. The speed and severity of changes in our economy affords all business leaders to reevaluate their priorities. Fortunately for all the Furniture Brands’ challenges, our strategic plan is taking us where we need to go. We’ll continue to implement that plan and do it quickly with a strong view to our risk mitigation and cash conservation. Implementing that plan quickly means it will incur charges and costs in the near term in order to be a stronger company in the future.

We’re in the midst of addressing some earlier strategic decisions that have made this company vulnerable to the risks of a weak economy. The company guaranteed the Lane and Broyhill retail store strategy was dependent on a very strong sales environment. That strategy was launched about 5 years ago and it has cost this company about $130 million since then in lease costs and bad debt write-offs with the majority of these costs affecting us in 2008. This has been a problem for our company, and we’re fixing it.

We’ve already incurred most of the costs of the solution, and our goal in delineating these charges is to provide increased transparency into what Furniture Brands will look like when we’re finished. This management team and board are fully committed to Furniture Brands strategic direction, and I’m confident that we’ll emerge from this period as a stronger company.

My other comment is on a larger level. Ours is a large and a central industry and it will emerge from this down-turn. The key to success is more than just hunkering down. It’s moving ahead to bring the right products to market and serving the right customers and consumers. We’re committed to helping our dealers build their business so that we can all be successful for the long term.

And with that, I’ll turn it over to John.

John S. Hastings

That concludes our prepared comments, and now, we’ll open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James

I am also in favor of more transparency, but I am confused. You have 13 more retail stores this quarter which you did call out as increasing the SG&A by some, I think, unspecified amount, you haven’t clarified how much that increased revenues as you’ve taken retail revenues in place of wholesale revenues nor how that impacted gross margin, could we get some help on clarifying those items?

Steven G. Rolls

The closed stores Budd, so there were two pieces to that…

Budd Bugatch - Raymond James

Not the closed stores Steve. The existing stores, the stores that you’re running, both closed and existing I guess, whatever went into revenues and to the numbers.

Steven G. Rolls

Let me just talk about the closed stores, those are stores just for everybody’s edification that were owned by dealers, or I won’t say owned, opened by dealers that we have lease guarantees for or sublet to those dealers. When those dealers went out of business, we took over those lease obligations. So those once we do that or when we know we’re going to do that, we mark-to-market those lease obligations given the current economic environment unlikely to re-lease, sublet what have you those locations at the same rates that the obligation reflects. So, we mark those to market through a discipline kind of NPV calculation and we take those charges. There are some stores that were previously closed that we would have bought out of the leases. We’re selectively looking at lease obligations if we can buy out of those at an economically reasonable price, we do that, and where we have done that, we’ve taken the further, I’ll call it mark-to-market if you will, write-down on those obligations. So, those things comprise that closed store expense amount that we disclosed. So, help me again Budd…

Budd Bugatch - Raymond James

I’m not asking about the closed store expense, I’m asking about, on the $412 million of revenues, how much are retail revenues and how much are wholesale revenues in that number. The character of the company is 13 stores more this year than last year according to what you said in your prepared remarks.

Steven G. Rolls

Okay Budd maybe I misunderstood your question.

Budd Bugatch - Raymond James

I’m asking for the ongoing retail operation and wholesale operation, sales, cost of sales, SG&A. You called out the reason for the higher SG&A was because of your retail, 13 more retail stores, but you have not elucidated what the impact on revenues of the additional retail and the additional gross margin, because retail gross margin in my experience is higher than wholesale gross margin.

Steven G. Rolls

Budd, as you know, we haven’t broken out our retail and wholesale numbers in the past. We didn’t do it this time. So, I’m afraid I can’t really …

Budd Bugatch - Raymond James

Well then you really can’t hide under the shield of increased SG&A because of increased retail operations, you can’t have it both ways.

Steven G. Rolls

I’m not sure we’re hiding under any shield. I think all we’re trying to say is we’ve increased the number of retail stores in our Thomasville business, and as you would appreciate, retail stores have a higher gross margin than wholesale businesses do. So, we’re not trying to hide under anything, Budd. We’re just trying to say that we’re increasing the number of owned and operated retail stores, and so our SG&A percentage would be affected by that. It wasn’t trying to hide under anything.

Budd Bugatch - Raymond James

We’re able to disagree. Could you give us a help on what might have happened to the intangible asset, I think this is going to get examined in this fourth quarter?

Steven G. Rolls

Yes, every year certainly in the fourth quarter we will review our intangibles, so that’s fundamentally goodwill and trademarks.

Budd Bugatch - Raymond James

And they come from basically the bankruptcy, fresh start accounting a number of years ago?

Steven G. Rolls

Right.

Budd Bugatch - Raymond James

My understanding I think of 142, if I think that’s applicable, is that when a stock price is well under book value, some of that accounting gets more onerous. Is that not correct?

Steven G. Rolls

It’s correct.

Budd Bugatch - Raymond James

So, we should expect that you’ve not called out what you thought that charge would be, that’s not included in the charges you’ve already identified for the fourth quarter?

Steven G. Rolls

That’s correct. We haven’t done that calculation yet. We’ll do that in December for the year. So, that hasn’t been done and we called it out because it’s possible there could be something given the environment.

Budd Bugatch - Raymond James

I understand. Can you size for us the remaining contingent lease liability at this time, at the end of the third quarter?

Ralph P. Scozzafava

Yes, it’s about $82 million.

Operator

Your next question comes from the line of John Baugh with Stifel Nicolaus.

John Baugh - Stifel Nicolaus

Is there a way to just give us a cash earnings or loss in the third quarter and fourth quarter cutting through all these charges?

Ralph P. Scozzafava

Our Q will be coming out and we’ll be giving the cash flow on that one. So, I don’t know if I can really give you that over this phone line today, but the Q will be out before too long.

John Baugh - Stifel Nicolaus

When do you file the Q, you don’t know?

Steven G. Rolls

Yes, it’s 40 days. As you know, the requirement is 40 days after the end of the quarter; so certainly by that point in time.

John Baugh - Stifel Nicolaus

Getting back to this $82 million contingent lease, I think it was something like $60 million at the end of the year and $120 at the end of June, and now it’s $82, so we wrote down something but then maybe we had to further increase the mark-to-market, or help me with the charges that took place in the third quarter there.

Steven G. Rolls

So, let me just use hypothetical numbers. You’ve got 10 stores that we are either on the lease and then we sublet or we have a lease guarantee for the retailer, and each of those stores has a, until the lease runs out, million-dollar lease obligation, so you’ve got $10 million of lease obligation, and one of those 10 stores goes out of business and we decide we’re not going to operate the store because we can’t do it economically. Sometimes we’ll take it over and we’ll run it. But if we decide we can’t, the store goes out of business and we look at that lease obligation and we compare that to current market rates in those markets, those locations for those types of space, and we take the difference and we discount it back over the term of the lease, and that’s that lease write-off if you will. We’re still paying the lease until we either sublet it or we buy out of the lease, which we do both of those things. We still pay that lease, on a dark store. We’re still paying a little bit of utilities, we’re still paying taxes, just some supplemental costs, but the accounting impact, the financial statement impact goes down to the current market rate of that lease.

John Baugh - Stifel Nicolaus

So, there’s a cash drain to physically obviously sublease the space?

Steven G. Rolls

That’s sublet, or as I said, we did buy out of some leases, so we’re constantly looking at opportunities to do both, either sublet over the term of the lease or even temporarily or to make a deal with the landlord to buy out of that lease early.

John Baugh - Stifel Nicolaus

All cash?

Steven G. Rolls

Yes.

John Baugh - Stifel Nicolaus

And can you give us today by brand the number of stores you have open and then some kind of guess, Ralph, as to what that picture looks like 6 months or a year from now in your mind?

Ralph P. Scozzafava

John, let me take you just through some of the company owned ones I think you’re probably most concerned with. Right now we have open 42 Thomasville stores that our company controlled guaranteed. We have 10 Drexel, we have 1 Henredon. So, we’re in the process now of managing those stores and running them. The bulk of what you’re seeing wind down are the Broyhill and Lane stores which are essentially all now captured and addressed, and to Steve’s earlier description, now it’s a matter of kind of negotiating our way out of leases and guarantees and obligations.

Steven G. Rolls

So, in the fourth quarter, those remaining Lane and Broyhill stores are closing. We’ve already written those mark-to-market on those leases. Thomasville, occasionally when we take over a lease obligation, we’ll close it if that was open in a market that just isn’t buyable. Most of the time, we can go in and change the way that store is operated, managed, change the people, we can leverage our regional capability and cut some costs, so, most of the time we’re able to go in and turn those around. So, that’s kind of what Ralph is referring to. So, we’ll open our own stores, we’ll take over existing stores. There are some Drexel stores that we own as well and one Henredon store.

John Baugh - Stifel Nicolaus

And to Budd’s question, on these 53 stores, are you willing to give us any kind of a feel for the P&L on those stores? Are you losing money, which Ethan Allen disclosed a close quarter, and they’ve gotten hurt too, and they have a negative EBIT in the quarter, I assume the same here, but we have zero visibility to any kind of figure, any help there?

Ralph P. Scozzafava

Yes, I’ll give you my point of view and then Steve can chime in. I think as we get more stores and we’ll have to sit down and determine when they become more material, and clearly I know you all are interested in understanding how they’re performing and how we’re doing at retail. As company owned controlled retail becomes more of our mix, certainly we have no problem disclosing at that point. We just have to sit down with our auditors to make that determination. I will share with you some information that we shared in the first quarter. Our same store sales for Thomasville in Q1 which we all know was a better quarter than today was up about 3% compared to our Q3 number that reports this quarter we just closed out where we were down 12%. So, that gives you a comparison of what the macro-environment is doing to our store volume. So, please don’t think that we’re not about trying to give you transparency into our numbers. I think we’re giving you more information now than you’ve ever seen before. We just want to make sure that we do it in a material way, and keep in mind, that we do have numerous competitors that are private companies that listen to these calls and read our materials, and we still have to compete in the marketplace.

Steven G. Rolls

Just to add conceptually, Ralph is right. It is not material today. We hope someday it will be material frankly, and as you know, we want to build our Thomasville retail presence, not exposure but presence, and what’s true in retail in any business is when you first open a store, you do lose money until you kind of get a presence, you get a critical volume, and our experience in Thomasville has been that. So, as we open stores, we’ll lose a little bit to begin with, that’s normal, and then it just keeps improving month after month after month. Similarly, when we take over a store in Thomasville from a dealer and we determine we’re not going to shut it down, we’re going to fix it, we do exactly that and our experience has been pretty good. We’ll go in and, as I said, we will change management, we’ll change the store layout, we’ll leverage our regional presence in terms of warehousing and in terms of oversight management, we’ll change and train employees differently, we’ll run the store differently. So, we’ve done a fairly good job at improving operations, but as Ralph said, until it is material, we’re probably not going to break that out separately.

John Baugh - Stifel Nicolaus

Alright, my last question is, forgive me for being lazy here, but what is the bonus structure for the top five with the company tied to in calendar ’08 and will there be a bonus, and is it tied to cash flow metrics? Is it tied to earnings? Any color there?

Steven G. Rolls

Let me answer that, this is in our proxy. Here’s what I’ll tell you about the top executives. We are tied in a short-term program that is an annual program that is tied to sales and earnings, and that’s just a straight-out to make our budget kind of a calculation and it can go from 0% to 200% based upon performance. There is a long-term program today and it’s the one that ends this year that was primarily targeted at cash flow and building the balance sheet. Going forward, that long-term program has more to include 3 elements, cash flow, return on invested capital, and market share growth, and that is a go-forward to your program in our long-term incentive. The steps to short-term incentive program is still sales and earnings, it will be that way in ’09 and going forward.

John Baugh - Stifel Nicolaus

So, should I say that there really won’t be much of a bonus relating to the short-term but there could be sizable bonus regarding the long-term because you generate a lot of cash?

Steven G. Rolls

Yes, that’s exactly what’s going to happen, John. I think when the long-term incentive plan that was put together a couple of years ago, when that was decided upon by the board, I guess it was 3 years ago, the big issue with some foresight was to be able to have this company stable and to have cash and to stabilize the balance sheet. If you think about where we were just, I think when I came on board, we were worried about the capital structure of the company violating potential covenants, and if you remember last September or August, we had to refinance the company with an asset based loan, we had over $100 million more in inventory than we have today, and we were able to really focus on cash flow, and at the start of this year, we had the highest cash balance and the lowest debt that we’ve ever had in history of the company going back to the early 90’s. So, we’re able to do that. So, essentially, the board and the shareholders got what they paid for. Going forward though, you and I both know, I think everyone on this call know, certainly we have to survive and have the staying power through this tough economic time, but we also have to generate profit. We have to get operating profits, maintain the strong balance sheet, and have a more balanced approach, and that’s what the management team has consented to do.

Operator

Your next question is a followup question from the line of Budd Bugatch of Raymond James.

Budd Bugatch - Raymond James

On the $82 million lease-like contingent liability, can you help us understand how many different stores that is and how many may be Thomasville, Drexel, Henredon, or are the Henredon stores included?

Ralph P. Scozzafava

The vast majority is Thomasville, probably 92% or 93% of those stores are Thomasville and the balance is really Drexel. The big problem for us has been retail stores under the Broyhill and Lane banners. Thomasville is a far more balanced portfolio of product across upholstery and case goods. We have seen it. We have seen the volumes and the returns in our Thomasville stores, able to support a store program very well, and that’s why we made the decision that that brand is our retail banner brand, and that’s why you’ll see significant television support, print, product innovation, in-store visual upgrades. You’ll see a lot of work that Steve mentioned around our sales organization on the floor, our management, the software and operating programs that we put into place to service those stores, our home-based program, our point-of-sale program, all of those things that we do to make that a successful retail model. We believe that Lane and Brohill are far better off and can serve our dealers very well with Broyhill with a strong case goods offering and Lane being the leader in the industry in motion upholstery. WE think that those play very well and are strong brands on the retail floors of our multibrand furniture retailers.

Budd Bugatch - Raymond James

If I do the math right, you’ve got $70 million plus of the $82 for Thomasville in terms of lease guarantees. How many stores is that, Ralph?

Ralph Scozzafava

It’s 43 today.

Budd Bugatch - Raymond James

43 are the stores that represent that $70 million?

Ralph Scozzafava

You’re looking at a total of 43 stores for Thomasville and close to $55 or $60 million.

Budd Bugatch - Raymond James

So then we have $22 to $27 million for directional?

Steve Rolls

It’s about 14. Just because of the timing, there are still 4 Lane and 1 Broyhill store at the end of Q3 that are closing as we speak.

Budd Bugatch - Raymond James

That are in the $82 million?

Ralph Scozzafava

Yes, and they will be gone.

Budd Bugatch - Raymond James

Let me ask you this question because I’m really confused about this. I’ve seen it at other companies. We do look at more than just one. You had a number of Broyhill stores independently owned in Texas in the last couple of weeks file for Chapter proceedings, and yet you had to know that they were in difficulty. I would have thought under the accounting rules that came into place a couple of years ago under FIN 46, you’d have been required to show those as VIEs. Is that not so? I mean you had to be the primary economic beneficiary of those stores.

Steve Rolls

No. We’ve evaluated, and our auditors have looked at it. That wasn’t something we needed to be doing.

Budd Bugatch - Raymond James

And that’s true when all of these other stores were…because the way retail has gone it has only gotten worse. It’s not gotten better, and without those lease guarantees, you never would’ve been able to get those stores opened or the dealers would never have been able to get them open.

Steve Rolls

Well, I don’t know that that’s true. Those were opened during a much healthier economy. Today, I think that’s probably true.

Budd Bugatch - Raymond James

That’s how you have to evaluate these under FIN 46, and you have to look at each owner’s equity and his ability to keep going.

Steve Rolls

Losses don’t require you to re-evaluate consolidation under that requirement, so it’s not like these stores always lost money.

Budd Bugatch - Raymond James

On the $15.6 million of inventory charges, how much were retail inventories and how much were wholesale inventories?

Steve Rolls

We didn’t break that out, but just for your information, it’s virtually all inventory that sits in our warehouse, so we’re not trying to be evasive.

Budd Bugatch - Raymond James

You told John that you would put the cash flow statement in the Q, but there is a cash flow statement in the release. Do we not rely on that one?

Steve Rolls

Sure, you can.

Budd Bugatch - Raymond James

So, there won’t be a material change in the Q?

Steve Rolls

No.

Operator

Your next question comes from the line of Jeremiah McWilliams with St. Louis Post-Dispatch.

Jeremiah McWilliams – St. Louis Post-Dispatch

As you head into ’09, I know you’re projecting a loss. At what point, given the credit situation being tight and consumer confidence down, do you project breaking back into the black, or is that too difficult to project at this point?

Steve Rolls

We just haven’t projected that yet, so we haven’t given a guidance other than for year end, and that’s been our typical way of doing that. I mean all year we haven’t beyond year end, so I can’t really tell you that. Obviously, for year end, we are not going to be there. We’ll take some more charges in this fourth quarter and have some more expenses.

Jeremiah McWilliams – St. Louis Post-Dispatch

In lieu of that, maybe you can talk a little bit about how you are managing the credit situation. Maybe you can walk me through how you are laying aside the cash for additional lending or financing, is that right?

Steve Rolls

There are a couple of questions there. Let me start with the fact that in our shared services push over this past many months and into the second quarter of next year, we are consolidating accounting functions here in St. Louis from all the brands. The very first one that was consolidated and is complete now is our credit and collections function. We’re running that much more efficiently today with an organization here, so we are seeing improvements in our ability to get people to pay on time to shorten times, but it’s a very difficult economic environment, so when we have charge-offs, those are customers who just can’t make it anymore. They go out of business, and we do what we do. We do what we can minimize the pain that we feel when that occurs, in taking over inventories or getting them to pay what they can pay. So we are trying to run that as efficiently as possible. It’s pretty hard going forward to say what will or will not happen, right? We all know this is an extraordinary economic environment that we can see since I can certainly remember, so we’ll just keeping doing the best we can to manage that situation and minimize our exposures, get our collections on time. I don’t know how to project that one forward, but we’re trying to be as diligent as we can on that.

Jeremiah McWilliams – St. Louis Post-Dispatch

When a shopper walks in the door though, I guess I’m wondering are there programs at retail right now where you can do two things; one, make money available when credit is tight. I’m wondering if Furniture Brands has its own new programs.

Steve Rolls

We do in some places. So let’s just talk about our own retail environment which is simply Thomasville. We take credit cards. We get deposit. When a customer comes in and orders a piece of furniture or pieces of furniture, we take deposits as any retail establishment does in that kind of area, so we get a good amount paid right upfront that really isn’t a credit exposure, so what we find is that in retail we don’t have much exposure. It tends to be more at the wholesale level selling to independent retailers. Also in our designer brands, when we work through designers where individuals like you and I might work with a designer to buy furniture for our living rooms or dining rooms or bedrooms, we get deposit as designers will get deposits from the customers and then we get paid, so our experience has been pretty good to date in the designer area and certainly in the owned store area on credit exposures. It’s really more in the wholesale arena.

Operator

Your next question comes from the line of [unidentified analyst].

Unidentified Analyst

In your filings, you say that there’s a fixed charge covenant ratio if you fall below a certain level of access availability, and I don’t know if that means you have a block a place, but I’m just wondering if the $28 million of availability that you talk about in your press release is before or after the availability threshold.

Steve Rolls

It’s after, and that would suggest that before it’s $28 plus $75 is our true availability calculated in the asset base loan. From that $75, we subtract out any letters of credit that we have to net out to the $28 million.

Unidentified Analyst

On the dividend, did the banks require you to do that, or was that more of just an internal proactive decision?

Steve Rolls

Internal proactive decision.

Operator

Your next question comes from the line of Maggie Gilliam with Gilliam and Company.

Maggie Gilliam – Gilliam and Company

You’ve been moving manufacturing back to the United States a little bit over the last few months. Can you talk about what the grand design is here? Is it to try to keep the US plants running full, and I suspect they aren’t, but where you stand on that, and then to use the offshore facilities more on a contractual kind of basis?

Steve Rolls

What we’re trying to do is have a bit of a balanced footprint. That’s what you’re seeing. We have had to shut some facilities in the US, one in Mississippi, another one in North Carolina. What we’ve also done though is we’ve added, and that’s probably what you’re referring to, Plant C, which is next door to the Thomasville building is a site that we already own that is now back and running, and we are making case goods in there. We also have moved to more capacity and an extra shift in our Lenore facility, more case goods there, so yes, you’re seeing a little bit of that. We think it makes sense, but it’s on a case by case basis. The consolidation we’re doing at Pacemaker with Broyhill Upholstery is really about taking two manufacturing facilities into one large one and then moving all three warehouses that were disparate to one central warehouse, so it’s a big consolidation that makes us a lot more efficient in a large facility that we already own. The Indonesia plant and the buildup there is so that we can have low-cost, high-quality product from Asia in one of our facilities. That makes sense we have a smaller plant already there and a very strong management team, so we’re looking at it on a case by case basis and just seeing how it pays out, but at the end of the day, the more balanced we are, the better off we think we are.

Ralph P. Scozzafava

Just to add a point to that specific case where we brought production back in Thomasville, that was a very rigorous financial analysis, and while there’s been a surge or certainly over the past five to ten years of capacity moving to Asia, certainly case goods more than upholstered goods, prices have gone up, out of China for example, labor rates are going up, taxes are going up, with fuel prices you’ve got increased transportation costs. When you’re over there, you’ve got a lot of logistical challenges of managing that whole supply chain that have real costs to them, so we looked in this case for those particular products that were being produced at a very careful analysis that says if we were to produce these back here in a second shift, would it make sense, and it did, so we moved it.

Operator

I’m showing that you have no further questions at this time. I would now like to turn the call over to Ralph Scozzafava.

Ralph P. Scozzafava

I want to thank everyone for being with us this morning. We’ve been working extremely hard as you can imagine over the past couple of years to really reposition Furniture Brands and take advantage of this strong portfolio that we have and the powerful organization we have in each of our brands. Certainly, we are in a very difficult economic time that I don’t think anyone certainly here and my guess is on this call has seen in our lifetimes, so if you combine that with the challenges that we have here, you can get an understanding for how much work is being done by the committed associates that we have here at Furniture Brands. To be clear, we’re working hard to maintain a strong balance sheet and to weather the economic issues that we face. We’re focused on product and our consumers. We’re focused on doing the best job that we can to make our dealers successful and with managing our cost structure to the very best of our ability, and we can continue to do those things, we’ll manage this business and we’ll move this company and make it the kind of company that we all believe that it can be. I want to thank our investors for being on the call, certainly the analysts who follow us, and we’re going to get back and we’ve got more work to do as soon as we hang up here, so thanks everyone.

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