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U.S. Home Systems, Inc. (NASDAQ:USHS)

Q3 2008 Earnings Call Transcript

November 13, 2008 4:30 pm ET

Executives

Brett Maas – President of Hayden Communications

Murray Gross – Chairman and CEO

Robert DeFronzo – CFO

Analysts

Joel Havard – Hilliard Lyons

Nick Genova – B. Riley & Company

Laurel Miller – Southwest Texas Capital

Chris Doucet – Doucet Asset Management

Ivan Smith [ph] – Raymond James Financial

Rick Fetterman – Fetterman Investments

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the U.S. Home Systems Inc. third quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for question. (Operator instructions) this conference is being recorded today, Thursday, November 13, of 2008.

This time I’d like to turn the conference over to Mr. Brett Maas, of Hayden Communications. Please go ahead, sir.

Brett Maas

Good afternoon and thank you for joining the U.S. Home Systems, Investor conference call. Following management comments, we’ll open the line to answer your questions.

This call is also being simulcast on the internet through our website at www.ushomesystems.com or through the Viavid broadcasting website at www.viavid.net.

An audio replay of the call will be available on these websites for 14 days. Today’s presentation may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements are based on a number of assumptions including expectations for continued market growth and anticipated revenue levels.

Although, the company believes these assumptions are reasonable, no assurance can be given if they will prove correct. If the company’s performance differs materially from these assumptions or estimates, U.S. Home Systems actual results could vary significantly from the estimated performance reflected in any forward looking statement.

Now it is my pleasure to introduce Murray Gross, Chairman and Chief Executive Officer of U.S. Home Systems. Murray.

Murray Gross

Thanks Brett. Good afternoon everyone. Joining me today is Peter Bulger, our President and Chief Operating Officer and Robert DeFronzo, our Chief Financial Officer. Before we review the operating results for the third quarter, I would like to give you an overview of some recent events.

As we previously reported, we and The Home Depot agreed to terminate the installed deck program under our service provider agreement. As a result, in February we ceased offering deck products in various markets. In October we see selling deck products in our remaining markets in Northern Virginia, Maryland, Philadelphia, New York and New Jersey.

We had plan to return to marketing deck products under our own Designer Deck brand in the Northern Virginia, Maryland and Philadelphia markets after we had completed the phase-out in The Home Depot stores. However, after careful study and evaluation, we have determined that we faced too many challenges to continue this business under our brand or any brand.

The factors we considered in making our decision included our growth strategy to concentrate our resources on offering products that we can scale over our larger footprint with our strategic partner The Home Depot

Two the continuing challenge of security departments on a timely basis due to the uniqueness of the designer deck product.

Three, growing demand for traditional deck construction with composite materials, which rendered our factory built deck product obsolete.

Four; the challenge and expense of reintroducing our designer deck brand as we entered the seasonal downturn in addition to the near-term serious decline in the housing market. As I’ve said to you before, the demand for decks usually fall as new construction by one to two years.

We will complete the installation of all existing deck orders, which was approximately $3.4 million at September 30 and thereafter. We intend to offer for sale our Woodbridge, Virginia Deck manufacturing facility and it’s equip. In connection with our decision to cease offering deck product, we expect to incur charges of approximately $150,000 in the fourth quarter of 2008, related to increased depreciation of certain manufacturing equipment, severance cost and other shutdown related expenses. We do not expect an impairment charge related to our Woodbridge manufacturing facility.

In July, we launched a pilot program in the Dallas market to offer a new product category through large organization systems. We simultaneously introduced our closet organization system with garage systems as a total solution to the consumer for their home organization needs.

We are currently working with The Home Depot to provide for a rollout of these products in certain markets, where we currently offer our kitchen refacing products. We anticipate, we will begin this rollout in the first quarter of 2009 and complete that rollout by the end of the third quarter.

Home organization storage systems, including closets and garage systems are a growing product category that fit well with our product mix. We are also planning to pilot a new product in 2009, in The Home Depot stores in Boston Massachusetts, Philadelphia, Pennsylvania, Southern New Jersey and Long Island, New York.

The product line, which is offered through a subsidiary of The Home Depot, is a wood renewal system in which existing cabinet doors and drawer fronts as well as the cabinet boxes and other wood surfaces in the home, including flooring or refinished, through a proprietary process, involving the application of special cleaners, neutralizers, coloring agents, sealers and finishers.

We believe that this wood renewal system is an excellent product for customers, who are looking for a more economical alternative to cabinet refacing. This will then provide Home Depot customers with a solution for every kitchen. We are excited about this opportunity to work with Home Depot, to expand our product offerings to products which have the potential for scalability across our entire system.

We believe this strategy is a key factor to our future revenue growth and in leveraging our brand in corporate infrastructure. As I’ve said before, our branch operating and G&A expenses are our largest fixed cost. The more revenue we can spread over those fixed cost the more our operating margins will improve.

As you are aware earlier this year, our Board of Directors authorized the repurchase of the company’s outstanding stock up to $2 million. Any repurchase under our stock repurchase program maybe made in the open market at such times, in such prices as we may determine appropriate.

During the third quarter, we purchased 111,587 shares of our common stock including our prior repurchase program which we initiated in August of 2007. Cumulative repurchases through September 30, were 905,420 shares at a cost of approximately $5.6 million.

Now, let’s turn our attention to our operating results for the third quarter. Revenues for the third quarter ended September 30, increased 2.1% to $35 million from $34.2 million in the third quarter of last year. Revenues from deck products declined $4.8 billion, as compared to prior year quarter reflecting the phase-out of the product offering.

Excluding deck products, revenues increased $5.5 million or 21.6% to $31.2 million in the third quarter 2008, as compared to $25.6 million in the same quarter last year. The increase is attributable to our kitchen and countertop product line and resulted from higher backlog of orders at the beginning of the quarter and the combination of strong new order input in the current period an increased manufacturing output.

Excluding deck products, our new orders in the third quarter increased 9% or $2.4 million. Net income from continuing operations, was $600,000 or $0.08 per share in the third quarter 2008 as compared to $1.2 million or $0.15 per share in the same quarter last year. We have experience an increase in marketing cost to acquire a customer, which has adversely impacted our operating margin.

In June 2007, we initiated a new in-store marketing program in which we utilize an independent marketing firm to staff The Home Depot stores to generate customer wage. While this program has been effective at generating a greater number of range or marketing cost to acquire a customer through the in-store program has been higher in the cost of acquiring a customer without the utilization of the in-store program.

The higher cost of the in-store program is a result of the combined fees we paid to The Home Depot and the in-store marketing firm. Although, the program has a higher cost to acquire the customer, the program is principally responsible for our increase in new orders and revenues.

We are continuing to evaluate this in-store program. We are all aware of reports continuing economic pressures, including the softness in the housing market, uncertainty in the credit markets, rising unemployment and higher energy cost.

During the current period, we have experienced a sharp increase in the number of customers, who would decline financing for their home improvement project, thereby adversely impacting our new orders. Approximately 85% of our customers elected to utilize financing products provided through The Home Depot to fund their home improvement project. Customers must qualify under these programs to receive financing.

During the third quarter of 2008, 82% of the customers selecting finance in product were improved as compared to 93% during the same quarter of 2007. Despite, the success of our in-store program, to generate increased customer and interest we believe these economic pressures have had an adverse effect on our generation of new orders and that these macroeconomic conditions will persist throughout 2009.

Now, I would like to turn the call over to Bob DeFronzo, our CFO, who will discuss our operating results in greater detail.

Robert DeFronzo

Thank you, Murray and thanks everyone for joining us today. Let’s begin with our new orders in the quarter. Overall our new orders, was $30.8 million in third quarter of 2008 as compared to $31 million in the third quarter of last year. Our new orders for deck product declined $2.6 million in the quarter, which reflects the phase-out of the deck product offering.

Excluding the deck products, our new orders increased $2.4 million or 9%. Approximately, $1.2 million of that increase resulted from new markets we opened in 2008. The remaining increase was generated in market that were open greater than one year and principally resulted from an increase in the number of customer appointments for our kitchen and countertop products.

As Murray noted earlier, we attribute the increase in the number of customer appointments to our in-store-marketing programs that we had initiated in June of last year. Repeating Murray’s comment, our revenues for the third quarter of 2008 have increased 2.1% to $35 million from $34.2 million in the third quarter of last year. Our revenues from our deck products declined $4.8 million, as compared to the prior year.

Excluding these deck products, our revenues were $31.2 million in the third quarter of 2008, which is an increase of $5.5 million or 21.6% from $25.6 million in the same quarter of last year. Of this $5.5 million increase revenues from markets that were opened in 2008 contributed $1.2 million in revenues and markets opened greater than one year increased $4.3 million. Again the increase was attributable to our kitchen and countertop product line and resulted from higher backlog of orders at the beginning of the quarter, as well as the combination of stronger new order input in the current period and increased manufacturing output.

Our gross profit in the third quarter was $18.3 million or 52.2% of revenues as compared to $17.8 million or 51.9% of revenues in the same quarter last year. The increase in gross profit reflected $397,000 from higher volume, $281,000 or 80 basis point from favorable product mix, which was offset by a 157,0000 or a 30 basis points in higher cost of goods principally associated with our deck product line.

The lower margin in deck products resulted from certain changes in our deck product design and cost of steel and hardware component utilized in our deck under structure.

On the positive side, since bath and deck products have lower margin than our kitchen products, our sales mix to higher kitchen revenues helped our margins as compared to the third quarter of last year. Our operating expenses increased from $15.8 million in the third quarter of 2007 to $17.3 million in the third quarter of 2008.

As Murray had indicated earlier although, a substantial portion of our operating cost, our sales and marketing expenses that vary with revenues, our marketing cost to acquire a new customer has increased resulting in higher marketing cost and reduced net income.

In the aggregate, our marketing expenditures were $7.9 million or 22.6% of revenues in the third quarter of 2008, as compared with $6.7 million or 19.7% of revenues in the third quarter of 2007. In addition our operating costs have increased from the addition of new sales and installation centers we’d opened in 2008. Our branch operating expenses increased to 138,000 as a result of the expansion of our operations.

Our quarterly report on Form 10-Q includes additional information. I would like to encourage everyone to take time to read that and with that I would like to turn the call back over to Murray.

Murray Gross

Thanks Bob. Now we will open line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Joel Havard with Hilliard Lyons.

Joel Havard – Hilliard Lyons

I guess congratulations first for defining market gravity as long as you all have. It looks like it’s catching up just a bit here. The credits number you’ve referenced Murray make sure I got them right. 82% approval rate in Q3 this year versus 93% a year ago, did I write that down?

Murray Gross

95%.

Joel Havard – Hilliard Lyons

95%, and that’s into an environment were about 85% of your business is historically credit driven?

Murray Gross

Yes, correct.

Joel Havard – Hilliard Lyons

Will presume that gets a little tougher yet with all the cleverly dancing on the part of consumer lenders. I’m trying to make this the only sort macro theoretical question, but how do you work your way through that?

Murray Gross

First, before I answer the question, let me quantify that for you. It was a total of $5 million in credit rejects that hit is. If it had not been for that caliber, we would have one hell of a quarter in new orders and it wasn’t a total of $5 million, it was additional $5 million. So, what we are doing now as we are…

Joel Havard – Hilliard Lyons

But those were orders that don’t welcome jobs?

Murray Gross

That it’s correct. Those are the orders which we sold and did not become jobs. Now, have got now and obtained paying permission from The Home Depot to use another financing source or whatever financing sources, after they’ve had the first look at the deal and the cost.

Joel Havard – Hilliard Lyons

And this is normally through that The Depot credits card?

Murray Gross

That’s correct.

Joel Havard – Hilliard Lyons

And is that a City product?

Murray Gross

Yes. One of the things that cost us, some constellation was Depot had two credit programs; one was their interest credit card program and I want to grammatically correct here, it was interest credit program and then they had their regular installment loan program.

Joel Havard – Hilliard Lyons

Is that also is City managed?

Murray Gross

That was the City managed program, and they discontinued that program, I’m going to tell you May and so we look with that all through the quarter, and that probably impacted our sales even somewhat for the true installment loan volume. So, we are now working on a couple of new sources to replace that business. Whether it will have a serious impact or not it’s too soon to tell, this was actually the first week we kicked it off and so what the result will I won’t be able to report.…

Joel Havard – Hilliard Lyons

Well could you give a little bit color than on what you down at – fortunately, you’ve got some experience and I know the total FCC dynamic was to go and make sure that you all had an available credit source, clearly trying up a loan?

Murray Gross

That was really for what we kind of term sub-prime paid and FCC is a viable source and we continue to use that for the sub-prime customer. However, if you take the prime customer that had a FICO let’s say 700 or above, they were too resistant to the rates that FCC has to get, and because of their own credit situations, those rates are just not competitive for the prime borrower.

Joel Havard – Hilliard Lyons

Is the reject pool here typically squired down for the sub-prime customers or is that a –?

Murray Gross

I would say for the most part, but we don’t know enough because we don’t get any disclosure from Depot. So we don’t know what the reason was.

Joel Havard – Hilliard Lyons

So the two year point, it will take some while to?

Murray Gross

Yes, it will take some time for us to. I think this morning, yesterday when everybody got upset about what Paulson said about consumer credit. My reaction was (inaudible) watching the market get out flatter in points, I was saying this is what we need. We got to consumer lending going again to enable the customer because we believe we were getting good people turn down, but we didn’t know.

Joel Havard – Hilliard Lyons

I appreciate the color on that one. The second big seen for me is what brand/sale/G&A can we expect to be cutout of ’09 ex-deck in its entirety? Or may be to ask it backwards, what could we have cutout of ‘08 maybe it’s more for Bob the questions, but …

Murray Gross

I’ll turn that to Bob.

Robert DeFronzo

Joel I don’t have a quantified number, but I can tell you a locations were the branch is we are operating with deck, they operate with all products. So, if you look at our branch operating, although it increases because we have so many canters across the country. Our centers are fairly small in operation and so, I mean you got basically an installations manager and product sales manager and couple of administrative people and it’s fairly small.

So, there is not a lot of opportunity to cut cost there, where those cost will come out we will be within the manufacturing facility itself and our margins on decks have been lower and we’ll get more out of our margin percentages. So, by concentrating more on our other products and products that can grow across the larger base, we should improve our future than continue to say with the deck product, which is limited.

Joel Havard – Hilliard Lyons

Couple of thoughts on some of the volume initiatives here, storage is starting to rollout a little more broadly, so you’re pleased I guess. Depot has pleased us well with initial results there. Murray, I know it’s early to be thinking about it, but could you give us a view of maybe number of stores and in Phase I and sort of what the decision timeline would be before you, be given the green light for a stage two and what the magnitude of that might be?

Murray Gross

I’m hoping to learn that next week, but I can tell you that the plan is that we will roll garage organization and cause it’s probably across the system over the next nine months. That’s the plan, whether we decide to do it in every month it, I don’t want to say yes, we’re doing some little future investigation, but the results in Dallas were good and we did some initial presentation work for Depot last two weeks ago that they observed how the installations done and what it looks like. Those communications are going on right now and I will tell you organization will become involved in our entire platform.

Joel Havard – Hilliard Lyons

Okay, same being different. The point here, the wood renewal initiative, now this is not refacing, but really stuffy cleanup job?

Murray Gross

Yes. The Depot owns a division, which has a wood renewal project, that they have kind of tested in some of the and as we looked at that and work with them, it seems like a very logical alternatives to have someone with even a newer work kitchen to house built in the last 10 years ,which typically 8 or 10 years which is not our customer, but maybe he had a particular not finish on a house that was built in the 90s, from 95 to say into the early 2000s, when that was a big finish and now it’s absolutely everything is going darker wood, and the basic alternative was to paint those cabinets, which will held up overtime.

They have a, I’m not sure if it’s a patented product, but I believe it is, that they put neutralizers and Joel you are kind of DIY and if you try to repaint wood it never takes dry. From what we have seen develop a product, which allows you to restrain those cabinet and impregnate that wood. So, that you can take that, and darken it down to chocolate, but you can certainly get a nice medium wood shape out of that old cabinet for very really a pretty reasonable price.

In addition to that when we’ve got the opportunity once we refinish that cabinet, two add new hardware, they had organization to it to add a countertop and we are guest-mating, we had no experience with the gap that we do this test in the free markets, but hopefully we will wind up with a $4 to $5000 sale up.

Joel Havard – Hilliard Lyons

You anticipated everything but the word canalization here Murray that’s a greatest term…

Murray Gross

It will only be sold as what we refer to is a regeneration product. So we are going to originate the way for refacing and this get the magnitude to the thing. We are running 12,000 to 13,000 leads a month and were net sales about a 1,200 to 1,300 of those. So, we have got a lot of potential customer left and then we will call those customers.

Joel Havard – Hilliard Lyons

I’m sorry to interrupt you. The 1200 or 1300 is you’re existing –?

Murray Gross

Yes, that’s our net orders. So, it is a numbers that even cancellations yet…

Joel Havard – Hilliard Lyons

But, that’s on your existing kitchen program?

Murray Gross

That’s correct and we’ll go back via email, telephone solicitation or it will have a separate sales team. So, the salesman that’s making the original call will not be presenting the product and then if the customer has an interest, he will present what we call the regeneration of that lead and present this alternative product. So, what we’re trying to avoid is the very thing you’re talking about and that’s exchanged in $8,000 sales for our $4,000 sales.

Joel Havard – Hilliard Lyons

That’s a well thought out approach. I can’t think of…

Murray Gross

The question is will be as well though out execution.

Joel Havard – Hilliard Lyons

Yes and again this is going into test then in Q4...

Murray Gross

It will probably January 1, so we get all that...

Joel Havard – Hilliard Lyons

So, it’s mid-year before you are really ready to make a decision on that?

Murray Gross

No, it will be before that?

Joel Havard – Hilliard Lyons

Final question housekeeping here; could you give us the number of service centers and/or stores, served in kitchen bath and other like the quarter end?

Murray Gross

Yes, well stores are about 1600, 1662 to be exact that includes the Expo stores. We just added about 50 stores in South Florida for the bath products. As we picked up that inventory and so we got about 600 stores for the bath product.

Joel Havard – Hilliard Lyons

And is that one in existing kitchen service centers or these new service centers?

Murray Gross

Yes, they are existing our goal is to implement programs, where we can leverage that existing infrastructure. We’ve got there our G&A is a fixed cost, our branch operating is a fixed costs. If I can move more revenue over those costs then, then I get a significant contribution margin.

Joel Havard – Hilliard Lyons

You forced me to lie here, okay. One more thoughts about that how much longer are you are willing to give in-store marketing program to prove its value. I cough the guest of the comment that you do believe that it is driving the incremental difference here…

Murray Gross

Yes, there is still doubt that it’s proven its value now, it drove our lead cost up over $1 million, to generate that revenue, but there is no doubt it works and so we are everyday talking about how we modify it, how we make it better. The unfortunate thing, if we hadn’t had the credit crunch that we have along with it, because most of that business that was rejected from credit came out to that program and had we had that additional $5 million worth of revenue out that program, I’d be running around the table singing God bell America.

Joel Havard – Hilliard Lyons

Not to be factious, but are they just talking to the guys in the most warn out issues. How is that program is addressing you’re lead credit for the audiences?

Murray Gross

We don’t know. From my own observations I would tell you, no that they are limited. I go out and visit a store or it’s not an individual I am going to Home Depot to buy something and I’m continually engaged by there’s people and I make a point to allow them to engage me before I tell them who I am to see how they conduct themselves and as usually I’m not sweetest one. The last time I was there, I mean they headed for me like a fly to honey. My wife was with me and I was walking down to isle by the kitchen department and the young lady was right there and so in addition to that, so that we get some comparisons, we are now running test of our own in three markets to see how it plays in side by size.

Joel Havard – Hilliard Lyons

Now, what does that mean with company employees versus…?

Murray Gross

With our own employees, just to see if there is any difference. So far we haven’t observed anything significant.

Joel Havard – Hilliard Lyons

Well guys congratulations again on keeping the business sound in this very tough environment. I will jump out a line, best of luck.

Murray Gross

Okay Joel

Operator

Thank you. (Operator instructions) Your next question comes from Nick Genova with B. Riley & Company.

Nick Genova – B. Riley & Company

Just a couple of questions, in the past you guys have talked about operating margin targets in mid to long range targets of 5% to 7%. Obviously with the environment being difficult that’s going to make that more challenging and I don’t know how the deck business necessarily affects that, but can you guys talk about maybe the timing on those and whether those are still realistic?

Murray Gross

I think it’s obvious at the moment they are not realistic, today. I think once we get through this downturn we are in, I am probably are more convinced that ever that they are real listing. Our gross margins will improve, I think you will see that improvement as we wind out the deck business, and get the purely kitchen bath and our organization business margins. I don’t want to stick by net doubt and I will tell you what I think it will go yet, but I think you will see nice improvement in our operating margins.

Nick Genova – B. Riley & Company

And then on that margin side, the organizational business did those margins are they pretty close to what the kitchen and bath segment does?

Murray Gross

Yes.

Nick Genova – B. Riley & Company

And then so obviously what that deck business being going we should battle of these benefit the margins here in the next couple of quarters as the list is showed, right?

Murray Gross

We had in this quarter and during the year and one of the things it really drove us to make the decision about getting out of the deck business was that the consumer is really demanding composite materials. Our process for building the deck is not conducive to a pre fabricated deck out of composite material and then there is some issues with building coach and railings and so our design and so forth is really built around selling a wood, a lumber deck

As we started selling composite materials we guess we couldn’t generate the efficiencies out the building the deck stick built as we put out a manufacturing in effect. So in order to be competitive in the marketplace, we are fairly competitive when we had a Designer Deck of my choice that we went out and we put the deck into there couple of days. Now we were stick building decks competing against a contractor and it took away that action so, we saw rather depressed margins out of our deck business.

Nick Genova – B. Riley & Company

That makes sense. You guys have $3.4 million in backlog as of September 30, on that deck business. Can you talk to how along until that pretty you much completed winds down?

Murray Gross

Our intent is to complete it all by the end of the year. Now, I will promise that will happen, but in October we completed the balance third of that maybe a little more than a third. We ought to do that again in this month, December if the weather is kind to us, we’ll get most of that out of the way. So, our goal is to have it all installed by the end of the year, there might be a few hundred thousand dollars left to swap over. But I would think that would be extent level.

Nick Genova – B. Riley & Company

And in that Woodbridge facility is that that going to be for sail not or are you going to wait until that’s completely wounded done from there?

Murray Gross

Yes, we are putting it on the market probably the end of this month. We are having appraisals done on that as we speak.

Nick Genova – B. Riley & Company

And you guys have any sense right now for what the value that property maybe?

Murray Gross

No, probably I will know that once I get the appraisal, but I can tell you what my wishful thinking is but don’t know what it is in this environment.

Nick Genova – B. Riley & Company

Okay. Would it be safe to say that it’s enough to cover the mortgage you guys have on that property?

Murray Gross

Heavens yes

Nick Genova – B. Riley & Company

All right, perfect. Then final question that I’ve got is, on the bathroom side. You guys have done a phenomenal job growing the kitchen business especially in this environment, but in the bathroom side it’s been kind of stag, is there anything you guys are working on there to try to get some traction in that business?

Murray Gross

Yes, we are working on our whole new type of display for that business. That will be kind of interactive in-store. We worked those designs out now with Depot and one of the things we have been able to do is, use our in-store promoters on that program and hopefully that will change and that business will grow again. I think it will grow even somewhat now by getting into the Miami market. We’ve got a lot of plans for it.

Nick Genova – B. Riley & Company

Perfect, all right. Thanks guys and good luck.

Murray Gross

Thanks.

Operator

Thank you. Our next question is from the line of Laurel Miller with Southwest Texas Capital.

Laurel Miller – Southwest Texas Capital

Hi this is Laurel, how are you doing today.

Murray Gross

Doing well. How are you?

Laurel Miller – Southwest Texas Capital

Doing fine. I had a question on the buyback program, if you consider that a success, if it hits your objectives and if you plan or continuing or just what you could say about it?

Murray Gross

Well I would say, yes we planned to continue it absolutely. Has it met our objectives? Probably not as quickly as I would have like, we had many days. I entered while we are limited to buy 25% of the average number of shares that if we traded over that last 20 days. So, with the volume of trading our stock, I can generally buy it anywhere from 3,500 to 4,000 shares a day and there were many days I couldn’t get that and I have not really been able to make many block trades, with someone which I can do on a day which we’re not in the market, but no one comes along and says, I am selling you 25,000 or 50,000. So I guess the answer, it’s been a successful as we can get it be.

Laurel Miller – Southwest Texas Capital

I appreciate that.

Murray Gross

Okay.

Laurel Miller – Southwest Texas Capital

Thank you

Murray Gross

You’re welcome.

Operator

Thank you. Our next question is from the line of Chris Doucet with Doucet Asset Management.

Chris Doucet – Doucet Asset Management

Good afternoon guys. Congratulations on a surprisingly successful quarter in a challenging environment. Most of my questions have been answered. I did have a couple of questions. So, did you say you are generating 12,000 to 13,000 leads per quarter or per year, I missed that?

Robert DeFronzo

Per months.

Chris Doucet – Doucet Asset Management

Per month. Okay and to follow-up on the gentleman’s question about the Woodbridge facility; the Woodbridge facility has a $1.5 million first mortgage?

Murray Gross

Yes about 1.6, I think.

Chris Doucet – Doucet Asset Management

1.6, and what is the current value on the books are right now for the facility?

Murray Gross

I think it’s on the books; it’s a guess Chris maybe Bob knows. I think it’s probably 2 point something through, yes.

Chris Doucet – Doucet Asset Management

You think you’ll get more than book value or more at than just the debt?

Robert DeFronzo

We will get more than book value.

Chris Doucet – Doucet Asset Management

Okay. I’ll step back in the queue. Let me ask you, one last question were you able to buy any blocks during the quarter?

Robert DeFronzo

I bought one block, but during this quarter. Not sure, I’m going to say, Chris I think, I already bought one block in September.

Chris Doucet – Doucet Asset Management

Okay. Thank you guys congratulations again on the quarter. I’ll step back.

Operator

Than you. Our next question is from Ivan Smith [ph] – Raymond James Financial. Please go ahead.

Ivan Smith – Raymond James Financial

I’ve got just one question and it maybe sort of hard to answer, but maybe you can give me estimate. On the organizational product issued that your going to rollout in (inaudible) classes of course, you probably don’t know for sure just how many location you will be in., but once you get it rolled out, can you maybe give me ballpark or estimate figure, what you think this will meaning to annually on a revenue basis, dollars?

Murray Gross

It would be a pure guess Ivan, I can tell you this that in the in the tests in Dallas, we generated about a $100,000 a month. While it was in the private program here in Dallas, I think I mentioned that over the last time, that somewhere between 80,000 and 100,000 a month. What it does in the other branches, I don’t know, but I’m optimistic that it should be less as well. I don’t know, if I answered your question or not.

Ivan Smith – Raymond James Financial

Well, we just have to see how many places you give rolled on into and then will...

Murray Gross

Yes, and that just probably might have been, that was in a rather limited number of stores, here in the Dallas market. So, if you want to extrapolate that out on what it would mean, then Dallas for year and multiply that times 40 markets. I would be very, very excited about that.

Ivan Smith – Raymond James Financial

I would to.

Operator

That you. Our next question is from the line of Rick Fetterman with Fetterman Investments. Please go ahead.

Rick Fetterman – Fetterman Investments

Than you. Good afternoon.

Murray Gross

Hi Rick, how are you?

Rick Fetterman – Fetterman Investments

Fine than you Murray. How many stores were there in Dallas test?

Murray Gross

16.

Rick Fetterman – Fetterman Investments

One little question regarding Woodbridge, do you expect a $150,000 charge in the fourth quarter to be pretty much it?

Murray Gross

Thanks what they are telling me now and I’ve asked the question about ten times.

Rick Fetterman – Fetterman Investments

Did they tell you how much of that is non-cash?

Murray Gross

Other that the severance pays, all of it..

Rick Fetterman – Fetterman Investments

Okay.

Murray Gross

There will be some severance, which I’m going to guess probably $25,000.

Rick Fetterman – Fetterman Investments

Last question is, you commented on the deck backlog. Can you tell us, what the backlog was for the rest of the business at the end of the quarter?

Robert DeFronzo

Sure. It was $15.2 million in that kitchen refacing about $1.3 million in bath.

Rick Fetterman – Fetterman Investments

Okay, that does it for me. Thanks and congratulations on a great job in this really lousy environment.

Operator

Thank you. At this time we had no further questions. I’d like to turn it back to Mr. Gross, for any closing remarks.

Murray Gross

Gentlemen and ladies, I would like to thank all of you for attending our call. As I said it hasn’t been fun this quarter. We’ve been working on things, I’ll tell you that and I really want to congratulate our team and any of our people that are listening because they’ve really, really worked hard. We’ve made a lot of progress operationally.

I think you can seeing by the confidence that Depot had into us to grow our business with some new categories that has (inaudible). From their point of view we don’t have a lot of experience and they have the confidence in our team to be able to execute those plans and we are just going to keep fighting. Somebody said to me yesterday, if it doesn’t kill you, you’ll be stronger for it.

I think when we come out all of this, we’ll be stronger and hopefully what the treasury did with taking steps to loosen up consumer credit, if that really works and the credit gets back to kind of a normal flow for the consumer, you can just imaging what another $5 million would mean to us in backlog if we were setting with it today or any portion of it. So, hopefully this will help mitigate some of the other challenges that we fixed. So, I thank you, for your time and your continued support.

Operator

Thank you, sir. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Source: U.S. Home Systems, Inc. Q3 2008 Earnings Call Transcript
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