Furniture Brands International, Inc. (FBN) Q4 2012 Earnings Call February 13, 2013 8:30 AM ET
Ralph Scozzafava – Chairman & Chief Executive Officer
Vance Johnston – Senior Vice President & Chief Financial Officer
Rick Isaak – Vice President, Controller, Investor Relations & Chief Accounting Officer
Jason – KeyBanc Capital Markets
Chad Bolen – Raymond James
Good day ladies and gentlemen, and welcome to the Q4 2012 Furniture Brands Earnings Conference Call. My name’s Angela and I’ll be your operator for today. (Operator instructions.) As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Rick Isaak, Vice President and Chief Accounting Officer. Please proceed, sir.
Thank you, Angela. Good morning everyone and thanks for joining us today. With me this morning is Ralph Scozzafava, our Chairman and Chief Executive Officer; and Vance Johnston, our Chief Financial Officer. I want to take a moment to read the Safe Harbor Statement before I hand it over to Vance to go over our financial results for Q4 and full year 2012. Ralph will then go over the highlights of the quarter and the full year and end with a discussion on our go forward strategy.
I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Our actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of our control. Please refer to our SEC filings including our Form 10(q)s and Form 10(k)s for a discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements.
If you do not have a copy of today’s press release you may obtain one along with copies of prior press releases and past SEC filings by linking through to the Investor Relations page of our website at www.furniturebrands.com. I will now hand it over to Vance to discuss our financial results.
Thanks, Rick, and good morning everyone. As reported in this morning’s press release total sales were $264 million for Q4, an increase of 3.3% from the same quarter last year. Sales from the 48 Thomasville stores that we have operated for more than 15 months increased 4.8% from Q4 2011.
Gross profit for Q4 2012 was $54.6 million and included $1.0 million in charges related to cost reduction activities, and gross margin was 20.7% as compared to $58.8 million in gross profit and 23.0% in gross margin in Q4 last year. The year-over-year change in gross margin excluding the aforementioned charges was primarily due to increased discounts including the additional clearance of older inventory and product that is being replaced.
SG&A expenses totaled $70.9 million for Q4 compared to $71.8 million in Q4 2011. SG&A for Q4 2012 includes $2.8 million in charges related to cost reduction activities. The decrease in Q4 SG&A excluding these charges was primarily due to lower expenses resulting from prior cost reduction activities and favorable legal settlements.
The operating loss for Q4 2012 was $23.9 million as compared to an operating loss of $10.2 million in the prior year period. The current quarter operating loss includes $11.3 million of charges which consists of the aforementioned $3.8 million of cost reduction charges as well as $7.5 million of impairment charges comprised of $6.1 million related to assets held for sale and $1.4 million related to trade names. The Q4 2011 operating loss includes a $3.0 million gain on idle facility sales as well as $0.2 million in impairment related to assets held for sale, both of which are recorded in impairment of assets net of recoveries.
Interest expense for Q4 2012 was $2.3 million as compared to $1.0 million in the prior year quarter. The increase in interest expense was primarily due to increased interest rates, higher debt, and closing costs amortization related to the debt refinancing in September, 2012.
Net loss for the quarter was $22.9 million, or $0.41 per diluted share which includes a $10.8 million after tax charge from the aforementioned items, partially offset by the reversal of a $2.4 million valuation allowance on our tax asset. This compares to a net loss in Q4 2011 of $9.5 million or $0.17 per diluted share which includes a $2.8 million after-tax gain from the aforementioned items.
Inventory at the end of Q4 was $244.3 million which is down from the Q3 inventory balance of $259.8 million but up from the year-end 2011 inventory balance of $228.2 million. Capital expenditures for the full year were $7.6 million. We were not required to make a contribution to our pension plan in Q4. For the full year we contributed $8.4 million to our pension plan.
Cash at the end of the quarter totaled $11.9 million and long-term debt was $105.0 million. We ended the quarter with total liquidity of $87.3 million comprised of the cash balance of $11.9 million and $75.4 million in excess borrowing availability under our credit facilities.
For the full year 2012 revenues decreased 3.2% to $1.07 billion. Gross profit was $244.3 million and gross margin was 22.8%. Gross profit for 2012 includes $1.9 million in charges from inventory write downs related to product rationalization and $1 million in cost reduction charges. Gross profit for 2011 was $267.3 million and gross margin was 24.1%. Gross profit for 2011 includes $2.8 million in cost reduction charges.
SG&A of $279.7 million decreased from $305.5 million in 2011. SG&A for 2012 includes $3.8 million of cost reduction charges and $3.4 million of environmental charges, while 2011 includes $4.7 million in charges related to cost reduction activities and $0.5 million of environmental charges.
The operating loss for 2012 was $44.1 million and includes the aforementioned $10.1 million of charges as well as $8.7 million of impairment charges. The operating loss for 2011 was $44.5 million and includes the aforementioned $8.0 million of charges as well as $6.4 million of impairment charges.
Net loss was $47.3 million or $0.86 per diluted share which includes an $18.3 million after-tax charged for the aforementioned items, partially offset by the reversal of a $2.4 million valuation allowance on our tax assets compared to a net loss of $43.8 million or $0.80 per diluted share in 2011 which included a $10.9 million after-tax charge from the aforementioned items.
Ralph will go over our strategy and areas of focus for 2013 in a moment, but for 2013 we expect CAPEX to be in the $18.0 million to $21.0 million, D&A to be in the $17.0 million to $19.0 million range, and we will be required to make a contribution to our pension plan in the range of $6.0 to $6.5 million. In addition to our routine maintenance spend our 2013 CAPEX budget includes system investments related to our transformation plan as well as an expansion of our Mexico facilities.
As we did in 2012, we plan to closely monitor our cash flow performance when determining the timing of certain CAPEX projects and we’ll recalibrate these CAPEX plans accordingly. I will now turn the call over to Ralph to provide more commentary on our results.
Thanks, Vance, and good morning everyone. On today’s call I want to review our Q4 results, do a brief recap of 2012 and then lay out our key focus areas and strategy for 2013 and going forward, starting with sales.
Q4 sales increased 3.3%. We entered Q4 with a healthy backlog and that helped drive the sales performance, and we ended the year with a backlog level slightly down from the end of the prior year. With regard to sales cadence through the quarter, our sales increased each month with December being a very large month for us.
Gross margin was down from the prior-year quarter even after consideration of the charges Vance described, primarily driven by increased discounts including those for older inventory and product that we are working on replacing. SG&A was down from the prior-year quarter as we continued to see previous cost reduction activities take hold and continued to maintain tight cost control measures.
I’ll now go over the key highlights of our sales performance, starting with our Thomasville retail business. Comp store sales at Thomasville retail for Q4 2012 increased 4.8% from the prior-year period. The new products and investments in advertising that we’ve made, along with the traffic driving initiatives we’ve been working on have begun to yield results at Thomasville.
I’ve talked to you before about our enhanced marketing efforts and how we added direct mail catalogs to our television, online and print efforts at Thomasville, and how our Labor Day written sales performance was stronger than we’ve seen in years on the heels of a very well-received catalog. While weather issues in the Northeast grew traffic a little bit in November our marketing efforts helped drive our overall traffic in comp sales increases for the quarter. We cleared some inventory and some old accessories in order to further improve the appearance and presentation of our new product styles in our retail stores which contributed to the decrease in margins during Q4.
On the wholesale brands side of the business, Broyhill and Lane continue to expand the product offerings targeting key product categories, style, and price segments for the mass market. At Broyhill, the Express Program continues to bring industry-leading delivery times and service levels to our dealers. Both Broyhill and Lane have improved the breadth of their product offerings as they migrate to more updated and transitional furniture styles. We want to continue to leverage our strong Broyhill and Lane brands and service to drive our distribution at retail.
Our Designer Brands business saw strong performance again this quarter. We continued to stretch our price brands to offer customers a variety of good, better, and best offerings which has shown good results this year. We also continue to successfully partner with interior designers with some of the highest quality furniture in the industry and drive our collective businesses together. We’re a leader in this high-end sector of the industry and believe we have the best products and the best brand names for our customers.
Now I want to provide a brief recap of 2012, starting with product. This past year we increased our mix of updated and transitional furniture that better reflects a wider range of customers’ tastes and preferences and helps broaden the appeal of our offerings aimed at increasing our market share. We’ll continue to make the right product decisions to drive progress on this front going forward.
As an example, we’ve seen strong results from our Broyhill upholstery product that has been very well received by our customers. Broyhill, Thomasville and Drexel Heritage as well as a couple of our other brands have brought more updated and transitional upholstery and case good offerings to market which have initially sold quite well.
Next, we improved our service levels to our dealers in several ways. Our Broyhill Case Goods Mixing Program from Asia greatly enhanced our ability to service our dealers as did our improved Lane Express Quick Ship Program. As you know, these programs allow dealers to offer a wide variety of customizable upholstery products to their retail customers. They’re able to deliver these in a timely fashion and at competitive prices without having to stock unnecessary inventory.
Now, regarding supply chain initiatives we increased our production from our Mexico and our Indonesia facilities and started our Broyhill Case Goods Mixing Program as well. This has helped us reduce our cost and participate more in the high-volume, lower price point sectors of the market. Now with respect to cost structure, our cost base is lower than it’s been in years as we reduce and tightly control our costs. And finally, the new financing package that we discussed with you on our last earnings call greatly increases our financial flexibility.
While we’ve made progress in these areas we know we have challenges as well and we’ll continue to work to overcome them. We didn’t generate sales growth or positive free cash flow for the year and after adjusting for the aforementioned charges operating losses improved only slightly versus 2011. Tight SG&A controls only modestly offset sales and gross margin declines.
We took action this year to turn over our product assortment at many of our larger brands and this impacted our gross margins for the year. While the product mix is much improved there is still work to be done to get it to where we need it to be and we’re focused on this in 2013.
Our major focus continues to be on generating free cash flow. In order to do this we have driving profitable sales growth as our number one initiative, improving manufacturing efficiencies, and we’ll continue to aggressively reduce and control our costs, improve our inventory and working capital while making disciplined capital investments.
Our strategy going forward to help us achieve our plan is fourfold: the first, focus on driving distribution on our wholesale brands. Having the right product at the right prices with great service will help us gain floor space at our existing dealers, penetrate new dealers and help us build a presence in new channels we have not previously participated. I know I’ve given you this example before, but take Lane for instance, where a large piece of the volume in the Motion Upholstery category is done at price points of $799 and below.
Being able to develop great product at these competitive price points so we can garner our fair share of these high-volume opportunities is a key priority for us. We’ll leverage our domestic manufacturing capacity, our Mexico cut and sew factory, our brands and our service capabilities to bolster our market position in this extremely important mass market sector.
Secondly, to continue to develop and execute an integrated Thomasville retail store program – we have 110 dedicated Thomasville retail stores of which 48 are company owned. While dedicated retail is a small part of our business today it’s also the segment with the most potential for profitable growth.
We control our own destiny here and there’s a direct and measurable relationship between our sales driving efforts and our results as we saw from the addition of the direct mail catalogs and the resulting traffic and order increases in the latter part of 2012. In 2013 we’ll build upon this as we work on refining our store prototype, updating our accessories and in-store visual displays further balancing our media mix in order to optimize our traffic and pursue a true multichannel model. To date we have five stores operating under our new prototype and we’ve been very pleased with the early results.
Thirdly, we need to continue to simplify our business and significantly reduce our costs. We’ll focus on making our organization more effective and efficient by simplifying our business and really concentrating our efforts on four key areas: the first, dedicated retail; second, our wholesale brands; the third, our Designer Brands business; and then fourth, our special markets businesses. This will help us drive our efforts against our biggest growth opportunities while becoming a more effective and leaner operating company. This will also enable us to better leverage our strong brands across selling channels, transfer best practices across our company, realize important synergies – and this benefits us as well as our dealer partners.
The fourth piece, vertically integrate our business further: we’ll continue to wrap up our offshore manufacturing and mixing facilities. These are very important to us. They’re critical. They help us control our product quality, reduce costs, and better service our dealers as well as provide them with increased flexibility. At the appropriate time we’ll take our Thomasville retail store program and leverage it further with more store locations.
So in summary, there remains much work to be done to drive consistent and profitable sales growth and ultimately generate free cash flow. We’ve got many initiatives in place and they’re good ones as I’ve just described. We’ll continue to work hard in 2013 to execute these initiatives and continue to improve the business.
With that, that concludes our prepared remarks for this morning and now we’ll hand the call over to the operator to start the Q&A session.
(Operator instructions.) Your firs question comes from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.
Jason – KeyBanc Capital Markets
Hey guys, this is actually Jason standing in for Brad this morning. I just want to first touch on your cash flow outlook. I mean except for the increase in CAPEX it looks like it’s relatively in line with the line items you’ve given next year to this year. I was wondering if there’s anything, working capital or anything else you’d point out that could really start improving your free cash flow in 2013?
Sure, let me start out and then I’ll hand it over to Vance. I think very first and foremost we’ve had inventory creep up a little on us this year and I think we can be much more disciplined around how we manage inventory. And I think we tied up some cash in inventory that we really did unnecessarily, and we’ve got a pretty good plan in place to take it down.
Mexico plays a role in that, in that we don’t have to commit ourselves as much to cut and sew kits from Asia as we did in the past. We can convert our own materials in the course of a week or two versus making commitments for twelve and fourteen weeks of inventory and floating it on the water. I think that’s helpful.
I think the other piece is our accounts receivable. We had a very large December, just the sales gains through the quarter; good order activity in November, shipped in December and I think we probably closed the year with more in AR than we typically do.
Jason – KeyBanc Capital Markets
And then you had mentioned inventory. You talked about it coming down sequentially but we see it still up about 7%. How far are you in working through some of this kind of outdated or inventory that you feel you need to update and liquidate some of the older stuff?
Yeah, I think that’s a great question. We have some inventory that we need to liquidate and it’s pretty isolated. It’s mostly at our Lane brand and frankly a lot of it is cut and sew kits from Asia, and we’re working our way through that inventory. And I think it’ll be throughout 2013 that we’ll do it. I don’t expect to see as much of an effect on gross margins as it created in Q4 2012 but I think we’ll work our way through it.
But really I think in answer to your question, we’re going to continue to take inventory down. We will close this year with lower inventory, this year being 2013, than we closed in 2012 and it’s just going to be through good and better processes; and again, the enabler being our factory in Mexico that’s going to enable us to do it.
Jason – KeyBanc Capital Markets
Okay. And then on the demand side, have you seen any changes in demand with the higher payroll tax or anything now a month and a half into the year that you guys would call out?
You know, we haven’t seen it. Our order trends I would say for the back half of 2012, and even so far into 2013 have been basically flat to up slightly and you can see it with our sales trends – they mirror that. If you look at the back half of the year I think we might be up 1%. We have seen stabilization, I think that’s good on our business, and of course I think what we all want to see is increased order trends and that’s the work that we’ve got to do in this coming year.
Jason – KeyBanc Capital Markets
Alright. And then lastly from me, I know you guys have talked about some facilities earlier last year. You mentioned the West Coast DC that was supposed to roll off, I think you had quoted about $14 million of facilities that you guys had on the market. Is there any update on any of those?
Sure. We’ve gotten out of the West Coast facility – that was a Rialto warehouse, but I’ll let Vance take you through some of the properties and assets held for sale.
Yeah, so I think the property you’re alluding to is our West Coast distribution facility which that lease expired and we’ve gotten out of that facility. As it relates to manufacturing facilities, what I would tell you is we recently made another announcement regarding the consolidation of our Mount Airy facility as well and as we continue with our transformation plan and go through the year we’ll obviously continue to kind of evaluate opportunities that exist to make sure that we reduce our costs and have the most efficient manufacturing platform possible.
Jason – KeyBanc Capital Markets
Alright, thank you very much.
The next question comes from Chad Bolen with Raymond James. Please go ahead.
Chad Bolen – Raymond James
Hey, good morning everyone, thanks for taking my questions. Ralph, you talked a little bit about the order trends in the second half of the year in 2013. You also mentioned that backlog maybe was down slightly at the year end. Q1 is typically seasonally a better volume quarter for you guys. You had sales growth year-over-year in Q4 – do you think that you can increase the shipments year-over-year in Q1 as well?
Chad, we’d love to. We typically don’t give any forward guidance on sales. I can tell you this, that the most important thing that we’ve got to do is get new product and it’s the right product into the market and clear through some of the old product that we’ve got there, and we think we’ve got some programs to help us do that.
I’m encouraged by what I’ve seen at Thomasville from a Q4 perspective in terms of the comp store sales growth and I’m also encouraged by the new products there. I mentioned a little bit on our wholesale brands. We’ve had a Broyhill upholstery business that’s had three years of growth three years running, and now we’ve added the Mixed Container Program for case goods and we’re looking for strong things there.
It’s a matter of us going ahead and getting the right product in the right distribution at the right price point and that’s what ultimately drives sales growth. So we had a back half of the year that was up a tiny bit – you know we’re not satisfied with that. We need to grow sales and grow gross margins and when we can do that, gross profit dollars flow and it just creates so much leverage in our financials. We’ll do that while we manage our cost structure, that’s really the game plan and we’re five weeks into it, six weeks into it and were just going to go real hard at it.
Thank you. (Operator instructions.)
Okay. Well listen, I want to thank everyone for being on the call this morning. We’ve got again a lot of work to do so we’re going to go ahead and get right after it. So thanks everyone and we’ll see you on our next call. Take care.
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