Steinway Musical Instruments, Inc. Q4 2008 Earnings Call Transcript

Mar. 5.09 | About: Steinway Musical (LVB)

Steinway Musical Instruments, Inc. (NYSE:LVB)

Q4 2008 Earnings Call

March 5, 2009 5:00 pm ET

Executives

Dana Messina - Chief Executive Officer

Dennis Hanson - Chief Financial Officer

Donna Lucente - Corporate Controller

Analysts

Arnold Ursaner - CJS Securities

Andrew Berg - Post Advisory Group

Rick Tortell - Columbia Management

Kevin Sonic - RK Capital

Jeremy Dunst - GE Asset Management

Jeff Matthews - RM Partners

Operator

Welcome to the fourth quarter 2008 earnings release conference call for Steinway Musical Instruments. My name is Rose and I will be your conference coordinator for today. (Operator Instructions)

This afternoon the company issued a press release disclosing financial results for the quarter and 12 months ended December 31, 2008. If you have not yet received a copy, you may download it from the news section of the company’s website, www.steinwaymusical.com. Today’s call will begin with a reading of the Safe Harbor Statement, which will be followed by remarks by Dana Messina, Chief Executive Officer. Mr. Messina will be joined by Dennis Hanson, Chief Financial Officer, and Donna Lucente, Corporate Controller, for the question-and-answer session.

Today's call contains forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements represent the company’s present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.

These risk factors include the following - changes in general economic conditions, recent geopolitical events, increased competition, work stoppages and slowdowns, ability to successfully consolidate band manufacturing, impact of dealer consolidations on orders, ability of dealers to obtain financing, exchange rate fluctuations, variations in the mix of products sold, market acceptance of new product, ability of suppliers to meet demand, concentration of credit risk, fluctuations in effective tax rates resulting from shifts in sources of income, and the ability to successfully operate acquired businesses. Further information on these risk factors is included in the company’s filings with the Securities and Exchange Commission.

Today’s presentation will include EBITDA as well as other adjusted financial measurements, in which are considered to be non-GAAP terms. These measures present operating results on a basis excluding certain non-comparable items. Reconciliations of these measures to the most comparable GAAP terms are available on the company’s website www.steinwaymusical.com.

Now I would like to turn the conference over to Mr. Dana Messina, your host for today’s presentation. Mr. Messina, please proceed.

Dana Messina

Welcome, everyone. Thank you for joining us. I know you guys all had a tough week in the stock market, but let me start by reminding everyone that Steinway is a great company. We have no financial issues and we continue to execute on our mission to build great instruments.

I know there’s a lot of fear out there and many of you are concerned about your investments, especially those linked with the high end consumer. I’m going to walk you through the business of Steinway so that you understand that this great company is well positioned to handle this period of worldwide economic stress. First I’ll walk you through the fourth quarter and full year results and then we’ll discuss our balance sheet and the measures we’ve taken to prepare ourselves for a difficult economy. And finally we will go through the operations and give you a better picture of what we see. Suffice to say we are confident that we have a great team of employees, brands, products, and assets to prosper. Furthermore, we believe that unlike many companies, we can survive the demise of the major banks in the United States.

Let’s look at the fourth quarter performance. We generated a profit of over $3 million or $0.40 a share. Yes, our profit was down significantly, but I think it represented an excellent performance given the conditions we face.

Sales for the quarter were a $94 million down 22% from last year. That’s slightly better than what we expected when we released preliminary sales data in January. The lower volume led to reduced gross profit, which was down 27% and gross margin shrank about 200 basis points.

Operating expenses were down 17% for the quarter. Considering that our results were actually quite good through September, this shows that we were ready and able to react quickly when conditions in the fourth quarter changed.

We are continually looking at every expense and we are moving as aggressively as possible when we see opportunities to reduce costs. It’s a terrible environment and position to be in. We have hundreds of loyal employees who are very good at what they do. The last thing we want to do is let any of our people go. I think we all understand what we are facing and we have taken and will continue to take the necessary actions.

Adjusted EBITDA for the quarter was $12.1 million, down 34%, but comfortably covered our net interest by more than five times.

Our capital expenditures were quite low. They were about $1.5 million for the quarter.

For the full year, we generated net income of $8 million or $1.59 per share on a non-GAAP basis. Sales were $387 million. They were down about 5%.

Gross profit was $115 million, down 7%, and gross margins were 29.8% down, only 60 basis points.

Adjusted EBITDA for the year was $43 million, down about 5%.

Let’s spend some time discussing our balance sheet, its strength and the philosophy of how we positioned ourselves.

First many, many years ago, we as a company decided that whenever possible, it is worth it to pay extra and enjoy covenant-free, long-term, fixed rate debt, available in the high yield volume market. That decision and philosophy was proven correct. As I said, we believe we can survive even if every major bank fails, gets bailed out, or nationalized. Steinway has been around for a long time and unlike many, we’ve endured environments like this before.

Let’s look specifically to our balance sheet. We ended the quarter with $44 million in cash, availability under our bank lines was in excess of $100 million. We have more than enough cash to cover our outstanding bank lines. We have no covenants to speak of on those bank lines, unless availability falls below $20 million, and we have no intention of getting anywhere close to that level.

In addition to our cash and bank availability, we have substantial work in capital assets, which we can turn into cash over time. We have $60 million in receivables, which is net over zeros, but credit issues or losses we there realize.

We have $167 million in inventory and I’ll make a few points about that. Our inventory is at cost and we estimate that the retail value of it exceeds $300 million. This inventory isn’t food or clothing, it’s musical instruments, doesn’t go bad and we’re confident we could sell it at prices far higher than where we carry it.

In total, our cash, bank lines, and significant work in capital provide us with ample cushion to work through an extended downturn.

Next let’s discuss real estate. While today there is no bids for any real estate, we do own significant amounts of good unencumbered properties. I don’t know when the markets will be liquid enough to sell or finance these assets, but they are significant. Our primary real estate assets are our 17-story office building in Manhattan, which houses our Steinway high retail store. Our 14-acre parcel in Queens, located on the water with views of Manhattan. It’s on our books for about $13 million, but I suspect that even in this market it’s far more valuable. And finally our plant in Hamburg, Germany, it sits on a nice piece of land located in a good spot.

Our bond debt is interest only, contains effectively no covenants and is not due until 2014.

So the balance sheet is in good shape, it’s liquid, and it’s flexible, and thankfully we are not dependent on financial institution.

In terms of challenges and opportunities facing us in the balance sheet, we expect our dealers to lose all financing with Textron and G.E. Those two firms provided inventory financing to many of our dealers. Textron announced that they are leaving the business and while G.E. has indicated their intention to continue, it is our opinion that G.E. Capital will most likely exit the business in the near term. We are prepared for that.

We will lose some sales because our dealers cannot finance their inventory, but the great opportunity for us is to begin to finance these dealers ourselves. We anticipate launching a dealer inventory finance program very shortly. We believe it will be profitable and will create better relationships for us with our dealers. We will finance $5 to $10 million to begin this program and trust me, our lending standards will be far tighter than G.E. This, however, is not likely to entirely replace the $25 million in sales that were financed by these other companies.

Let’s move to operations and we’ll star with pianos. Obviously, it was a tough quarter with sales off over 20%. It was far tougher in the United States than the rest of the world. We saw unit declines in nearly every market, including China, which was down 8% for the quarter. We talked a little about inventory financing issues we face with our dealers, but more importantly, consumer traffic has declined sharply.

We seen those trends continue in the first quarter. We estimate traffic at the dealer level to be down 25% and some cases 50%. We expect to see some inventory declines at the dealer level in the United States as they adjust to a world with little or no financing. Fortunately our dealers in every other part of the world never had access to floor plan financing and their inventory levels remain appropriate for today’s market.

No surprise, gross margins declined in the quarter due to lower production volumes. Specifically we produced 25% fewer pianos in New York. We will continue to lower production until we are comfortable that our inventory and demand have reached equilibrium.

On the positive side, our institutional business is holding up well. It’s about 20% of our worldwide piano unit sales. It’s a long lead time business and we feel pretty good about it. We are aware of the large decline in domino values and what that may mean to us. We factored that into our thinking and still feel pretty confident about this segment of the business.

On the band side, band sales were down 26% in the fourth quarter as dealers reacted to the economic turmoil. Dealers are ordering later, buying only what they can sell immediately and taking no chances with their inventory.

We’ve seen some improvement in the last few months as reality sets in and business continues to be okay. Our end consumers are still going to school. They’re still joining the band. Dealers with low level of debt and proper inventories are telling us that it’s business as usual. To them, this financial crisis is just another news story that doesn’t affect them.

Dealers with excess debt or high inventory are struggling. They’re working to right size their businesses and have cut back purchases while they’re in survival mode.

The professional market will also be soft for us until this crisis abates. On the positive side, we introduced some new instruments. Our new Leblanc clarinet is a huge hit. We introduced it in late January and our factory is backordered through September. It’s the lowest cost, highest value instrument on the market. It goes right after one of our competitors that’s having financial and labor problems right now and if we can execute on this over the next few years, we will gain tremendous share in this market.

These are the types of opportunities that we have to seize to really come out of this in great shape. It also proves that the market is alive, if you have killer products and great prices. We feel really good about our band prospects for the long-term. We have better products. Our competition is reeling and we’re going after them aggressively.

That’s it for operations.

In terms of the outlook, in January we announced that we expected sales in the piano division to be off 20-25% and in the band business to be off 10-15% for 2009. Based on the trends we’ve seen through January and February, we see no need to change that outlook.

With that, we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have our first question comes from Arnie Ursaner from CJS Securities.

Arnold Ursaner - CJS Securities

You mentioned the new Leblanc clarinet. I thought one of your key strategies was to try to manufacture offshore. I assume Leblanc is still manufacturing here, so can you tell us more about the clarinet, price points, and again, most of the manufacturing you had previously done in the states with band instruments you achieved margins much, much lower than what you were getting on imported products.

Dana Messina

The clarinet market is a pretty large worldwide market. We designed a clarinet from the ground up. It’s made from composites. It’s got some unbelievably attractive features. It’s 20% lighter. They keys are black, plays great. We manufacture it most of it in the U.S. We have the keys for the instrument made for us in Taiwan and we do the final assembly and testing in the U.S. It’s a product with margins that we expect to be in the 40%-plus range and so we’ve proven that we can build products in the U.S. using offshore components that will be competitive for us around the world.

This particular product that has a retail price of about $800. We will be competitive with any clarinet maker in the world. It’s a better clarinet for less money than any other clarinet in the world and that’s what we’re driving towards with it.

Arnold Ursaner - CJS Securities

And the product that it would hopefully gain some share, what sort of price point is that one selling for?

Dana Messina

Probably a little over $1,000.

Arnold Ursaner - CJS Securities

Dennis, what sort of tax rate, guidance review can you give us for the upcoming year?

Dennis Hanson

38 to 40%, Arnie.

Arnold Ursaner - CJS Securities

Two things within your balance sheet or financials. Obviously you had a fairly sizable jump in inventories year-over-year and I’m sure that was despite some efforts to reduce them and the other thing is your debt went up a little bit and I though you were trying whenever possible to buy debt in the open market with your excess cash.

Dennis Hanson

You know the fourth quarter, we had a lot of pianos in production, even though we reduced volumes, but we were not prepared for the level of sales decline and it will take us some time to catch up on reducing our inventories, but we will get there.

In terms of our balance sheet with the bank debt. I’m not sure if every one of our lenders got bailed out, but I would say all of the major lenders in our bank syndicate were either bailed out or received some kind of major cash infusion from the government. We were a little nervous towards the end of the year whether or not our agent bank was going to survive. We were less nervous about some of the other banks, but we did draw down some of the line to make sure that we have the availability should one, two, three, or four of our banks in the syndicate fail.

We paid back a lot of that money that we’ve drawn down from them and will continue to do so. In terms of buying the bonds back, our window opens up on Tuesday and we expect to be in the market buying some of our debt.

Operator

We have our next question from Andrew Berg from the Post Advisory Group.

Andrew Berg - Post Advisory Group

Dana, when we look at your sales and marketing expense, which has been running around $48 million dollars the past few years and your G&A which is running around $35 million. Giving some of the cuts you made, how should we think of those numbers on the go forward basis?

Dana Messina

In a typical year, we normally run SG&A around 20% and those are numbers that we’re going to try and get back down to.

Andrew Berg - Post Advisory Group

That’s just for the G&A piece?

Dana Messina

For all of it.

Andrew Berg - Post Advisory Group

As you talk about taking on the function of extending credit to your customers, do you have people in house who are going to be doing that?

Dana Messina

Obviously there’s some expertise available in the market, but you have to remember on the band side of our business, we got a very active credit department, because for the band dealers we’re oftentimes shipping them product that we’re not going to receive payment for until October or November when kids go back to school and so the credit department that we have is pretty sophisticated and understands how to look at these dealer financials.

In terms of the floor planning, we have looked at some people from outside the industry and we’ve also looked at some third party services. We’ve also done inventory financing in our foreign operations via credit lines for some of our dealers. We expect our credit standards to be quite high. We’re not lending to any dealers where we don’t receive personal guarantees. We’re going to try and keep the lines very modest to try and force some of our dealers to turn their inventory faster. We’re going to be very careful about it and make sure we have the right team of people doing it.

Andrew Berg - Post Advisory Group

You said initially you’d be doing $5 to $10 million and that implies that that number could grow bigger. Is there a dollar cap?

Dana Messina

Right now we’re not going to let it go above $10 and we foresee the need for it to really go above that figure. We think the guys at G.E. and Textron took on far more risk than we would ever be willing to take. So if their credit line is outstanding now or $25 or $30 million, we expect to be able to do the same amount of business with credit lines less than half of what they had.

Andrew Berg - Post Advisory Group

On your revolver, can you confirm what the availability was at the end of the quarter?

Dana Messina

Our domestic revolver was over $85 million of availability and our foreign revolver around $20 million.

Operator

We have our next question coming from Rick Tortell - Columbia Management.

Rick Tortell - Columbia Management

I think last quarter something that was highlighted, issues with getting quality band products out of China, are you seeing any progress there? I know it’s not on your nickel, I think last time we may have missed a few on the revenue line because of some issues of returns or just not getting the product.

Dana Messina

I think whatever problems we were having in Asia, they seem to have worked themselves out. We’re pretty happy with most of the suppliers. Obviously we’ve upped the standards in terms of quality and people are demanding much tighter tolerances and we have our own people now in Asia. It’s not something that hits my desk every day as a problem anymore. We’ve isolated whatever issues we had to a few suppliers. The products are flowing through regularly now. We don’t have a problem with that. It’s really more on the demand side and that’s just going to take some time to work its way out.

Andrew Berg - Post Advisory Group

You have talked about the statistics of how the instrument business works, but what is it 10% of the fourth graders will play an instrument?

Dana Messina

Yes, 10% of the fourth and fifth graders start to play a musical instrument. 50% of them will stick with it.

Andrew Berg - Post Advisory Group

And that means an upgrade at some point, right?

Dana Messina

Or they’ll stay with it about 15% upgrade at some point to a step up or a professional instrument.

Andrew Berg - Post Advisory Group

So let’s focus on that 10% number to start. In this kind of environment, so what happens? You have dealers that are having a tough time getting financing, but you still have fourth graders that are going to raise their hand and say I want to play an instrument. What’s happening, I guess walk me through the flow of it. So dealers use their inventory. So once the inventory is gone, I would think even if somebody has to travel a few miles, they’re still going to find somebody that can get them an instrument, right?

Dana Messina

Look at it this way for the rental market. The school rental market for that fourth and fifth grader, we’ve not seen any change in the demand for our end consumer. Now remember how they’re serviced. We sell to a dealer who has a certain number of instruments in his rental pool. He starts renting them to these kids and some of them buy them, some of them return them, some of them upgrade them. The dealer keeps turning over this rental pool typically for a couple of years.

In this kind of environment, that dealer is going to take back that used instrument and he’s going to fiddle with it and fix it and try and re-rent it before he’s going to buy a new instrument to put in his rental pool. So we’re seeing dealers doing everything possible to try and extend the life of their rental pools. Instruments that would typically last for a couple of years before they were sold or needed to be replaced, guys are trying to stretch them out to last for three or four years so they don’t have to buy instruments.

They do get push back from the end consumer. A lot of whom want newer instruments and that’s really the issue we’re grappling with. So the guys in the rental market really aren’t seeing much change. They’re trying to milk their inventory as best they can. In terms of the step up and professional market, they are seeing some fall off there. Instruments over $1,000 or $1,500, they’re definitely seeing a slowdown there.

Andrew Berg - Post Advisory Group

So the guy that’s repairing the instrument and I recall you saying that I make as much margin on that as I do on the whole instrument. Are you seeing the parts volume go up?

Dana Messina

It depends on the instrument, but we are seeing our repair parts business as still pretty solid. Our accessory business is still pretty solid and very profitable. We actually feel pretty good about the band business. Sure it’ll be down as the dealers try and milk this inventory and as professional instrument sales fall, but overall, you know, I met with a bunch of our large dealers a couple of weeks ago, you would think they were oblivious to this financial crisis. It’s business as usual in the rental market with the school systems.

Andrew Berg - Post Advisory Group

It almost should be. 10% of the kids are going to play instruments for the first time and that’s not going to impact them.

Lastly on high end pianos, what are you seeing out there in the used market as it relates to I guess both pricing and volumes?

Dana Messina

We haven’t seen much in the way of change in prices or volumes in the used market. The market has quieted down for the used pianos as well as the new pianos. There’s not as much store traffic for the new or the used. I think that’s eventually going to pick up a little bit, but the used piano business should get busier. It’s going to be a challenge to sell new pianos, but we continue to do so. We sold pianos in January, February, and we’ll sell them in March. We introduced a new limited edition piano in January. I think it sells for $90,000 at retail. We had 70 of them available at the end of January and I think we sold through all of them.

Andrew Berg - Post Advisory Group

Is that institutionally?

Dana Messina

No, that’s a product to dealers. I know you Wall Street guys think that there’s nobody out there, but we still have consumers, but I’m not going to kid you. Business is tough on the piano side, but it’s tougher here in the U.S. than it is anywhere in the world. Whatever softness we’re seeing in the U.S., it’s probably double the softness we see anywhere else.

Andrew Berg - Post Advisory Group

Are you actually physically closing some of the retail locations?

Dana Messina

Ours? No.

Operator

Our next question comes from Kevin Sonic from RK Capital.

Kevin Sonic - RK Capital

Regarding the rest of the world that you were just talking about, has that held up right through January and February?

Dana Messina

I mean it’s down, but it’s not anything like the U.S. and as I mentioned in my comments, we’re fortunate that the floor plan financing and the aggressive kind of lending practices that took place here were not available to piano dealers anywhere in the world, so the dealer inventories in other countries are where they should be for this kind of environment. The traffic is not down nearly as much. The confidence level is not nearly as bad. The institutional business seems to be holding up quite well. So it’s softer, but it’s nothing like what we’ve seen here. Here you have the combination of dealers reducing inventories because their banks want their money back or Textron wants its money back, combined with lower store traffic. We don’t have the financing issues anywhere else in the world.

Kevin Sonic - RK Capital

It sounds like it may be less of an issue of differences in end demand and more of an issue with the dealer level.

Dana Messina

I think end demand, you know, when you see these kind of economic slowdowns, we definitely see end demand get deferred, but also every time we’ve had one of these, you see a V-shaped recovered because the demand for Steinway pianos remains relatively steady. Sure people can defer them, but when things turn around, we’re not going to lose that customer. If you play the piano for 30 years and this is a priority in your life, you’re going to buy one, but we’re definitely going to go through a rough patch here.

Kevin Sonic - RK Capital

With expenses, you alluded to targeting kind of a 20% of revenues. If revenues decline at the low end of what you’re suggesting for 2009, that implies something like $60 million. You were at about a $20-$22 million dollar run rate per quarter for awhile and you got that down to about $18 this quarter. So commend you for that, but you’d have to take another million dollars a month out of that basically to get to that $60 million dollar rate. Are you already closer to that from Q4 as you cut expenses through Q4?

Dana Messina

We’re getting closer. We did make some workforce reductions in the band business in January and February. I think our employment levels there are down north of 20%. We’re continuing to do it on the piano side, most of it will be domestically, because the labor laws in these foreign jurisdictions make it harder to reduce your workforce, but we will have a lot of people on short-time work. We do already, whether it’s working four days or three days a week. We’re shutting the factories down one week a month or two weeks a month. We’ll do whatever is necessary.

Kevin Sonic - RK Capital

I’m referring to SG&A, below the cost.

Dana Messina

Same thing. We are considering putting a lot of our staff on four-day work weeks. We do need a certain number of people to keep the place going, but we are going to do whatever is necessary. We understand what the environment is out there. We will make cuts we need to make to make sure that our expenses are in line and that we’re generating enough in terms of profit and cash flow to service our CapEx and hopefully make a return for our shareholders.

Kevin Sonic - RK Capital

If sales decline in line with what you’re thinking at the moment, understanding it’s a dynamic environment we’re in, what do you foresee for inventory by the end of the year?

Dana Messina

It’ll be down.

Kevin Sonic - RK Capital

I know it’ll be down, but relative to the sales decline.

Dana Messina

It’s hard to say. We’ve made tremendous progress on reducing a lot of our inventory levels from where they were to what they should be, but that was based on a different economic environment in September. So we’ll continue to reduce. I think the easy part is reducing the Boston and Essex pianos, that’s easy for us to shut off our OEM suppliers, which by and large we’ve done.

The band instrument business, any inventory reductions will happen in the fourth quarter, because we have to build inventory as we go into back-to-school with the order patterns we’re seeing from the dealers. So we have some risk on that inventory, but I think we have more visibility on the sales side there, so I’m not that worried about it. On Steinway, we’ve reduced production 25%. If we have to reduce it another 10% or 15% to get to equilibrium, we’re going to do it. We’re going to get our inventories in line.

Kevin Sonic - RK Capital

What do you consider in line?

Dana Messina

If our inventories were $20 million less than where they are today, I’d probably be satisfied.

Kevin Sonic - RK Capital

At the end of the year?

Dana Messina

Yes.

Kevin Sonic - RK Capital

I imagine that takes a quarter or two before you can make much progress, because of some extra dealer inventory out there?

Dana Messina

There’s a couple of things. When you see it on the balance sheet, it’s probably a decision that we made six months or nine months beforehand. When we decide to reduce piano production, you don’t see that inventory flow through for a couple of quarters, because of the way the manufacturing process works.

The same is true for band. We build inventory and then shrink it down when there’s back-to-school. So we’ve made pretty significant moves to get our inventory down by the end of the year, but if sales continue to decline we’ll take further action now. You’ll probably see it at the end of the year, but you may not see it for the first quarter. We’ll see it and we’ll be able to communicate it to you that it’s coming down, but it’s definitely a time line.

Kevin Sonic - RK Capital

You mentioned the real estate assets carried a cost and obviously a different market value and certainly the markets change, but that doesn’t mean they’re not worth well above what they’re carried for in the books of course. Being way out here in Denver, I don’t have much of a window into what’s going on in Queens. What does an acre of land go for in Queens? On the water with views in New York?

Dana Messina

I’m not even going to venture a guess. I mean in a good market, if somebody wanted to get a zone for a rental apartment, it was worth north of $10 million an acre. In today’s environment, I wouldn’t even venture a guess.

Kevin Sonic - RK Capital

What is that property carried in the books for?

Dana Messina

With the factory, about $13 million.

Kevin Sonic - RK Capital

For Steinway Hall in Manhattan, what’s the square footage there?

Dana Messina

It’s about 212 square feet.

Kevin Sonic - RK Capital

And a good market?

Dana Messina

Remember we don’t own the land. We’d have to share those proceeds with the landowner.

Operator

We have our next question from Jeremy Dunst from GE.

Jeremy Dunst - GE Asset Management

For 2009, what would you expect for your cash interest and cash taxes?

Dennis Hanson

Our cash interest runs about a little over $2 million, $2 million to a quarter, so probably $10 million for interest. And then taxes, probably $5 million, $5 to $10 million. That’s a guess. We don’t really forecast that.

Jeremy Dunst - GE Asset Management

What about your work in capital? It sounds like you’d be reducing inventory by $20 million, that we can expect it’ll be a source of cash in 2009?

Dana Messina

Should be.

Jeremy Dunst - GE Asset Management

Is CapEx anything you can cut back on?

Dana Messina

Right now our CapEx runs about $5 million a year. Most of it, about three and a half of it is maintenance. There might be a little bit, but not much.

Jeremy Dunst - GE Asset Management

Do you expect any cash restructuring charges?

Dana Messina

We may have some severance costs as we go through this.

Jeremy Dunst - GE Asset Management

What would you expect those to be?

Dana Messina

We don’t have a number to give you.

Jeremy Dunst - GE Asset Management

Just to confirm, what percentage of your total sales is dependent on floor financing? Is it just the $25 million?

Dana Messina

It’s about 10 or 15%.

Jeremy Dunst - GE Asset Management

Who’s the agent on your revolver?

Dana Messina

General Motors, Geneca.

Jeremy Dunst - GE Asset Management

Who are the other significant lenders?

Dana Messina

J.P. Morgan and Bank of America.

Operator

We have our next question from Jeff Matthews from RM Partners.

Jeff Matthews - RM Partners

Just wondering if you could elaborate on the floor planning issues with G.E. and Textron, why they’re leaving the market, why they were doing irrational pricing as you seemed to indicate and how does you being tighter on credit, does that affect the level of sales going forward?

Dennis Hanson

In terms of the guys in the market, Textron has announced in February or in February exited the market, so they’re doing no new business. Whether it was from mistakes they made elsewhere in their company or the music business, I don’t know, but my understanding is they’ve exited commercial finance altogether, because they can’t finance their balance sheet.

In terms of G.E., you know, was G.E. doing un-economic things? My personal opinion is they were. I’ll give you a couple of examples. Now that we’re seeing some of the results from some of our dealers, we have found pianos that we sold to dealers five years ago that G.E. has been financing for five years and never really required the dealer to pay the principle off or sell that piano or do anything with it. You know, they’ve got a build of that kind of inventory that we were frankly unaware that they were financing longer than a year or two. On terms that were un-economic, their interest rates were fairly low and a lot of what they did in terms of lending for long period of time on inventory really just didn’t make a lot of sense to us.

So were there some sales that we probably should have had? Probably, but as I said, it’s about $25 million dollars worth of business and we expect to lose probably $5 or $10 of that going forward.

Operator

We have our next question from Arnie Ursaner from CJS Securities.

Arnold Ursaner - CJS Securities

Dana, you mentioned before some of the dealers in response to Rick’s question. I guess one of the questions I have is you do own a few dealers and some of these dealers are struggling. Are you considering expanding your dealer network?

Dana Messina

We are. We recently bought a piano dealer in Düsseldorf, Germany. We closed that I think last month, at a price that roughly was 70% of the cost of the inventory. Pretty cheap. And so, we’re looking at other opportunities in the U.S. to open our own stores in major markets and we will look at some of the opportunities that we’re presented with in terms of liquidations of inventories and finance receivables and what have you.

Arnold Ursaner - CJS Securities

It would be almost unfair to have a conference call and not ask for an update on Elkhart and how that’s performing and perhaps expand on that and broadly discuss your whole portfolio of domestic facilities and where we are in the process of right sizing your operations there.

Dana Messina

Well I’m so happy we decided five years ago to reduce. We made a goal to reduce our manufacturing square footage by 50% or 500,000 feet. The plants themselves are running fine. They don’t have the orders we’d like them to have, but the quality of the products are coming out great. We’ve got some of the plants operating on four-day weeks. The plants making these new clarinets obviously are working full-time. The products are good, the orders are soft, there still opportunity for us to take costs out of these plants by improving our first path yields, but other than that, I think we have just about the right amount of space and we have some small opportunities to consolidate more space, but we’ve done the majority of it.

Arnold Ursaner - CJS Securities

With school budgets under a lot of pressure, how do you think that will play out? It would seem to me when you’re cutting really to the bone that music programs could be a candidate for cut-back. How do you see that impacting that business?

Dana Messina

You have to remember, most of the customers that we deal with. At end of the day, the parents are paying the rental fee for almost all of the instruments. The schools will buy big instruments like tubas and sousaphones and xylophones and we expect there to be softness in that business. It’s maybe 20%. It could be as high of our business comes directly from the schools, if I look at it, and that’ll be soft definitely. That’s why we think the band business, we told you at your conference that it would be off, and it’s because the schools systems will be down and it’s because the professional instruments will be down.

The student market for musical instruments is as robust and solid as we’ve described it to people. It’s very steady. It’s very predictable and it literally is, this financial crisis to our well financed dealers. This is just a new story on TV. It has no effect on what they’re doing day-to-day and it was really nice to hear them say it.

Arnold Ursaner - CJS Securities

Your 57 Street property, one of the issues when you didn’t have the sale is you had to re-up or rent the space you had to the two key customers. Can you update us on that?

Dana Messina

The rents and the leases are due I think until the end of 2010 and we’re in active discussions and negotiations with them now, but we don’t expect to have the new lease in place until some time later this year.

Arnold Ursaner - CJS Securities

Drivers of your growth and your business over the last few years has been tremendous growth in international as well as the institutional market and for lots of different reasons. One could argue that both of those could be under a [multi-year] cloud. International because of currency and slowing. Economic growth in these emerging nations. Institutional, you mentioned the endowment programs, maybe you saw some stuff at your end, because it was already in a prior year budget, but how do you see this evolving as these two are both under major clouds?

Dana Messina

The international markets are going to be challenging simply because of the fallout from the U.S., but our business in China, sure it was down 8% in the fourth quarter, but it was up almost 8% for the year. I mean the business there is still pretty good.

Our business in other parts of the world, it’s still pretty good and our dealers aren’t over-inventoried. It’s going to get soft. If it’s off 10-15-20%, so be it. That’s just the world we have to live with, but we’re right sizing ourselves to deal with it.

I don’t know that it gets as bad as it is here in the U.S., because consumers and institutions in other parts of the world weren’t as aggressive as consumers here were. So we don’t see the same kind of issues. In terms of institutions, the foreign institutions which make up a big part of it, they’re not endowment-driven the way some of the universities are here. So our institutional market overseas, we see it holding up pretty well and our institutional market in the U.S. because of the long lead times we have, we know who we expect to sell to in the next year or two. Yeah, we have seen some fallout and we factored that into our thinking when we told people what we expected for sales this year.

So we don’t see any surprises there. It’s going to be tough, but we don’t see any real surprises.

Arnold Ursaner - CJS Securities

You have super voting shares. In essence, you control a lot of the major decisions for the company. You have a very strong background in private finance and you highlighted in all of your prepared remarks and conversations the asset values in the underlying business and to the extent your liquidation value is some multiple of the current stock price and since you control the company and given your background, how do you reconcile all these factors? Do you finally just say this is getting silly and take a much more aggressive stance given the enormous disconnect between the asset values you’ve just described, which are multiples of your stock, and where we are today.

Dana Messina

Not lost on me and my background is not lost on me. That’s all I’m going to say on it.

Operator

We now have our next question from Andrew Berg from Post Advisory Group.

Andrew Berg - Post Advisory Group

Dana, just one quick follow-up. As we go back to the rental market and the band market, what percent of your sales are from dealers who are trying their inventories a little bit slower and trying to expand them. What percent of your sales are from the professional market?

Dana Messina

About 25% of our units and 50% of our revenue comes from the professional market and 75% of our units comes from the student market. In terms of dealer that are not turning as fast, we’ve seen probably a 10% increase in slow paying dealers, which would be the indicator I would use.

Andrew Berg - Post Advisory Group

Okay, when you say 25% of your units, what percent of your revenue is that for the dealer?

Dana Messina

50% was professional, the other 50%...

Andrew Berg - Post Advisory Group

Thank you. Got it.

Operator

We have our next question from Jeremy Dunst from GE.

Jeremy Dunst - GE Asset Management

I just had a few follow-up questions. The first is how much does G-Mac hold of your revolver?

Dana Messina

$30 million.

Jeremy Dunst - GE Asset Management

And then J.P. Morgan and Bank of America?

Dana Messina

There are a couple other guys in there, but what are they, $20, $30 million a piece.

Jeremy Dunst - GE Asset Management

Have you looked at replacing G-Mac as your agent?

Dana Messina

Sure we’ve looked at it, but they are quite confident in their ability to sustain themselves with the bailout money they’ve got from the government and whatever other bailout money they expect to get in the future and they see no reason to resign as agent. They seem bullish on us and bullish on themselves. We don’t have the right to unilaterally change our agent.

Jeremy Dunst - GE Asset Management

So if their $30 million was unavailable, would that that pose a problem?

Dana Messina

Not for us. As I said in our prepared remarks, all these banks can go out of business; we’re fine.

Jeremy Dunst - GE Asset Management

Of the $44 million of cash on your balance sheet, how much of that is the revolver draw?

Dana Messina

$15.

Operator

Once again, if you have a question, please press the star, then one on your touchtone phone.

Dana Messina

Okay, if that’s all the questions, we look forward to speaking with you May 5 on our next call.

Operator

Thank you, ladies and gentlemen, and before we go, the company would like to announce that it’s Q1 2009 Earnings Release Conference Call be held Tuesday, May 5, at 5:00 pm ET. This concludes our conference call for today. On behalf of Steinway Musical Instruments, we would like to thank you for your participation. Have a good evening.

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