Executives
Ralph Scozzafava - Chairman and CEO
Steve Rolls - CFO
John Hastings - VP of Communications
Analysts
Budd Bugatch - Raymond James
John Baugh - Stifel Nicolaus
Barry Vogel - Barry Vogel & Associates
Furniture Brands International Inc. (FBN) Q2 2009 Earnings Call August 5, 2009 8:30 AM ET
Operator
Welcome to the second quarter 2009 Furniture Brands earnings conference call. My name is Katrina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I will now like to turn the presentation over to your host for today's call Mr. John Hastings. Please proceed.
John Hastings
Yes. Thank you Katrina and good morning everyone. Welcome to our second quarter earnings conference call. With us today are Ralph Scozzafava, Chairman of the Board and Chief Executive Officer and Steve Rolls, our Senior Vice President and Chief Financial Officer.
During our prepared comments and the question-and-answer session that follows, we will be making statements expressing the beliefs and expectations of management regarding future performance. Any such statements are forward-looking statements, which reflect our current views with respect to future events and are based on assumptions and therefore are subject to risks and uncertainties. These risks and uncertainties include without limitation, the risk factor set forth in our most recent Annual Report on Form 10-K filed with the SEC. We do not undertake or plan to update these forward-looking statements even though our situation may change.
Thank you, and now I will turn the call over to Ralph.
Ralph Scozzafava
Thanks, John. Good morning, everyone. We appreciate you being with us again today. This morning, I will make a few brief remarks about our performance for the quarter, and then, I will turn it over to Steve Rolls to go over our results in a bit more detail.
In yesterday's earnings release, we reported that our top-line sales declined 36% from a year ago. That level of sales decline is consistent with what others in our industry are reporting and it is not unexpected given the state of the current economy. The decline in GDP over the past few quarters is the steepest that we have seen in 50 years and the fact that we have been able to maintain out gross margins during this period, speaks both to our pricing discipline and our efforts to take cost out of the business.
Our balance sheet remains one of the strongest in the industry and we are consistently reducing our net debt while maintaining a very good liquidity position. Furniture Brands today is in a strong position to weather this downturn and having settled this we are just not satisfied with our results and we will do better.
At this point I will let Steve take us through the financials enclosed with some additional comments and then we will take some questions. Steve?
Steve Rolls
Thanks Ralph. As Ralph said sales for the quarter were down 35.9%. That decline reflects not only the weak economy but some other factors that are specific to furniture brands. A year ago our revenue included sales under licensing agreements that helped the top line but created losses on the operating level. For that reason we opted not to renew those agreements last year.
Another contributing factor in the sales decline is a refusal to extend credit terms to customers that do not meet our risk profile. While hard to quantify, we certainly are seeing a decline in the year-over-year sales to specific customers that we know are struggling financially.
In the second quarter of 2008 we booked an additional $11 million in bad debt expense to address accounts that ultimately could not pass. Year-to-date our bad debt expenses have been much lower.
Our reported gross margin of 21.4% declined slightly from a year ago period. Both quarters included special charges that are detailed on the press release and the margins of generally comparable on an adjusted basis.
The table on the press release also shows our costs associated with factory down days at 3.4 million this quarter compared to 7.5 million in 2008 quarter. That decline in unabsorbed indirect costs shows through plant consolidation, we have taken overhead out of our manufacturing processes. It also illustrates the operating leverage that we can achieve with an increase in throughput once sales recover.
On a reported basis SG&A is down $56 million from last year. Excluding the special charges in the press-release, SG&A declined more than $28 million or 27%. A portion of SG&A attributable to our company-owned stores remained flat year-over-year, even though we had 14 more stores in the second quarter of 2009 from 2008. This reflects the efforts of our retail team to streamline operations and run a more efficient operation.
Cash flow for the quarter was a positive $19.6 million excluding the receipt of a $25.6 million tax refund in April, and the pay down of $16 million of debt. Working capital improvements more than offset the quarters operating loss than capital spending.
At the end of the quarter, or long term debt was $129 million and we had a cash balance of more than $77 million, leaving us with net debt of $51.7 million. The balance sheet for June 30 shows $19 million of debt as current debt. That amount was paid down in late July, and our net debt remains in the low $50 million range.
Our company-owned retail store program continues to affect our reported financial performance negatively, as our stores are impacted by the same weak demand trends and fixed operating cost that all retailers face today. More than half of our reported total company operating loss is related to the 62 company-owned stores that we operate and an additional 26 closed retail stores where we continue to incur cost. We have seen improvements in the company-owned stores where our retail team has been able to implement better operations.
That concludes our comments on financial results and we will address specific questions at the end of the call. Now, I will turn it back over to Ralph.
Ralph Scozzafava
Thanks Steve. I will make a few closing comments before we open for questions. While we plan and budget for the worst of conditions and are weathering this economic storm, there are some positive factors emerging. GDP is forecasted to decline at a much lower rate this quarter and turn positive in the second half of 2009. Lower housing prices are attracting buyers and consumer confidence appears to be stabilizing. Those are all good signs for our industry.
Thanks to our decisive actions in 2008 and so far in 2009, Furniture Brands is well positioned to take advantage of improving market conditions. Our solid balance sheet gives us sustained power to get through periods like this one where the demand is weak. It also allows us to maintain pricing discipline and also to continue product development that supports our brands.
We have also made real improvements in our cost structure. As Steve said, SG&A is down $56 million from last year on a reported basis. Excluding the special charges, SG&A has decreased $28 million in the second quarter alone. A portion of SG&A is directly related to sales levels but much of the decrease is related to lower headcount and operating costs, focusing our marketing budget on working media and better management of our accounts receivable that lowers our bad debt expense.
These are part of the changes we made for the business. In the past 18 months we have consolidated manufacturing and warehousing in many of our operations. We have moved to a shared services structure and reduced the size of our organization to match our new volume levels. These structural changes provide permanent cost savings and will generate significant operating leverage as sales levels increase. That is the key focus for Furniture Brands today; stabilizing operations and growing our top line.
Steve discussed how we are not using the discounts or easy credit to drive sales. These tactics might help temporarily prop up your sales line but they erode brand equity, destroy gross margin and in many cases, end up as big write-offs in the bad debt column later on.
What we are doing is offering our retailers a full value bundle; reasons why our brands and our products can improve their business. We start with the power of our brands; Lane, Broyhill and Thomasville are three of the top brands in the industry. Our research shows that consumers prefer brand to non-branded products and their preference for buying a branded product increases with the purchase price. We make sure those furniture has value with consumers by understanding what they want.
Furniture Brands is becoming the industry leader in developing consumer insights and leveraging those insights into the product development process. We are the only key manufacturer that can offer retailers products, the new state-of-the art consumer testing where we take their target consumers and test our products before they go on in their sales [depots]. Because we view this consumer testing to develop products, they are more likely to be popular with consumers, we can help our dealers turn their inventory faster.
We can also address the working capital needs by offering express programs from most of our collections that let dealers refill their stock, many cases in days, not weeks or month. Those two elements, let retailers earn a gross margin return on investment that is much higher than if they purchase containers of non-branded items directly from offshore suppliers.
We also support our dealers with a broad range of programs designed to drive traffic into the stores. Lane's nationwide home entertainment tour has visited more than 100 dealers to-date and has driven significant consumer traffic and sales at every stop. It is a multi-million dollar investment we are making to support our Lane dealers and it was recently recognized by Event Marketer Magazine as the top mobile marketing campaign of the year.
Broyhill is driving its GMROI advantage with two programs that reduce dealer's working capital needs. Broyhill maintains ready-to-ship stocks on a number of fabric and leather collections and six case good collections that can be delivered in days across North America. That quick turnaround gives dealers a big cash advantage over buying containers months in advance from overseas suppliers. Broyhill also offers the customer other program that can deliver pieces in any of 30 colors in 21 days. It is another advantage that Broyhill brings to its dealers.
Thomasville is now preparing for a very strong Labor Day sales event with two-week TV campaign that will feature more than 600 spots in those two weeks alone across the country. We are also partnering with HDTV's online platform and using Google and Yahoo's search programs to build awareness of the Thomasville sale and of course the Thomasville brand. Those programs will reinforce the sale messaging that is part of the new Thomasville website and drive traffic to our dealers.
Our Lane, Broyhill, Thomasville and Drexel Heritage websites are incorporating enhancements, such as better dealer locators and mapping functions, reference pricing and new room-planning software. All these enhancements enrich the research process that consumers start on the internet. Our goal with all of these developments is twofold; make our websites as informative for our consumers as possible and then to drive traffic to our dealers.
Our Designer Brands are also leveraging their online presence with a new email marketing program that delivers timely product and brand news directly to the Nation's leading interior designers. This increases brand awareness and really lets Hickory Chair, Henredon, Maitland-Smith, Pearson and Laneventure stand out in a very crowded niche market. These are just some of the activities that we have against our brands to drive our business and the business of our retailer partners.
Well, that concludes our prepared comments for the day. We want to thank you for being with us and now we will open up the lines for your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Budd Bugatch representing Raymond James. Please proceed.
Chad Bolen - Raymond James
Good morning, Ralph, Steve and Jon. This is actually Chad filling in for Budd. A couple of questions. I know Steve, you mentioned in your comments that, it is pretty hard to quantify but, could you give us any help on kind of understanding how much business you walked away from due to the credit concerns, and in addition to that what do you think the year-over-year impact was of the absence of the licensee programs?
Steve Rolls
Yes, I will start by saying that I cannot give you those quantifications. In terms of business that we elected, I guess I would say not to take based on credit profiles. That is really hard to understand because you do not know what the orders might have been for those that became financially distressed and I do not mean, we just sort of turn our backs on retailers that are. Most retailers today across industries are having a tough time.
So we did not just turn our backs, we worked very carefully with our retailers but we were also careful to manage our risk in a very analytical way, so that we did not get out there and make decisions that we should not just based on sales because if you extend more and more credit in sales to people who are not going to make it, maybe it feels good in the short term, because you get sales but you do not collect on. So, we have really done a much better job there, but I say it is just really impossible to tell you how much that is, but you just know that there would have been higher sales and we have done that.
On the licensing side, we have talked in the past about, Ralph Lauren, as a big piece of business that, I will say, walked away from when the contract was up. We did talk to them about renewing and indicated we just could not renew on the same terms and conditions and so we in the end elected to part company there.
So that actually helps the bottom line, hurts the top line because we were losing money on those sales. So, that is an example of what that looks like and again we did not break that out and quantify it for there is more than just Ralph Lauren. And we will continue to do that when we license people's names or brands, if you will, to make sure that it makes sense for both parties.
Chad Bolen - Raymond James
Sure, and as we kind of attempt to model sales going forward, could you remind us, when did the Ralph Lauren deal expire? Was that the end of last year and what was the timing of Lillian August?
Steve Rolls
I will tell you, Ralph Lauren deal expired. It was not the first quarter of this year. We still had inventories that we needed to sell and we completed that in July, so all of that is out of our inventory now, but we stopped kind of our fundamental relationship in the first quarter. Lillian August is also a Q2 '09 stop with not nearly the same exposure as Ralph Lauren.
Chad Bolen - Raymond James
Okay, and could you quantify for us the impact of discounting in the quarter and maybe give us a comparison, maybe at least qualitatively versus last year and last quarter, how was that trending.
Steve Rolls
We have been pretty focused on not going overboard on discounting and I will tell you, I mean we certainly do discount and we have done some. I mean just things like Ralph Lauren to eliminate the inventory you have to do a little a bit. So, I think the difference is, where we have done some of that, it has gone to companies like Big Lots. They do not kind of dirty our normal sales channel.
So if you do a lot of stuff, if you pump all that through your normal sales channel, it hurts a little bit more because they just steal sales from other goods. So, we have got some of that, but we have did it in a fairly controlled and disciplined way, so that we did not, get crazy across our product lines.
We will probably see a lot less of that going forward, but we did not really breakout how much that was, but I think you can just see from our gross margins and if you look at some companies in the industry, you can see where there sales did not drop as significantly year-over-year as may be ours did, but if you look at their gross margins and you can really see the impact of discounting. So, the fact that our margins stayed relatively flat year-over-year, it tells you that we used some discipline there.
Chad Bolen - Raymond James
Okay and I guess maybe a longer-term strategic question sticking with that gross margin theme. I mean, assuming we get back to normal demand, not sure if anybody knows what normal is anymore?
What is the gross margin, maybe what is the broader margin profile of this company? I mean can we get back to 30%? If yes, I mean what are the levers that get us there?
Steve Rolls
We have not given any targets, but it is a good question and let me talk about the levers. So, we are dead on working on those right now. We are taking a much more disciplined centralized approach to negotiating contracts with our suppliers and I mean raw material suppliers, transportation, logistics, you name it, we have an organization in place.
Actually we are still building parts of it, as we brought in a new head of supply chain, but, we are seeing some good results already and getting better raw material prices, better raw material terms from our customers, and then really, these relationships are partnerships and it is not just going back to suppliers and hammering them for pricing terms, but, what we have done is, gone out to them and say it is going to be kind of a different world going forward, we want partnerships. In the end it is going to mean we are going to have fewer suppliers.
It is not going to be so fragmented, we are going to have more meaningful relationship and those things will hinge on quality of product, delivery timing, price terms, all the things that you want to do in a strong long-term supplier relationship and I will tell you the feedback we have gotten is very good. The suppliers have stepped up and said that is great, we want that. We are here to be with you.
So what will happen is, we will have fewer suppliers going forward. We are already seeing improvement in our prices and our terms most of which has not rolled through our income statement yet, as you can imagine here by the time you negotiate new price, new terms and you have to place the orders and has to work through the system.
So we think we will see some improvement in the second half of the year from those things on just the raw material side and I would not say just raw materials but supplies in general.
We are also working on logistics in improving our transportation costs, so you will see lowering cost, you will see better terms, so that will help improve our accounts payable.
We have had a, I would call a ridiculously low days payable outstanding in our industry or any industry. We have been able to improve that, we will continue to improve that and that is in a positive way, so all these things are working in that direction.
I think the other thing in terms of gross margin is both factory utilization. As you know we have completed a lot of plant consolidation, the rough edges of that are in terms of the pure consolidation have probably been completed mid to late second quarter, where you get some efficiencies. When you first do that you do not have efficiencies. What we are doing now is taking that to the next level and that is to implement lean cellular manufacturing in places where we did not have it.
We used it, in our decentralized mode of operating in the past in a couple of businesses very, very effectively, but we did not have that, those same lessons and understanding across the businesses.
So, we are in the process of implementing new cells for example at Broyhill, and Lane, and Thomasville and you have to kind of walk before you run, when you do that, when you first implement a cell its efficiency is down, no surprise and you keep improving it, you get used to it, the people absorb that and take ownership for it and then it gets better and we are already seen some fairly quick turn around and improvements in productivity, in first-time quality, even in terms of safety.
So, those are things we will continue to roll out. It will take time to get its full benefit but we hope to see some, at least modest benefit in the second half for this year if not hopefully greater.
So, we are doing a lot of things at that gross margin level to continue to improve, obviously as Ralph talked about, he talked about for some time, things like consumer testing.
We believe it will have a significant impact on the top-line and the gross margin level, because as you introduce products that consumers are more like to buy because they told you they are, you have less wasted product if you will, because specially in the Asian supply chain, where we manufacture or outsource in Asia, you have minimum order quantities, long lead times, and a lot of that stuff goes in the inventory.
Here, as we improve that process, we will be able to lower our inventories at much higher quality, higher turns in our inventories and improved margins because, consumers will want to buy that product, our retailers will want to stock that product, they want to give us more floor space. It is not the kind, when you snap your fingers and it happens tomorrow, you have to get it tested. You have to get into the retailer stands. Consumers have to say, I like that and buy it. So, there is a bit if a delay impact, but we are well underway and we think that will prove out over time. Sorry, that was a long answer but…
Chad Bolen - Raymond James
Okay. That is very helpful and I have got two more quick ones if I could. One, what was your availability on the ABL at quarter end. Did you pierce the threshold and then did the $19 million pay-down in July fix that or kind of where do you stand?
Steve Rolls
No, we have not. I do not think, certainly since I have been here and I do not think since the ABL began, pierced the threshold. There are two thresholds. The threshold that we intentionally stay above is, $75 million of excess availability and we were above that both at quarter end. The reason we paid down $19 million is because of our working capital reduction. We report our borrowing base on the 25th workday of the following month.
So as we did that, that indicated we would pay down a certain amount. We elected to pay down $19 million to stay above that $75 million. If we go below that, and stay above $62.5 million, we have to do weekly borrowing base reporting and there is cash dominion. That is certainly not the end of the world and we can do that. We just elect not to and have always elected not to. So that is why we stayed, and we still have a lot of cash. We just stayed above that level to simplify our lives.
Chad Bolen - Raymond James
Sure.
Steve Rolls
The $62.5 million, if we hit or go below that, that would trigger a fixed charge coverage ratio which we do not need and so if you look at that we are over $12 million or $13 million of excess availability.
Chad Bolen - Raymond James
All right, great. And last question. Could you just give us an update of the store count Thomasville and Drexel and kind of dealer versus company-owned?
Steve Rolls
Yes, we have 46 Thomasville company-owned stores. I do not think we have ever broken up the Drexel, probably have not. There are I think, ten of those, so that is been fairly static. There are 62 other Thomasville stores dealer on stores and occasionally we take some of those over.
Operator
Your next question comes from the line of John Baugh representing Stifel Nicolaus. Please proceed
John Baugh - Stifel Nicolaus
Good morning. Can you discuss the revenues in Q2 as it relates to Q1? There was a fairly substantial decline, almost 20% sequentially and you mentioned the licensing and the credits. Does that explain all that? I guess what I am really wondering is, we are hearing in general that furniture sales sequentially sort of flattened out over the past, I do not know, two, three, four months. Are you seeing that after you adjust for whatever anomalies that occurred with licensing and not selling sort of retailers etcetera.
Steve Rolls
Let me just jump in for one second and I think Ralph's going to take the question. I just want to correct, I said 62 non Thomasville owned stores. We have 62 total stores owned by the company, the non Thomasville is 85. So, I just told you the wrong numbers sorry. Ralph?
Ralph Scozzafava
Yes John, with regard to your question, when you peel away the piece of business that we have kind of walked away from, you start to get to kind of a run rate that shows a little bit of stabilization, we are seeing our order rates tick up a little bit, and sequentially throughout, certainly the last I would say six to eight weeks we have seen with the exception of the July 4 holiday which is always a timing issue, we have seeing our weekly shipments tick up a little bit. It is not huge but that is really what our trend has looked like.
John Baugh - Stifel Nicolaus
Okay.
Ralph Scozzafava
I think the Q2 is always a very, very low quarter for us and for I think, a lot of our peers, Q1 is the strongest quarter of the year, Q4 tends to be almost at that level and then you really deal with Q2 as the worst.
Steve Rolls
Q3 is second in line.
Ralph Scozzafava
Yes.
John Baugh - Stifel Nicolaus
I want to be clear on what you just said, you said orders, shipments, you said tick up, is that you already here that is a sequential orders or shipments just clarity there please?
Steve Rolls
It is really more sequential. Please do not draw a straight line here because anybody in retail or wholesale today is kind of looking for the bright spot, the bright light at the end of this tunnel, and then you hear anecdotally from retailers about things picking up, so we are certainly hopeful that there is some economic pickup here. We are not banking on it, we are still doing whatever we can to tighten our belts but there were some sequential pickups.
Ralph Scozzafava
John, to be clear addressing the earlier question, Steve mentioned gross margin. Gross margin becomes a critical measure for us, going forward that is really a big piece of what we have to manage along with our cash. The other though is to continue to drive down our breakeven point, drive down our costs.
Those are the things within our control and it is under the heading of plan for the worst of the conditions, budget for the worst of the conditions and then we will see sales tick up, I think we will see sales come up dramatically, at some point. We just cannot forecast that economically, so we just continue to manage as we go.
John Baugh - Stifel Nicolaus
And on that gross margin, I think you mentioned, you had, I forgot the number, 14 or something more stores this year than a year ago, obviously retail gross margins are higher than manufacturing gross margins. Our manufacturing gross margins year-over-year, what are they? And are we going to get that color in the 10-Q again with the retail breakout?
Steve Rolls
Yes, we will breakout three months and six months of retail, Thomasville retail, other and wholesale sales of that. Retail gross margins, we are not unique here, are pretty tough for anybody in the retail space because you just get de-levered with the weak economy. So, they are not very good.
I mean they are clearly higher than gross margins at wholesale but, they are not very -- gross margins are ok, the net margins are not very good. There is plenty of room for improvement but there is a high leverage factor there as well. So, our wholesale business was not where, we think it needs to be, it certainly is not as bad as it looks in total.
John Baugh - Stifel Nicolaus
Good and then, as you look at the business and maybe a comment on the manufacturing, separate from retail. I assume the problems at retail, where the losses were significant is, at this point largely of volume, in other words, you cannot really alter your cost structure dramatically. Maybe you can, if so, I would like to hear where, but I assume that is just levered to volume. Are there any brands? I assume some of the brands are loosing money, on wholesale manufacturing side, are we still committed to all of the brands or is there a possibility of walking from one or several brands to where there would be an up tick in earnings.
Steve Rolls
There are a lot of questions there. Let me try to get through them. On the retail side there are some things. There are two factors. We have taken over stores from our retail partners and we do that typically because they are not operating very well. So we made the decision, especially if we are on the lease, which we have been on ma many stores. Unfortunately over time we made the decision to keep it open or not to keep it open.
In the case of Thomasville, we typically will keep those open because we can benefit from a couple of things. One is some regional concentration. If is a larger metropolitan area, call it Chicago, New York, LA, that kind of thing, the more stores we own ourselves, the more we can leverage regional management, warehousing, distribution. So there are some cost savings that we can drive.
The other thing is sometimes the reason that we take the stores over is because the prior management did not maybe manage us effectively as they could have and should have. So we typically will change out management. We will often change out store personnel. We will train them. We will lay the stores out differently. So there a lot of kind of standardization that we can do to make those stores operate more effectively and take cost out.
Having said that, still in this economic environment it is pretty tough to make money, but we are kind of doing that for the future that when things turn around there is a lot of leverage there and you can make money. I am sorry, what is your second, third question?
John Baugh - Stifel Nicolaus
Were there any in manufacturing, I assume there are some divisions that are losing money?
Steve Rolls
Yes in a lot of our businesses. John then our profitability would vary by brand and there are reasons for those so, and we continue to focus on improving those things to make sure that we are selling profitable products that we are not just selling products to sell, that we are selling profitably to customers because, you have to look at how to sell to customers and whether you make the money and making adjustments accordingly. There are a lot of things that we are focused on doing there.
In terms of brands, we have 10 brands. Do all of them fit in our portfolio today? They do. We are always open-minded about adjusting our portfolio and we will continue to look at those things strategically and that is not a signal that we are about to sell anything, but, we are always looking at that and deciding what make sense and what does not, where the synergies lie, because, we are about driving cost synergies moving from this holding company that we have been in the past to a more centralized operating company.
John Baugh - Stifel Nicolaus
Can you tell us where the contingent liability on leases for independent dealers stands and any movement in that number in last quarter or six months?
Steve Rolls
Yes, that is, we disclose that in our 10-Q which we will, when that comes out shortly. It will have come down a little bit, it will continue to come down over time, just by the passage of time and getting closer to the lease expirations there.
We continue to take over some stores, so those that number comes down, but we take it over, so it does not really come down and then we mark those leases to market unless we keep them open.
So, there are a couple that we have actually opened back up and turned into Thomasville stores that were not Thomasville stores prior. So, we will declare that in our Q.
John Baugh - Stifel Nicolaus
Was there any write-off excluding the stores that you took in, did you take any additional hits on that number in the quarter?
Steve Rolls
No.
John Baugh - Stifel Nicolaus
Then a last question. How did you, I guess may be for Ralph, how do you think about a recovery of in terms of your higher-end brands, are we certainly seeing some light at the end of the tunnel with $8000 tax rebates to buy inexpensive homes and subsidized mortgages and all these things but I have not seen any help for the $0.5 million of home owner and I doubt any of this is coming. And we have got declining prices on those homes, the Jumbo mortgage market that is not working basically, lenders that do not want to lend on and on and on.
How do you think, what do you think about your business and I do not know, ‘05 ‘06 is a peak, how many years or how much time and what level of our cover we can get in your upper end brands and middle to upper, lets say relative to the peak in light of the stresses, we are looking at higher tax rates, the Bush tax cuts, I can go on and on and on, you know a lot of things coming out of Washington. I will stop there and get your thoughts strategically.
Ralph Scozzafava
Yes I guess John the way, the way I am looking at it if we go back in time to the years you mentioned '05 and '06, I think what we saw was unprecedented access to credit, we saw an extremely, what I call a hyperactive financial market and real estate market. From that standpoint, GDP was very strong, we know that is a key indicator and those were I think, kind of the big years.
Will we return to that any time soon? No I do not think '05 and '06 levels will return any time soon, they were certainly not planning for anything like that. If they do we will have tremendous leverage on our business and our cost structure to be extremely prosperous and profitable.
All the things you mentioned are key indicators, impediments if you like. Look at the GDP numbers. We come back to that as our leading indicator, down five in Q4 of '08, down over six in Q1 of '09. We know that we lagged that to a degree. I think that is largely responsible for a lot of the Q2 results that you see particularly at the top-line for companies who did not get into the big discounting. So, right now I think we are at a low point and I do see some stabilization to your early question.
When we come out of this, is very, very hard to project but I do know that we are going to see a lot more positive economic activity going forward than we just got through. What we are trying to do now is broaden our market, broaden our offerings to our consumers and our dealers. Make sure we cover more price points and also drive the leverage of our brands and try and get traveling in to our dealer stores.
What we have seen performing better and its no secret, we know that in downtimes upholstery tends to perform better than case goods, we are seeing that in our business. Not unlike, maybe what is happening in the Auto industry or other large durables at the very high end as you mentioned, the luxury end of the market, our higher price point brands and products tend to be selling slower, at a slower rate than what I would call the products in our good price ranges.
So, we are seeing that dynamic and I think we are going to see that for a while now. I do not know, I have seen the latest projections, I love to have a second half recovery, I would love to have a 2010 recovery, I think that would be helpful for lots of us in our industry. We are not budgeting for that. We continue to manage our cost structure, do everything we can to drive top line, maintain and stretch gross margins and just be good operators as we manage through and we will be able to do that. So I wish I had good news. I wish I could say its Q4 and its all going to be wonderful, but I do not think its going to be Q4 of 2011. It will be some time before that.
John Baugh - Stifel Nicolaus
Well my question given so much timing is, if you think about, if we are running at say half of where we were in '05, do we get 100% of that back, 75% of that back, 50% of that back, 25% of that back, at whatever time we recover for a year or two or three years. That is really what I am trying to drive at?
Ralph Scozzafava
Yes, it is so hard to get to, I guess the only thing I can say John is, I do not think we will get to that level for quite a while. There are credit would have dilution, way more than it is right now and I think there are enough safeguards in place to block that. We could be years away from that. So it will be somewhere, somewhere lower. I really cannot estimate.
John Baugh - Stifel Nicolaus
Do you, are you planning, are you budgeting? If say, you got half of those revenues back over some course of time, that would target a return on invested capital better than 10% or an EBIT margin for the total corporation in the mid to high single digits or is there any kind of that planning, long range thinking going on, that you could reveal with us?
Ralph Scozzafava
Yes, let me start the answer. Then I will hand it over to Steve to talk about ROIC. The one thing I will tell you is a return to even 2008 levels at our current cost structure provides tremendous leverage on this business. And you can do the math. What an incremental $400 million - $500 million, whatever the number would be? What that would deliver at our current cost.
So, we are at a point now where we can really drive significant leverage and we are not done getting our gross margins in order and getting our cost structure down, again, driving down the breakeven point. So, we look forward to any kind of a recovery, because we think that is going to be great for our company and our shareholders.
Steve Rolls
So, John we are very focused on ROIC. Obviously it is negative today, but that is a very good proxy for cash flow, because you are focusing on your entire income statement and your balance sheet. We think there are opportunities, as I have said on all those areas, so our gross margins will continue to find ways to improve those.
SG&A costs will continue to find ways to leverage that, there are things that we have done and can do in the short run. There are other things that can be done over the next, call it two, three, four years that can provide some meaningful improvement in SG&A, as well as our capital base and we still have idle assets that we are slowly selling off intelligently, not giving away.
We will continue to improve our working capital efficiencies, our manufacturing and capital efficiencies as things improve we can go to second shifts. So there is a lot we can do over time.
John Baugh - Stifel Nicolaus
Steve is there some sort of contribution margin on the incremental dollar revenue, $0.20, $0.30, $0.40 to the pre-tax line of something like that?
Steve Rolls
I think you just take our gross margin and just apply that. I mean on the SG&A level you have got sales commissions call it the three plus percentage points, but say you take the gross margin assuming no improvement in gross margin and see what that looks like minus that sales commission, but as I say we are focused on improving that as well.
Operator
Your next question comes from the line of Barry Vogel representing Barry Vogel & Associates. Please proceed.
Barry Vogel - Barry Vogel & Associates
Good morning gentlemen. I have two questions for Steve and one for Ralph. Steve can you tell us what the utilization rate was for your manufacturing facility in the United States in the second quarter?
Steve Rolls
No, we really never break that out. I can tell its improved, as we have done our consolidations where we have gone in Broyhill from behind locations, manufacturing, warehousing kind of staging locations into one, getting the kinks out there. In our Lane business we have overtime eliminated two manufacturing locations.
So that helps. I think you see year-over-year lower downtime costs but some of that still volume dependent I think we have room to improve there as we get the kinks out and as volume picks up.
Barry Vogel - Barry Vogel & Associates
Could you give us some color on the bad debt expense, you said that you had $11 million charge in the second quarter?
Steve Rolls
Last year we did, and do not misunderstand, we have and we budget for bad debt expense on a normal basis along the way. So we would have some of that during the quarter but a year ago in the second quarter we took significant charges of that $11 million level, we did not take those kind of unusual, if you will, charges this quarter.
Barry Vogel - Barry Vogel & Associates
I am sorry I misunderstood, so it was the second quarter of '08 that you had $11 million of that bad debt charge?
Steve Rolls
Yes, that is correct.
Barry Vogel - Barry Vogel & Associates
What about second quarter of '09?
Steve Rolls
Again we did not break that out, we would have a little bit, we have it every quarter, but the difference kind of an extraordinary charges was $11 million year-over-year.
Barry Vogel - Barry Vogel & Associates
Okay.
Steve Rolls
We have been managing that much, much better.
Barry Vogel - Barry Vogel & Associates
You have this $127 million of trademarks on the books and I do not know how the accountants rule on something like trademarks as opposed to goodwill. One would think that those trademarks are not as valuable as they were when you have got to put out the books. Can you give us some color on that?
Steve Rolls
Yes, every year we evaluate the value of our intangibles, so, goodwill, trademarks. At year end, we wrote off our goodwill and we wrote down our intangibles, our trademarks. We will evaluate that again at year end and if necessary make adjustments there.
Your trademarks tend to have more value than goodwill for obvious reason, I mean you cannot turn around and sell your goodwill in the marketplace but you can sell your trademarks as your brands are worth money.
Barry Vogel - Barry Vogel & Associates
Okay and, can you give us potential on some of your assets that are for sale?
Steve Rolls
The assets that we have for sale today are closed manufacturing, warehousing, office, or surplus plan. We have sold a couple of pieces in the second quarter and early third quarter.
We have other pieces for sale that we expect we will sell, call it the next six months or so, but we are being very careful, we do a very strict analysis, as it is a depressed market today. If we waited one year, two years, three years, what might that value, that market value of that facility be? Weigh that against what a current buyer might give us or might have already offered us and what the carrying cost of that facility is overtime.
Even though its closed, you have some taxes, some maintenance, some security, some utility expense and they are not huge buts its real money. So, we do that analysis and decide if the price that is being offered today worth taking and in many cases it is.
Barry Vogel - Barry Vogel & Associates
What is the value on books of all those assorted assets?
Steve Rolls
It differs and I do not have that isolated number for you. What we do when we close, let us say a manufacturing location or a warehouse, we will mark it to market. So today we have taken charges. If you look over the past over the past quarters, we have taken charges when we closed those facilities to write the book values down to an estimate of market value. In many cases, the tax values will be higher.
So as they sell we will generate tax losses that can be applied in the future. We write off our deferred tax assets but that does not mean they are not available. They are. So it just differs.
Barry Vogel - Barry Vogel & Associates
I have a question related to that whole thing with Ralph. You have stated in this conference call that you think it could take quite a while for things to come back. And I am wondering despite the fact that you have closed -- the company has closed a lot of facilities, I would that think that you should be considering possibly further consolidation, considering continuation of factory downtime costs, all these things.
Because as you explained there is tremendous uncertainty as to how long its going to take to get furniture sales back to a reasonable basis for the company. So I was wondering, where do you stand on that issue?
Ralph Scozzafava
Yes, I think it is a great question and one of the things that I think is critical to start with is and I think John's question was about how do we get back to '06 levels, which were absolute peak years for the industry. So to get back to a peak year is really is a stretch.
Do I think we will get back to significantly higher volume levels than we are seeing today over a reasonable period of time? Yes, I absolutely do. I think we have got a manufacturing footprint today that works for us. We did significant consolidations in 2008 and 2009 that Steve has mentioned, five facilities into one at Broyhill, he mentioned what we had done at Lane and similar at Thomasville and in our Designer Brands. So I think we have got a pretty good footprint. The key now is to integrate lean manufacturing, cellular manufacturing, into all of our faculties, and that is where we are going to find an important cost saving.
So that is the productivity that we are after. We were, what I would say is, tremendously focused on SG&A and costs along the supply chain. I think that our SG&A can still improve. However, I think that there is real benefit and profit to be had managing our raw materials, managing our operations. So that is where you are going to see us really spend a lion share of our time.
When we see demand return and it will happen I believe somewhat slowly but it will happen. There is a tremendous opportunity for us to get to another shift in a lot of our factories and that is what we will look to do.
Barry Vogel - Barry Vogel & Associates
By the way I got to commend you and your management team. You done a great job under these circumstances.
Ralph Scozzafava
Thank you. Really appreciate it. Are there any further questions?
Operator
Gentlemen, there are no further questions at this time.
Ralph Scozzafava
Well, we would like you to thank everybody for being with us this morning. We have a lot of work to do. So we are going to get back at it, and our results will improve. And we look forward to talking you all next quarter. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!