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Executives

James D. Ferguson – President and Chief Executive Officer

Richard C. Coggins – Chief Financial Officer, Treasurer and Secretary

Analysts

Sam E. Rebotsky – SER Asset Management

Jack D. Wallace – Sidoti & Co. LLC

Span-America Medical Systems, Inc. (SPAN) F1Q 2014 Earnings Conference Call January 30, 2014 10:00 AM ET

Operator

Good morning and welcome to the Span-America Medical Systems First Quarter Conference Call. This call is being recorded.

Before we begin today's call, let me remind listeners that this conference call contains statements that are forward-looking as defined within the Private Securities Litigation Reform Act of 1995. We wish to caution the listeners that these statements are only prediction, actual events or results may differ materially as a result of risks and uncertainties facing the company including the ability to achieve anticipated growth in sales of medical and industrial products in fiscal 2014.

The possibility that sales to achieve retail customer described in previous releases could decline faster than we currently expect. The possibility of disruptions in our consumer products business related to the transfer of our exclusive distribution agreement from Louisville Bedding Company to Hollander Home Fashions on May 24, 2013 as a result of the sale of Louisville Bedding’s utility bedding retail business to Hollander. The possibility of a loss of a key customer or distributor from our products, the addition of risks caused by the acquisition of M.C. Healthcare, including those related to business integration, international operations and foreign exchange.

The possibility of having material on collectible receivables from one or more key customers or distributors, the potential for volatile pricing conditions in the market for polyurethane foam, raw material cost increases, the possibility that some or all of our medical products could be determined to be subject to the 2.3% medical device excise tax imposed by the Affordable Care Act.

The potential for lost sales due to competition from low-cost foreign imports, changes and relationships with large customers or key suppliers, the impact of competitive products and pricing, government reimbursement changes in the medical market, FDA and Health Canada regulation of medical device manufacturing and other risks referenced from time to time in our Securities and Exchange Commission filings.

Span-America is now responsible for updating the information contained in the conference call beyond today or for changes made to this call by the Conference Call Company or Internet services.

I would now like to turn the call over to Mr. Jim Ferguson, President and CEO of Span-America Medical Systems. Please go ahead sir.

James D. Ferguson

Thank you, Shannon and good morning. As usual I have our CFO Richard Coggins on the call with me; he will be here to give you a detailed financial view in just a few minutes. But first I will share my thoughts on our first quarter performance and then at the end. I will come back and give detail for what we expect as we move forward, and then we will be glad to field any questions that you might have. So our first quarter was what we have warned everyone about, with the lost of our Black Friday promotion business, that business that we had for the last two years. Our sales were $14.9 million which was down by 31%, net income was $666,000 or $0.22 per diluted share. Both of those numbers were down 51% from the previous year.

Our first quarter performance was inline with what we expected, the of their Black Friday promotion coupled with the fact that we didn’t have a large one-time order in the medical business that kind of rolled over into the fourth quarter of 2012, made it very difficult to overcome our performance that we had a year ago. The order that we had again in the medical business it was one that actually started shipping in the early part of the fourth quarter of 2012, where we had several $100,000 of that that moved over into the first quarter and again just made it very difficult on us.

As for our medical business, it was down 3% in the quarter, but we had a number of positive things happen. On support surface continued to show growth even though it was modest, our Custom Care and Easy Air products led the way. Our Canadian business at M.C. Healthcare, it was even from the previous year, so we felt pretty good that we kept that moving in the right direction.

The best part was that our operating income for medical business was 15% even though our sales were down 3%; we continue to perform well in this area. Another area of positive results was our VA business and it was up 23% year-to-year meaning from the first quarter of 2012 to the first quarter of 2013 to the first quarter of 2014. This account continues to be a strength for us as we move forward.

And now to discuss the Custom Products business, our Custom Products business was down 60% not only did we lose the Black Friday business, but we also saw a great deal of softness from several other customers. It’s been well reported that holiday sales were not great for many retailers, so we believe that this was a result of that situation. The positive appears that our industrial business was 16% in the quarter on the strength of a couple of new piece of business that we have just got.

Overall that shortfall was isolated in our Custom Products business and the first quarter performance was inline with our expectations, we have our work cut out for us during the rest of the year since there were a lot of positive things happening which I will discuss in a few minutes.

So with that I’d be glad to turn it over to Richard and he will give you a lot of detailed information on the financial performance. Richard.

Richard C. Coggins

Thank you, Jim and thank you to our listeners joining us today. We appreciate you joining us for today's call. I’ll follow our usual format, I will review the financial highlight from first quarter of fiscal 2014 sales and earnings results then I’ll discuss our balance sheet and cash flow for the quarter and then finally I’ll turn the call back over to Jim to get his comments on the business and our future outlook.

As I’m sure you saw from our release yesterday, our sales and earnings for the first quarter of fiscal 2014 were down significantly from the first quarter last year and like Jim said, our first quarter numbers were about what we expected, to summarize our results total sales for the quarter decreased 31% and $14.9 million and similarly net income declined about 51% to $666,000 or $0.22 of diluted shares compared with first quarter last year. The reason for our drop in sales and earnings was simple but dramatic; almost all of it was caused by lower sales volume in our consumer bedding products.

So let’s get right to the numbers. Our total consumer bedding sales were down 56% during the quarter to $3.4 million, compared with $10 million in the first quarter last year. That’s a $6.6 million drop in sales and $5.8 million or 87% of that decline came from the Black Friday promotion with one of our retail customers that we did in November of 2012 and then did not repeat in November of 2013.

As we announced last quarter, the lost this retail accounts to another supplier in a competitive bidding process. So $5.8 million of the $6.6 million sales decrease came directly from that Black Friday promotion. The remaining $800,000 decrease in consumer sales came mostly from the everyday business with its same customer, since the customers decided to switch suppliers. We believe, they’re allowing their sales to wind down in preparation for a full changeover that we expect to happen in February. So this drop in consumer sales was by a long shot, the main event affecting our sales and earnings for the quarter.

I’ll come back to earnings in just a minute, but let me first make a few more comments about sales. We actually had a couple of bright spots in our Custom Products segment in the first quarter but they were overshadowed by the lost account. First, our Internet sales of consumer bedding products were up by 26% during the quarter to just over $300,000. That performance continues a trend of double-digit sales growth in that product line, also our industrial sales as Jim mentioned, which make up the other part of the custom products segment grew by 16% to $881,000 with industrial sales increase came from a healthy combination of new customers and growth from existing business.

Now taking a looking at our medical segment, medical sales were down by 3% during the first quarter to $10.6 million, compared with $10.9 million in the first quarter last year. And overall, our medical sales for the quarter were a little softer than we expected, but they still turned in a pretty solid performance. Sales of our largest medical product line therapeutic support surfaces increased 3% to $5.5 million in the first quarter. We’ve seen steady growth in our support surface product line for almost three years now, and we’re encouraged by the results in this important part of our business.

Sales of our M.C. Healthcare Products were at a level at $2.4 million in the first quarter of this year and last year. This was our first full quarter of selling the new Encore bed. And I would say so far, we’re pleased with the startup and the customer reaction to that product and we expect it to be a significant contributor to our M.C. Healthcare sales as we move forward.

Sales of our other medical product lines were generally down during the first quarter. These lines include our overlays, positioners and seating products, as well as risk manager bedside safety mat. Demand for those products was weak in the first quarter, which is not unusual in the October through December quarter, because of the holidays during that timeframe.

So that covers the main points about our sales performance. Now I’d like to give you some information about our first quarter earnings results. Again, the elephant in the room is the $6.6 million decline in consumer bedding sales. Even though those were low margin sales, the loss of that business had a major negative effect on earnings, because our fixed overhead and administrative costs don’t change much in the short run when we lose an incremental piece of business like that. Of course, the same math works to our benefit when we gain new incremental business and we have seen and enjoyed the effect of that additional promotional business for the last two years now.

Similarly, we’re now unfortunately seeing a same thing in reverse. We’ve taken steps to reduce our variable cost, light material of course, and unfortunately some labor costs in the form of production jobs, and we will continue to look for ways to trim costs, but we have no plans to reduce costs in areas that we believe will help the company to grow in the future. So with that as background, here are the earnings numbers; our gross profit level was down by 22% to $4.8 million. That’s a decline of $1.3 million from the quarter and practically all of that decrease came from the lower volume of consumer bedding products.

Our gross margin however rose to 32.2% from 28.4% in the first quarter last year. The reason for the margin improvement was a shift in sales mix towards the more profitable medical segment, as a result of the lost consumer business. It’s nice to have the margin improvement, but of course, we’d much rather have the higher gross profit level even if the margin percentage was lower.

In the medical segment, our gross profit was down slightly by about 1%, because of the 3% decline in medical sales and because of slightly higher manufacturing costs at M.C. Healthcare as we start up manufacturing of the new Encore bed. However, our medical segment gross margin percentage was up slightly, because of a more profitable overall medical sales mix, as sales of therapeutic support surface increased while sales of other medical products either were leveled or declined.

Looking at expenses below the gross margin line, all expense categories were down reflecting the lower sales in the quarter. Our total SG&A expenses were down by 7% or about $280,000, but that level nearly enough to offset the lost gross profit contribution from the lower consumer sales volume. As a result, our operating earnings were down by 52% to $1 million and our net income likewise declined by 51% to $666,000 or $0.22 a diluted share, and as you know by now, the large majority of that earnings decline was related to a lower consumer sales volume. We’re working hard with our partner, Hollander, to replace those consumer sales, and Jim will give you a little more information on that shortly.

Now, let me turn the corner here and make a few comments about our balance sheet and cash flow for the first quarter of fiscal 2014. Our balance sheet at the end of December of 2013 remained in excellent shape. There are just a few noteworthy items, and the first, our cash balance at the end of the first quarter was $5.3 million, which was down 3% or about $150,000 from our cash level at the end of last fiscal year. Our working capital accounts including receivables, inventory, payables and accruals were all down slightly during the period, generally reflecting the lower sales volume in the first quarter.

Our cash flow for the first quarter of fiscal 2014 was down significantly to $673,000 from a company record $3.4 million in cash flow in the first quarter of fiscal 2013. Now, there are two reasons for that sharp decline. The first and the largest is again related to the Black Friday promotion that we did in November of 2012. Because of that promotion a year ago, we had a $2.4 million decline in inventory from the end of September to the end of December of 2012, and a decline in inventory creates an increase in cash flow. So $2.4 million of our $3.4 million in cash flow in the first quarter a year ago was entirely related to the reduction in inventory as we shipped the products for the promotion.

Since we did not have that promotion in the first quarter of this fiscal year, we did not have a large inventory reduction and the related increase in cash flow like we did a year ago. So that alone explains about 83% of the reduction in our first quarter cash flow. The remaining decline in cash flow was caused by our lower earnings during the first quarter of this fiscal year.

In spite of the large decline from the unusually high cash flow in the first quarter last year, our cash flow this quarter of $673,000 allowed us to fund capital expenditures of $272,000 in the first quarter and pay dividends of $410,000, which were our largest two uses of cash during the first quarter. Overall, our financial condition is excellent and we look forward to continuing that trend in future quarters.

That wraps up my comments on our financial results. I’ll now turn the call back over to Jim for his view on the business.

James D. Ferguson

Thank you, Richard. Just want to comment a little bit here on what we expect moving forward, and as we move into the second quarter, we still have another negative impact, which Rick has already touched on and that is we have the loss of the major piece of our everyday business. This coupled with our loss of the Black Friday promotion equates to approximately $13.3 million in lost revenue.

We will begin seeing the everyday business begin to phase out in February and we’re working closely with Hollander, who is our marketing partner in retail, to replace this business, but it will take some time. We’ll also add that we are also bidding on next year’s Black Friday promotion. So for Hollander this has been – they have been a great partner and they brought a lot of multiple opportunities to us and we are really looking forward to the upcoming year and what they can bring.

As for the business in general, we’ve been keeping very busy and we’ve been assessing our calls, which resulted in a paring down of our workforce by approximately 20%, Richard touched base on that but we did a pare down at workforce by about 20%. Those positions were phased out throughout the first quarter as sales began to slow. We will continue to look at our staffing levels to make sure that they match up with the level of sales that we’re seeing.

So now let’s our attention to the medical business. This business is moving forward quickly. We have a number of opportunities ahead of us, particularly with our new Encore bed. It continues to be well received in the industry and this coupled with our complete line of support surfaces continues to be a great combination, and we have a number of evaluations on the bed happening as we speak and with more being generated all the time. This gives our sales people a great story to tell to their customers.

Also other new products in the pipeline, as I’ve always said, our pipeline is full. It’s the lifeblood of our company. We will be introducing in February an expandable bed frame, which will be able to attach to our existing bed frame, so that they can get the same width of bed just as they can get on the new Encore frame. On most of the frames that we already manufacture, they’ll be able to attach these expandable widths and be able to expand it out to the 42 inches that we see on the Encore frame.

We will also in February, be bringing out a new low air loss mattress, so it will be a little bit of a lower end product that will allow us to compete at a lower cost level. And then finally, we’ve got another one that will be coming out probably some time about mid year. It’s going to be another surface product and we’ve already had a couple of our large corporate customers show great deal of positiveness toward that product. So we’re really looking forward to that one coming out. We believe that these items will have a positive impact on our business during the current year.

We’re also into running for several corporate buyers, which as you know always play a very positive role in our overall business. When you could layer in a high six figure or a seven figure piece of business on a regular everyday business, good things begin to happen. So we’re really looking forward to those opportunities as we move through the year. So with our new products coupled with some large corporate orders, we believe that our medical business is poised for growth during 2014. We look forward to its successful year for this part of our business.

In the Custom Products business, we’ve been busy trying to replace the $13.3 million loss. At this point, we have four customers that should reprice approximately $4 million of that loss. The $4 million is an annualized number, so given the timing that should probably be in the neighborhood of about $2.5 million to $3 million by the end of this fiscal year. We’ve already started one of those accounts, we’ve got another one coming up probably within the next late February early March, and then the others will start sometime around April we believe. So those things are coming and they are coming fast.

Again, they are right down the line of what we’ve done in the past in terms of pads and pillows. And then we’ve also got several other potentials that are very close, and as I have said, we’ve been very busy with Hollander. They’ve been a great partner, and we are very quickly trying to make up lost ground here. We are also seeing a great deal of opportunity in our industrial business. As we’ve reported, they were up significantly in the first quarter. And as I’ve also mentioned, they have a lot of great opportunity out there and it’s driven primarily by the automotive industry and the packaging business.

One final note on our custom products business, and I spoke about this last time, is a direct-to-consumer sale of a mattress product over the Internet. Our products had been developed, they had been tested, and they’ve passed all the applicable testing. So we are ready to go with those products. The website is being constructed so we expect this endeavor to have a positive impact on our business during the second half of this year. This will obviously be a first of its kind where we’re actually selling a product directly to a customer over our own Internet website.

So we’re really looking forward to that opportunity and think that will add to us greatly not only this year, but in years to come. And as you can tell, we have been very busy in all phases of our business to make sure that we move forward from this significant loss of revenue.

We continue to believe that we have great deal of opportunity. So now, we must capitalize on those opportunities. We reaffirm that our annual reduction and earnings per share will be in that $0.10 to $0.15 – $0.10 to $0.15 range although probably closer to the upper end of that range.

And with that said, we’ll be glad to take any questions that you might have. So Shannon, if you’ll come back and let’s take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take our first question from Doug Weiss with DWS Investments [ph].

Unidentified Analyst

Hey, good morning.

Richard C. Coggins

Good morning, Doug.

James D. Ferguson

Good morning.

Unidentified Analyst

So I just want to make sure I’ve got the guidance correct. You were down $0.24 in the first quarter, you’re saying down $0.10 to $0.15 for the year, so you’re saying that the back three quarters would be somewhat better than last year?

James D. Ferguson

Yes.

Unidentified Analyst

Okay.

James D. Ferguson

That’s what we anticipate.

Unidentified Analyst

Okay.

James D. Ferguson

We think we’ve made some head roads into cutting costs inside the business, as well as we think we have some new business opportunities out there.

Richard C. Coggins

You know one thing to keep in mind, is that our first fiscal quarter, the October through December has historically been generally our weakest quarter of the year. Now you have not been able to see that in the last two years for fiscal years 2012 and 2013, you couldn’t see that, because it was masked by the large seasonal promotion that we did in each of those two years, but if you look back further than that you will see first quarter tends to be a little light for us. And so we expect to do better in the next three quarters than we did in the first quarter.

Unidentified Analyst

Okay. And then on the consumer side, so you lost $13 million plus, but about half of that is the seasonal promotion. So it sounds like, if you – well let me ask you, this customer, did they bid the kind of recurring business separately from the season promotion, are those two different…

Richard C. Coggins

Yes, yes that’s done separately.

Unidentified Analyst

So you’ve replaced most of the recurring business at this point, it sounds like, because that would have been like $6 million or $7 million, right?

James D. Ferguson

Well, the Black Friday promotion was $5.8 million and the remainder would be the regular business.

Richard C. Coggins

Yes. So on an annual – of the $13.3 million again, these are annual numbers, $5.8 million was the seasonal promotion, the other $7.5 million was everyday business and what Jim said earlier is that we’ve added – are in the process of adding four new accounts that should annualize somewhere in the $4 million range, but we’ll only see 2.5 to 3 of that in the fiscal year. Yes. So…

Unidentified Analyst

I’ll tell you, sorry…

James D. Ferguson

Yes, go ahead.

Unidentified Analyst

$4 million of $7.5 million and you’ve got some additional – it sounds like you’re well on your way to replacing…

James D. Ferguson

We are and we think we’ve got some other opportunities, there are two or three others that were very close and that probably could ship out another, I don’t know maybe $1 million or so and we’ve got them everyday. We are quoting business everyday. Hollander has been very good about this and they have accounts and contacts that Louisville Bedding did not have. So they’ve got a stronger organization a more professional organization and I think they all did well.

Unidentified Analyst

And can you remind me how we did the business industrial pieces in all that?

James D. Ferguson

Last year, we did about $3 million over there. And so we think we’ll have a nice little increase on that side of the business.

Unidentified Analyst

Okay. So, yes, so now – so it sounds like especially if you win, if you are fortunate enough to – at that Black Friday business again, you actually could – the consumer side could be looking pretty good in 12 months.

James D. Ferguson

Yes. Well, it’s one of those things where and we went through the same thing and many years ago, when we lost our largest customer in the medical business, it takes a little while to replace that business, but when we came back, we were actually stronger than we were prior to that primarily, because we didn’t have all our eggs in one basket. You replaced that $13.3 million from one customer with probably eight or 10 customers that are much smaller. But then, if you lose one, it doesn’t hit you nearly as hard as what this one did.

Unidentified Analyst

Okay. And then so we – I was asking prior quarters a little bit about M&A and you do – you have a lot of cash at this point, plus you have your credit line, which is unused and I know – my sense is it’s been tough to find good deals at attractive pricing, if it continues to be difficult to find attractive M&A opportunities, are there larger projects you could fund that would have good returns on investments that you could put some of that cash to work?

Richard C. Coggins

We look at that all of the time. I mean obviously, we are always looking at opportunities to be able to use our cash as much as we like giving it back to our shareholders. I’m sure they would also like for us to use it to try to grow the business. The main thing we got to do is, make sure we do it prudently and we don’t do something foolish and – but I agree with you, but – and we’re always looking for whether it’d be on acquisition or a business opportunity or ways to put that cash to use.

Unidentified Analyst

What about expanding the sales force, would that be a plausible use of cash or is that not economical?

Richard C. Coggins

No, I think part of the issue there is we feel pretty comfortable with where we are at this point, if we were going to do anything we might start looking more actively at putting something offshore as opposed to doing it domestically, I don’t think just adding people domestically is going to add a lot to our business.

Unidentified Analyst

Is that something you’re looking at international expansion?

Richard C. Coggins

Well, we’re always looking at those opportunities. I know somebody talked several calls ago about looking at Brazil, when we actually did some market or got some market research on Brazil and their total market for that product is $52 million, which was a standard to us.

Unidentified Analyst

Okay.

Richard C. Coggins

And so there is not nearly as much opportunity there as I think lot of people suggest. It seems that the people that they look for our products, the products that we have are primarily European countries and Japan. Those are the places that tend to look at products that we do more favorably.

Unidentified Analyst

Okay. Then last question, I think while the Affordable Care Act was going through Congress, you had spoken a few times about that creating some uncertainty especially on the home healthcare side and are you seeing some improvement now that that has become law?

Richard C. Coggins

No, we’ve seen no – nothing from that whatsoever at this point. It’s been kind a non-event for us and I don’t know how long it will take for any of that to trickle down our way.

Unidentified Analyst

Well, I guess, more generally on home heath, because it seems like certain segments of the home healthcare market are doing well, but that’s been a tough area for you over the last couple of years, is that true?

Richard C. Coggins

Well, I think I would – it may be our idea in a volume standpoint, but not from a margin standpoint. I can tell you that the home care business is not doing well. They have been the hardest hit by cut backs in the medical industry by Medicare reimbursement of any of the groups that we deal with and the home healthcare business as we said is very difficult at this point in time. As one of our largest customers, the CEO put it that little thing, I went through before, he said long-term care is sick and home healthcare is dead. That was his read in the back. So we do not see there anything come back from the home healthcare standpoint at this point at this point.

Unidentified Analyst

Okay. All right. Well, thanks and we’ll talk to you next quarter.

James D. Ferguson

All right, thank you.

Richard C. Coggins

Thank you.

Operator

And we’ll take our next question from Jack Wallace with Sidoti & Company.

Jack D. Wallace – Sidoti & Co. LLC

Good morning, guys and thanks for taking my call.

James D. Ferguson

Sure.

Richard C. Coggins

Good morning, Jack.

Jack D. Wallace – Sidoti & Co. LLC

A couple of questions for you. You know you mentioned in your script that sales positioners and overlays and et cetera were down 60% year-over-year and it’s – the first quarter is typically pretty weak for you – for those products to begin with. Any reason, I guess costs were concerned for the 60% decline there even in the weak quarter and do you see this segment coming back a bit over the course of the year?

James D. Ferguson

Well, a couple of things to think about. Again, we’re talking positioners, overlays, seating and then our Risk Manager product, with regard to positioners, one of the things that we’re still dealing with is the loss of some private label business that happened in January of 2013. We talked about that many times last year and didn’t mention it in this year’s release, because that should be our last quarter. But about a $150,000 of the decline in those products came from the loss of that private label business a year ago. The comparison on positioner sales will now starting in our second quarter of fiscal 2014 the comparison will be more on an apples-to-apples basis so you should see that comparison improve starting in the second quarter for positioners anyway.

With regard to overlays, the overlay part of our business has being slowly declining for many years and we don’t see that trend turning around and that’s been a function of what’s going on in the market as mattress products and support surfaces have gotten better over the years. It has reduced the need for overlay. So we still have a good solid overlay business, it is profitable for us and will, and we’re happy to continue selling those, but we don’t see growth in that area going forward.

James D. Ferguson

Well one thing to keep in mind that Rich didn’t mention is that we are at the end of a situation where we may pick up a new private-label customer in the positioning device world if you will that we think will probably happen, we’ll probably earn all the details of that one here over the next month. And probably proceed in shipping that new customer sometime during the third quarter or our third fiscal quarter. So we do have some upside in terms of that but that’s not 100% it’s probably about 80% at this point in time.

Richard C. Coggins

Yes I mean short answer to your question is we don’t have particular concerns about that part of our business. But we are not expecting significant growth from that part of our business going forward. With one exception of the risk manager the bedside safety mat. That product – you are going to see some volatility in that product line in sales from quarter-to-quarter, that’s just the nature of that business, but overall that’s a great product, we do expect it to grow moving forward. And we just had a down quarter in sales of that particular product line in the first quarter.

Jack D. Wallace – Sidoti & Co. LLC

Okay thank you that was definitely helpful. In previous calls and previous years I think you had – or made mentioned of there being a central one-time large order in the second quarter for a beds up in Canada. Do you have any I guess insight into that for the second quarter?

James D. Ferguson

Not at this point.

Richard C. Coggins

We’re we are looking; we’re talking but nothing definitive at this point.

Jack D. Wallace – Sidoti & Co. LLC

Okay and then just as follow on to one of the earlier questions talking about the ramp from Q1 to Q4 to get to back up into that $0.10 to $0.15 decline. So we should expect that the majority of that growth is going to come some of the new product launches as well as the incremental business one in the consumer products divisions, is that a fair way to think about it?

James D. Ferguson

That’s a fair way to think about it, I think you are going to see continued growth in the medical business, which is going to continue to generate increased profitability on that side of the business, the key is going to be we got to get the consumer back up, get the revenues back up on that side of the business very quickly here, so that we can generate the level of profitability that’s going to take to be able hit the numbers that we are looking for.

Richard C. Coggins

Jack, I’m trying to kind of be clear about, where the growth areas that we are expecting for the rest of the year are in the medical and industrial product areas. Our consumer sales for the rest of the year are going to be down even with the new business, the new business that we talked about again is on an annualized volume basis. So as we face that in this fiscal year, we are still going to have down quarters on the – just for the consumer part of the business for the next three quarters.

Jack D. Wallace – Sidoti & Co. LLC

Right. So and again, its just from a sequential basis you are going to be seeing the consumer pop backup that obviously will be down year-over-year into the last…

Richard C. Coggins

Yes with the magnitude of the decline – yes, I’m sorry the magnitude of the decline in the consumer business for the next three quarters, wont be as large as it was in the first quarter, because of the seasonal promotion we referred.

Jack D. Wallace – Sidoti & Co. LLC

Okay, and then lastly here, were there any I guess sequential year-over-year impacts on the price of foam in this quarter?

Richard C. Coggins

No, it remained very stable.

Jack D. Wallace – Sidoti & Co. LLC

Okay, great. Thanks for my questions.

James D. Ferguson

Thank you.

Richard C. Coggins

Thank you.

Operator

We will move next to Sam Rebotsky with SER Asset Management.

Sam E. Rebotsky – SER Asset Management

Yes good morning, Jim and Richard.

James D. Ferguson

Good morning.

Richard C. Coggins

Good morning.

Sam E. Rebotsky – SER Asset Management

I guess it, as you sort of broadcast, your dealing with the difficulties and hopefully that everything, will keep coming to fruition and is that at this point the $0.10 to $0.15 lower, do we expect a reduction in the next quarter or is it all in the second half that basically the benefits will come back more so?

James D. Ferguson

Well, first thing I would tell you is we can’t that precise in terms of quarter-to-quarter reductions, I mean we certainly could in the first quarter because of the seasonal promotion, we basically got the results that we expected, if you look at the upper end of our range in this $0.10 to $0.15 per share reduction range that we talked about what we believe is that higher end of that range in the $0.15 per share range is still achievable for us in terms of a reduction in earning compared to fiscal year 2013. So we do have to do significantly better from an earning standpoint in the next – in each of the next three quarters in order to hit that even the upper end of that reduction range.

And as far as exactly how that will be spread out over the next three quarters. We can’t be that precise about it. What I can tell you is that, historically if you wipe out seasonal promotions and things like that our fourth fiscal quarter historically tends to be a stronger quarter for us, second – first quarter again excluding seasonal promotion. First quarter tends to be our weakest and the second and third quarters are our average. So if this year, if it’s the trend in this year is similar to what we’ve seen historically then I would expect our earnings to improve generally from the second quarter to the fourth quarter of – fiscal quarters of 2014.

Sam E. Rebotsky – SER Asset Management

Okay, that’s sounds good. I know it’s difficult, it’s pretty difficult to sort of telescope that much. Now as far as the foam, there has been – it’s been basically flat quarter-over-quarter and we expect – I mean that is also difficult to sort of broadcast, but at this point the way things are we expect the foam prices or we may pass some of the cost on or all the cost being – how are we dealing with the cost of the foam with the customers.

James D. Ferguson

If we get a foam price increase it is covered in the medical business, it has to be handled over a period of time because we do have contractual arrangements with some customers. And so that get handled over probably a six to nine months period. And those things will be recouped; it’s just a matter of when and so forth. In the Custom Products business there is couple of things we do and one is with some customers we’ll pass on a price increase, others we’ll actually change the product to accommodate the price increase and that’s done with the customer.

We’ll tell the customer we’ve got this, but we can do this to your product whether we take a quarter of an inch of foam out or whatever it happens to be. We can change the product a little bit to accommodate the foam price increase. So it basically works either way you do it, but that can be handled and even one of those two different ways. But we cant – at this point we cannot particularly under the Custom Products business it’s hard for us, because their margins are fairly sound over there. It’s hard for us to just price increase and it doesn’t happen.

Sam E. Rebotsky – SER Asset Management

Okay, and as far as you are working with Hollander, do you find the consumer market, their understanding of the consumer market are they – are you bidding on say 10%, 20%, 50% more products or you trying to – assuming that the piece that you lost was still there. Are you trying to sort of diversify or you are limited by the cost of delivery…

James D. Ferguson

We are going after a lot more customers, their customer base is larger than what Louisville Bedding has, so they are – one of these pieces of business is a customer that we had never talked to before and it’s going to be pillows. So that one is a little bit interesting to us, they are – they understand the market very well, they are very good retails suppliers they know what they are doing from a marketing standpoint, they are excellent and the one place that they are having to learn a little bit about is about foam pads. They are very good at the pillow market because they were the largest pillow manufacturer in the country, so they knew everything about pillows in terms of foam pillows that whole deal, but they knew very little bit about foam pads in that business and it’s taken them a little while to get their arms around that, but I can tell you from dealing with them and the organization that they have, they will do a very good job of it.

Sam E. Rebotsky – SER Asset Management

Okay, okay. And what has been your experience dealing with new potential investors – did you get to appear at the Sidoti Conference this past year and…

James D. Ferguson

They actually have one coming out I believe, it’s in sometime here within a next month or so or something or maybe a little bit longer than that that they’ve invited us to and we’re contemplating that one.

Sam E. Rebotsky – SER Asset Management

Okay. That sounds good, it sounds – and telling your story a little more to the investment community would be good and…

James D. Ferguson

Yes.

Sam E. Rebotsky – SER Asset Management

You seem to be working on all the different areas to increase the sizes of the business and deal with the problems. It seems you’re doing what you have to do. It’s unfortunate when you lose a major customer, but good luck guys.

James D. Ferguson

Thank you so much.

Richard C. Coggins

Thank you very much, appreciated.

Operator

(Operator Instructions). And we’ll go to a follow-up question with Doug Weiss with DWS Investments.

Unidentified Analyst

Hey.

James D. Ferguson

Hello.

Unidentified Analyst

You know I actually meant to ask you little bit more about M.C. Healthcare and the Encore frame. So I think that wasn’t a major contributor this quarter or is that going to increase over the balance of the year?

James D. Ferguson

It should have increased. We did, I would say a couple of hundred bed frames in the fourth quarter and probably about that same amount in the first quarter and we’re getting a lot of interest and a lot of evaluations going on out there. We’ve been pleasantly surprised that how it’s been received and not only from the long-term care, but also in VA, we’ve had a couple of VA accounts look at it and buy some of those. So we’re looking forward to what it’s going to be able to do and again, there were a lot of calls associated with just starting that up. So we think not only, is it going to be a good contributor from a revenue standpoint, but also from a profitability moving forward, we get a lot of those upfront costs out of the way.

Unidentified Analyst

Am I right that the frame is somewhat more expensive than the mattress; is it?

James D. Ferguson

Yes. Normal mattress anywhere a foam mattress will run you I don’t know probably $100 to $500, depending on which you’re buying. This bed frame will probably run you anywhere from about, depending upon what you put on and you got to remember it’s like a car, it has all kinds of options things that you can put on it and it could range anywhere from probably about $1,800, $1,900 on the low side to almost $3,000 on the high side depending upon what you put on it.

Unidentified Analyst

So do you think in terms of the overall North American market is the frames a bigger market or is that not the case, because they are replaced less frequently?

James D. Ferguson

They are replaced less frequently, these things usually will last 10 years to 15 years, where a mattress is going to last to probably depending upon the mattress three to five years.

Unidentified Analyst

But that would imply they are – they are kind of similar markets in terms of size?

James D. Ferguson

Yes.

Unidentified Analyst

Names about…

James D. Ferguson

Probably…

Richard C. Coggins

Yes.

Unidentified Analyst

Right.

James D. Ferguson

Probably similar.

Unidentified Analyst

Yes. Okay. So it sounds like…

James D. Ferguson

Similar in terms of revenue, but in terms of the units you’re going to sell a lot more mattresses obviously.

Unidentified Analyst

Right, but it – my sense of that is just looking at your revenue breakout; you are much less penetrated on the frame side than you are on the mattress side. I mean…

James D. Ferguson

That is correct.

Unidentified Analyst

Yes and so.

James D. Ferguson

Out when we report further there.

Unidentified Analyst

That’s great, all right. Okay. Well, I just wanted to get a sense of that. So that’s all I got. Thanks.

Richard C. Coggins

Thanks.

James D. Ferguson

Thanks, Doug.

Operator

And there are no further questions in the queue at this time.

James D. Ferguson

Okay. We’d like to thank everybody for being with us today and we look forward to reporting to you after our second quarter. Thanks.

Operator

That does conclude today’s conference. Thank you for your participation.

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