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Stanley Furniture Company, Inc.(NASDAQ:STLY)

Q2 2014 Earnings Conference Call

July 15, 2014 9:00 AM ET

Executives

R. Glenn Prillaman – President, Chief Executive Officer & Director

Micah S. Goldstein – COO, CFO, Secretary, Director & CAO

Analysts

Bobby K. Griffin – Raymond James & Associates, Inc.

Steve Hale – Hale Partnership

Operator

Greetings, and welcome to the Stanley Furniture 2014 Second Quarter Operating Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Micah Goldstein, Chief Operating and Financial Officer of Stanley Furniture. Thank you, sir, you may begin.

Micah S. Goldstein

Thank you, Christine. Good morning, everyone. Glenn and I appreciate you taking the time to join us this morning. During the call today we may make some forward-looking statements that are subject to risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from our expectations is contained in our SEC filings and the press release announcing our results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the call this morning. Glenn?

R. Glenn Prillaman

Good morning, let me start with few comments on the Stanley brand then to wind down of the Young America business. And then comment on the Company’s financial position now and moving forward. And then I’ll ask Micah to run through the financial details and we can open up the call for questions.

First, I have two comments on the Stanley brand, we were pleased to see the Stanley brand grow nicely as shipments were buoyed from strong order growth in the previous quarter. It is nice to see this kind of growth when we and many of our customers were dealing with our announcement from the beginning of the period to cease domestic production of our other brand Young America. Of course, total company sales growth was impacted by the decline in sales in the Young America product line but this was expected, because we stopped taking special orders from customers one month end of the quarter.

Second, when we report third quarter numbers in October you’re going to see that we have a healthy business with great potential remaining. We will have completed the work associated with the end of the production in Robbinsville and we will no longer be utilizing the assets of this plant. At that time, we will breakout the financials of only the Stanley product line and report the Young America brand as a discontinued operation. This will provide clarity in our operating results for our Stanley brand and how this part of our business can be supported by our company’s adjusted cost structure.

Now what remains of our domestic operations related to our Young America brand is very simple only one point? We are winding down operations in Robbinsville that support the last orders associated with our Young America brand and we’re working to sell remaining related inventories. We expect to have production complete in the first part of the present quarter and then we will sell remaining inventories over the coming quarters. And we expect most of those remaining inventories to be sold by the time we exit the year.

As far as the total company’s financial position is concerned I’d like to communicate three points. First, we are successfully adjusting the size of the company’s overhead structure without sacrificing service to customers or momentum behind initiatives to grow the Stanley brand. We expect selling, general and administrative costs to be approximately $3.5 million quarterly for the near term, excluding restructuring charges. And if you all remember this is down from the $5 million amount that we have consistently kept as guidance for you for sometime.

Second, the company still expects the closure of its Young America facility in Robbinsville to be cash generative in total. As we guided when we announced the closing of our Robbinsville plant in April, we expected to use cash initially in order to satisfy all open orders, including the large influx of orders we received when we announced ceasing domestic production. The company should generate cash in the coming quarter through the sale of assets associated with the Young America operation and we anticipate ending this year with more cash than we exited the last.

Third, it is difficult to predict sales, but if we can continue our trends from the first half of the year we should exit this year with a business that is operating profitably and generating cash. As far as recent orders are concerned our retailers have seeing a softening in consumer traffic, and we have noted a corresponding softness in orders that began in the latter part of the second quarter.

Now lastly, as part of our company’s restructuring efforts related to ceasing domestic manufacturing efforts, we announced that Micah plans to resign in mid-August. Micah has been an integral part of the team here at our company as we did everything we knew possible over the last several years to make our domestic manufacturing model successful. From now until his departure, Micah will be focusing on maximizing the value of the assets at our Robbinsville plant and assisting with several other financial matters. Micah has been a great part and I thank him for his efforts.

Anita Wimmer, our current Vice President of Finance and an executive who has been promoted through the department throughout her 20 years here with Stanley, will assume the role of our principle financial officer upon Micah’s departure. She will assist to me with investor relations among other financial and administrative support roles she already fulfills in the company.

That concludes what I’ve had shares until their questions Micah if you could take everyone through the details of the financials.

Micah S. Goldstein

Okay, thanks Glenn. Let me first cover the financial results of the quarter and then I want to speak specifically about the restructuring charges we took in the quarter. I can share a little bit of about what we expect to taken Q3 and Q4. And then I’ll end with some comments on what’s you should expect related to our cash balance.

Net sales for the quarter were $24 million. As mentioned in the press release the Stanley product line grew almost 11% over the prior year and would 9.3% above the sequential quarter. Our flat sales of the total company level for the results of soft Young America backlog going end of the second quarter and the back that we only took orders for one month of the quarter for product that still needed to be produced in Robbinsville.

Net of restructuring, our gross margin improved 150 basis points over both the prior year and the sequential period. This increased simply side that higher revenue of our Stanley brand and the winding down of production in Robbinsville.

SG&A expenses net of restructuring for the second quarter of the year were $4.7 million basically flat with both prior year and sequential quarter. We continue to work hard rationalized the size of our corporate structure and get it in – with the new size of our business. As Glenn mentioned for the near-team you should use $3.5 million as a good estimate of our SG&A. As a percentage of sales this will likely pushes over 20% in March until growth leverages, the largely fixed costs from our SG&A.

As forecasted we did use $3 million of cash during the quarter to satisfy Young America orders and to wind down production. Inventories and payables that show in reduction you would expect with the closing of the factory and accounts receivable were basically flat as the growth and shipments from our Stanley brands were offset with the reduction and wide shipment and collection.

Switching gears to talk a little bit about our restructuring efforts, here is the few points of interest. The total restructuring charge we took for the second quarter were $16.2 million and largely non-cash, go through the details of those there was $11.8 million, non-cash write-down of PP&E.

Unfortunately we found no buyer of the facility as a going concern and we began the process of selling off machinery and expect that to continue through September. We’ve written down the assets to what we think we’ll get in this process and obviously if we get more over less and we expect we will make those adjustments in the future.

We wrote-off the Young America website development costs and the portion of our new system that was tied specifically the Young America and those two things totaled 1.6 million, we took an additional inventory write-down of $1.7 million as final orders clarify the amount of raw materials that could be used in production and we reviewed the value of our remaining finished goods inventory.

The balance of the charges were made up of allowances for floor samples, write-down of a lease obligation and accrued severance, of the $16.2 million and restructuring charges cash used for restructuring during the quarter was minimum and consisted mostly of severance related expenses.

Going forward we estimate $500,000 in restructuring charges in the back half of the year and they should only be for severance related expenses and any further adjustments to fix the assets inventories for bad debts as values become realized. Cash used for restructuring will range from $300,000 to $500,000 as we pay-out severance salary continuation and other termination costs. We entered the third quarter with the Young America backlog of $2.3 million that we expect to shift this quarter.

Additionally we have $5 million in receivables net of bad debts reserve that we and what we believe to be about $3 million of finished goods that we’re working to sell, proceeds from the sale of the plant, property and equipment will begin to come in August, but primarily be collected in September and early October.

With that, Christine, let’s open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Budd Bugatch with Raymond James. Please proceed with your question.

Bobby K. Griffin – Raymond James & Associates, Inc.

Hi, Glenn and Micah, thank you for taking my question. This is Bobby filling in for Budd.

R. Glenn Prillaman

Good morning, Bobby.

Micah S. Goldstein

Hey, Bobby.

Bobby K. Griffin – Raymond James & Associates, Inc.

Real quick, you gave us the Stanley brand growth rate for the quarter 10.9% year-over-year. Can you give us any color on maybe the percentage of sales last year and the second quarter between the two brands and then we can back into this year and maybe some color on that percentage for the third quarter as well, where we can start to try to model out the two different revenue portions.

Micah S. Goldstein

Yeah, Bobby we’ve historically said that our sales split between Stanley and Young America were on 60, 40 range and I think that’s a good number to use for last year. With Young America sliding this year and as we wind down and Stanley ramping up, I think I already used the number closer to 65, 35 for the quarter that we just reported. It will obviously become a lot more clear next quarter.

Bobby K. Griffin – Raymond James & Associates, Inc.

All right and then where do you – when you look at next quarter in terms of the Stanley brand, this quarter 10.9% where do you think next quarter would be given the slowdown you saw in retail I mean how do you feel about next quarters revenue for Stanley brand.

R. Glenn Prillaman

Bobby, its Glenn. It’s tough to tell right now, tough to predict where it will be I mean we’re at month end, we have seen some softness at retail, in close touch with the retailers as I’ve said latter part of the second quarter we saw that softness in our order rates it’s just tough to predict right now.

Bobby K. Griffin – Raymond James & Associates, Inc.

All right and then to touch on the proceeds from the PP&E as they start to hit in August, you expecting to come in more towards the later end if I heard you correctly. Do you have any type of rough estimate on what that number might be or what you are aiming for?

R. Glenn Prillaman

Well, we wrote things down to $6 million so…

Bobby K. Griffin – Raymond James & Associates, Inc.

And I mean is that a fair, I mean at this point from to be – you wrote things down at this point both I mean is that how can I think about the possibility of should we factor in anymore write-downs or how should we think about that going over because that first we are going to try to sell the entire plant but that didn’t workout as well either.

R. Glenn Prillaman

Yeah, so our efforts to clearly in the shareholders best interest and our employee’s best interest that we go to found somebody to buy and operate to factor in. We worked very hard to try and make that happen and as you’ve said we were not successful. So we wrote the assets down to what we think as a best value that we could come up with – withheld from the people, they are helping us sell the assets.

I sell a lot of, unfortunately there is a lot of experience in the industry of selling used wood working equipment. So our factory is little bit unique in that we have a lot of modern equipment from recent investments. And we hope we’ll benefit more than others have in the close down. But all we could do is put best number on it that we know today and we’ll update and I would not expect it swing dramatically one way or the other.

Bobby K. Griffin – Raymond James & Associates, Inc.

Okay that’s fair enough. And then is it too early to tell how any interest has been in those assets so far or is it too early to tell that.

Micah S. Goldstein

I think it’s a little early to tell. We have had, say there has been probably 20 different groups of people that have towards the factory so for looking at particular pieces of equipment. We are entertaining offers right now through a private sale period that will run through the rest of this month and early into August and then we’ll switch over to a auction process for whatever is remaining. So yeah the money to answer your question from earlier, we’ll start coming in late August, the bulk of it in September and then probably a little bit dragging into October.

Bobby K. Griffin – Raymond James & Associates, Inc.

Perfect. I appreciate the details and best of luck going forward and thank you again for the time taking my questions.

Micah S. Goldstein

Thank you, Bobby.

Operator

Our next question comes from the line of Steve Hale with Hale Partnership. Please proceed with your question.

Steve Hale – Hale Partnership

Hey, Micah, hey Glenn.

Micah S. Goldstein

Hey, good morning Steve.

Steve Hale – Hale Partnership

Hey, good morning. Couple of quick questions first after all of those kind of the non-cash charges just what’s the go forward anticipated depreciation and amortization charge?

Micah S. Goldstein

That should be around $420,000 a year, Steve.

Steve Hale – Hale Partnership

Is that going to be in COGS or SG&A?

Micah S. Goldstein

We think about it. Well, the amortization is all for the software system which will be in SG&A expense, some of the depreciation will be related to our warehouse in Martinsville, Virginia, which would in COGS and some of its related to leasehold improvements at corporate which would be SG&A.

Steve Hale – Hale Partnership

Okay, okay terrific. And then you guys were mentioning selling off the PP&E. But is there -- you guys I noticed that you took some impairments, are you kind of itemize it Micah on the website development through Young America is there any plan to sell that brand in the website.

R. Glenn Prillaman

Steve, its Glenn. At present we maintain ownership for the brand and its intellectual property. The board and I are always looking at, in the offers that might come forward, but no immediate plans no.

Steve Hale – Hale Partnership

Okay. And then you mentioned that you haven’t someone who is helping you guys sell the PP&E?

R. Glenn Prillaman

We hired a group called Industrial Recovery Services.

Steve Hale – Hale Partnership

Okay.

R. Glenn Prillaman

They’re one of the better known players in the wood working space and helped us with our Stanleytown liquidation some years ago, that was very successful and certainly the leader in that industry – the furniture industry has helped make these guys a lot of money.

Steve Hale – Hale Partnership

Awesome. Awesome and then last I guess Micah would you leave in which appreciate your service and the status that you go, its been a pleasure watching you do your work, but what’s the plan with your Board fee that you will be leaving in terms of it’s vacancy, is that going to be filled short-term is that something that just going to happen in the next Annual Meeting.

Micah S. Goldstein

Yes, actually I don’t think that we’ve got very, we’ll figure that out and let you know and others know as we do, I think that, what I think is important for you to know from me is that I leave a friend of the company and a large shareholder who desperately wants to see those shares increase in value. So I think that I will continue to work closely with Glenn and the team to try and do all I can and they will figure out the right way to replace that Board’s [fee] when the times correct.

Steve Hale – Hale Partnership

Awesome. Okay thanks guys.

Operator

(Operator Instructions). Our next question comes from the line of Michael Medley with Gate Citi Capital [ph]. Please proceed with your question. Mr. Medley your line is live, perhaps you are on mute.

Unidentified Analyst

Hi, good morning. Thanks for taking my question. And congrats to Anita on the new role and Micah best look going forward. I was curious if you could just provide a little clarity you mentioned being on a run rate operating profitably at year end and if you take the 60:40 split and it implies around $60 million in sales of Stanley and $3.5 million run rate of SG&A around $14 million in SG&A costs does that imply kind of a 25% gross margin. And then how we should think about the Stanley brand, going forward?

R. Glenn Prillaman

This is Glenn. And I think that from a gross margin perspective for the short-term you should think about low-20s for a gross margin and then as you think about $3.5 million on SG&A, it kind of gives you where we are. So, we are not going to be widely profitable as we exit the year. If trends continue from the first half, but we can be profitable and generating cash.

Unidentified Analyst

Okay, that’s helpful. And then when you referred at exiting the year with more cash, should we and (inaudible) kind of the $19 million of cash marketable securities and restricted cash that you started the year with, does that kind of the level we should think about it at year end?

Micah S. Goldstein

That is correct.

Unidentified Analyst

And I guess it would be great if you could update us on how you think of utilizing that cash once it’s all in and your plans on returning it to shareholders or other matters?

Micah S. Goldstein

Yes, Michael this is Micah. I think that our primary focus right now is to wind down Young America, sell off the assets, collect our receivables and get the company where we’re no longer transitioning between things. And once we do that and the company is stabilized. I think the board will sit and make some decisions on capital structure and the best uses of that cash. We are – in such consistently on the subject that you know we have an open authorization to buy shares should we think that’s the right avenue or some other avenue. And I think from Glenn’s comments earlier what’s very clear for this company going forward is that growth is the absolute most important thing that we can do.

Our fixed costs are largely fixed our SG&A is largely fixed and there is a portion of COGS that are fixed. And we can really leverage those fixed costs with growth. So I think that you will see the company think about using its cash to help support growth. First and foremost and then after that we’ll see.

Unidentified Analyst

Got it, I appreciate. Thanks and maybe just finally given the smaller footprint of your company given the closing of Young America. I guess from an investor standpoint how do you think about the benefits of continuing to operate independently versus possibly joining forces with the larger firm and pulling the costs across even on larger revenue base. Thank you.

R. Glenn Prillaman

Yes, this is Glenn. I think that the board thinks as long as the public markets fairly valuing the company and we are able to grow with the current structure and that’s certainly a viable plan. The main thing in those that right now we need to kind of finish up what we have in front of us, and make sure that we can grow and what we do best and then we can look at any other options that may come around at that point. And we are in constant discussion about it. Now the same is your comment about or your question about cash or capital structure.

Unidentified Analyst

Got it. I appreciate your help. Thank you.

R. Glenn Prillaman

You are welcome.

Micah S. Goldstein

Thank you.

Operator

Mr. Prillaman it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

R. Glenn Prillaman

Okay, thanks everyone again for joining us. We do look forward to reporting next quarter. Our management team and sales force certainly looks forward to focusing on the part of the business that provides the company the opportunity for growth and profitability.

And I’m confident in our go forward strategy as they design marketing logistics company operating and [oversee] sourcing model only. Our financial and operating model is simpler than it has been in the past. And I’m both pleased and proud to see several key managers including Anita who is here with us today again ready and prepared to step into expanded roles and our company adjust for a smaller size but a profitable future. So, thank you again and now we adjourn the call. Thanks, Christine.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Source: Stanley Furniture's (STLY) CEO Glenn Prillaman on Q2 2014 Results - Earnings Call Transcript

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