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Executives

Steven G. Rolls – Senior Vice President and Chief Financial Officer

Ralph P. Scozzafava – Chairman and Chief Executive Officer

Analysts

Brad Thomas – Keybanc Capital Markets

Todd Schwartzman – Sidoti & Company

Chad Bolen – Raymond James & Associates

Barry Vogel – Barry Vogel & Associates

Maggie Gilliam – Gilliam & Co.

John Baugh – Stifel Nicolaus

Furniture Brands International, Inc. (FBN) Q2 2011 Earnings Call August 4, 2011 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Furniture Brands International, Inc. Earnings Conference Call. My name is Tiana and I will the operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today Mr. Steve Rolls, Chief Financial Officer. Please proceed.

Steven G. Rolls

Thank you, operator. Good morning, everyone, and thanks for joining us today. I’ll take a moment to read the Safe Harbor statement before I go over the financial results for our second quarter. Ralph Scozzafava, our Chairman and Chief Executive Officer will then follow with a discussion of the highlights in the quarter.

I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934. Our actual results and future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of our control. Please refer to our SEC filings, including our annual report filed on Form 10-K for a complete discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements.

If you do not have a copy of yesterday’s press release, you may obtain one along with copies of prior press releases and past SEC filings by linking through to the Investor Relations page of our website, furniturebrands.com.

Now, I’d like to move on to our financial results.

As reported in the last evening’s financial results press release, total sales were $296.2 million in the second quarter, an increase of 2.3% over the same period last year. On a sequential basis, sales in the second quarter were almost flat versus the first quarter of 2011.

Gross margin for the quarter was 24.8%, down compared to 25.7% last year. The decrease in gross margin on a year-over-year basis was driven largely by higher material costs relative to sales price and inventory write-downs. We continue to work on our ongoing productivity and price initiatives to help mitigate the impact of the cost pressures that we are facing.

SG&A expenses totaled $79.3 million for the second quarter, compared to $75.2 million last year and down slightly from the $79.6 million level we reported in the first quarter of 2010. On a year-over-year basis the increase in SG&A was primarily due to higher advertising expense and favorable settlements in 2010 related to certain international tax and trade compliance matters. We expect SG&A for the third quarter of fiscal 2011 to be slightly above the just reported second quarter levels and we will update you about our expectation for fiscal fourth quarter SG&A levels on our third quarter earnings conference call.

On the retail side of our business, the 45 Thomasville stores that we have operated for more than 15 months showed a same-store sales increase of 8% this quarter. Even at this quarter, we were up against a strong 21% same-store sales comp in the second quarter of 2010. We are pleased with Thomasville’s same-stores sales performance. This represents the sixth straight quarter of same-store sales growth.

Our 66 total company-owned retail stores at the end of second quarter was lower than our 71 stores at the end of the second quarter of 2010. Even with this reduction in stores, we reported flat retail sales on year-over-year basis and a slight reduction in retail operating losses.

Inventory at quarter end was $246 million versus $251 million in the second quarter of 2010. We expect to end this year with inventory levels down approximately $10 million to $20 million from the 2010 year-end levels of $250 million. Cash at quarter end totaled $35 million and debt totaled $77 million.

At the end of the quarter the excess availability to borrow under our revolver was approximately $54 million with total liquidity of $89 million. The decrease in our cash balance compared to the end of the first quarter largely reflects the investments being made in Indonesia, Mexico and SAP. In addition, we made a $2.4 million payment associated with the refinancing of our asset-based loan through 2016, which we mentioned in last quarters release.

We said capital spending for the year would be more heavily weighted to the first half and you can see that was indeed the case with the year-to-date capital spending coming in at $17.4 million. We continue to expect our capital expenditure for the full year to be with in our previously issued $25 million to $29 million guidance range.

We continue to expect depreciation expense to be approximately $24 million. Our required 2011 pension contribution is expected to be approximately $3 million. As we get near to the end of 2011, we will have greater visibility with respect to the required contribution in 2012.

As a reminder, we fund the plan at the higher ERISA minimum as oppose to the lower IRS minimum. As we progress through 2012, we will consider the possibility of funding some of the early 2012 required contribution, and we will update you accordingly.

I will now turn the call over to Ralph to discuss our results in more detail.

Ralph P. Scozzafava

Thanks, Steve. I’m pleased to see that our revenue driving strategies gain traction and a reported revenue increase of 2.3% this quarter. We’ve spoken to you in previous quarters about the initiatives we have in place to drive profitable sales. These initiatives are ongoing at our company. Consumer tested product, new product introductions that resonate with customers, brand building investment that are serving to drive customers to our websites and ultimately to our stores and those of our dealers as well as continued progress on lean manufacturing and eliminating waste across our company. Our efforts are focused on ensuring that the sales we’re driving are profitable and that our cost structure is an optimal one.

On the revenue side much like prior quarters, our upholstery business performed better than our casegoods business and our higher end products outperformed our more mid-priced offerings.

We did see our brand building initiatives make a difference and we’re pleased to report that the momentum we saw and spoke to you about last quarter with respect to website traffic and store locator hits continued into the second quarter. We believe this is indicative of increased consumer interest in our brands and helps validate our focused brand building strategy.

On the Thomasville side, the 8% same-store sales increase on top of a very strong plus 21% same-store sales increase in the prior-year quarter was performance that we’re pleased with. As you know, we’ve directed a significant portion of our brand building spend towards Thomasville and a continued improvement in same-store sales results at our own Thomasville stores is indicative of brand building dollars well spend.

We believe that the revenue increases we’re experiencing at Thomasville are a result of a confluence of factors, including an improved overall in-store experience, on point brand messaging is driving qualified traffic to our stores. Newer product that is inciting consumers to buy and in-store design services that are helping score purchase decisions.

We continue to look at opportunities to open new Thomasville stores with the right economics and in the right locations. Late in the first quarter, we opened a Thomasville store at the Galleria in Dallas and in the second quarter, we opened a new one in Lincoln Park in Chicago. There will be a couple more Thomasville store openings in the coming quarters. These locations will be carefully selected and as we’ve said before, with respect to future lease roll offs, we’re going to make some optimal decisions there as well.

On the cost side of the equation, we have a number of ongoing initiatives to increase our productivity and optimize our cost structure. We’ve already spoken to you about the expected benefit of $10 million to $12 million on an annualized basis from the Indonesia and Mexico manufacturing facilities that we anticipate will ramp up to full realization in 2014.

In addition, the eventual sale of the Appomattox plant is expected to result in savings of approximately $4 million to $5 million on an annualized basis. On dark store leases, toady these represent a drag of $6 million annually on our profitability and these will start to drop off rapidly in 2014 as their terms mature.

As far as our open stores go, we have our Thomasville stores as well as our other retail locations. On the Thomasville side, our loses will be helped by future store relocations, resizings and store closings as a large portion of those above market Thomasville leases come due in the 2013 to 2015 timeframe.

With respect to the other open retail stores in our portfolio, as their leases come due, a majority of these stores will simply be candidates for closure. Our relentless focus on seeking out area to drive out ways and optimize our cost structure continues, and this quarter resulted in the initiation of an early retirement program that is in process right now. We have always and will continue to seek ways to improve the cost structure of our company and advance forward on the road to profitability. Next quarter, we’ll have more details to share with you on the costs and associated benefits that we expect from this particular early retirement program.

As I said before, we’re focused on reducing unnecessary costs in order to increase our efficiency and productivity and also there are areas of the business that will be beneficiaries of increased investment because of this. These are areas that serve to drive our revenue and this is the kind of investment that we view is necessary for the future health of our company.

In summary, we showed some progress with our sales results this quarter. That said, this summer is a seasonally weak period for the furniture business and we all can see and hear the same data points on the health of the U.S. consumer and the economy. We cannot forecast the macroenvironment, but we can control our controllables as we’ve consistently said, and that’s what we’ll continue to do. Our focus is on the elements that are critical to driving profitable revenues. We’ll make the necessary investments to drive these sales, we’ll make the tough decisions to mature our cost structures appropriate and we have our sites firmly set on returning our company to profitability.

That will conclude our prepared remarks. Thank you all for being with us today. And now, we’ll up the lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Brad Thomas, Keybanc Capital Markets.

Brad Thomas – Keybanc Capital Markets

Thanks. Good morning, Ralph. Good morning, Steve.

Ralph P. Scozzafava

Hey, Brad.

Steven G. Rolls

Good morning.

Brad Thomas – Keybanc Capital Markets

Ralph, just to follow-up on one of your last comments you alluded to the summer being one of your slower periods of time seasonally. Can you just talk a little bit more about what you’ve seen in your business over the course of the quarter and over the last month or so? It seems like, May was a difficult time for the consumer, whether it was weather, gasoline prices and then there are the headlines that we have seen over the last couple of weeks about the debt ceiling, have those been an overhang? What are you seeing in your business?

Ralph P. Scozzafava

Yeah. I think a couple of things, Brad. First of all, on a historical basis, we typically see Q3 as our lowest quarter. On average if you go back over the last seven or eight years, it is about 24% of our business, 23.6% is the exact number. So it does represent a low mark. We also in the course of Q3, as a lot of our peer companies do, take a week off to do a lot of maintenance on our factories. That is usually the July 4th week. So there is some internal pieces to that as well.

As far as what we are seeing on the macro front, a lot of what you are reading and the same thing that I am reading is true. We are seeing fuel prices become certainly an issue. The debt overhang and all of the activity in Washington has certainly distracted people, certainly consumers. And I think the order trends throughout the summer, will be at historical levels. That’s really what we are seeing. So we are going to manage our way through Q3. Look forward to what we are going to see for the Labor Day holiday, and the back half of the year.

Brad Thomas – Keybanc Capital Markets

Great. And then can you just give us an update on Indonesia? I think it was the third quarter that you all were on track to finish the new plant the last time you gave us an update, is that still on track?

Ralph P. Scozzafava

Yes, it is. I am happy to report. I just came back, I was there about three weeks ago. I was with Ray Johnson and Ed Teplitz, and we were able to walk the facility, and we were very impressed. The facility is running. It has got state-of-the-art equipment in it. It is one of, in my view one of the nicest furniture factories that I have ever seen. And we're excited about trying to fill it up. We brought Ed with us, and his Thomasville merchants, and we are looking at Drexel Heritage product and Thomasville product to go into that plant. And our objective now is to fill it. We have got a good strong workforce there as you know, we have had over 1,000 employees on the ground there. And we continue to add and now our challenge is to fill it, and get to the cost savings as soon as we can.

Brad Thomas – Keybanc Capital Markets

Great. I think in the past you talked about the Indonesia facility and the Mexico facility contributing I think it was $10 million to $12 million annually by 2014. Could you just talk a little bit about your current expectations for how that would ramp up?

Steven G. Rolls

Yeah. We really haven't kind of given a trajectory. It’s a good question. I would say in the first year, because you are ramping up, you have the more difficult time getting those savings for a couple of reasons. One, just efficiency as you ramp up. That’s typical, and the other is because you don't have as much product flowing through. But Mexico is ramping up pretty quickly, I would say that would probably ramp up faster than Indonesia, because it is just a little simply to do that. But we would love to get there before 2014 and we will certainly try, but that’s kind of the guidance we try to give you, but again, it is the first year of that isn't the best part of it.

Ralph P. Scozzafava

At this point, Brad, it is a little bit, it has been a drag in Q1, a little bit of a drag in Q2. And then, certainly that will reverse itself as we get into the end of this year and early next year.

Brad Thomas – Keybanc Capital Markets

Great. That’s very helpful. Thanks, guys.

Ralph P. Scozzafava

Thank you.

Operator

And your next question will come from the line of Todd Schwartzman, Sidoti.

Todd Schwartzman – Sidoti & Company

Hi, good morning, Ralph. Good morning, Steve. Steve, regarding your new guidance on the SG&A for Q3 up sequentially, does that assume the normal seasonal downturn in sales?

Steven G. Rolls

Yeah, it does. I mean, SG&A is an area we always have puts and takes. I think Ralph mentioned in his comments during our session before this, that we do have an early retirement program underway. And so that will add some costs, and eventual savings during the quarter. And there are a lot of other things and out. But yeah, we probably have a little less sales commissions if our sales are seasonally down.

Todd Schwartzman – Sidoti & Company

And what are the puts and takes we should consider with respect to the third quarter gross margin, specifically commodity pricing, and also on the revenue side, what are you seeing with regard to ASPs?

Ralph P. Scozzafava

Well, I think, from a raw materials standpoint, I think that we have seen at bit of a mitigation in some of the increases. clearly what has happened with things like cotton and materials like leather, have really changed the game a little bit. You have seen a lot of pricing across our industry. The apparel industry and others. So we have seen those start to lessen. But they are still well above year-ago levels, cotton is almost double what it was year ago. Leather availability. So you do deal with some raw material issues. And frankly affected us a little bit from a gross margin perspective this quarter. We do have productivity initiatives in place, and our goal is to offset those. We have some pricing initiatives in place. And we are going to look at the two of those together to help offset. That said the bulk of those material increases you saw in Q2, we look for similar levels in Q3.

Todd Schwartzman – Sidoti & Company

Got it. And on Thomasville, what can you tell us, what can you add in the way of color on the store traffic patterns, conversion rates and such?

Ralph P. Scozzafava

Yeah. I think – I think the and that’s a good one for us. And we are pleased with it. We have been able to drive qualified traffic to our Thomasville stores. And to us that is critical, and we are seeing our close rates go up. And that really is a combination of the right kind of traffic coming in the door, and just strong work done by our designers at store level. We are in our Thomasville store here in Lincoln Park just yesterday. We have got a great staff there, very energetic, very knowledgeable, ready to help consumers. And we just feel good about the work that is happening in store, both from a service point of view, a design point of view, and then of course, our product continues to get better. So we are pleased with where we are and the advertising does help drive the right kind of people in the store.

Todd Schwartzman – Sidoti & Company

Can I get you to quantify the improvement?

Ralph P. Scozzafava

Well, with the same-store sales increase at the end of the day to me says it all. While we are pleased that we were up 8% this quarter, we wanted to be up more. It would have been six-straight quarters of double-digit increases. We weren't able to do it, we were up against a big number last year. But at end of the day, all of this work that we do on product, on in-store experience, on good messaging to consumers, on driving traffic, close rates, all of those things have to equal sales increases. And we are pleased that we were able to do that.

Todd Schwartzman – Sidoti & Company

And on the SAP implementation, I realize that’s more of a 2012 event, but can you speak to the trajectory of costs involved there?

Steven G. Rolls

Well, we’ve incurred a lot of costs already. We would have – we have licensed SAP, well, that was a year or more ago. We have staffed up an internal team that is dedicated to SAP implementation, with a lot of both process experience and SAP-specific experience. We had consulting help work through the blueprint process, which is anybody who has done one of these knows, that’s probably the most important part of the whole process, getting it right up front. So now we are prepared to start our implementation in a phased approach. So as we go forward, we will continue to have the costs obviously of the team that is doing this. We will have some additional consulting support along the way. We haven't really quantified it for you and we really aren't prepared to that. You will see us invest over the next call it few years in that.

Todd Schwartzman – Sidoti & Company

If you had to guess as to which quarter those total expenses peak, what would it be?

Steven Rolls

They really will peak in the four quarters of next year I think. So maybe the first three quarters would be the highest.

Todd Schwartzman – Sidoti & Company

Okay. Terrific. Thanks, guys.

Steven Rolls

You bet.

Operator

And the next question will come from the line of Budd Bugatch, Raymond James.

Chad Bolen – Raymond James & Associates

Good morning, Ralph and Steve. This is Chad Bolen filling in for Budd.

Steven Rolls

Good morning Chad.

Chad Bolen – Raymond James & Associates

A couple of questions if I could, back to the subject of SG&A. Your performance in the second quarter and sort of the run rate that you are guiding to for third quarter, was pretty significantly better than normal run rate that you guys have been talking about in the past couple of calls. What specifically drove the variance in the second quarter versus kind of that $83 million or so run rate that you’ve been talking about. And how sustainable is this level of spending beyond the third quarter?

Steven Rolls

Well, as I say, in SG&A there a lot of things that go both directions. I would say maybe a couple that highlight there are compensation costs were probably a little lower than we might have thought. And we did have the benefit of selling a receivable of a customer that went out of business last year. So that was fully written off. And we had some interest in buying that. We sold it. That helped a fair bit during the quarter. Obviously one-time you won't see that carry into next quarter.

Chad Bolen – Raymond James & Associates

Okay. And as I look at the revenue, it was kind of flattish sequentially, which I think if I am right is better than sort of the typical seasonality, which would suggest a bigger decline. Can you help us kind of understand what drove that? Was it just simply that demand at the consumer level was better? Was there a year-over-year benefit or sequential benefit, if you would, from pricing increases? And sort of, if you could remind us of the timing of some of the pricing actions you’ve taken? Was there any pre-buy or pull-forward related to that, just whatever color you could give us there?

Ralph Scozzafava

Sure. I think from just the talk about the pricing first. Really no influence on pricing, discount levels, same average selling price, same year year-on-year. I think the story of the sequential performance from Q1 to Q2, is more a story about Q1 than Q2. I think everybody can remember back, it seems like years ago. But we had a significant issue in January. We had some weather-related issues. I think others cited the same experience that we did. So I call it more of a depressed Q1, which created the flatness sequentially. I think that’s really the math.

Chad Bolen – Raymond James & Associates

Okay. That makes sense. And as I look at the Thomasville numbers, it looks like the operating loss widened by about $500,000 versus the prior year, despite about a $500,000 sales increase. And it looks like the gross margin was really the culprit there. What were the drivers of the decline in gross margin year-over-year? And how do we think about that run rate in the back half?

Ralph Scozzafava

Yes. I guess what I would say on that is two things. One is you have stores that come in and stores that you obviously open, and stores that you close. And we had a couple of stores that we closed in the quarter and there was some discounting. And of course, from an SG&A standpoint, when you open new stores, you also have the expense before you get the revenue. So you have two elements really at work there. And the reason I bring that up, Chad, is that just to remind everybody, if I go back four years ago, we really didn't have any Company stores to speak of.

And today, we are up over 50 Thomasville stores and then they were all take backs. And Steve said in the past, we do some pretty detailed analysis around, should we stay open. And then of course, if we do, how do we improve and so on and you tend to get a lot of those right. We have gotten most of them right. But every now and then you have got a store where you put all the plans in place, and you are better off at the end of the day either relocating it or closing it. So in this past quarter, we had a couple of relocations. We had one closure. And those are starting to really drop off and become minimal now that we have had these stores for a while. But that’s really your SG&A influencer and your GP influencer over the quarter at Thomasville.

Chad Bolen – Raymond James & Associates

Okay. And last one from me. You talked about higher ad spend year-over-year in the second quarter. How are we looking for the back half of the year? Would you continue to expect year-over-year increases? Maybe how is the magnitude compared to what you did in the second quarter?

Ralph Scozzafava

Well, I think what you will see is, that it be a little bit less. And the reason for that is in the Q4 of last year, and the first and second quarter of this year, new introductory campaigns. You tend to heavy up and spend aggressively to really get the awareness that you want to. And then you have to drop back to what I will call normative support levels. So our advertising will continue to be up year-on-year for the whole year, but you will see that the heavier period is really behind us now.

Chad Bolen – Raymond James & Associates

Okay, well, thanks, guys, for taking my questions, and good luck to you on the rest of the year.

Ralph Scozzafava

I appreciate it.

Operator

And the next question will come from the line of Barry Vogel, Barry Vogel and Associates.

Barry Vogel – Barry Vogel & Associates

Good morning gentlemen.

Ralph Scozzafava

Good morning.

Steven Rolls

Hi Barry.

Barry Vogel – Barry Vogel & Associates

I have a couple of questions for Steve. You talked about the inventory charges and when you gave us these prior tables, which you have now stopped given us because the numbers are much less important than they were when you had all of these charges going on the last few years. You mentioned the inventory charges in the quarter. Can you give us an idea what they were, and on that subject are they in the process of ebbing, so that we don't have that continue? Or is this just going to be an ongoing situation?

Steven Rolls

As in any business, you’re always going to have some inventory charges. I don't think there is an industry or company anywhere, that doesn’t have some kinds of charges of inventory. But what we’re striving to do, Barry, is be much better at the front end and the inventory, or the product that we introduce, so that we can minimize those charges going forward. So we know we are always going to have them. But we are getting better and better at it. And we are trying to very carefully every quarter assess our existing inventory, its flow, its sale rate, its quantity. And where appropriate we will take those charges. So you will keep seeing us do that. What I think you will see is that we're not going to be at the levels we have been in the past because we are getting better at. We are not where we need to be, but we are getting better.

Barry Vogel – Barry Vogel & Associates

Can you give us some idea roughly what the charges were in the quarter?

Steven Rolls

Yeah, and we really didn't break that out.

Barry Vogel – Barry Vogel & Associates

I know. That's why I am asking you the question.

Steven Rolls

Yes.

Barry Vogel – Barry Vogel & Associates

You don't want to give the number?

Steven Rolls

We tend not to do that.

Barry Vogel – Barry Vogel & Associates

Okay. Can you give us an idea, Steve, of the price cost squeeze that occurred, and how negatively it affected you for the raw material cost increases?

Steven Rolls

Yes. It was probably is a good chunk of the difference in our gross margin, if you look at that. Certainly on a year-over-year basis. So we continue to look for ways to increase our productivity to offset those material costs increases. I think as Ralph kind of alluded to earlier, if you back a few months, it was much more alarming the things we’re hearing in industry, across various materials. So it softened a bit. I mean they are still out there and all of us were facing that, not just Furniture Brand. So you will see people take actions, I am sure, in lots of different ways to accommodate those.

Barry Vogel – Barry Vogel & Associates

So truly, this should continue in the third quarter, that’s the tone of what your comments are?

Steven Rolls

Yes. No, we continue to look for ways to offset those. There are a lot of ways to do it.

Barry Vogel – Barry Vogel & Associates

All right. Which means your gross margins are going to be impacted versus last year on that matter alone?

Steven Rolls

I haven’t given guidance on gross margin, as we don’t do, but as I said we will keep looking for ways to improve gross margins. And we’ve been pretty good about that, but we’ve been consistent about saying, don’t expect every sequential quarter to be better than the last, or year-over-year, but over time there are lot of things we still can do to improve our gross margins to get them higher and we will keep doing that.

Barry Vogel – Barry Vogel & Associates

Now you in your past tables, you used to give us factory downtime costs, which were very consistent or most of the time, certainly in 2010 they averaged about $2 million to $2.5 million a quarter. Can you give us some idea of what they cost you in the second quarter?

Steven Rolls

It wasn’t too big, one of the biggest drivers of factory downtime cost for us was the Appomattox plant that we closed at the very end of the quarter, first quarter, very beginning of the second quarter, so that certainly helped. We will always have some factory downtime cost, Ralph talked about the July 4 period where we intentionally shut some factories down, so there but we’ve got a much more normalized level that was pretty small.

Barry Vogel – Barry Vogel & Associates

When do you hope to sell Appomattox?

Steven Rolls

Tomorrow.

Barry Vogel – Barry Vogel & Associates

No you mean yesterday.

Steven Rolls

It’s hard to say, it’s for sale. We’re actually selling off furniture pictures, equipment kind of stuff that we don’t need out there very soon and then what we saw on the facility it’s hard to predict when that happens.

Barry Vogel – Barry Vogel & Associates

Okay. Now as far as, Ralph, as far as the company stores, I think you mentioned in your comments or Steve did, that they split from 71 stores to 66. What’s your best guess of the amount of stores that will be company stores that will be operating by the end of the year?

Ralph Scozzafava

I think the number will be similar, we’ll announce a new store openings here in just a little bit but it should be similar and then over time you will see that number increase as we find more good locations with the right kind of adjacencies, occupancy cost and so on so don’t expect a big change from here to the end of the year.

Barry Vogel – Barry Vogel & Associates

As far as the closed-store expenses, I wrote down, but I am not sure about the number. Is it going to be around $6 million this year?

Steven Rolls

Yeah. It will be around six, assuming we don’t buy any leases, it will be about six this year, six next year, starts to drop off in three years a little bit and then drops off pretty fast after that. But...

Barry Vogel – Barry Vogel & Associates

Would those be cash expenses?

Steven Rolls

The cash is about $10 million, the six relates to about 10 of cash because we’ve done mark-to-market on those leases.

Ralph Scozzafava

But if we do buy, Barry your question is does it take a little bit of cash sometimes you get off the lease and the answer is yes.

Barry Vogel – Barry Vogel & Associates

Okay. Now have there been any changes in terms of your credit facility?

Steven Rolls

No other than what we announced in our last call, we extended it and got more availability under that credit facility.

Barry Vogel – Barry Vogel & Associates

And you mentioned you paid $2.4 million. Was that the payment against your credit facility?

Steven Rolls

Yeah that was the refinancing.

Barry Vogel – Barry Vogel & Associates

Okay. Thank you, very much. It’s a tough economy to turn this thing around. It is not getting any better. So you really have your hands full.

Steven Rolls

We are working on it.

Ralph Scozzafava

Thanks, Barry.

Steven Rolls

Okay.

Operator

And the next question will come from the line of Maggie Gilliam, Gilliam & Co.

Maggie Gilliam – Gilliam & Co.

Yes, good morning. Ralph, would you be good enough to elaborate a little bit on the early retirement program? How expensive is it? And what do you hope to accomplish? What will be the savings obviously?

Ralph Scozzafava

Yeah. We’ll be able to tell you more about Maggie when we get back together in our next earnings call, as you can imagine we’re in the notice period right now. So it’s not something that we are able to comment on as much as we’d like to. But what I can say on from a general point of view is we do have a number of employees who are in the process of making some decisions as to whether they stay on. its voluntarily or they move forward with their retirements and we want to make sure that they have all the information they need and an opportunity to transition. So that's really what we're doing. We'll be able to, in November tell you exactly what the clause were and what the potential savings for the company will be going forward. But it’s something that that we thought was appropriate at this time, given the ten year of lot of our folks and the intentions of lot of our folks.

Maggie Gilliam – Gilliam & Co

You don't have any objectives as to numbers of people?

Ralph Scozzafava

Yeah, we do, we have exact numbers and we just can’t release them given that we’re in the notice period, it’s more of a legal thing than anything else.

Maggie Gilliam – Gilliam & Co

Okay. One other thing. On the subject of advertising, as one of the accomplishments you are getting as a result of the new corporate structure, and ability to get better buys and better savings, make your dollars more effective all the way around?

Ralph Scozzafava

That’s a big part of it. You can imagine simple things like designing websites. We can have one capability in one place they can do it for whole nine of our businesses, when we buy media it's opposed to behaving like a number of smaller companies. We combined together and become a large company and get better buys and more frequency and reach for our dollars. So that's what we’re looking to do to leverage, what we bring to the market and we together are able to do that and make our dollars go a lot farther

Maggie Gilliam – Gilliam & Co

Good. Okay, thanks.

Ralph Scozzafava

Thanks Maggie.

Operator

(Operator Instructions) The next question will come from the line of Stanley Elliot Stifel Nicolaus.

John Baugh – Stifel Nicolaus

Hi, it's actually John Baugh. Couple of quick questions, Ralph. One, have you quantified or could you quantify what ad spend for calendar ‘11 will be versus ‘10 in either dollars or percent of revenue?

Ralph Scozzafava

We haven't done that, but I can tell you that John, its going to be up versus year ago. It was up significantly in the first half and the year up and our objective with it is simply to drive traffic to create consumer impressions and ultimately drive the sales line. But we haven't gone for the specific dollar numbers or percentages, your competitive reasons as you can imagine.

John Baugh – Stifel Nicolaus

And you talk about branding. I mean are these ad dollars more branding, or are they more promotional? And if they are more branding, could you mention which brands you are putting the ad dollars behind?

Ralph Scozzafava

Yeah. There are branding. There is a lot of work and you probably have seen some of it on air for Thomasville, Lane is another big recipient and our big businesses and really the third one would be Broyhill.

John Baugh – Stifel Nicolaus

Okay. And then can you help us understand, you made reference to managing your way through the third quarter. You had an increase in revenue in the second quarter year-over-year, but there seems to have been a big influence last year favorably from the home buyer tax credit. Now we get easier comparisons going forward with what happened last year. But sequentially, it seems like the economy is slowing. So wondering how that all percolates into your expectations for year-over-year revenue performance, and I realize, you’re not going to give me a number. But any comment about how the months April, May, June, and July have tracked year-over-year and those seemingly kind of counter influences? Thank you.

Ralph Scozzafava

Yeah. Sure, John. I think just, and then I don't think this will be tremendously enlightening to anyone. The first half of last year, we had some good tailwind that I think that helped 2010 created a little bit bigger of a base. And then I think we also what happened in the back half of 2010. 2011 started a little bit slow. We saw some momentum during the second quarter, and year-on-year comps we’re happy to have them be up. I can’t to predict what's going to happen in third quarter or fourth quarter. I'm glad that the things would come down, it seems we’re on a way to some kind of a fiscal policy that will have people feeling a little bit more secure.

I watched the unemployment numbers just like everyone else. The housing numbers are not tremendously encouraging. And that’s really why we say we managed through. And our job here is to do everything we can to put great product out in our stores and in our dealer floors and to drive traffic to those stores via our website with our advertising and to be really smart about how we manage our factories, our sourcing and our expenses, and that’s really to manage through. You got to hit on all pieces, because I don’t think anyone, not also anybody else that is in an industry that’s depended upon housing is expecting the silver bullet of tremendous top-line growth, and then all the leverage that goes with that. So we don't expect to see that and we’ll continue to battle as Barry Vogel mentioned, and that’s really our game plan.

John Baugh – Stifel Nicolaus

Ralph, could you comment at all on how July tracked year-over-year or any help in terms of answering my question, which is we have the economy weakening, but we have easier comparisons. I’m just wondering whether that tilts the numbers up or tilts them down, in other words, which side is winning?

Ralph Scozzafava

Yeah, it's hard to say John. I know what you're looking for and it's hard to give you what you’re looking for without providing guidance. So we can't do that. The fact that the comps are better than they have been in years past is more of a, are up or down kind of a discussions. What we're looking for is to drive through consumer demand, get our product through the chain and that’s what we’re focused on. So I can’t tell you up or down, all I can tell you is we’re going to continue to improve our business, improve our company. And that's when I talked about controlling our controllables, that’s exactly what I mean.

John Baugh – Stifel Nicolaus

All right.

Ralph Scozzafava

Okay. Well listen, I want to thank everyone for being on the call today for your interest in our company. We've got a lot to do as you know and we're going to continue to do it. We’re positive about where we’re heading, and we’ll keep working hard to get there. So thanks everyone and we’ll talk to you on the next conference call.

Operator

And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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