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Executives

Lynn Chipperfield - Senior Vice President

Ralph Scozzafava - Vice Chairman of the Board and Chief Executive Officer

Dan Stone - Vice President, Financial Planning & Analysis

Analysts

Chad Bolen – Raymond James

Ike Borcia – Morgan Keegan

Jeremiah McWilliams – St. Louis Post Dispatch

John Baugh – Stifel Nicolaus

Fred Speece – Speece Thorson Capital Group

Furniture Brands International, Inc. (FBN) Q4 2007 Earnings Call January 31, 2008 8:30 AM ET

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Furniture Brands Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Lynn Chipperfield, Senior Vice President.

Lynn Chipperfield

Good morning everyone, welcome to our Fourth Quarter Conference Call. With me here today are Ralph Scozzafava our Vice Chairman of the Board and Chief Executive Officer and Dan Stone our Vice President, Financial Planning & Analysis.

We will be making some forward looking statements on this call so I once again caution you that such statements are based on our current expectations and are subject to a number of changes that could cause actual results to differ and you should refer to our public filings for more information about that.

As is our usual custom we do plan to limit this call to one hour and so everyone will have an opportunity to participate we’ll ask you if you’ll please give us your single best question and then we’ll move on to the next participant. If you do have additional questions or follow up you can get back in the queue and we’ll address all questions time permitting.

With that I will turn it over to Ralph Scozzafava.

Ralph Scozzafava

Good morning, we appreciate you being with us again today. This morning I’ll make a few brief remarks about our performance this quarter and for the year then I’ll have Dan Stone speak to you about our results in more detail.

We issued our fourth quarter earnings release yesterday, sales for the quarter declined 12% from a year ago, we recorded a net loss from continuing operations of about $42 million or $0.86 per share. For the year we reported a net loss from continuing operations of $1.06 per share which included a large amount of one time charges to income related to the strategic plan. As we have told investors for the past several months our strategic plan will contemplate many changes to how we do business and with those changes come costs that are reflected in our current results. I don’t like them but they are necessary.

These are really investments in our plan and the footnotes to the income statement provide the details. We’ll discuss guidance in a few moments but todays release really sets a tone for how we are going to report our financial results going forward. We are going to use GAAP numbers to report earnings and we’ll provide enough detail that everyone can create an ongoing results number by whatever definition or modeling method that you choose.

Now I’ll turn it over to Dan Stone to expand on the fourth quarter and full year 2007 results.

Dan Stone

For both the quarter and the year our net sales declined about 12%. Sales totaled $505 million for the quarter and $2.1 billion for the year. Sales levels for both periods exclude the revenue from our HBF business which is now classified as a discontinued operation. We expect the HBF sale to be completed in the first quarter 2008.

A big factor that contributed to the year over year decline in sales was an increase in sales discounts of more than $28 million. As you know discounts are a known part of the furniture industry but we utilize very aggressive discounting in 2007 in order to get our inventories to their right level. We expect discounts to return to more normalized levels in 2008. Still if you exclude these factors, sales still showed a decline from last year. Later in his comments Ralph will discuss the steps we are taking to gain back momentum.

Lower gross margins for the quarter reflected a number of factors including higher discounts, inefficiencies and plant closures. We would expect to see the year over year benefits of the plant closures in 2008. SG&A includes several items related to our strategic plan and these are detailed in the footnote to the income statement. On an ongoing operations basis SG&A increased primarily due to the additional retail stores during the year as well as increased bad debts.

The press release referenced that key emphasis in 2007 was on cash and our current financial position is very strong. Cash on had at year end totaled $118 million and long term debt was $280 million. We plan to pay down long term debt by an additional $15 million in mid February. The press release also laid out our guidance for 2008; we forecasted net sales for 2008 will be between $1.9 and $2.0 billion. The lower sales forecast reflects a continuation of soft market conditions, elimination of sales due to company owned stores that were closed in 2007 and targeted printing of unprofitable sku’s and retail relationships.

We’ll combine higher quality sales with the initiatives outline in our strategic plan to generate net earnings from continuing operations on a GAAP basis of between $0.40 and $0.60 per share. This translates to roughly between $20 and $30 million in net earnings from continuing operations that includes all anticipated costs associated with the remaining restructuring activities. That target is a big increase from our reported results in 2007 even with adjustments for the listed charges. We would not have incurred these charges if we’re not highly confident that they would help drive our 2008 priority of increased profitability.

To give a bit more color on how these charges will translate to improved 2008 performance let’s talk about it in three categories. The first category is inventory; we allowed more than $28 million in discounts above prior year levels in 2007 as I previously talked to bring inventory in line with our business forecast. Not only did we generate significant amounts of cash due to this reduction but we were able to close three warehouses as we significantly decrease our demerge costs in 2008. On an after tax basis the combination of these factors will provide between $20 and $22 million in after tax earnings in 2008 over reported 2007 levels.

The second category is facility and work force reductions; during the fourth quarter alone we closed two factories and eliminated an additional 100 management and non-production positions. This on top of earlier closures of three factories and the reduction of an additional 230 positions in the past spring. We incurred severance costs in operating inefficiencies in 2007 due to these reductions but we expect these actions to provide incremental positive impact of after tax earnings between $25 and $30 million in 2008.

The third major action we took in 2007 which will benefit 2008 earnings was the closure of 18 company owned stores in the fourth quarter. These locations had been historically poor performers and their closure will eliminate an annualized drain on profitability of between $5 and $7 million after tax basis.

Just as our focus in 2007 was on generating cash our focus in 2008 is on improving profitability. Of course we are taking actions on a number of other strategic areas that will also provide savings such as our move to a shared services model with centralized HR, IT, finance and logistics. These programs support the move to an operating company model which is an essential element in our strategic direction.

With that I’ll turn the call back to Ralph.

Ralph Scozzafava

Dan did a good job explaining the investments and hard decisions that we made in 2007 that will benefit Furniture Brands going forward. Now I’d like to discuss another decision that the Board made yesterday reducing the quarterly dividend from $0.16 per share to $0.04. This new dividend rate puts our earnings payout at level that’s appropriate for today’s home furnishings industry and is much closer to that of companies our size. The Board will revisit the dividend policy regularly and today we think that putting that capital to work on our strategic plan is simply the best investment that we can make.

Our goal in 2007 was to increase our cash balances and strengthen our balance sheet. We talked to you at the investors conference about managing for cash and clean up in ’07 and we did it. We made a commitment to meet our goal and we were able to succeed. Today we have the most cash and the least debt that Furniture Brands has shown at any year end since it finished its recapitalization in 1992. In 2008 this team is making the same commitment to achieve our earnings target. We know the markets are soft but that’s not an acceptable excuse and you won’t hear excuses from us.

We’ve examined the factors that we can control and we are confident that these results are within our grasp. Our strategic plan is four core elements and I’d like to share the progress that we’ve made on each of them and what more that you can expect. The first element of the plan is to build up brand power, we have great family brand, the best in the industry. Our challenge is to harness the power of these brands and get them in front of the right customers. Our shift to an operating company model will let our new Chief Marketing Officer, Alex Hodges and his team take a holistic approach to how we serve the consumer.

In 2008 you’ll see Furniture Brands use a far more rigorous process to test our new products with consumers before we take them to market. This will increase the acceptance rate, our overall hit rate, lower our inventories and lower our need for future discounting. This will also see us engaged to consumer directly to increase advertising as we shift our ad budget to increase our percentage of working dollars. Nor our ad monies will be more targeted at reaching the consumer in things they can see, touch and feel with our message.

The second element of the plan is to win with customers, namely our dealers and retail partners. We just completed our first national sales meeting with all of our sales teams together, kicking off our WOW strategy right before the Las Vegas market this week. WOW is an acronym that stands for Win in the store, Own the customer, Work together. For our sales team the cornerstone of the WOW strategy is the value bundle that gives them the tools to sell dealers and retailers on multiple levels. By taking the dialogue beyond just price and item we can deliver what the retailers really need, value. Then we can all achieve our financial targets.

We are also getting better at manufacturing and sourcing which is our third strategy. We’ve made substantial progress in improving our supply chain and our logistic capabilities. As you know we are setting up our Furniture Brands Asia office to coordinate our relationships with third party suppliers. This is not a manufacturing operation but rather a supplier management function. We’ll now have engineering, CAD drawing, design, and quality assurance functions in house when they had formerly been managed externally. By having our own supply chain management resources on the ground in Asia we can cut lead times, safeguard our designs longer and maintain our high quality standards.

Our fourth strategy is to grow and develop our people. We are allocating the right financial resources to the strategic plan; we also have the right team in place to execute it. At the investor meeting in New York last October Ed Teplitz had just joined the company from Ethan Allen as President of Thomasville and he is making significant progress already. Since then we’ve added furniture veteran Dan Bradley to head up our Designer Group which is made up of Henredon, Maitland-Smith, Laneventure, Hickory Chair and Pearson. These small brands have a unique appeal and need a specialized approach and Dan is one of the very best in the industry in understanding that business.

I also mentioned Alex Hodges who joined this month from Russell and prior to that where he worked at Eastman Kodak and SmithKlein Beecham. He is a classically trained marketer, a talented marketer and will do a lot for our portfolio brands.

The last thing I’d like to leave you with before we begin the Q&A is this; the story of Furniture Brands is that we are in the beginning phases of a large transformation of one of the largest and potentially best positioned companies in the home furnishings industry. In 2007 we made choices that were targeted at strengthening our balance sheet for the road ahead. The fact that our cash is at the highest level since 1992 and our debt is at its lowest level and continues to decline shows that we’ve succeeded in our first objective which is stabilizing the financial condition of this company.

Now our focus turns to increasing our profitability and I’m confident that we’ll be just as successful at that in 2008. The strategic plan we have in place is based on solid business principles, it’s not fancy it’ll just be effective. It will generate substantially greater value for our shareholders. I hope you take away the message that we are doing the right things. We are making solid progress and we look forward to meeting and exceeding your expectations in 2008.

With that I’ll turn it back to Lynn.

Lynn Chipperfield

That concludes our prepared comments, we thank you all again for being here today. We’ll open up the lines for your questions and I’ll remind you once again that we’ll limit it to one question per caller until we’ve covered everyone or we run out of time.

Question & Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chad Bolen with Raymond James

Chad Bolen – Raymond James

In regards to the sales discount line item, could you help us understand how that’s calculated exactly what does it consist of and does the smaller run rate in Q4 versus kind of the full year does that imply that the negative impact from discounting is weighing late in the year?

Dan Stone

Yes, the sales discounts were a combination of returns, allowances, markdowns, those kind of items so it’s everything from gross to net for us. Yes, it’s a cycle down in Q4 as we are getting substantially closer to our inventory run rate.

Chad Bolen – Raymond James

The EPS guidance of $0.40 to $0.60 is GAAP what kind of charges can we expect in ’08? Do you have more facilities or stores to be closed? Will we get any help on those ahead of time or will you report them as they are incurred.

Ralph Scozzafava

We don’t anticipate lots of factory closures ahead of us. We don’t have a lot of that activity in our plan. We think we did a lot of it in 2007, certainly if we make an evaluation over the next 12 months we’d certainly let you know ahead of time but we don’t see that being a big number.

Operator

Your next question comes from the line of Ike Borcia with Morgan Keegan.

Ike Borcia – Morgan Keegan

A question about the ’08 guidance, the EPS range it’s, year over year compared this year you generated a decent loss in you are basically looking to make some money, a decent amount of money in ’08. I’m just trying to wonder with the top line continuing to be pressured and the environment remaining challenging, how exactly do you get from ‘A to Z’?

Dan Stone

In the script we just gave you it laid out the key building blocks so certainly we factored in sales decline in our guidance for next year and then you’ve picked up cycling the markdowns from last year, the factory closings, head count reductions, store closures, reduction in demerged costs, there’s a much longer list than that we gave you the key items there, to allow you to get from last year to 2008.

Ralph Scozzafava

On top of all it all, or maybe underneath it all, is we made some choices around taking the charges and getting what we would call the unprofitable piece of our business behind us. That’s why you saw the numbers that you saw for Q4, what we like to say around here is we had what we called low grade fever and you can live with it for a long time or you can take the medicine and get it out of the system, that’s really what Dan has outlined for you and that’s the bridge back from where you saw ’07 to ’08 and we believe they are behind us forever and we’ll continue to go forward and optimize.

Ike Borcia – Morgan Keegan

I know you said in February you are planning to make the $15 million on the debt pay down, can you give us some more color on how that should go into the future with your debt reductions?

Ralph Scozzafava

They way we’re thinking about it is as we have excess cash and we want to use it to drive our strategy we think that’s primarily what we have to do. We have ample liquidity to do that so we are in a far better position now than we were 12 months ago. The fact that our balance sheet is the strongest that it’s been since the reorganization over 15 years ago tells us that we have a strong foundation and we’re one of the companies that will go forward in this industry no matter what happens to the economy and competitors and everyone else. We are on very solid ground with all of the resources we need to move forward. As we have excess resources beyond what we need to implement our plan we certainly think that paying down debt is a smart idea.

Operator

[Operator Instructions] Your next question comes from the line of Jeremiah McWilliams with St. Louis Post Dispatch.

Jeremiah McWilliams – St. Louis Post Dispatch

I wanted to ask you the marketing shift. It sounds interesting but I wasn’t sure exactly what that would entail on the ground and what consumers might be seeing in the next few months?

Ralph Scozzafava

I think for us, we talked about moving from a holding company to an operating company. The other major transformation is to move from a manufacturing, design, sourcing company to a products company and to think about consumers first, understand their wants and needs and to do what I would call fundamental consumer insight work that will inform our grand strategy, our new product introductions the way that we communicate with consumers, position our brands and so on.

What you are seeing already in the marketplace is an amped up version of some commercials that were running in a marketing plan for Thomasville in particular and you’ll see more of that work against our brands going forward whether it’s on air, digital, print, catalog and so on. More aggressive, very excited to have Alex and his team here and we’ll really start to muscle build that area going forward.

Jeremiah McWilliams – St. Louis Post Dispatch

It sounds like you’re investing more as well as shifting, would that be fair to say or are you going to be spending more?

Ralph Scozzafava

I think over time we’ll be spending more, I think our working media dollars are certainly going to be more even now and you’ll see us invest smartly as we know our consumers better going forward.

Operator

Your next question comes from the line of John Baugh with Stifel Nicolaus.

John Baugh – Stifel Nicolaus

My question is on the stores, can you refresh how many stores we currently own now, some color by brand and then you didn’t respond to were there any additional stores, and have you got all the unprofitable store at this point closed?

Ralph Scozzafava

I can start with the last question and we can kind of work our way back and then I’ll turn it over to Dan to give you some numbers. One of the things we want to make sure we do is if we have unprofitable stores that we don’t think make sense going forward. If we can’t improve them then we need to just take the bite and shut them down, that’s what we did in Q4. With Thomasville, you were with us at our strategy meeting in New York, we all know that Thomasville is on strategy for us, we want to be a vertical retailer, and we believe that we can operate in every key market in the country with Thomasville. You’ll see us continue to deliver and driving and making those stores as profitable as they can be.

We believe that Lane and Broyhill are great brands that should be in with general furniture retailers in more of the mass market if you like. We’ll take and eye against and look at existing stores as we go forward. There are not a lot of them left for us to be really looking at that are company owned. We are somewhat comfortable with where we are. We don’t know what the economy will bring us in ’08; if those stores become unprofitable then we’ll have to take a look at them.

Dan Stone

We own mid 20 number of stores, the bulk of those are Thomasville and Drexel. The stores we closed down at the end of the year, 18 stores, all the stores here in St. Louis from Lane and Broyhill, some Thomasville stores in the Bay area and some Lane stores in Texas.

John Baugh – Stifel Nicolaus

As a follow up, what should be our expectations given your revenue guidance for working capital of I assume source of cash in 2008?

Dan Stone

We think our working capital levels are in the ball park of where they should be now so they’ll be slightly tweaked going forward. We’re certainly not happy with our cash to cash cycle; we’ll continue to work on that. We are roughly in the ball park now.

John Baugh – Stifel Nicolaus

So we wouldn’t expect much of a source?

Dan Stone

I wouldn’t expect a huge ramp down inventory, or a huge trump from cash working capital in ’08.

Ralph Scozzafava

I think we did a good portion of it, $100 million reduction in ’07, a big number, and then of course we’ve got to drive earnings. That’s our focus, profit, in 2008, we can optimize, Dan mentioned, our cash cycle. We do have some opportunities there but we don’t expect ’08 to look line ’07 from that standpoint.

Operator

Your next question comes from the line of Fred Speece – Speece Thorson Capital Group

Fred Speece – Speece Thorson Capital Group

Could you give us a capex number for ’08? Are you planning to outsource more manufacturing?

Ralph Scozzafava

From a capex number that’s a number that we tend to keep here. Outsourcing, from our standpoint we’re probably where we should be. We make the bulk of our upholstery product ourselves; we make a good portion, more than half our product ourselves. We’ve got good partners overseas and we don’t see the mix shifting greatly from where it sits today.

Fred Speece – Speece Thorson Capital Group

You don’t plan to share the capex for the coming year?

Ralph Scozzafava

No.

Operator

I show no further questions in the queue, now I’d like to turn the call over for any closing remarks.

Lynn Chipperfield

That concludes our call for this morning, again we appreciate all of you being with us here today and we look forward to talking to you at the end of the next quarter. Have a good day.

Operator

This concludes the presentation and you may all now disconnect.

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Source: Furniture Brands International, Inc. Q4 2007 Earnings Call Transcript
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