Furniture Brands International's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Furniture Brands (FBNIQ)

Furniture Brands International, Inc. (FBN) Q2 2012 Earnings Conference Call August 2, 2012 8:30 AM ET

Executives

Rick Isaak - CAO, Controller and IR

Ralph Scozzafava - Chairman and CEO

Vance Johnston - SVP and CFO

Analysts

Brad Thomas - KeyBanc Capital Markets

Bud Bugatch - Raymond James

Operator

Good day ladies and gentlemen and welcome to the Q2 2012 Furniture Brands Earnings Conference Call. My name is Sonia and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I’d like to turn the call over to Mr. Rick Isaak, Chief Accounting Officer. Please proceed sir.

Rick Isaak

Thank you. Good morning everyone and thanks for joining us today. With me this morning is Ralph Scozzafava, our Chairman and Chief Executive Officer; and Vance Johnston, our Chief Financial Officer.

I want to take a moment to read the Safe Harbor statement before I hand it over to Vance to go over our financial results for the second quarter. Ralph will then follow with the discussion of the highlights for the quarter.

I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21E 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 maybe outside of our control.

Please refer to our SEC filings including our Form 10-Qs and Form 10-Ks for a 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 today’s press release, you may obtain one along with copies of prior press releases and past SEC filings by link through to the Investor Relations page of our website furniturebrands.com.

I now hand it over to Vance to discuss our financial results.

Vance Johnston

Thanks Rick and good morning everyone. As reported in this morning’s press release, total sales were 265.5 million for the second quarter, a decrease of 10.4% from the same period last year. Gross profit for the second quarter of 2012 was 64 million and gross margin was 24.1% as compared to 73.4 million in gross profit and 24.8% gross margin in the same quarter of last year.

The year-over-year change in gross margin was primarily due to additional clearance of older inventory and product that has been replaced, decreased retail margin and lower plat utilization, partially offset by lower cost resulting from prior cost reduction activity.

SG&A expenses totaled 69.8 million for the second quarter compared to 79.3 million in the second quarter of 2011. The decrease in second quarter SG&A was primarily due to lower expenses resulting from prior cost reduction activities.

As our cost reduction efforts have taken route, we expect SG&A for the remaining quarters of 2012 to track towards the lower end or below our previously communicated 73 to 77 million guidance range.

Our operating loss of 5.8 million was essentially flat to year ago period as the lower sales volumes were offset by our cost savings efforts. Net loss for the quarter was 6.8 million or $0.12 on a per share basis as compared to a net loss of 6.6 million or $0.12 per share in the second quarter of 2011.

On the retail side of our business, sales from the 44 Thomasville stores that we have operated for more than 15 months were down 7.4% from the second quarter of 2011 following an 8% same-store sales increase in the second quarter of 2011.

We ended the quarter with 48 company-owned Thomasville stores, our Thomasville retail operating loss for open stores improved to 4.3 million from the 4.7 million loss reported in the second quarter of 2011 driven by lower SG&A cost.

Moving on to our balance sheet. We generated 3.7 million of free cash flow in the second quarter. This was primarily driven by continued improvements in working capital management and disciplined capital spending.

Capital expenditures for the quarter came in at 2 million for a year-to-date capital spend of 3 million. We remained disciplined on the capital allocation front and expect CapEx as well as depreciation to come in at the low end or below our prior guidance ranges. Just as a reminder these ranges were 16 to 18 million for CapEx and 22 to 24 million for D&A in 2012. We continue to manage our resources diligently as we strive to maintain high service levels for our customers balanced by disciplined management of working capital.

We contributed 2.9 million for our pension plan in the second quarter of 2012 or 5.5 million contribution year-to-date. As you know, with the recent passing of [Mac 21] and the resulting interest rate stabilization changes, Congress delivered pension relief in 2012. We expect the impact will be favorable relative to our prior expectations for cash contributions for pension plan over the next three years and we are currently in the process of determining exactly what the impact will be.

Cash at question end totaled 19.1 million and long-term debt was 77 million. We could borrow an additional 29.7 million above our $35 million threshold under our AVL as of the quarter end resulting in total liquidity of 48.8 million. We continue to expect to generate positive free cash flow in 2012.

I will now turn the call over to Ralph to provide more commentary on our results.

Ralph Scozzafava

Thanks Vance and good morning everyone. The success that we are seeing with our sales initiatives to drive new entry level price product into the marketplace at Lane and the mix direct-container shipping program at Broyhill along with the rollout of more updated and contemporary product across all of our brands was more than offset in the quarter by some product shortages we experienced which I’ll elaborate on in a moment. This resulted in a steeper sales decline in the second quarter and a higher level of order backlog to normal heading into the third quarter of the year.

The team once again executed well against our cost and efficiency goals that enabled us to hold our operating loss setting with the year ago period despite the volume decline experienced during the quarter. Our year-to-date operating losses have improved to 4.4 million from the 7.9 million we reported in the corresponding period of 2011 and we remained focused on our goals of delivering continued improvement and progress to our profitability.

With regard to the cadence of sales for the quarter, April and May were the slower month from a sales perspective with relative strength in June, as has been a consistent pattern; our higher end designer brands continue to outperform the rest of the business.

Against the backdrop of an uncertain macro environment and a somewhat cautious consumer, we had a relatively strong Memorial Day promotional period across all of our brands with some softness in non-event weeks.

Before I move on to discussion of our brands, I want to take a moment to speak of an increase in our order backlog at the end of the second quarter when compared to the year ago period. In total, our backlog was $19 million higher than last year as we exited the quarter. There were few factors that drove the increased backlog including an increase in orders on our contract business along with some supply chain changes that we made in our Broyhill case goods business. We had some shortages associated with some of our new upholstery product intros, we were unable to fulfill all of the demand that we saw for some of this new product during a period. These factors decreased shipments during the second quarter and increased our backlog levels by $19 million exiting the quarter.

Moving onto a discussion of our brands. At Thomasville retail we experienced the decline in our store traffic for the quarter driving a comp store sales decline at 7.4% versus the year ago period when we had an 8% comp increase. The team continues to drive bottom-line improvements as reflected in a $100,000 and $1.9 million year-over-year reduction in Thomasville open store retail operating losses for the second quarter and year-to-date periods, respectively.

In 2012, our Thomasville marketing plan has been enhanced to add a catalog to our TV, print, and online efforts. We have utilized two catalogs in the first half of 2012 and are seeing them help drive the better qualified customers to our stores. We will be enhancing our marketing efforts in the second half to address our traffic declines and will start this activity with our upcoming Labor Day event.

In addition, our new products are now shipping to all of our stores and are available for consumers to buy this month, and we are very excited about the new looks that we have available at retail.

At Lane, we made considerable progress in getting new value priced product developed and accepted on dealer stores which allows us to participate in high volume segments of the business. We are pleased with the traction the newer products are seeing in the marketplace that has enabled to fulfill all of the orders for this new product due to some shortages we experienced in our cover supply from Asia. We are focused on improving our instock positions on these key cover items and are now in a solid instock position today and in good shape going into the back half of the year.

At Broyhill, our upholstery sales continue to improve and this business has got solid momentum. The case goods product for our new Asia direct mix container programs started to ramp up in June and we expect it will get more product on retail floors during the third quarter. We need some strategic changes in our supply chain to rebalance production of some of our better selling groups to enable them to participate in the program. This enhancement resulted in a slight timing change and contributed to our sales decline in Q2 and to the overall increase in our order backlog that I mentioned earlier. We are now instock in our key items and well positioned to ship all product I third and fourth quarter.

On the efficiency front, our lean culture, continued commitment to remain disciplined with our [co-ops] as well as leverage our resources to find even better and more competitive ways to run our business continues. We have made progress on each of the cost and efficiency initiatives, we have spoken about with you in previous quarters, and are on target to deliver the planned $30 million in 2012 cost savings. This has helped drive the 12% reduction in year-to-date SG&A as compared to the same period last year.

And our major capital projects from 2011 are being integrated into our business. Production is ramping up nicely at our Mexico plant and our Indonesian facility. And we are on-track to realize the associated 10 to $12 million in annualized savings in 2014. Mexico has nearly 500 associates today is absorbing more and more of our cut-and-sew work each and every day. We are excited about the quality and cost advantages that we gained by utilizing both of these two new facilities.

So, in closing I want to reiterate our relentless focus on the continued improvement of our financial results and driving free cash flow. The results we are seeing from the sales initiatives already in place in parts of the business are encouraging, and we developing additional initiatives so that we can continue to introduce product that resonates with consumers and is priced [right] while generating acceptable margins for us. This is helping us gain floor space at existing dealers, develop relationships with new customers and participate in other distribution channels that we had not penetrated today.

We showed continued progress this quarter in executing against our cost and efficiency efforts that we put in place at the company, and our lean culture is enabling us to continue to find new ways to run our business smarter, better and more efficiently. We remain committed to our goals and improving our operating results and generating positive free cash flow in 2012.

With that I’ll conclude our prepared remarks, and we’d like to hand it back over to the operator to begin our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed.

Brad Thomas - KeyBanc Capital Markets

I wanted to follow-up on sales first of all, Ralph, you mentioned the product shortages and that the backlog is up pretty substantially, my math suggested that may have been a 6% drag on sales in the quarter, if you had been able to fulfill that higher level of backlog. First of all is that right, is that the way to kind of think about the way the quarter played out. And then secondly, as we move forward, does that mean you should get a nice tailwind as e move into the September quarter and would you expect that quarter to have positive sales?

Ralph Scozzafava

Yes, I think Brad your number is [get on], I think it's kind of a mid single-digit drag. So, that’s exactly right. And the 19 million that we take into the back half of the year, the bulk of that, obviously shift in the back half most should happen in the third quarter. So, we will see what the future holds for it. We like having momentum of course, we would rather have preferred to be shipped in Q2 but we will ship when we have new orders and we have the product, the inventories there, it's the matter of delivering it out.

Brad Thomas - KeyBanc Capital Markets

So, just a follow-up on that, if you make that adjustment in sales in the quarter, the company’s run rate going back to last four quarter or so was sort of a mid single-digit decline in sales on average over that period of time. To get that boost from having the better backlog, I mean that could put in flat territory in the September quarter. I mean is that a reasonable expectation based on where the orders are tracking at this point.

Ralph Scozzafava

It certainly is, yes.

Brad Thomas - KeyBanc Capital Markets

And then just lastly on the free cash flow outlook, what sort of revenue level do you need to hit in order to meet that target of positive free cash flow for the year?

Vance Johnston

First of all as it relates to free cash flow, we still (inaudible) comfortable at this point with the previous guidance we have provided positive free cash flow for the year. As you know we don’t give revenue guidance out, but having said that if you think about our free cash flow, there is four major elements; there is EBITDA, working capital, CapEx and then pension that really affect our free cash flow. On the EBITDA standpoint, even though sales maybe down now year-to-date, obviously we got a lot of cost reduction initiatives and you can see the results of those impacting our SG&A and our income statement. So, obviously very aggressive cost management that’s helping things. And then working capital and CapEx were being very aggressive and disciplined in a way that we manage that. And then is you are probably well aware, we think we are going to get little bit of favorability related to pension contribution as well. So, all that in total at this point, we still feel very comfortable or so feel comfortable with our guidance on free cash flow.

Operator

The next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

The increase in inventory, sequentially and year-over-year doesn’t seem to (inaudible) with out of stock position. So, I guess, explain that and where is the inventory and do we have to see discounts and impact to gross margin to move that inventory?

Ralph Scozzafava

No actually, [John], the inventory is right now the freshest [that extends] since I’ve been here and we took a lot of shipments in the month of June and essentially, the up inventory is really there to service the backlog. There are two big elements to it, one we get cover shorts on our upholstery business and that pretty much hit our Lane brand. As you know we put some new entry level price point product into the marketplace and it's so very, very quickly and it's a matter of gaining replenishment and as we have been moving cover supply very quickly from Asia here (inaudible) and also in our Mexico facility as we rebalanced. So, that’s a big chunk in the inventory and then the other part we made some shifts.

With Broyhill we have a direct container program and it's a mix program. And we wanted to allow our best selling collections to be in that. So, to be able for a dealer to get an (inaudible) for example, our best collection and to get it as part of that mixing program which is important to us, that was a big enhancement and we moved factories and we want to make sure that we had the right kind of quality. So, once we got through that move in a couple of others that are similar to that, now we take that inventory and we are shipping that as we speak direct in containers to our customers. So, we don’t see any issues with that at all. It's not about a discounting game or anything along those lines. We got increased backlog and now we got inventory to service it.

Unidentified Analyst

And then I see payables are way up. have you changed turns with existing vendors in the past year or have you gone out and found other vendors who can give you extended terms or are these the same terms and it's just the increase in inventory matching payables?

Ralph Scozzafava

I think it's all of those things. As Vance mentioned we have been pretty aggressive around how we managed our capital, our working capital. And I just mentioned some supplier changes that we made whenever we do those, we want to negotiate not only quality priced service, but turns. So, there is an element to that as well. So, we are just trying to do the best that we can to make sure that we can manage our working capital and that’s an element of it. Now when you take inventory at the end of the quarter like we did, you are going to see an increase in payable at the same time.

Unidentified Analyst

The pension number, I believe it was somewhere in the 15 million range in terms of an estimate for ’12 of cash. I think you mentioned you paid 5.5 million to-date. Is that a good number now that just to annualize? I know you expected to quote a favorable statement, but any more detail?

Vance Johnston

You are about right on your thoughts around kind of what we have previously given is guidance around pension contribution to tax is up 14.5 million with the original expectation. So, we believe that there will be some favorability as it relates to that, meaning lesser cash contributions in the current fiscal year lower than that 14.5. We are actually in the process of assessing that right now and so we will have more definitive information on that.

Ralph Scozzafava

The benefit, [John], will come as Vance mentioned in 2012 and then our initial projections that we really don’t want to share, because we don’t have the final numbers to plug into the formula. The favorability in 2013 and ’14 is much greater.

Unidentified Analyst

And then on your free cash flow statement, I think your original CapEx guidance of 16 to 18. And you have done something like 3 million something year-to-date. I mean can we get to this goal by coming here with CapEx in way below that 16 to 18; I’m struggling to get there.

Ralph Scozzafava

Certainly CapEx is a component of free cash flow, we don’t expect it to be way below, but as for the previous remarks we expected to be at the lower end or slightly below that guidance for the year. So, that where you are expected to come in and certainly that’s one component that is helping us get to the positive free cash flow guidance that we previously gave.

Unidentified Analyst

And then I guess last question for you Ralph. Are there divisions or assets that are being contemplated to be [divested] at this point?

Ralph Scozzafava

We really don’t have anything exactly to talk about if we have some news we will certainly go public with it, but in answering your question it would be no, not today.

Operator

The next question comes from the line of Bud Bugatch, Raymond James. Please proceed your line is open.

Bud Bugatch - Raymond James

Just to make sure I understand the liquidity threshold, did you say 17 million, Vance, above the weekly reporting and cash [to medium] level?

Vance Johnston

No, we said 29 million above the $35 million threshold.

Bud Bugatch - Raymond James

That’s the fixed [shipping] cash, right?

Vance Johnston

That’s correct.

Bud Bugatch - Raymond James

So, $7 million less or 22 million above the weekly [dominion test], right?

Vance Johnston

Yes, if you just take 7.5 million less than that you get to 22 million, that’s right.

Bud Bugatch - Raymond James

Okay. So, that’s the liquidity threshold.

Vance Johnston

That will be free cash [dominion].

Bud Bugatch - Raymond James

Secondly, we were talking, you came in with very good cost control on SG&A, and it's been now for several quarter below the 73 to $77 million level. Can you go through what’s the components of that are and why that doesn’t continue the $69 million level?

Ralph Scozzafava

Yes, I think, Bud, what you will find in and we will do a little bit more work between now and the next time we are on a call together. But I think Vance alluded to, we are going to be at are below the low end of that range. When you put into place initiatives around cost savings, you try and estimate them as best you can and we try to be conservative with that and I think we are getting more of the savings and we are at the higher end of the ranges that we had projected internally in terms of savings, and that’s what’s flowing through. So, we try to give you guy’s conservative numbers that you can model with on the expense side and then go ahead and (inaudible). Vance can give you a couple of specific examples, but I think there is a pretty as I allude the numbers are pretty strong across the board, benefit and a lot of it comes from what we enacted here last third and fourth quarter and next year.

Vance Johnston

Yes, I’d just add to that, Bud, as you think about relative to our own internal expectations, benefit costs, savings, to been little bit better than we had anticipated. That plays a role too. I think bigger thing is what Ralph alluded to is that the cost reduction efforts and initiative we put in place including last year’s actions are sustainable and I really believe through our P&L and so that’s a good thing to see.

Operator

Thank you. There are no further questions in the queue at this point. (Operator Instructions)

Ralph Scozzafava

Okay. Well, I want to thank everyone for being with us this morning. We appreciate your interest in our company and our business. As usual we got more work to do to improve our results and we will continue to do just that. Again thank you everyone and we will talk to you all very soon. Take care.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!