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Executives

Rick Isaak - VP, Controller, Treasurer & IR

Ralph Scozzafava - Chairman & CEO

Vance Johnston - CFO

Analysts

Nick Halen - Sidoti & Company

Budd Bugatch - Raymond James

Jeremy Hamblin - Forefront

Dillard Watt - Stifel Nicolaus

Furniture Brands International, Inc. (FBN) Q3 2012 Earnings Call November 1, 2012 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Three 2012 Furniture Brand Earnings Conference Call. My name is Dan. I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the 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, the VP, Controller, Treasurer and IR. Please go ahead, 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 third 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 and Exchange Act of 1934. Our actual results and future financial condition 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 linking through to the Investor Relations page of our website furniturebrands.com.

I will 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 $256 million for the third quarter, a slight decrease of 0.9% from the same period last year.

Gross profit for the third quarter of 2012, which included $1.9 million in charges from inventory write-downs related to product rationalization was $54.2 million, and gross margin was 21.2%, as compared to $57.5 million in gross profit and 22.3% in gross margin in the third quarter last year. Gross profits for the third quarter of 2011 included $2.8 million in charges associated with cost reduction initiatives.

The year-over-year change in gross margin excluding the aforementioned charges was primarily due to discounts, including the additional clearance of older inventory and product that has been replaced and increased product write-downs, partially offset by lower expenses related to prior cost reduction activities.

SG&A expenses totaled $70.1 million for the third quarter compared to $75 million in the third quarter of 2011. SG&A for the third quarter of 2012 included $3.1 million in charges associated with increased environmental reserves, while SG&A for the third quarter of 2011 included $4.7 million in charges related to cost reduction activities. The decrease in third quarter SG&A excluding these items was primarily due to lower expenses resulting from prior cost reduction activities. As our cost efforts have taken root, we continue to expect SG&A for the fourth quarter of 2012 to track towards the lower end or slightly below the quarterly guidance previously communicated of $73 million to $77 million.

The operating losses including the aforementioned items in each respective period, as well as a $9 million intangible asset impairment charge in the third quarter of 2011, was $15.8 million in third quarter of 2012, as compared to $26.5 million in the third quarter of 2011.

Interest expenses for the third quarter of 2012 was $1.8 million, as compared to $900,000 in the prior year period. The increase in interest expense was primarily due to the previously announced debt refinancing, which resulted in a write-off of capital fees of $900,000 related to the company's old credit.

Net loss for the quarter was $18 million, which included $5.9 million of after-tax impact from the aforementioned items. This compares to a net loss of $24.5 million in the third quarter of 2011, which includes a $13.4 million after-tax impact from the aforementioned items.

Net loss on a per share basis for the third quarter of 2012 was $0.33 as compared to a net loss per share of $0.45 in the third 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 4% from the third quarter of 2011, following a 5% same-store sales increase in the third quarter of 2011. We ended the quarter with 48 company-owned Thomasville stores.

Inventory at quarter end was $259.8 million, as compared to $248.9 million in the third quarter of 2011. Capital expenditures for the quarter came in at $1.9 million for a year-to-date capital spend of $5 million. We now expect our full year 2012 capital spend to be less than $12 million and depreciation to be approximately $20 million.

We contributed $2.9 million to our pension plan in the third quarter of 2012 for an $8.4 million contribution year-to-date. We expect no further contributions for 2012 and we now estimate the contributions to our pension plan to be $6.3 million for 2013.

Cash at quarter end totaled $15.5 million and long-term debt was $83.3 million. As we announced in September, we closed a new five-year secured credit facility comprised of $200 million asset based loan and a $50 million secured term loan. We repaid the amounts outstanding under our old asset based loan and incurred $8.3 million in associated closing costs, which were capitalized, and will be amortized over the five year life of the agreement, resulting in $500,000 in expected Q4 amortization expenses or $1.9 million on an annualized basis.

Assuming current interest rate, interest expense for the remainder of the 2012 is expected to be $2.5 million. We ended the quarter with total liquidity of $109.7 million comprised of cash of $15.5 million, and $94.2 million in excess borrowing availability under our credit facilities.

Excluding the $8.3 million in one-time costs associated with this new financing and other non-recurring costs, we now expect free cash flow for 2012 to be negative depending on inventory levels at year-end.

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

Ralph Scozzafava

Thanks, Vance, and good morning everyone. We delivered sales for the quarter that were down slightly versus the year ago period. While these delivered sales trends showed a slight decrease year-over-year, we were pleased with the modest increase in our written sales trends, which represents an improvement over prior quarters.

As you may remember, we closed our second quarter with a backlog that was up by $19 million over the same period of 2011. We continue to carry a strong backlog and close the third quarter with backlog levels over $20 million higher than Q3 of last year, driven by solid order activity in the recent quarter.

With regards to sales cadence throughout the quarter, our shipment improved throughout the quarter with the strongest year-on-year performance realized in the month of September.

I want to go over the key highlights at each of our major brands starting with Thomasville. While comp store sales for Thomasville retail for the third quarter of 2012 declined 4% versus a plus 5 comp in the third quarter of 2011, there was a year-over-year improvement in traffic trends through the quarter.

Last time we talked, I told you we enhanced our marketing efforts to improve traffic trends at Thomasville this year by ending direct mail catalogs to our television, online and print efforts. We heavied up on our advertising in the third quarter and delivered our best Labor Day written sales performance in a number of years. Our Labor Day catalog was our best performing throughout year-to-date as we continue to improve not just our products and consumer offer but also the content of the catalog.

We're also focusing on refining our mailing list to customers and prospects to drive not just more traffic but better qualified traffic to our stores. This helped drive a strong improvement in written sales trends in our Thomasville stores in the third quarter both sequentially and on a year-over-year basis. Right now, we're kicking off our holiday home sale with more television, online and print support, along with our fourth direct mail catalog of the year. A number of our new products are now in store and our early reach on them are quite positive.

For Lane and Broyhill we strive to deliver not just the right product at the right value to customers, but as importantly to bring better logistics and service levels to our dealer partners to help them drive their business. This is where our product intersects with distribution and we continue to put programs in place to enable us to service our dealers better and quicker.

At Lane, we're making progress on hitting strong price points with the right looks particularly in motion upholstery and recliners. At the recent High Point market we introduced a number of innovative new projects and products that are merging comfort with technology that consumers use every day. We have sold goods that can chargetheir iPhones and iPads as an example, or sectionals with speakers and bluetooth technology that can play music or view photos or videos from a phone or computer just to name a few of the innovative new products that we've introduced.

And as I mentioned earlier, improving our end stock positions and service levels continues to be a focal point at Lane and we're excited to announce our new improved Lane Express program, which we offered at High Point market a few weeks ago. This program makes it even easier for our dealers to get custom upholstery from us without having to stock lots of inventory. It enables them to put a wide assortment of our Lane products on their floors, offer the customers the ability to customize their selection in virtually any way that they want, a recliner, a rocker recliner, a wall saver, or with power, and they can pick from numerous cover choices that we can make to order and deliver in less than three weeks.

Our domestic manufacturing capacity, as well as our Mexico cut-and-sew plant enabled us to offer all of these to our dealers, this large variety of domestically made product with quick delivery at a competitive price.

Moving on to Broyhill, our upholstery sales continued to improve with compelling new looks for the consumer and increased service levels to our dealers in the form of our Broyhill upholstery quick-ship program, which is among the strongest in the industry. We have been able to take advantage of our domestic factories, leverage our Mexico cut-and-sew facility to turnaround customer upholstery orders in one to two weeks in many cases. The Broyhill program and this business has been a growth story for us from past two years and continues to gain momentum after a very strong High Point market last month.

On the Case Good side of Broyhill, the Asia direct mix container program that began shipping during the third quarter will help get more of the right product on to our dealer floors. Our dealers can now get some high volume price points in the marketplace with some of Broyhill's very best collections. We have been pleased with some of the early results that we have seen here as we have had a large group of major dealers recently expand the Broyhill case goods product mix through the use of this program.

On to our Designer Brands business, which has remained pretty resilient throughout the recession and now into the recovery, their performance continues to be quite solid. Hickory Chair is the best example of our success within the designer brand business. In Hickory Chair, we have cultivated a very long and loyal customer base of interior designers and high-end dealers over the years.

The key to our success has been the very important stylish design aesthetic of the product, the extremely high quality domestic craftsmanship, our manufacturing flexibility to customize both the upholstery and case good product, and also our focus on strengthening our relationships with interior designers across the country by providing onsite training in the form of classroom programs like Hickory Chair University, where designers come to our facility and go through a curriculum on site and earn a certificate upon completion.

In addition, our partnership with industry leading design talent for certain product lines has also been very successful in enabling local interior designers access to some of the best designers and styling in the industry. Hickory Chair has become the workroom for the interior designer with the ability to customize virtually anything.

Moving on to our operations, increasing our customer service levels has been a key focus area over the past few months. We have improved our service levels within these months and it is a constant focus for us. And then, with regard to efficiency in our supply chain, our Mexico cut-and-sew plant now has nearly 500 associates and produces over one third of our combined Lane and Broyhill Kits that we use in our domestic plants.

On the SG&A front, our Lane culture continues to produce efficiencies and, as Vance mentioned, we feel comfortable that we'll be at or below the lower-end with expense range that we discussed at the start of the year.

In the quarter, we are very pleased to close on a new financing package that replaced our old asset based loan and provides increased borrowing capacity and greater financial flexibility for the company. So let me do this. Well, firstly, we believe that these new facilities provide a prudent level of financial flexibility and headroom for the company. Second, this increased financial flexibility enables us to continue to invest in our strategy to drive sales and improve our efficiencies.

Now, for competitive reasons, I am not going to go through any specific new projects but you have seen us in the past investing our capabilities like lower cost manufacturing in Mexico and Indonesia things that improve our competitiveness and our cost structure. We will continue to make these kinds of necessary investment choices to further strengthen our position for the longer term.

And third, it also affords us the ability to make some opportunistic investments. For example, in the case of some of our dark stores where the buyout of leases is the right economic decision, we are now more easily able to pick advantage of these positive net present value opportunities. And as always when it comes to capital our decisions are very disciplined. We have strict return hurdles and defined payback periods before we make any choices.

So, in closing, the third quarter showed more progress with sales results that were close to flat year-on-year, recent sales trends had improved both sequentially as well as on a year-over-year basis. Traffic transit time as to retail that showed improvement on the heels of more thoughtful and focus marketing and better product, cost efficiencies across the business that help drive the improvement in year-to-date operating results as well as a new financing package that greatly improves our financial flexibility.

There are still much more work to do and we know that on the path to profitability in getting us to that point remains number one goal of the entire Furniture Brands organization.

So, with that, we will conclude our prepared remarks and hand it over to the operator to start the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Okay. So your first question is going to come from the line of Brad Thomas at Keybanc. Please go ahead, Brad, you're in the call.

Unidentified Analyst

Hey, guys this is (inaudible) in place of Brad Thomas. Just wondering if you could give an update on your full container initiatives and how that's ramping and what type of line savings you would be anticipating on that since you implemented?

Ralph Scozzafava

I am sorry can you repeat the initiative we didn't catch that?

Unidentified Analyst

Yeah, full container initiative?

Ralph Scozzafava

Yeah, sure. I can tell you we began shipping in full in the July August timeframe. That's really a mixing facility that's in Asia. We've been able to move a number of our sourcing factories into one particular region. And what we like about it is it's one of our very best collections for Broyhill. So, collections wise Attic Heirlooms or Artisan Ridge, these are very strong collections for us that a dealer can now put mix in one container and get it shipped directly. And the reason that's important is many; many dealers don't want to or can't logistically take one collection and fill a container with it. So within a wide variety of our best sellers, they're able to take it in quantities that they can work with, and then be able to flow the containers and what it does it opens up direct container pricing to our dealer base. So what that means is we share the savings with them. They're able to get better price points for example a four piece Broyhill bedroom can now resale at $19.99. It can go $16.99 on promotion, very competitive high volume price points and it ends up being much more sales or in profitable for the dealer and for ourselves. So ramping up nicely.

Unidentified Analyst

Okay. And then your inventory was up 4%. Are you expecting more discounting your current activity or do you think inventory levels are in good shape moving forward?

Ralph Scozzafava

I think inventory levels were high in our estimation. I think we're going to -- you're going to see them to come down by the end of the year. We're trying very hard to balance probably our highest service levels over the past couple of months with inventory. But we think that they will come down. It happens to be the freshest things with inventory we've ever had. So that's good news. But we want to move through. We think we can operate at a lower level.

Operator

And thank you for your question. We've another question for you. This one is from the line of Nick Halen of Sidoti & Company. Please go ahead. Nick, you're in the call.

Nick Halen - Sidoti & Company

Can you just talk a little about trends that you guys are seeing in terms of demand for; I guess case goods versus upholstered. And just in terms of the new products you rolled out at higher point, are the majority of them upholster products?

Ralph Scozzafava

Yeah, Nick so let me take the first one. Throughout the recession and even now, which is we're entering recovery we've seen upholstery outperform case goods. It's been very, very consistent. And it does continue although I will say our case goods trends are increasing and the gap is closing. Well but that dynamic still remains.

As we went to High Point market on your second question, a lot of product innovation that we brought out was in the upholstery area. We did have new case goods collections at Broyhill as a part of the mix container program at Thomasville, and Drexel Heritage. So those were solid. But I would say that the majority of the work that we found has been to freshen up upholstery, and really to make it more contemporary, clean alliance, and a little bit more stylish.

Nick Halen - Sidoti & Company

Okay. Now I know in quarters passed you mentioned opening anywhere from two to five new stores during 2012 and I was wondering if you had any updates on how that's progressing?

Ralph Scozzafava

You know we're actively looking at real estate but we don't have any plans at this point for the balance of the year. There is just one mix that we're talking about. But we will not open the two to five that we had talked about. And I think the most important thing that we can do is be smart about where we go, find the right locations, but we've got work to do on the Thomasville store program too. We like the attraction that we're getting now with some of the new products. We like some of the marketing that we're doing. But we still want to work hard around that concept.

Nick Halen - Sidoti & Company

Okay. And just lastly one more from me I guess kind of a housekeeping question, I know you broke it down a little earlier but I was wondering if you can just kind of repeat just in terms of well you said you're expecting about $2.5 million in interest expense. I was wondering if you could just kind of go over that again real quick for the fourth quarter?

Ralph Scozzafava

Sure, Vance do you want to walk through.

Vance Johnston

Yeah we expect now about $2.5 million in interest expense in the third quarter that would include, interest as we see it right now based on rates and based on the amount of debt outstanding, and then also based on the amortization of the capitalized fees that we discussed as well. So those would be the main components of that. So that's what we expect for the fourth quarter of the year.

Nick Halen - Sidoti & Company

Okay. And then I guess going, will this be I guess the last quarter you could expect that to be a little bit leveled that I guess return to more normalized in the first quarter of '13?

Vance Johnston

Now, actually going forward, interest expense we expect to be, obviously we have a new credit facility where we have a term loan that's at a higher rate and then we also have an ABL as well. So going forward you could expect interest expense to be incrementally about somewhere between $4 million to $6 million over the previous year.

Operator

Thank you very much for your question. I have another question. This one is from Budd Bugatch of Raymond James. Please go ahead Budd.

Budd Bugatch - Raymond James

Thank you for taking my questions. I guess starting with sales Ralph you went through qualitative discussions of some of the brands can you may be go through and tell us which brands might have been up or down in revenue during the quarter and what the outlook is for them in the fourth quarter?

Ralph Scozzafava

Yeah, I think Budd just to talk a little bit about that I think, you can see in the release the Thomasville numbers showed slight decline. My designer brands have performed pretty well throughout I'd say the last few years despite anything that's happened externally. I think they were seeing good traction on our Broyhill business and we're just now seeing some good order trends coming up, a broader upholstery business that Lanes are part of, so. We were almost flat for the quarter and it's pretty well spread across those brands, designer brands out in front a little bit, beyond the others.

Budd Bugatch - Raymond James

Flat that seems to be just given the fact that housing seems to be better and some of the mortgage most one you recently have already is really good results, saw in sales results in the quarter. Could you just address that a little bit what you're doing to get that and what looks like for the fourth quarter. You think revenues will be up. You've had an increased backlog now in two quarters so I net the delivered sales having been there?

Ralph Scozzafava

Yeah I think we've seen stronger order rates in the third quarter. I think that's for sure and so I think that's probably a strong dynamic for us. We look at a lot of competitors. We look at a lot of retailers and the other public numbers just like everybody else does and we see, we see a mixed bag. But we know what we need have to do here and the most important thing that we've to do is focus on great product, make sure it's a value to our dealers and make sure we can deliver it in full and on time. And when we do those kinds of things, we get good results and that's what we're focused on right now. So more to come, we would like the backlog moving into the fourth quarter. We'd like the order trends. We'll see what fourth quarter and first quarter bring.

Budd Bugatch - Raymond James

Could you quantify the order trend? I didn't hear a number, you said orders were up sequentially and year-over-year, did you give us kind of a range of what they were up?

Ralph Scozzafava

No I didn't. But what we did talk about was the backlog. We were up our backlog year-over-year about $19 million at the end of Q2, about $20 million at the end of Q3 and minus 0.9 percent of sales. So that's really been, that's the trend and we see this as a trend for us. We like what happened at High Point. We like the products that we're bringing to market and the yearly returns on it have been good. So the key now is get old products off the floor, get new products on the floor and let the good hard work that we've done with new product development in our programs, and our strong grants takeover.

Operator

Thank you. Budd, that's nice to have the questions in the queue at this point in time. (Operator Instructions) Just waiting for our questions to come through.

Ralph Scozzafava

I think we have one more.

Operator

(Operator Instructions) Okay. We have a question from Jeremy Hamblin of Forefront. Please go ahead, Jeremy.

Jeremy Hamblin - Forefront

I wanted to just go over the pension expense, and Steve if you could go over the details again guidance for 2012 and what you expect 2013 and going forward with the changes in legislation?

Vance Johnston

Yeah, so I think we've provided some information on this, but effectively, we expect no further contributions in the current year. We expect about $6.3 million contributions in 2013, which we provided that information as well. So that's really on the contribution side. We don’t really give a lot of information or guidance as it relates to expense going forward, and then obviously our pension liability gets kind of reassessed at the end of each fiscal year.

Operator

Okay. Thank you for your question. And we have another question. This comes from Dillard Watt with Stifel Nicolaus. Please go ahead.

Dillard Watt - Stifel Nicolaus

I'm just wondering if you could may be give us a little bit of a walkthrough of sort of over the last three, four quarters now increases in accounts payable?

Vance Johnston

Sure. I think what you are seeing from us is as managing working capital; we are pretty diligent about it. We look at the best decisions that we can make with regard to inventory, AR, accounts payable. And what you have seen is inventory come up slightly and probably more than we'd like, again we like the service levels; we wanted to be able to perform at lower inventory levels to do it.

As it relates to accounts payable, we have got numerous vendors large and small that we have done business with for many years. It's critically important for us to have good partnerships and work together with them. We are also a very big customer for a lot of people. And we have the ability to work in extend term and do things that enable us to manage working capital. But when we make arrangements with vendors and also with customers it's really between us and the customer and the vendor.

So, what we are trying to do is just manage our balance sheet as best we can and work our way through this period, this recession and then to the recovery. And that's really what you are saying, so I would anticipate that inventory would be down. I would anticipate that AP would be down, but we are working against that.

Operator

We have another question from the line of Bud Bugatch. Please go ahead, Bud, you’re in the call again.

Bud Bugatch - Raymond James

I may have missed the payables issues. The question is are you going to meet to tap further into the line during the fourth quarter? Is that part of what gets to the interest expense calculation events?

Ralph Scozzafava

Yeah, well, Bud, we have -- just one thing and then I’ll hand it to Vance. Really the reason we have that facility is to help us manage our business and we may or we may not but I think Vance can give you some detail around what he’s thinking.

Vance Johnston

Yeah. Hi, Bud. So basically the way an asset based lining facility should work is, I know you’re familiar with this, is that we will borrow, draw down and then payback on that facility as we deem necessary. Obviously, we have a forecast of what that looks like, we don’t provide that information. We haven’t that the forecast previously, but we will drawdown and pay that back as we kind of move through the quarter, the fourth quarter and the year. So, it won’t necessarily stay as a static amount, but you can expect to kind of draw down and paybacks to take place as well on that asset base lining facility.

Operator

There are no further questions in the queue, so at this moment in time I will hand over to the chairman and CEO Ralph Scozzafava for some closing remarks. Do go ahead, sir.

Ralph Scozzafava

Okay. Thank you and thanks everyone for being on the call. We appreciate your interest in our company. If there are other questions or items that need further clarification please feel free to give us a call here and we’ll certainly try and take care of all those needs. That said, we’re going back to work and we’ll talk to you all again next quarter. Thanks so much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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