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Stanley Furniture Company, Inc. (NASDAQ:STLY)

Q3 2008 Earnings Call

October 14, 2008 9:00 am ET

Executives

Douglas Payne - Executive Vice President

Albert Prillaman – Chairman, Chief Executive Officer

Analysts

John Baugh – Stifel Nicolaus

Budd Bugatch – Raymond James

Todd Schwartzman – Sidoti and Company

Operator

Welcome to the third quarter Stanley Furniture Investor conference call. (Operator Instructions) It is now my pleasure to introduce your host, Douglas Payne, Executive Vice President for Stanley Furniture.

Douglas Payne

Welcome to our quarterly conference call to review our third quarter 2008 operating results. We appreciate your participation. Joining me this morning is Albert Prillaman, our Chairman and CEO. During our call this morning we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause actual results to differ materially from our expectations are contained in the company's SEC filings and the press release announcing our third quarter 2008 results.

Any forward-looking statements speaks only as of today and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call. At this time, Albert has some opening comments.

Albert Prillaman

The sales and earnings for the quarter were within the guidance range we had provided in mid July. Net sales were down a disappointing 25%. Of course we had some restruction charges in the quarter as we have consolidated two plants into one and that continues to go well as we previously indicated.

The first nine months sales were down about 18% and year to date operating income about $3 million or 1.7% of sales excluding the restructuring charges, operation income was about the break even level for the quarter because of the significant sales decline, but frankly we were pleased to be at near that break even level with that much of a decline.

The manufacturing consolidation as I said earlier is going well. It's difficult, but we're very pleased with what that will do for us as we control our costs in the future. We continue to generate very positive cash flow and our financial position just continues to improve as we move through this recessionary climate.

I will now ask Doug to comment on the balance sheet.

Douglas Payne

As Albert indicated, our balance sheet continues to be in excellent shape. We generated strong cash flow from operations, reduced working capital, increased cash on hand to $36.7 million and continue to improve our financial position in the third quarter.

Cash from operations during the first nine months of 2008 was used to pay cash dividends of $3.1 million, next scheduled debt payments of $1.4 million, fund capital expenditures of $1.5 million, and increase cash on hand by $5.1 million.

Working capital excluding cash and current maturities of long term debt decreased to $53.8 million at the end of the third quarter compared to $73 million a year ago. Inventories declined 24% to $47.5 million, down from $62.3 million at the end of the third quarter of 2007. Accounts receivable also declined 29% to $25.1 million from $35.3 million a year ago.

Base sales outstanding and accounts receivable equaled about 46 days at the end of the quarter and is well within our normal range. Approximately $19 million remains authorized by the Board of Directors to repurchase stock. As you know, we curtailed our share repurchases in the latter portion of 2007. We continue to believe now is the time to be more conservative and maintain a very strong financial position in these uncertain times.

Albert Prillaman

As we go forward the recessionary climate has continued. The last ten days we've actually seen another downturn for obvious reasons, but hopefully that will soon correct itself. We're not changing the guidance that we gave in mid July, and in general terms what that means for the year, we expect operating profit in the $2 million to $4 million range, excluding the various restructuring charges that we have.

As we look at our business, we certainly believe that we have well positioned ourselves from a balance sheet viewpoint as we go through this recession, but at some point in time we're very aware of the fact that we've got to start growing again. If you look at our business in two segments, the Young America business is pretty healthy. Its downturn has been fairly modest over the past year.

Where we've really had some difficulties and the product line that needs some work done is our Stanley line, our adult business, our bedroom, dining room, home office, home entertainment. And certainly when you get into our adult dining room and bedroom business, it is very much a postponeable category, and it has suffered more during this slow down. And that's fairly typical over the last several downturns, but we're working very hard to improve that. We're very pleased.

We have already introduced some of the product that we plan to bring to the October market. We've had very positive results on that. We'll actually be shipping that in November. That's our Coastal Living collection which we're very excited about going into next year. And we have formulated plans to really show off that side of our business.

So as we come out of this thing, and we will come out of it at some point, we like our position. We like our balance sheet and we plan to be a strong performing company again as we come through this recession.

And now I will open this up for any questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Baugh – Stifel Nicolaus.

John Baugh – Stifel Nicolaus

Let's focus on the charges, just to be clear, is it $7 million and $9 million pre-tax for calendar '08?

Albert Prillaman

It's $7 million and $9 million pre-tax. I'm not sure if it will all be recorded in calendar '08. Some of it could very go into calendar '09 depending upon the timing of the disposition of some of the real estate and machinery and equipment and so forth, associated with the consolidation of two factories into one.

John Baugh – Stifel Nicolaus

As we look at the third quarter, how do the charges break out between gross profit and SG&A?

Albert Prillaman

Gross profit is in the gross profit. There is a piece that is in SG&A.

John Baugh – Stifel Nicolaus

You broke even on an EBIT level at $54.5 million roughly. How do I think about the break even EBIT going forward once the restructuring steps you're taking are in place? Are we making money at $218 million, $219 million in revenue, or are we still break even EBIT? How do I think about that?

Albert Prillaman

Let's go back. I've got the answer to your first question, then we'll come to that one. The restructuring break down between gross profit and SG&A for the third quarter is about $3.8 million was restructuring charges included in gross profit, or cost of goods sold, and about $1.4 million was in SG&A. That should total up to about $5.2 million in operating charges.

Your second question about profitability and where are we going forward, assuming that sales stay where they're at, as you know the moves that we've made, we've indicated and we expect that to result in improving our cost structure in the range of $5 million to $6 million going forward. We won't begin seeing that, or all of that in the fourth quarter.

I would expect that we would begin to gain some traction, but we'll still be going through some transition and ramping up our Robinsville facility in the fourth quarter of this year. But as we move into 2009, I would expect that we would see that improvement in our cost structure.

We're sort of at a break even level currently, at the current sales level, so we expect to see that at the operating income line, we expect to see that move back up in the positive area going forward, assuming sales stay where they're at.

John Baugh – Stifel Nicolaus

Is there any impairment issue on the $9 million in good will or is that still fine?

Albert Prillaman

For the moment it's still fine. We do an annual review and test that. We began looking at that. At the moment, given the company's ability to generate cash flows and so forth, I don't expect that to be an issue, but it's something that we will do a more formal evaluation on in the fourth quarter.

John Baugh – Stifel Nicolaus

When you look at your customers credit situation, and I realize that you have limited exposure to any single one account, but it has to be collectively deteriorating and I'm curious as to what color you can provide about how bad it is, the timing, seasonally when your retailers cash flow is at its worst. What's your expectation of fall out there may be from your customer base?

Albert Prillaman

I wish I had all the concrete answers to all those questions. Unfortunately, I don't. But I'll tell you what we do know. Your receivable portfolio continues to be in really pretty decent shape. Now having said that, we're clearly aware of what's going on and monitoring that very closely. As you can probably tell by looking at our results for the third quarter, when you look at our receivables, our payment terms, and our DSO and so forth, is all holding up really well, especially considering the environment that we're in.

I think part of that is a function of our business model and the fact that there's virtually no inventory between us and the end consumer. Most of what we receive each day is shipped, or is basically sold orders to consumers, so the retailer really doesn't have an excuse not to pay us and it's actually cash positive as it relates to the business that he's doing with Stanley Furniture.

Douglas Payne

I would say to you, in this credit crisis, or as it's called that we're in, our business model even works better for that retail because he can move very rapidly, taking care of his customer, getting that customer's money, paying us without the long lead times that the container direct kind of programs and so forth.

Albert Prillaman

Having said all that, clearly, we're keeping a very close eye on that and trying to make sure that we are partnering up with the right people that are going to be able to survive this mess. You just have to manage as best you can.

John Baugh – Stifel Nicolaus

What's your sense of, obviously the last ten days have been horrific if you consider news headlines. Before all of that post Labor Day, what did you see in September? I'm not asking you to make a forecast of what's going to happen from here, but was there another leg down before the last ten days, or was it pretty much a consistent quarter?

Albert Prillaman

I'd say September was not much different than let's say July/August, until the last ten days. One of the things that was a little encouraging to us was the initial response to our Coastal Cottage collection which we put out there early, and we met our expectations if not exceeded them a little bit on our initial orders that we received before the retailers had even seen it.

We're going to ship that before Thanksgiving so that will be getting some new product on the floors as we go into a better selling season and we go into next year. We're encouraged by those orders, but the end of the line retail has not changed much in the third quarter.

Operator

Your next question comes from Budd Bugatch – Raymond James.

Budd Bugatch – Raymond James

Let me ask you to bring out that crystal ball of yours and see into the longer term future and see where you think margins and growth rates do kind of level out again once we get through this.

Albert Prillaman

You have to look at this historically. It's not like we haven't gone through recessions before. My crystal ball says in the furniture side of it, we're closer to the end than the beginning because we've been so tied to housing, and housing led us into this thing, and housing will lead us out. So when it starts picking up and some people say that's going to be in the first half of next year, some people say the second half, who knows?

But I think that will begin to help very much our Stanley business. The Young America business which is more or less more geographically driven, and its proven again that it holds up better than the other side. We have more pent up demand. But we are really getting our factories in good position to be very efficient.

Our Young American business in total, our plants, everything, is pretty much fixed. It's just a matter of execution going into next year. On our Stanley business, what we've referred to as our collection business, we've got to get some velocity going there. But our plants are improving significantly. They've got a good trend of improving their efficiencies even in a down market.

So we're optimistic that when we do bounce back on the top line, a lot of it will be following through on the bottom line. We plan to internally, we will get back to where our historical levels will be. How long that's going to take, this is going to depend on the top line.

Budd Bugatch – Raymond James

Does that get you in a double digit op margins again? Is that where – anything structurally changed in the industry? Lots of structurally change with the competition and the manufacturing footprint in the industry. Yours has changed less so because of your blended strategy. Do you still foresee a double digit op margin in the long run?

Albert Prillaman

My answer to that is yes, I think that's doable. There's certainly a lot caveats to that because predicting the future is a dicey game and there are a lot of variables that will go into that. Clearly to get back to a double digit operating margin, we would have to have significant improvement in volume levels.

I think what we're trying to tell you, who knows where the environment's going to go, but if business condition and sales stay where they're at in the range where they're at today, from an operating margin viewpoint, going into '09, you should expect to see us return to a positive operating margins, and we're not going to double digits in this sales environment. But I think we'll turn back profitable and then from there to getting back to historical double digit operating margin level will largely depend on how quickly we can rebound on the top line.

Douglas Payne

It's almost totally a revenue issue.

Budd Bugatch – Raymond James

Is Robinsville pretty much operating now and Lexington closed?

Albert Prillaman

We have since the quarter ended, we've actually ceased production and completed that at the Lexington facility, and we continue to be in the process of increasing output levels and assimilating the product into the Robinsville facility.

Budd Bugatch – Raymond James

Are you operating more than one [mark one] shift now at Robinsville now or is it pretty much one shift?

Albert Prillaman

Pretty much one shift.

Budd Bugatch – Raymond James

But you will be prepared to operate more than one shift once volume returns.

Albert Prillaman

That's correct.

Budd Bugatch – Raymond James

The additional cost of a run through into '09, would that just be pretty much the carrying cost of Lexington until you will be able to dispose of it?

Albert Prillaman

Yes. And whatever the true ups end up being on the final disposition of those assets.

Budd Bugatch – Raymond James

When you look at your receivables, I think the allowance now looks like it's about 7.7% or 7.8% of receivables which is up significantly, so you've bolstered the historical level I believe. Do you true that up at the end of the year with writing off receivables? Last year you had a pretty big drop off. There was a drop off in volume too.

Albert Prillaman

We did. We actually don't do the write off of the accounts until the end of the year. And so reserve typically builds during the first three quarters and then comes back down at the fourth quarter. But even if you account for that, we have increased our reserve level. Even if we work through and net up and physically writing off the accounts that we would need to write off during the first three quarters of the year, we would actually have an increase in the reserve balance.

Budd Bugatch – Raymond James

Inventories, in days, cost of sales outstanding have also gone up. I presume that's mostly volume related as volumes have come down and the tail of some of your product is longer. Is there any change in the structural level of inventories.

Albert Prillaman

No.

Budd Bugatch – Raymond James

And a question on the good will. I'm trying to remember what the $13 million or $9 million net is attached to. I thought it was attached to Lexington.

Albert Prillaman

No. It's actually attached to the entire business and it goes all the way back to one of our last LBO's.

Douglas Payne

It probably would be in '89 I guess.

Budd Bugatch – Raymond James

So that is a whole business cash flow issue that has to look at that before you determine whether you have to write that off. It's not just one of the assets.

Albert Prillaman

That is correct. It's the entire business.

Budd Bugatch – Raymond James

My last question relates to one of our favorite topics, the CDSOA. Any update on what's going on there? Have you heard anything?

Albert Prillaman

Your ears are better to the ground than ours. I don't have any updates related to that.

Operator

Your next question comes from Todd Schwartzman – Sidoti and Company.

Todd Schwartzman – Sidoti and Company

I wonder if you could quantify, just to get a sense of the relative of the strength of Young America, was the sales decline for Young America for the quarter about half that of the collections of the adult groups? Was it better than that? Was it worse?

Albert Prillaman

We traditionally don't break that out. It's just our normal, it's more severe, but I would just say it's our normal recessionary environment, but it's much less than our bedroom and dining room business.

Todd Schwartzman – Sidoti and Company

Do you think you're gaining market share in youth?

Albert Prillaman

It's hard to get your arms around that, but we have absolutely no indication we're losing market share. The published numbers on it is more anecdotal, but we have not reason to believe, anecdotally, we continue to believe we're gaining momentum in that business.

Todd Schwartzman – Sidoti and Company

Have you penetrated any new accounts with Young America specifically?

Albert Prillaman

Not a significant account. Your independent businesses move around, but that business is just much more stable than the other business. But our signature shops continue to improve and where there's dedicated space and so forth. I don't think we could identify any major penetration because in our upper medium price range where we operate, we're the dominant player there, and we've seen no erosion of that.

Todd Schwartzman – Sidoti and Company

You had mentioned, I'm talking about your approach to share purchases that now is the time to be conservative. Is that same degree of conservatism apply as well to the dividend policy?

Douglas Payne

Well we don't have any plans to adjust or make any changes to the dividend.

Todd Schwartzman – Sidoti and Company

Could you walk us through your long term view of the manufacturing mix, domestic versus imports and maybe the level of sourcing you expect to see maybe five, ten years down the road?

Albert Prillaman

The difficult thing, if you take the last five years, the last three years of what's happened in China, certainly their costs are accelerating faster than ours, and then you try to forecast that out. That gap will continue close, but that's assuming that you continue to have some revisions with the currency, that their inflation – there's no reason to believe that their inflationary pressures won't continue to accelerate greater than ours, but off a much lower base.

So having said that, that continues to improve our manufacturing position, but who's to know what China is going to do with their currency? That's a major part of it. I might also add who's to know what's going to happen with freight. The freight costs are going up dramatically, a lot of that due to the oil. Now oil is back down. Does that change that scenario? We don't know.

But what we do know is this; we know we have dramatically improved our cost situation by going to one plant, Young America, and with our plans to multi shift that. So that improves our situation.

Will we continue to source about a third of our business in Young America? For the time being, we evaluate what we can bring inside, obviously. But we'll continue to do that. I see no reason for Young America, at this time, based on what we know that it will change from one-third, two-thirds.

Now we have that same scenario over on the Stanley side and I don't think that will change because chares almost by – I can't see many situations where we bring chairs back in. So much of what we do on the Stanley side are design oriented whether they're using materials such as woven material, leather, even stone or something like that. That's always going to be better off-shore. So I don't see that blending will change either.

My best guess is right now if we go five years out, we'll still be two-thirds, one-third; two-thirds domestic, one-third outside. And I do not see, again my best guess, I don't see that increasing as far as outside sourcing. If anything would happen, you could see a scenario if we get very efficient and our costs go up, that we may bring our youth beds back inside, but it's way to early to forecast that. So that would decrease the amount that you source.

But I don't see it changing a lot. I really don't. I still don't see a scenario that says that we outsource everything. I don't see that.

Operator

We have no further questions. I'd like to turn the floor back over to management for any closing comments.

Albert Prillaman

Thanks everyone for joining us. We look forward to moving through this recession and positioning our company so that we are a much better value to our shareholders and to our customers as we get through this recession.

We appreciate your interest.

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Source: Stanley Furniture Company, Inc. Q3 2008 Earnings Call Transcript
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