Furniture Brands International, Inc. Q1 2010 Earnings Call Transcript

| About: Furniture Brands (FBNIQ)
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Furniture Brands International, Inc. (FBN) Q1 2010 Earnings Call Transcript May 6, 2010 8:30 AM ET

Executives

John Hastings – VP, Communications

Ralph Scozzafava – Chairman and CEO

Steve Rolls – SVP and CFO

Analysts

Barry Vogel – Barry Vogel & Associates

Budd Bugatch – Raymond James

Stanley Elliott – Stifel Nicolaus

Operator

Good day ladies and gentlemen, and welcome to the quarter one 2010 Furniture Brands earnings conference call. My name is Veronica, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. John Hastings. Please proceed, Mr. Hastings.

John Hastings

Thank you Veronica and good morning everyone, and welcome to our first quarter earnings conference call. With us today are Ralph Scozzafava, Chairman of the Board and Chief Executive Officer; and Steve Rolls, Senior VP and Chief Financial Officer.

During our prepared comments and the question-and-answer session that follows, we will be making statements expressing the beliefs and expectations of management regarding future performance. Any such statements are forward-looking statements, which reflect our current views with respect to future events and are based on assumptions, and therefore are subject to risks and uncertainties.

These risks and uncertainties include, without limitation, the risk factors set forth in our most recent annual report on Form 10-K filed with the SEC and all of our subsequent SEC filings. We do not undertake or plan to update these forward-looking statements even though our situation may change.

During today’s call, management comments will use certain non-US GAAP financial measures to supplement our US GAAP disclosures. Whenever we disclose our non-US GAAP financial measures, we provide in the company’s earnings announcement a reconciliation of such measures to the most closely applicable US GAAP measure.

Thank you and I will now turn the call over to Ralph.

Ralph Scozzafava

Thanks John. Good morning everybody. We appreciate you being with us again today. I will make a few brief remarks about our performance for the quarter, and then I will turn it over to Steve Rolls for more details.

Yesterday as earnings release reported that our topline sales in the first quarter of 2010 totaled $322 million, down 9.7% from a year ago, and up 12.9% from the fourth quarter of ’09. This sequential increase is the most meaningful we have seen on the topline in sometime. The earnings release also reported that our gross margin was 26.2% compared to 22.5% in the ’09 quarter.

Since Furniture Brands launched our strategic plan in ’08, we stated that our gross margin will be a key indicator of our progress. While I am pleased with our progress this quarter, I think we still have room for improvement. Also in yesterday’s release, we reported net income of $3.5 million or $0.07 a share. One of the main objectives of our efforts has been to lower the breakeven point for the company, so that we could generate positive shareholder returns in any economic environment. To achieve positive earnings on sales of $322 million speaks of the progress that our team has made in taking costs out of the company and exiting on profitable business.

As our consumer-tested products gained traction in the marketplace, we expect to deliver more earnings power through a smarter and a more efficient company going forward. Steve will now take us through the results in more detail and discuss the drivers of the financial statements. Steve?

Steve Rolls

All right. Thanks Ralph. As Ralph said, sales for the quarter were $322 million, up 12.9% sequentially and down 9.7% from the first quarter of 2009. Sales in the first quarter of 2009 included the liquidation of Ralph Lauren inventory after we exited that contract at the end of 2008. Revenues in the 2010 quarter also reflect our exiting some ready-to-assemble business in late 2009. In both cases, this was on profitable business. Those two factors attributed to approximately 40% of the year-over-year sales decline. In the past, we might have kept that business just – Hello?

Operator

Mr. Hastings, you are on the line.

Steve Rolls

I am not sure where that cut back, so I will start back a little bit about the revenues being down year-over-year. The two factors that I talked about are attributed to about 40% of the year-over-year sales decline. In the past, we might have kept that business just to keep the factories running absorb overhead, I think the lesser we have learned over the last two years is to take as many costs out of the business as possible, because you can’t count on a rising or an even stable topline to absorb all the costs.

Today, as business conditions and demand improve, we have a very scalable manufacturing model that can add capacity with lean manufacturing efficiencies and eventually through additional shifts. Gross margin for the quarter of 26.2% is the highest reported quarterly gross margin since the fourth quarter of 2004, and shows a 370 basis points increase from the first quarter of 2009. More than half of the improvement was due to supply chain improvements. A key initiative for the supply chain team in 2010 is the continued rollout of lean manufacturing across the company. This is not a new process, but an extension of the very successful EDGE program that Hickory Chair created more than a decade ago.

We anticipate that all of our production facilities will incorporate the EDGE system by the end of the year. During the first quarter alone, we formed 85 separate EDGE teams that are focused on eliminating ways to improving product flow. The company on retail stores also continued to improve. Gross margin at our own 65 stores improved 240 basis points to 42.3% and contributed an incremental 50 basis points to our overall 370 basis points gross margin improvement for the company.

The incremental retail margin improvement illustrates the profit contribution of a better-run retail operation. The 40 Thomasville stores we have operated for more than 15 months show a same-store sales increase of 16% for the first quarter of 2010 versus 2009. This is the first same-store sales increase since we have owned a meaningful number of Thomasville stores and illustrates that our Thomasville retail operation is moving in the right direction.

SG&A for the quarter was $79.9 million, which includes approximately $1 million in costs associated with closed retail stores. SG&A for the quarter also includes approximately $2 million and additional expense related to achieving the stock price performance target for the first tranche of our time and performance-based management retention restricted stock unit grants. The increase in incentive compensation only partially offset the reduction in SG&A, largely due to our across-the-board focus on cost control. SG&A associated with our retail stores is flat with a year ago, despite having three more stores and 20% higher sales in the 2010 quarter.

Cash at the end of March was $60.5 million, and on April 12th, we received $57.3 million of our $59 million tax refund receivable. As of that date, we were net cash positive by approximately $37 million and had $27 million of additional availability under our asset-based lending facility. The press release shows our outstanding debt as a current maturity because the ABL waiver for our pension funding staff expires in January of 2011.

We can address this situation in several ways, including obtaining a new waiver or making a contribution in the form of cash, stock or combination of both. The amount of the underlying – of the underfunding is also highly dependent on interest rates. When we valued the plan at the end of last year, it was underfunded for ABL purposes of about $65.5 million. However, a 100 basis points increase in the discount rate between now and the end of the year would reduce the underfunded amount by approximately $52 million. We will monitor interest rates in our contribution options throughout the year.

Clearly, we have ample liquidity fund, working capital and capital expenditure needs. We expect the maintenance portion of our 2010 capital expenditures to be about $10 million, and we are also making investments in SAP implementation and the expansion of our Indonesian case goods facility. For 2010, we expect capital expenditures to total between $25 million and $30 million. This concludes our comments on financial results, and we will address specific questions at the end of the call, and I would like to turn it back over to Ralph.

Ralph Scozzafava

Thanks Steve. I will make a few closing comments before we open up the line for questions. The Furniture Brands’ 2009 Annual report has a very simple theme, ready. Yesterday’s results showed that we are ready to deliver improved financial performance to FBN shareholders. We now have a cost structure that is sustainable even in periods of weak demand and we have the balance sheet that can fund organic growth as well as new programs. We have knowledge and processes to develop products that consumers want and we have people who are aligned around the common vision of building a strong company. The difference between our being ready to perform and really performing is simple, it’s profitable topline sales.

We showed sales improvement this quarter, we have several initiatives underway that should help our sales growth as the economy improves. I would like to share some of those with you today. The sales process as we all know, it starts with products, and I believe that our product lineup today is the best that it has been in years. We use a rigorous process to develop this product that combines the creativity and deep experience of our designers, and merchants, salespeople, input from our dealers, and then we overlay a scientific approach in evaluating consumer response and purchase intent.

We devoted significant resources to our new product development process, and we saw the results of our investment at the high point market last fall. Dealer placements for our tested new products exceeded levels that we had never achieved in the past, even versus some of our best-selling collections. Last month’s market high point saw the same kinds of results. More placements for our tested products because our dealers know that we are hitting the hot buttons for consumers and our consumers are responding well at retail.

Now, we are getting our products on the dealer’s floor, we need to drive consumer traffic to our dealers. Thomasville showing national TV spots to support our key 2010 promotions. Broyhill has a national print campaign at leading shelter lifestyle magazines to support our dealer promotional calendar throughout the year, which includes a partnership with Make-A-Wish. Lane will also use national print ads to support its dealer promotional program and continue the award-winning event marketing, the Lane Mobile Showroom. We are spending money, so that Furniture Brands and our dealers can make money.

The third element to increasing sales is service. We continue to make strong improvements in that area. More and more of our customers are getting their full orders delivered when promised and the quality of our product is constantly improving. It’s a powerful combination and one that’s key to growing our business going forward. With all that said, we have got more work to do. There are more ways to improve our business results and we continue to work harder and harder to make our company better and better.

Well, that concludes our prepared comments for this morning. I want to thank everyone for being on the call, and at this point, I will hand it back over to John and then open up the lines for your questions. John?

John Hastings

Veronica, if you would ask the audience to give any instructions for asking questions now please?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Barry Vogel from Barry Vogel & Associates. Please proceed.

Barry Vogel – Barry Vogel & Associates

Good morning gentlemen and congratulations.

Ralph Scozzafava

Thanks Barry, good morning.

Barry Vogel – Barry Vogel & Associates

You did a terrific job. I just have a couple of questions. I was very impressed with retail improvement and then congratulations on more transparency on your press release.

Ralph Scozzafava

Thanks.

Barry Vogel – Barry Vogel & Associates

Can you give us an idea realistically when you might breakeven and start making money in your retail operations?

Ralph Scozzafava

Yes, sure Barry. I think a couple of things. We have shown steady improvement as you know, and I was with the retail team just last week and I can tell you that the work that they are doing, I think is topnotch. The key now is to get great product in our dealer stores and in our stores in particular, and we have done a lot of work on the new product process and I think we have got some pretty strong offerings that are coming to market and some are on the floor now. That said, the work that happens in-store, the training of our design staff in-store, the ability to work with consumers in their homes is critical, and we are seeing improvement and our close rates are getting better, our average tickets are getting better, and that all leads us to a better topline that we all know is where it’s going to take to make these stores work.

We do have some drag in the numbers that you see. We have got about $1.5 million of dead store expense that falls into our expenses, that’s going to take us a little bit of time to unwind, but the math on this is really, can we get our sales up in the 15% to 20%, 25% range while continuing to take out costs, and that’s really the mission.

Barry Vogel – Barry Vogel & Associates

In terms of my question, what’s realistic given your progress internally and progress in terms of retail improvement, in terms of sales?

Ralph Scozzafava

Yes, I think that’s going to be dependent a little bit more on the broader economy. I can tell you we will continue to improve if the recovery from macro perspective happens faster, it will happen faster. But we will get those stores to the breakeven point, that will happen.

Barry Vogel – Barry Vogel & Associates

Okay. And as far as the turnaround in your business, and I know you had situation last quarter where you sold all that inventory to take advantage of the taxable changes, which I commend you for, but in terms of since January, could you give us some idea of sequential improvements in company sales generally?

Ralph Scozzafava

Yes, I can tell you. When you look at the fourth quarter and then you compare it to the first quarter, we have – of course we are up about 13% sequentially. We saw very similar numbers in January, February and March on a daily basis and on a weekly basis from a sales point of view. So, it wasn’t like we had a very large January and then a smaller February. Our weeks were pretty much trending almost in a linear fashion. So, we saw steady volume through Q1. I think going forward we are pleased with our order rates thus far, but all that said, first quarter is typically our strongest quarter of the year, and if this year flows like a normal year and out, I don’t know if anything has been normal over the last two, I think we can all attest to that. It’s hard to really look forward and expect it to look any different than the past at this point.

Barry Vogel – Barry Vogel & Associates

Thank you very much.

Ralph Scozzafava

Okay. Thanks Barry.

Operator

Your next question comes from the line of Budd Bugatch from Raymond James. Please proceed.

Budd Bugatch – Raymond James

Hi good morning. It’s certainly nice to see the lack of parenthesis in the report, so congratulations. And also on the additional disclosure, I am pleased by that too and applaud you for that.

Ralph Scozzafava

Thank you.

Budd Bugatch – Raymond James

On the change in net wholesale sales, which looks like they were down about 12% year-over-year, and I know that you may have given some of that detail while the call was being interrupted, but I think I missed that. Can you kind of give us some flavor versus the $287 million versus the $327 million, if we do the math and get to net wholesale sales, so what’s the flavor of that?

Ralph Scozzafava

I guess there are a couple of things, and I will hand it over to Steve. The one big one for us is we had a ready-to-assemble business that wasn’t tremendously profitable for us. And that falls in our base, so it really doesn’t help the comps a whole heck of a lot. And part of our margin increases is attributed to us exiting that. We had some remnants also, but Ralph Lauren inventory that we were closing out, and that ends up in your base. So, that does affect the year-on-year comp.

Budd Bugatch – Raymond James

So, when you pulled that out and pull out and try to get on a comparable basis, can you give us a feel for what the comparable change might have been?

Steve Rolls

Those two things were about 40% of the year-over-year decline.

Budd Bugatch – Raymond James

40%, so that would mean the year-over-year decline without that, that was about 8% then if you do it that way, 7% to 8%?

Steve Rolls

The pre-sales, yes, consolidated.

Budd Bugatch – Raymond James

Of the net wholesale?

Steve Rolls

Yes.

Budd Bugatch – Raymond James

Okay. And as you look forward in revenues, the second quarter is typically seasonally weaker, second and third quarters are seasonally weaker in this industry, we are back to a normal seasonality, should we expect that to continue or do we also have the base continuing into the second, third, and fourth quarters of 2009?

Ralph Scozzafava

I guess the way I would look at it, and I don’t have any better information than anybody else. I think that until this recovery looks a lot different for our industry than it looks right now, our plans are to expect volume to fall the way it typically does.

Budd Bugatch – Raymond James

Okay. That’s very helpful. When you are looking at gross margin, one of the things that’s impacted gross margin and you used to talk about it a couple of years ago or year or two ago was the fact that you did some heavier discounting, and I know over the last year, you have done that to bring inventories down, but the level of discounting that you had to do to clear products had been significantly, if I remember, it was a high-single digit percentage of a couple of years ago. What does that look like now that the inventories look like they are very clean?

Ralph Scozzafava

It’s a lot lower, it’s a normative rate. It would tie to what we would all recognize as normal promotional spending to drive activity with our dealers. So, just a real good cleanup versus a year ago.

Budd Bugatch – Raymond James

So, normalized would be low-to-mid-single digits kind of number as opposed to that higher-single digits?

Ralph Scozzafava

That’s right.

Budd Bugatch – Raymond James

Okay. And finally, we were the stunning look in the SG&A drop on a normal basis from the fourth quarter to the first quarter was really quite pleasing to my eye, and I am sure yours as well, including you had some accelerated comp expense spend in there, do I understand that as well?

Ralph Scozzafava

That’s right.

Budd Bugatch – Raymond James

Can you give us a feel of are we at a level where that SG&A is now at a reasonable run rate or how do you think about it from a fixed variable side?

Ralph Scozzafava

It’s a good question. It’s the one that we are – we answer every day here. We were pleased with the drop as well. We are not done yet, but all that said, at this point, we are at a place where we believe we can maintain where we are from an, what I am going to call, admin and operating expense standpoint. We have programs in place company-wide, it’s called our fitness program where we continue to build cost control and the elimination of waste into our culture, and that just plain works Now, going forward, as you know, with an SG&A, there are levels of brand support that could change and if and when they go up, that will be reflected in SG&A, but those will be strategic conscious choices that we will get to as we move our way through the year. But we will continue to take out admin costs and operating expense that’s unnecessary or that is duplication in our system.

Budd Bugatch – Raymond James

So, do you care to get, to hazard a kind of a feel of the variability of the SG&A, what’s the variability to sales, how do we model that going forward?

Ralph Scozzafava

I wouldn’t put a big collar around the current number that you have, if we were going to model. I would just think as we get more toward the back half of the year, we will make some choices around advertising and that will make it, maybe go up a little bit. Our goal is to offset it with admin and operating cost reduction. So, more to come, and you have been around us a long time. It wasn’t that long ago where a quarter would be $110 million in SG&A, and we don’t know where the bottom is, so we are just going to continue to be responsible to take costs out, make sure that we are still capable of doing things we need to do and make choices.

Budd Bugatch – Raymond James

Finally, just to make sure I understand the accelerated comp issue, that’s impacted this quarter for the tranche that was already won and awarded this quarter. There is one more tranche left, how will that likely be impacted? What’s the difference in the amounts?

Ralph Scozzafava

Sure, I will let Steve, yes, go ahead.

Steve Rolls

The one that added about $2 million of expense in the quarter, Budd, was the first tranche. It actually just hit one hurdle. There are two hurdles in those restricted stocking. One was performance-based on the stock price, the other is time-based. So, the first tranche hit its performance target during the first quarter. It still is accruing expense until it hits the time which is not till December of this year. The second tranche has a higher performance target and doesn’t hit its time-based vesting until December of 2011. So, we will continue to accrue on a normal basis for both of those tranches throughout the next, call it year and three quarters, to the extent that the second tranche hits it target, you would see another bump in expense depending on how long it takes to get there.

Budd Bugatch – Raymond James

Assuming it would hit next quarter, would it be a similar number to the first quarter?

Steve Rolls

It probably would be a little larger.

Budd Bugatch – Raymond James

All right. Thank you. Good luck on the balance of the year.

Steve Rolls

Thanks.

Budd Bugatch – Raymond James

I appreciate.

Operator

(Operator instructions) And your next question comes from the line of Stanley Elliott from Stifel Nicolaus. Please proceed.

Stanley Elliott – Stifel Nicolaus

Good morning. Thank you all for taking my call and nicely done. A question for you, did you guys see any lift in the higher-end case good sales in the quarter?

Ralph Scozzafava

You know, Stanley, we did see some lift in the higher end particularly the businesses that are interior decorator, interior designer-driven, we are seeing more projects, we are seeing bigger projects come in and our higher-end brands are starting to see the turn that we have been hoping to see and we started to see a little bit this quarter.

Stanley Elliott – Stifel Nicolaus

And also, I mean, if you guys care to comment on any possible divestitures, if that’s something in the pipeline, would you guys consider divesting a business it has to be either positive or could it be losing money, or how would you all think about something like that?

Ralph Scozzafava

We look at our portfolio. When you have as many brands as we do, occasionally we will sit together with the Board and we will make some choices around the brands that are important, the segments that are important. If and when we had anything to announce, we certainly would. Right now, the plans are to grow the businesses we have, we like our brands, there is a lot of work to do in working through the recession that we are currently in and now coming out of, and our goal now is to grow topline and to grow gross margin, take expenses out and just make each brand our portfolio stronger.

Stanley Elliott – Stifel Nicolaus

That’s all I have. Thank you very much and good luck.

Ralph Scozzafava

Thanks.

Operator

We will now turn the call back to management for closing remarks.

Ralph Scozzafava

Well, once again, I want to thank everyone for their interest in our company and thank our shareholders and analysts for spending time with us today. As always, we have got lot more work to do and we are going to get back to it right away. So, thanks again and we look forward to our conversation at the end of next quarter. Take care everyone.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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