La-Z-Boy Incorporated (LZB)

F1Q2011 Earnings Call Transcript

August 18, 2010 8:30 am ET

Executives

TST Recommends

Kathy Liebmann – Director, IR and Corporate Communications

Kurt Darrow – President and CEO

Mike Riccio – SVP and CFO

Analysts

Budd Bugatch – Raymond James

Matt McCall – BB&T Capital Markets

John Baugh – Stifel Nicolaus

Todd Schwartzman – Sidoti & Company

Presentation

Operator

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Good morning, ladies and gentlemen. Welcome to the La-Z-Boy’s fiscal 2011 first quarter conference call. At this time, participants are in a listen-only mode. As a reminder, this conference is being recorded.

It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations for La-Z-Boy Incorporated. Ms. Liebmann, you may now begin.

Kathy Liebmann

Thank you, Everett. Good morning and thank you for joining us to discuss our fiscal 2011 first quarter results. Present on the call are Kurt Darrow, La-Z-Boy’s President and Chief Executive Officer and Mike Riccio, our Chief Financial Officer.

Kurt will begin today’s call and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions.

As is our custom, the time allotted for this call is one hour. A telephone replay of the call will be available for one week beginning this afternoon. These regular quarterly investor conference calls are one of La-Z-Boy’s primary vehicles to communicate with investors about the company’s current operations and future prospects.

We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remarks. While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties as detailed in our regular SEC filings and they may differ materially from actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.

With that, let me turn over the call to Kurt Darrow, La-Z-Boy’s President and Chief Executive Officer. Kurt?

Kurt Darrow

Thank you, Kathy. Good morning, everyone and thank you for joining us on our call. Yesterday afternoon, we reported our first quarter results for fiscal 2011. For the quarter, we broke even on essentially flat sales.

As we outlined in our press release, we faced unusually challenging conditions during this period. In addition to the normal seasonality factors that typically pressure sales and earnings in our first quarter which ended in July, we encountered a series of additional headwinds, which included higher raw material costs, supply chain disruptions, a hurricane which affected shipping from Mexican-based cut-and-sew operation to our U.S. plant, and inefficiencies in Mexico as we finalize the transition of all custom cut-and-sew products for our U.S. operations.

As a result of the various supply chain delays, our plants did not operate as planned during July and we were unable to produce approximately $10 million of orders during the month requiring us to move that production to August. We have spoken a lot over the past year about the many changes we have made to our operating structure to be more efficient.

Our Upholstery segments results have clearly demonstrated the success of these efforts over the previous five quarters. At the same time, we have also improved the structure and performance of our Casegoods and Retail segments, which together improved their operating performance last quarter by more than $2 million.

Importantly the challenges we faced this quarter are not systematic to our operating structure, and with most of the issues that reduced production levels behind us, we do not believe the quarter to be indicative of what our performance will likely be for the remainder of the year.

We will continue to manage the business aggressively capitalizing on both the La-Z-Boy brand and our vast network of branded distribution outlets and we’ll work to drive sales across all business segments to grow our enterprise profitability and return value to our shareholders.

I’ll briefly review our operating segments before I turn the call overt to Mike. First, our Upholstery segment, for the quarter Upholstery sales increased 2.7% to $202 million. Our operating margin of 5% was impacted by the factors I mentioned a moment ago, but it’s worth discussing them a bit more in detail.

First, raw materials, while raw material pricing has eased from its peak in the May through July period, raw materials were at the highest range of the past 12 months yielding an unfavorable quarter-over-quarter comparison.

Second, our Mexican operation is not yet generating the manufacturing efficiencies we expected as we finalize the transition of all customer order cut-and-sew kits from our U.S. operations. The learning curve is intense in Mexico and our team is coming up to speed on the numerous frame style and fabrics they require to produce.

Third, flooding in Mexico caused by Hurricane Alex washed out roads and delayed shipments of cut-and-sew kits to our U.S. plants.

Fourth, we have experienced cover delays from Asia due to production and quality issues as well as late and higher costs containers. The delay from both Asia and Mexico impeded our production levels during the period and what is an already challenging quarter from a seasonality and volume perspective.

However, as I mentioned, although raw material costs remained higher than last year, pricing has abated somewhat from peak levels, our Mexican operation is improving its efficiencies and we anticipate a progressive rate of savings as we move through the year.

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