Furniture Brands CEO Discusses Q4 2010 Results - Earnings Conference Call

Furniture Brands International ( FBN)

Q4 2010 Earnings Call

February 3, 2011, 08:30 am ET

Executives

John Hastings - VP Communications, IR

Ralph Scozzafava - Chairman of the Board and CEO

Steve Rolls - SVP and CFO

Analysts

Brad Thomas - KeyBanc Capital Markets, Inc.

[Todd Slotman - Stability]

John Baugh - Stifel Nicolaus

Budd Bugatch - Raymond James

Sherman Chao - Impala Asset Management

Barry Vogel - Barry Vogel & Associates

[Tim Stabbles] - Private Investor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 furniture brands earnings conference call. My name is [Katie] and I'll be your coordinator for today.

At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions).

I would like to now hand the call over to your host for today, Mr. John Hastings. Mr. Hastings, over to you, please.

John Hastings

Oh, good morning, and thank you, [Katie]. Welcome to our fourth quarter earnings conference call. With us today are Ralph Scozzafava, Chairman of the Board and Chief Executive Officer, and Steve Rolls, our senior vice president 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.

Our Safe Harbor statement in the press release describes our current views with respect to future events and risks and uncertainties. We do not undertake or plan to update these forward-looking statements, even though our situation may change.

During today's call, management comments includes certain non-US GAAP financial measures to supplement our US GAAP disclosures. Whenever we disclose such 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. I will now turn the call over to Ralph.

Ralph Scozzafava

Thanks, John, and good morning, everyone. We want to thank you for being with us again today.

As I begin another year-end call, I can't help but notice the strong progress that's been made on our business over the past few years. Our balance sheet is solid with net debt down for more than $180 million to $25 million today. We've eliminated much of the financial risk from our capital structure.

Gross margin is at its highest level that we've achieved since 2004. Our move to an operating company model has enabled us to eliminate more than $100 million in annual operating costs while improving our ability to develop product and serve our customers better.

Furniture Brands today has a cost structure that can leverage increased sales, and I'll discuss our plans to grow profitable sales across our brands later on in this call.

Now Steve will take us through the results. Steve?

Steve Rolls

Thanks, Ralph. Yesterday's press release showed sales for the quarter of $276.1 million compared to $285.6 million in the fourth quarter of 2009. The $9.5 million decline in sales is primarily attributable to the high level of sales of discontinued and slow-moving inventory in the fourth quarter of 2009 that generated favorable tax treatment.

Sales levels for the 2010 quarter also were negatively impacted by two customer bankruptcies and by the company's earlier decision to exit some lines of unprofitable ready-to-assemble business.

We've refreshed that product category with new collections that use better materials and our exclusive assemblies technology. We've placed these new collections on hundreds of store floors, and we expect to begin regaining those lost sales later in 2011 and beyond.

Gross margin for the quarter was 18.1% compared to 7.1% in 2009 quarter. Results for both quarters included selected items, as shown in the reconciliation table in the press release. Adjusting for these items, gross margin was 22.1% for the 2010 fourth quarter and 21.7% for the 2009 fourth quarter.

Gross margin for the 2010 quarter showed a sequential decline as a result of some promotional sales that we opted to bring to the market. For the full year of 2010, adjusted gross margin was 25.5% compared to 23.1% in 2009.

The increase in gross margin reflects efficiencies gained by our conversion to lean and cellular manufacturing. The lean culture is based on continuous improvement. So we'll keep driving improvements in operating efficiency.

The increase in gross margin was driven by operational improvements and not by the typical leverage that comes with sales growth. The selected items table in our press release details those costs in our reported results that we consider to be either non-recurring or will be eliminated or reduced over time through the execution of our strategic plan.

We've discussed these in past press releases and in conference calls, but I'll touch on a few to provide some additional clarity. The property disposition restructuring charges are primarily related to our planned closure of the case goods plant in Appomattox, Virginia in April of 2011.

We had forecasted total charges to close the plant at about $7 million, and we expect the closure and final disposition of this plant to produce annual savings of about $5 million. As I mentioned earlier, we are committed to the ready-to-assemble business that will source that product.

The contract product that came out of Appomattox will be produced at our other case goods plants in North Carolina. We've disclosed factory downtime for several years as a way to illustrate our capacity utilization. Downtime for the quarter totaled $2.2 million of which $1 million is related to the Appomattox plant that we are closing.

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