Good morning, ladies and gentlemen. Welcome to the La-Z-Boy's Fiscal 2014 Third Quarter Conference Call. At this time, participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Incorporated. Ms. Liebmann, you may now begin.

Thank you, Christine. Good morning. Thank you for joining us to discuss our fiscal 2014 third quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, 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. A telephone replay of the call will be available for 1 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 Chairman, President and Chief Executive Officer. Kurt?

Thank you, Kathy. Good morning, everyone, and thanks for joining us this morning. Yesterday afternoon, we reported our third quarter results for fiscal 2014. We continue to be pleased with the direction of our business. We are making steady progress with the ongoing execution of our strategic initiatives to drive growth and profitability. We have an excellent structure in place, the strong brands of that network of almost 900 branded distribution outlets to the La-Z-Boy Furniture Galleries stores and Comfort Studio outlets, a mean and efficient manufacturing platform with supply chain opportunities, the plan to build out and further penetrate the North American market with La-Z-Boy stores, strong advertising, marketing and merchandizing strategies while having the potential for international expansion. Although weather played a role in our results through the third quarter, we believe there has been no fundamental change in the cadence of our business. For the period we posted a same-store written sales increase to the La-Z-Boy Furniture Galleries stores of 3.6%, we increased our overall sales and operating income for the quarter and generated more than $30 million in cash from operating activities. Now let me take a few minutes to review our three business segments. First, wholesale upholstery; on the 3.4% increase in sales we increased our operating margin to 11.3% from 10.3% in last year's third quarter. Although we post a smaller sales increase this quarter than we both plan for and have experienced in the recent past, our efficient manufacturing structure allowed us to improve our margins. With respect to our mix of products, stationary upholstery continued to grow at a solid pace ahead of recliners with our recliner sales continued to grow and were particularly strong during the period. Our power offering has also maintained its growth momentum. We remained committed to investing…

Thank you, Kurt. Consolidated sales for the fiscal 2014 third quarter were $350 million, up 3% compared with last year's third quarter. Consolidated operating income increased to $25.4 million from $22.8 million in the fiscal 2013 third quarter. The company reported net income from continuing operations attributable to La-Z-Boy Incorporated of $17.2 million, or $0.32 per diluted share, compared with last year's third quarter results of $16.8 million, or $0.31 per diluted share, which included $0.04 relating to gains on the sale of investments and a related tax benefit. As a result of our announced plans to sell Bauhaus, all numbers reported reflect the treatment of Bauhaus as a discontinued operation. Therefore, its $9.1 million in sales for the third quarter of fiscal 2014 and its $8.9 million in sales for the third quarter of fiscal 2013 are not reported in the net sales line item, rather sales and operating results for Bauhaus are included in the income loss from discontinued operations. The upholstery segment sales reflect the same adjustments for the quarter. You will find more details with our Bauhaus in Note 14 of the 10-Q filed last night. For the period our operating margin increased to 7.3% from 6.7% in last year's third quarter and our gross margin improved 1.9 percentage points in the third quarter compared to the prior year period. Now let me turn to SG&A. Incentive compensation costs were $3.8 million higher than in the third quarter of fiscal 2013, an increase of 1 percentage point. This was the result of our improved consolidated financial results and the increase in our stock price for the quarter as several of our share-based compensation awards, our liability-based awards and/or performed-based awards and their cumulative expense to-date is adjusted at the end of each quarter based on the…

Thank you, Mike. In closing we believe we are well positioned to grow profitably. We are continuing to strengthen our integrated retail platform and are progressing with our store build out strategy. We will be making ongoing investments in our company with a focus on long-term growth, profitability and returning value to our shareholders. We thank you for being on the call this morning and I will turn things back to Kathy for the Q&A.

Thank you, Kurt. We will begin the question-and-answer period now. Christine, please review the instructions for getting into the queue to ask questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Thanks. Good morning, Kurt, Mike and Kathy and let me thank you guys for all the detailed commentary that you provided this morning.

Good morning, Brad.

Wanted to just first start with just some couple quick questions on the cadence of business and how to think about your April quarter. Kurt, you mentioned that in the month of January, there was a very wide dispersion in the results. Can you maybe give us a sense of how things held up in some of the better markets and is it fair to assume that perhaps the present day we can and February has continued to be the same way as January was?

Well, a couple of comments there, Brad. Certainly we had more discrepancy of performance in January than we've seen in a long time. We had markets or even states that were up 10% to 15% during the month of January and we had some markets in the Midwest, in Northeast down as much as 20. So it was impactful and the fact that the company owns the majority of this portfolio in the Midwest and East Coast makes it a little more difficult on us and our overall business. We're looking to open a number of stores in warm weather climates in the next year.

That's helpful.

Excuse me, Brad, but you're comment on February, it's had its ups and downs and obviously there was a little weather-related problem on the Monday of President's weekend particularly in the Midwest and Northeast again.

So, if you think about modeling your fourth quarter – I know you guys don't normally give quarterly guidance, but can you just help us think through how maybe a softer backlog might handicap what your sales could be for this April quarter?

Well, it's hard to determine at this point. I would say in the short term, we have some actual increased backlog from not getting everything delivered in the third quarter because of weather both to the retail consumer and to our dealers. We had – a couple of days our plants didn't work full shifts and things of that nature. So there's probably a short-term backlog flow-through that will happen primarily in February. But I would phantom to say at least that and probably more was lost on the written side and the degree you get to make that up, particularly when they come for holidays and all, it's going to be a little difficult. So, we're watching both but I don't think there's any way to really tell for sure but I'm sure whatever game we have delivered in the fourth quarter will be challenged when we get to April on the written side.

Very helpful, thank you. And then just a quick question on the new format, I appreciate all the color that you provided. The quick math suggests that your latest format store at 4.5 million is 45% better than your oldest stores at 3.1 million. Can you help us think through what kind of a lift is really reasonable for us to model as you go through and move those stores and upgrade them?

So we haven't done a lot of the old gen remodels yet, so I don't know. There may be hopefully one or two in the 26 and I would say we expect a significant lift with one caveat. Some of the old generation stores are in smaller markets and they may not get to the average of the new design concept, but they have significant potential from where they are right now. But I would not hazard a guess right now what that would be until we get a few but obviously you can see the wide disparity in performance, only hampered by the fact that in few of a stores that are in the old generation format are really in smaller markets, so we wouldn't expect them to get to the average or we expect them to go up quite a bit.

So it seems like a very exciting opportunity nonetheless. Great, thanks so much. I'll turn it over to somebody else.

Thank you, Brad.

Thanks, Brad.

Our next question comes from the line of Budd Bugatch with Raymond James. Please proceed with your question.

Good morning, Kurt. Good morning, Mike. Good morning, Kathy.

Good morning, Budd.

Kurt, of the three times in stores I would assume that – well, I would ask you how many are company-owned of the 26 in the 230 of the new concept design and the new generation design?

We'll look that up. I don't have it right here in front of me, but I'm sure you have more than one question and I'll answer that.

Sure. And I assume that none of the old generation are company-owned, right? Most likely all the…

I think, Budd, we have a couple that we're waiting for the leases to run out and are easy to closing them or moving them, so all this is time phased. So, here are the numbers you asked for. The company has 14 of the 26 new concepts, 77 of the 229 and the new generation and we have 9 of the old format which I'm pretty sure at least half of them are going to be addressed this year.

Okay. And that was – the next question on that is what's the cadence of that three-year program? Is it a third, a third, a third or how do you look at that they were?

Yet to work out.

Well, so year one of this program was really last year and while we didn't get as many projects completed, we did get a lot teed up [ph] and you can see in our comments that we expect to do significantly more projects next year than we did this year. And so I think the desire and the will is there. Again, our dealers are being as cautious as we are as making sure they make the right real estate deal, but there's been more emphasis and more sense of urgency on the old generation stores to get them up to date, so we have a more consistent retail footprint and I would expect those to be done quite a bit earlier than before we reach the 400 mark.

Okay. My next question is regarding the startup costs. If you quantified it, I missed it and how about going forward, what do we look like over the fourth quarter and end to 2014?

So, Budd, the startup costs are – you have staffing costs, training costs and brand opening costs, putting in our IT systems and all but if we get a normal cadence going and with the size of our business, it isn't going to be anything that we would call out and make a big issue of. And this one was a little bit unique in the fact that there were all stores that we acquired and had more work to do to get them on all of our systems. But we plan that in our normal course of business.

Okay, all right. Mike, what was the CapEx again for the fourth quarter and for next year? Did I miss that? I heard it but I didn't get the number.

The fourth quarter is 13 million to 17 million and probably about 7 million to 9 million of that will be for the headquarters. The rest will be our normal CapEx. And so that would get us at about $18 million for the building and we talked about the building being 57 million, 58 million, so we'll spend about 40 million next year on that. So I would gather to say that CapEx would be $35 million to $40 million above our normal depreciation and amortization for next year because we just didn't spend it all this year because of some delays in the weather.

And is depreciation and amortization running about $32 million next year or is it 30 million in that range?

About 24 million, 25 million is with our normal spent.

It has been but it's been going – okay, it's probably just going to start go up.

It probably will start going up once we have the building capitalized, but the ERP system will add some to it but that's about the cadence of our depreciation and amortization.

So 35 to 40 above the 25?

Yes, sir.

Okay. And Kurt you gave the November and January numbers. If my math is anywhere right that would peg December somewhere and maybe just under 1% for comp?

Well, I can't do the math this fast as you Budd but I – December was better than. The weight of the month is not equal, so you can't do it literally but it was – the month of December was not down but I'm giving you all the monthly sales cadence I want to give you this morning.

No, thanks. You just ruined my shoes too on that. Finally, on Bauhaus it looks like a 1.2 million operating profit swing versus last year and I know – I expect we're not going to get the total restatements until you put the K out and for the fourth quarter, but can you give us a little flavor of maybe what over-comparing against in the fourth quarter?

Well, I mean you can look – if you look at the footnote of what they've done year-to-date, the cadence on that business is pretty on target and that's what it would have been and it's just – the business is – our volume criteria and our profitability criteria we've worked hard. I'm not blaming anybody but we just could not get the traction we wanted and we felt there was an opportunity to sell this, something we had confidence in. So we thought it was a good time to break it out and the overall sales of the business is not 3% of the company, so it's not a significant impact.

No, I did the sales, it was a difference in operating profit at least as the footnote had of about 1.2 million in the nine months from last year to this year.

Right, we had a profit of 400,000 last year and a loss so far this year of 800,000.

It's after tax. So this year we did have an impairment on the sale that we had to record from the value of the assets versus the sale…

That's in dis ops [ph], Mike.

That's on dis ops, but it's part of that line item. So if you take out – if you look at our footnote, we're about broke even on operations and the loss this year is pretty much attributable to the impairment. And then last year they made a little money.

All right, yes. And they do it by the time $1 million a quarter as I see it.

All right, thank you very much. Good luck on the fourth quarter.

Thank you, Budd.

Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.

Thank you. Good morning, everyone. Thanks for all the disclosure. A few things, could you comment on roughly what the cash you might receive from Bauhaus will be when the deal gets sold [ph]?

You'll be the first to know when we get it closed and certainly when we file our 10-K.

Okay. You mentioned raw materials, I think it was in the Q that was up six-tenths of a percent. Just curious how you're tracking year-to-date with the pricing you took versus the raw materials you've experienced, an outlook on those two variables for Q4 and going into next year?

So, John, our forecast it was I think 14 million of raw material increase and while raw materials were certainly up over last year, they're not quite at the level that we projected but there's some indication that they're continuing to have some upward trend next year. We haven't finalized all of our budgets for next year, so I don't have an exact number. But on the pricing of raw material side, we're in pretty good shape. You have to remember, typically we always are lagging so we'll hit the raw material increases before we can get the price increase past through our backlog and out to our customers. So there is some timing differences with that. But on an annual basis, our crystal ball this year was pretty good and we don't see any degradation as a result of it.

Great. And then Mike, do you have any guidance for us on comp expense in the fourth quarter? I know you had to predict the stock price and I guess I would just say let's assume it's lower than where it ended the January quarter. Are there any other variables to take into account or how do we think about that number and comparing to last year, I don't have the fourth quarter in front of me from last year?

Good question, John. Our stock price was around $3.89 in the third quarter, so that was not as forecasted what we had in there, but for the most part I don't see much of a major change. It will be up a little bit because our performance, if you look at our nine months compared to last year was up pretty significantly. I don't expect it to be up as much as it was this quarter unless there's a change in the stock price.

Great.

It's not very good guidance but it's the best I have right now based on where we're at in the quarter.

We got both factors which you got to calculate and we got various models, but you got the performance factor and you got the stock price factor. And depending on what they do determines what the increase would be.

Understood. Thank you so much and good luck.

Thank you.

Our next question comes from the line of Todd Schwartzman with Sidoti & Company. Please proceed with your question.

Hi, Kurt. Hi, Kathy. Kurt, I missed the beginning of your opening remarks. Did you estimate the amount of lost delivery sales due to weather?

We did not, Todd. Obviously we mentioned that we plan for more and certainly I think if we hadn't had the weather issue which it's logical to think there was more – there would have been more and then actually the numbers are a little more difficult to interpret if you don't take in the Bauhaus change and deduct that from both last year and this year. But it is what it is. We don't sit around and whine about the weather and complain. There's nothing you can do about it, but our position would be we would have more growth. We tried to give some color at the end of our prepared remarks about the degree of change we had in our written business from November to January to try to put a box around it but we would be guessing if we were trying to give you an exact number.

If you were to look at just the so-called good weather markets, how were those breakout in terms of met (indiscernible) or missed your own expectations for the quarter?

Well, I think the most clarity we can give is for us to saying that our pace of business has not fundamentally changed. I think you should read between the lines that we've been on a high single digit, low double digit same-store sales comparison. And while it's not universal that's the rate we started out in November. And in the bad weather markets there was a mirrored performance what happened in November.

I know you had mentioned that some states we're up as much as 10% to 15% and others of course were down at least as much more. Just trying to get a feel for whether it's just a very small handful of states that are doing the heavy lifting or if it's more diverse than that?

Well, the benefit is that the biggest states in the country are all warm weather states, but the bandwidth that the storm had in the Midwest and the East was pretty significant in terms of the population base. So, we're just going to have to hit to the warm weather months and sort it out. But I think we've done our best, Todd, to give you as much information as we're comfortable giving at the time.

Sure, understood. You updated your store opening roadmap, that's helpful, but how would you suggest we think about modeling the net change from let's say today through the end of '15 either in terms of square footage or perhaps store count?

We've given you the number of projects and I think we're close to the point of not closing very many stores without having a replacement in the works within the same year or same six months. And I would think our next door count next year should be somewhere between 10 and 15 at the present time, but again finding the right real estate, the timing of getting these projects done, it's hard for us to predict exactly when all these things happen unless they're under construction or under lease at the present time. So we're doing some projecting out, but we feel good and conservative about our projections but I think the important thing is we've got some momentum, we've got our entire organization, our independent dealers are just as excited about this growth path and the opportunities they have in markets there are already in or markets that are adjacent to their core markets that they're being aggressively pursuing. So we would expect to build continued momentum over the next couple of years about the next door account.

Got it. On the gross margin, could you talk a little more – a little more color perhaps on the 240 basis point year-over-year improvement?

Well, I think as Mike mentioned it's primarily in our operations, it's primarily in the efficiencies with which we're running the business. We continue to see productivity gains and we continue to see our leading principals come into play and identifying ways to be more efficient and reduce costs. So I have to give a call out to our operations team about trying to run an efficient organization as possible. And it furthers our belief that as we put more volumes through our plants that our profitability is there to be made because of the way the plants are running today.

Got it. Finally, just philosophically on Bauhaus and just the rationale, I get that it's a line that is distributed by third parties and it's not on the Furniture Galleries floors, but neither are any of your casegoods brands. So I'm just wondering if you could maybe just address how if Bauhaus was not deemed to be a core operation, how has some of the brands like Lea or Hammary or Kincaid, et cetera, might be considered vital parts of your long-term vision? So, what do they bring to the table perhaps that Bauhaus doesn't? Is it size, is it rounding out the product portfolio irrespective of the distribution channels or just some other factors?

Good question, Todd, and I think there's two phases of this. One, there is a size and a profitability metric that we feel we have to have in order to keep companies in our portfolio because our experience has been that smaller companies can take the same amount of effort to work on, to plan for, to audit and all those things you have to do as larger companies and there's a diminishing return there. Second, as I said repeatedly, some casegoods format for our company is essential because of its importance to the La-Z-Boy stores. In all the tables, all the occasional pieces, all the access pieces and all the bedroom and dining room that is sold in our in-home business with our designer through all the stores, we need to have products for those programs. So we didn't sell Bauhaus at all through dedicated distribution. We sell a lot of casegoods through our own dedicated, so strategically there is a big difference.

Perfect. Thank you.

Thank you.

(Operator Instructions). Our next question comes from the line of Kristine Koerber with DISCERN Investment Analytics. Please proceed with your questions.

Hi. Good morning. A few questions. First, just a quick follow-up on the weather and I know you don't want to talk a lot about it, but just wondering – so the fate, the better and better weather climate were the trends consistent throughout the quarter on those particular states?

They're never consistent. Good weather, bad weather, winter or summer, they're never – it's hard for us to say that all 22 states performed at the same level. Our independent dealers run different promotions and do different things, and so there is not a consistently. I will say the performance of the entire group is tighter aligned during a given month that it was January. The big swings from the positive to negative was the most we've seen in a long time in January. But typically there are swings and not every community has the same unemployment, housing dynamics going on. So it's all over the board.

Okay. And in the past when there have been weather-related issues, have you some pent-up demand come through?

That is hard to quantify. It depends on the time of year. The challenge about the weather this winter is it came right after the new year, it came on some holidays. As I mentioned there was some weather impact on Monday, the President's Day weekend. So when it comes on dates that are big holidays, it's more impactful than weather it comes on the 20th of July. We're not focused on the weather, we were just trying to give some people some ideas that we're looking to the future now, but we thought we would give some color on it and just to give you some idea of the magnitude of what we saw.

Okay, fair enough. And then you mentioned increased advertising for the holiday period, did you feel as though you got some sort of return on the increased spending?

So our increased spending was always within our idea that we were going to do more business. So we've been increasing our spending all along but our percentage to our total has not moved very much. So every time we have pushed the envelope on increased investment into marketing, we've got a commensurate fee. Unfortunately, some of that was hampered by the weather and we had some strong after Christmas sales and New Year Day sales and things of that nature that didn't quite deliver the – and the only reason we call it out it did go up slightly as a percentage of sales for the quarter. But I don't believe that would have happened had we had a normal weather situation.

Okay. And then as far as the casegoods business, you indicated that you're halfway through the process in terms of refreshing the assortment. When can we expect the completion? Are we looking sometime next year?

Yes, I think as we move – as we get two more markets behind us, the April market and next October then it takes some while, so I think in calendar '15 you'll start seeing all this new product refreshed out on the retail floors and we'll get a real readout a consumer thinks of our change and styling.

Okay. And then just one quick question. I think you mentioned traffic was down slightly. Is that correct?

Yes.

Okay.

Again that probably was weather-related as well but it wasn't down significantly to where it caused us any Incs [ph].

Okay, great. Thank you.

Thank you.

Ms. Liebmann, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. Thank you, everyone, for participating on our call this morning. If you have follow-up questions, please reach out to me and I will make time on my calendar. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.