Greetings. And welcome to the La-Z-Boy Incorporated Second Quarter Fiscal 2015 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications for La-Z-Boy. Thank you, Ms. Liebmann. You may begin.

Thank you, Kevin. Good morning. And thank you for joining us to discuss our fiscal 2015 second 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 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 judgments 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. And 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, and good morning, everyone. Yesterday afternoon, we reported our second quarter results for fiscal 2015. During the quarter, we grew the business, improved our operating performance, made strides in the execution of our 4-4-5 strategy and returned value to shareholders. Specifically, we increased sales 3.8% after a 14.9% increase in last year’s comparable quarter, increased the consolidated operating margin to 8.3%, achieved an 11% operating margin for the Upholstery segment and a 4.4% operating margin for the Retail segment. Experienced a 3.4% increase in written same-store sales for the La-Z-Boy Furniture Galleries network, added eight new stores across the network, generated $33 million in cash from operations, increased the dividend and purchased 640,000 shares of our stock. In summary, from a number of different perspectives, it was a solid quarter overall. I will now take a few minutes to review our three business segments. First, Upholstery, for the quarter sales in the Upholstery segment increased 3.6% and as noted a moment ago, we achieved an 11% operating margin, reflecting the overall efficiencies of our operations. As we work to deliver long-term profitable growth, we continue to make investments in the business. During the period, these included the ongoing implementation of a new ERP system and the replacement of our website and e-commerce platforms. With the digital elements of the consumer’s overall purchase process becoming even more important. It is critical we provide a more inspiring, compelling and easy desktop and mobile site experience. We expect the new website and e-commerce platform to go live in the fourth quarter and we will finish with the ERP implementation throughout our plants in May. As we seek to broaden our consumer base, we are excited with the cadence of new product introductions that are composed of sleeker and more stylist…

Thank you, Kurt. Consolidated sales for the fiscal 2015 second quarter were $366 million, up 3.8%, compared with last year’s first quarter of $352 million. This year reflects the reclassification of Lea and last year reflects the reclassification of both Lea and Bauhaus to discontinued operations. For the quarter, consolidated operating income was $30.2 million, compared with $26 million in the fiscal 2014 second quarter. The company reported net income from continuing operations attributable to La-Z-Boy Incorporated of $19.2 million or $0.36 per diluted share. This compares with last year’s second quarter net income of $17.2 million or $0.32 per diluted share, which includes the $0.01 per share benefit attributable to the reduction of certain valuation reserves against the company's state deferred tax assets. As noted in our press release, adjusted income from continuing operations attributable to La-Z-Boy Incorporated was $0.36 per share in this year’s second quarter versus $0.31 per share in last year’s second quarter. For the quarter, our consolidated operating margin was 8.3%, compared to 7.4% in last year’s comparable quarter. As Kurt referred to earlier, we had a reduction to our LIFO reserve for domestically manufactured inventory and this equated to about $0.02 per share. Because we ceased manufacturing at our Hudson facility during the quarter, the stream of domestically manufactured inventory will not be replaced and our LIFO reserve for this inventory was reduced accordingly. We expect additional reductions in this LIFO reserve over the next several quarters, but no periods without the same significant impact of this quarter. Somewhat offsetting these future reductions will be additional LIFO charges related to the increased inventory and the purchase finished goods earlier. Now let me turn to SG&A. Selling, general and administrative expenses in the second quarter as a percentage of sales decreased by 0.2 percentage points,…

Thank you, Mike. We are making a series of strategic moves and investments to drive profitable growth throughout our three business segments, including our store build, investment in advertising and technology and initiatives to drive supply chain optimization. As we stated in the past, our annual conversion targets on fully incremental volume, even with these investments, is 20% to 30%. According to our planning and forecasting, we believe approximately 80% of our volume growth for fiscal 2015 will be truly an incremental. The La-Z-Boy brand remains the strongest in the home furnishings industry. Our marketing platform is delivering results and our merchandising efforts have never been stronger. These elements, coupled with an efficient plant structure, will enable us to drive growth and leverage the fixed cost structure in association with our manufacturing facilities. And as our company-owned retail segment continues to grow, the overall enterprise will benefit from the blended wholesale retail margin inherent in our integrated retail strategy. We believe we have an exciting future ahead of us, the one where we will drive profitable growth and return value to our shareholders. We thank you for listening to the call this morning. And I will turn things back over to Kathy. Thank you.

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

[Operator Instructions] Our first question today is coming from Budd Bugatch from Raymond James. Please proceed with your question.

Good morning, Kurt, Mike and Kathy. This is Bobby actually filling in for Budd. Congrats in the quarter and thank you for taking my questions.

Good morning, Bobby.

Just real quick. Kurt, I was wondering if you could provide a little color on how much store startup costs during last year’s second quarter or we can get a little bit year-over-year comparison.

I don’t have that number in front of me, Bobby, but I would say that the bulk of our charges for new store startup will be in this for six months. We will have a little charge here in the third quarter, because I think we are opening three stores that will be little or no effect in the fourth quarter. So for planning out, we’ve probably utilized a little over $0.02 or the $0.03 that we have told you, but the comparison to the last year, I don’t have right in front of me.

Okay. Just congrats on operational efficiency there with the store startup costs to maintain flat margins. And then secondly, you mentioned commercial is going forward for the strength, how should we think about ad spending as a percentage of sales that should stay roughly the same or maybe tick up a little bit?

So our philosophy and our strategy is that we continue to up spend as we have the volumes to do that and the volume growth, but our percentage of what we spend on an annual basis hasn’t materially changed year-over-year for the last couple years, even though we have -- we are spending 15%, 20% more as we grow. So our objective is to keep our percentage of advertising consistent and to slide up with the growth.

Okay. And then lastly for me, is it possible to get a little bit of color on the cadence of sales during the quarter and how things progressed?

There was a huge difference quarter-to-quarter, Bobby. It was -- the big event in this quarter was Labor Day weekend and that was strong for the industry. And then, there was a falloff after that and then October bounced back pretty well, but there wasn’t 5 or 10 point differentials month-to-month, but October ended on a good month and we are looking forward to a strong holiday season.

I appreciate that color. And also Kurt thank you for the modeling help on the incremental volume. That’s very helpful knowing that about 80% of this year’s growth will be incremental. And best of luck going forward.

Thank you, Bobby.

Thank you. Our next question today is coming from Todd Schwartzman from Sidoti & Company. Please proceed with your question.

Hi, good morning, folks.

Good morning, Todd.

I wanted to compare the op margins on upholstery. You mentioned 11%. It looks like it was down year-over-year about 40 basis points or so. I was just curious what gets you -- what gets you higher, what gets you maybe to the teens. Is there maybe some gross margin upside regarding manufacturing efficiencies, maybe above and beyond cellular or maybe there is some more run rate to come there? I am just curious what those factors might be.

Todd, I think the biggest opportunity we have as we continue to grow is to utilize the capacity that we have in our existing facilities. We’ve stated numerous times the last couple years that we have somewhere between $250 million and $300 million of capacity available in our existing plants. So if they were making that much more furniture and our clients are absorbing the fixed overhead, I think our margin would be improved. And when I say the capacity we have the space, we don’t have the people, we don’t have them trained, we have to build out them ourselves. But once we moved all of our cut and sew out of our domestic plants to Mexico, it opened up space for future production. So from my standpoint, taxing the plant volumes-wise with additional sales is the best way for us to improve our margins.

So once that occurs, Kurt, relative to the 11%, relative to the 11.4 of a year ago and maybe if you want to kind of assign a volume number go along with it, but where can the margin go?

We are comfortable with the targets we’ve given on our segments today. In this industry, it’s not easy to make a double-digit operating margin. So I don’t want us to get too far ahead of ourselves, but certainly we’re already striving for more efficiencies, cost reductions, supply chain optimization. So we are not settling where we are at, but to make a projection on where it could go in the future would be premature.

Got it. And between sofas and recliners or maybe sofas and loveseats versus recliners, which has seen the greater penetration thus far of the power component as a percentage of total sales of that particular product category?

We offer power options on chairs and motion sofas and on modulars or sectionals. So we have it on any of our furniture that has a motion component. For us the largest penetration has been in chairs since that’s our namesake and that’s what we are known for. But we are real pleased with the penetration we’ve had in the other categories and think this new mechanism that we introduced that market will take up by power percentage even higher.

Is the percentage 50% on recliners, or is it something less?

Not yet, but it’s something less, but it’s growing all the time and it’s gaining more popularity. And I think the potential to get it to that level is within our reach. When we get our research to introduce this, I think the number was closer to 70% of all recliners sold in Europe are powered. And so there is lots of opportunity for growth in that category going forward.

And even domestically it seems the industry is headed in that direction, you maybe the leader, but I would think that competitors offering similar types of platforms is probably -- probably helps La-Z-Boy at the end of the day.

It does. However, we have a differentiation with our mechanism that has individual back and foot rest powers. So, all of our power units actually have two motors in it as opposed to one due to the uniqueness of our mechanism. And I just -- as I’ve said to people, Todd, if you think about, I don’t know how many years ago, but 25 years ago, you can only get power windows on Cadillacs.

Right.

And today I don’t think you can find a car without power. And I think you’ll see the same kind of phenomena over time happen with this category.

Yeah, I know, it’s definitely ubiquitous. On the Urban Attitudes, Kurt, you mentioned the two sofas are among your top 10 sellers. Other than that, are there any other surprises, positive or negative that you want to cite regarding Urban Attitudes?

So we are thrilled with the performance to-date. We give it a prominent positioning inside the stores. And the last quarter, it exceeded 30% of all of our sofa business. So the collection in total is meeting and exceeding our expectations of what -- but it also says too is that we are getting a customer in our stores that wants that products, that needs that product based on their living spaces. And we think there is continued upside potential here.

You are saying in Q2 more than 30% of your sofa sales were of the Urban Attitudes collection?

That’s correct.

Okay, great. Last quarter you said you planned for a second quarter for seven store openings. I am not sure if that was the whole network or not. But just want to kind of reconcile your expectations with the performance as it does look like you do your seven goal or is that five relative to your seven goal?

No, we primarily, Todd, talk in terms of the network when we give you numbers. The 30 to 35 projects is the network. And after they are open, we’ll call them out. But the other thing is, this is a fluid situation depending on how fast we can get stores remodeled, the weather building, sometimes stores float between quarter-on-quarter. We are pretty confident that the annual number is within the one or two store differentials, but quarter-to-quarter it can change sometimes.

Right. And then annual net project number that’s unchanged from three months, is that correct?

That’s correct.

Okay. And despite -- buying back the 600,000 shares, it looks like the diluted share count crept a little higher. Did you expect this to repeat in Q3, especially given the 33% dividend increase?

I’m not sure I get that number. I will have to look back at that and let you know. I didn’t think we crept up this quarter because our diluted share of -- the diluted portion of it has subsided from this year end. So, I will have to get back with you on that. I don’t know that on top of my head.

Okay. Sounds good. That’s all I have got. Thank you.

Thank you, Todd.

Thank you. [Operator Instructions] Our next question is coming from Matt McCall from BB&T Capital Markets. Please proceed with your question.

Thanks. Good morning, everybody.

Good morning, Matt.

I also appreciated the commentary, Kurt, around the projected growth and how it’s going to break out next year. A couple of questions on it. You talked about 20% to 30%, I think that’s referring to the 80% that’s truly incremental. Can you talk about what gets us to the high-end versus the low-end of that 20% to 30% range?

From our standpoint, our greatest margin conversion would be if all our additional sales came through the hundred plus La-Z-Boy stores we own and we manufactured it all, and we would get additional conversion at both the retail and the wholesale business. But as we said many times, it depends on where the business comes through. On the low side of it, would be our Casegoods business because of its import model and it doesn’t have as much upside leverage but has less downside risk. And if the high side would be our retail business as it grows and covers its fixed cost of rents and things like that. So those are the outliers but we’re pretty comfortable because of the mix of the three businesses that range covers us from top to bottom.

Okay. And then when we think about the other 20% of the business, how do we -- I know you've given some components with new store drag and things like that, but how do we think about the incrementals for that 20% of the growth?

Well, that 20% would have all the costs associated with it. So that part of the business would be closer to our normal operating margins in the segment because it's coming with the same costs that we started with. Now, they probably would do a little better because there's certain things that we get benefit in the more stores we have and back office situations. But it won't come anywhere close to the 20% to 30%.

Okay. And then most of that’s in retail where we -- because that’s where the new stores are coming in?

Right.

Okay. All right. And then Mike, you referenced the ERP impact on the income statement. What's the total impact on EPS going to be in 2015 and will you have any impact on your results in 2016?

We probably have the same cadence throughout the year on ERP as we go through and add a plant every quarter. Hopefully, as we work on the next couple plants in the quarter and we go live -- every quarter we're going live in one plant. And so the disruptions in the plant, as well as the costs will subside as the year goes on. And then next year when all the plants are on after we get through the first quarter, then we'll be mirroring expenses last year. And then as we put in our sales order management system, I don't see much of a difference over 2015 and 2016 because both years will be expensed, where last year we're capitalizing, this year we're expensing. We should not see a significant differential quarter-over-quarter on a negative basis on the ERP implementation.

What about on a positive basis? Will you see less of an impact in ’16 than you are going to see in ’15?

It should be less of an impact as we get the plants all done and we’re just working on the front end. Yes. But it will be more in the second half of the year, Matt, than the first half because we’re going live in our largest plant in the summer.

Okay. And so what would that positive impact be, a few million or…?

No. It won’t be that significant in the second half. But we will have some less disruptions in the plant as well. So as we get through this year, we will be able to give you a little more color on that, but I don’t - -it won’t be millions of dollars.

Okay. Where there is the disruption in this quarter, what is the disruption reference?

Okay. Okay. Were there disruptions in the plant this quarter? What's the disruption reference?

Well, the disruption reference is as we go live, we have to stop manufacturing during the period of time. There's a blackout period in the plant as we convert the inventory and do that. So every quarter, we're going to have some disruptions in the plant where we're not making furniture for a period of time, as well as getting the next plant ready to go live. So all we're saying is that as we're converting the numbers during the next couple quarters, we may not get the highest of our conversion even though we're still making good margin.

Okay. Okay. All right. So that’s separate from the new store drag and that’s included in that 20% to 30% operating contribution?

Correct.

Margin range. Okay. Got it. And then Kurt, you referenced the $4.5 million average in each store. I guess, that’s the first part of the question is going to be, is there any change there. I assume there is not but as we look at the source that you’re targeting for growth either converted or new stores? Is there any reason to not use $4.5 million? Is there anything that’s funky about those markets?

But first of all Matt, we will give you as much information as we can in February about the performance of the store network with the performance of our various store format within the network and the progress we’re making with remodel as oppose to new stores. And there won’t be uniformity that every store does $4.5 million. Depending on the size of the market, some of the stores don’t have the potential to do it. But if we take a store that was in the old gen and maybe it was doing $2 million and it went up to do $3.5, we’ll take that. And so we also will have stores that do $5 million, $5.5 million, $6 million to offset those. So we’ve talked about the average. But to just plug in every store doing that same amount of volume is not practical.

Okay. But the $4.5 million still a good average over time?

Yes. That will be at that position.

Okay. Thank you, guys.

Thank you, Matt.

Thank you. Our next question today is coming from Kristine Koerber from Barrington Research. Please proceed with your question.

Good morning. I have a couple questions. First, I wanted to follow up on Urban Attitudes, just given the success of the collection. Do you have bigger plans for Urban Attitudes over the long term? I mean, should we expect to see continued expansion of the product assortment? What about standalone stores for the collection? Anything like that?

We’re continuing to maximize what we have introduced a year and a half ago and added to the collection. But I think what it says more than just a collection is I think it talks about how our merchandizing and marketing team read the market and saw the void and saw the need. And so whether we call it part of the collection this idea of up styling, this idea of smaller scale, this idea of thinner lines with silhouettes, I think that’s a trend that’s going on in the industry and with people downsizing and more people living in condos. So we wouldn’t expect our entire upholstery line to be Urban Attitudes but certainly the success of it so far has been wonderful to see. And I think we’ll continue to listen to the customer of what she’s coming in to buy from us and make sure we react to her needs.

Okay, that's helpful. And then as far as the casegoods business, do you -- are you still targeting that 4% to 6% operating margin now that the division has been restructured?

Yes, we are. And we're -- we had the LIFO pick-up this quarter, but we're still combining some functions in the casegoods business. We're still downsizing from one office to -- from two offices to one. So there's still some more expenses to come out in some time here to do that. But yes, we think this is, at this point, a mid-single digit operating business. And we should be in a better place to achieve that now that we don't have the manufacturing facility.

Okay. Great. And then headquarters, where so you stand with the new headquarters as far as completion?

We are in the final stages. We should be moving in, in the first part of February. And I hope by the time we have the next call, we can have it from the new building.

Okay. Great. And then lastly, I know that you recently hired on a person. It was a newly created role, I guess strategy and analytics. Can you tell us what this individual, what role he'll play and why you've decided to create this position?

Sure. So we are, as we've said in a lot of things, investing in the future and trying to find other ways to grow the business. And we need somebody that has broad experience. You're speaking of Aaron Brown, who is coming to us after, I think, 14 years with BCG. And so he has a wealth of experience, both domestically and internationally. And we need somebody that’s not prudent with the day to day business to help us chart a pathway as some other things that we could be doing. We’re in the financial position to look at other options. And so it was a needed position for us to expand the reach and view of what La-Z-Boy is capable of doing in the future.

Okay. Great and thank you very much.

Thank you.

Thank you. We’ve reached end of our question-and-answer Session. I’d like to turn the floor back over to management for any further or closing comments.

Thank you for participating on our call today. Should you have any follow-up questions, I will be available and give me a call. Have a great day, everyone.

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