Greetings, and welcome to the La-Z-Boy Fiscal 2018 Fourth Quarter and Year End Results Conference Call. At this time, all participants will be 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. I would now like to turn the conference over to your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Rob. Good morning. And thank you for joining us to discuss our fiscal 2018 fourth quarter and year end results. With us this morning are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; Mike Riccio, our Chief Financial Officer; and Melinda Whittington, Senior Vice President and who will become CFO of La-Z-Boy Incorporated tomorrow. 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. Slides will accompany this presentation and are available for viewing through our webcast link. 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 remark. 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. 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. This morning, I am delighted to welcome Melinda Whittington to our team. Melinda brings with her excellent experience and expertise, with more than 25 years as a financial professional in the consumer products arena. She is a leader with a proven track record of operational excellence, and she will be an asset to our organization, as well as a great fit for our culture. I look forward to working with her, and I am confident you will enjoy getting to know her and working with her as well. At the same time, it's with mixed emotions that we say goodbye to Mike. He has been a great partner and advocate of La-Z-Boy, playing a pivotal role in helping transform the company during his tenure. While his contributions were many over his 12 years as CFO, his lasting legacy will be the work he did to strengthen our balance sheet. With the philosophy of financial conservatism and discipline, Mike leaves us in an excellent financial position, one that will enable us to invest in our future and weather inevitable economic cycles. I have the highest regard for Mike as a colleague, as a leader and a friend. And I thank him for his many contributions to La-Z-Boy and wish him all the best in his retirement. Mike will step down as CFO at the end of today, and Melinda will become our new CFO as of tomorrow. So now let me turn to the business at hand. By now, you have all had the opportunity to see our results for fiscal 2018 and the fourth quarter, which we released late yesterday afternoon. All in all, it was a solid year where we maintained top quartile profitability performance within the furniture industry. I will take…

Thank you, Kurt. I will quickly review our numbers for the fourth quarter since Kurt already spoke about our performance by segment. Sales for the fiscal 2018 fourth quarter were $420 million, up 1.8% from a $413 million in last year's fourth quarter. Consolidated operating income increased 5% to $45.7 million, and the consolidated operating margin increased to 10.9%. The company reported net income attributable to La-Z-Boy Incorporated of $34 million or $0.72 per diluted share versus $28 million or $0.57 per diluted share in the prior year period. The current year quarter included a $0.06 per share benefit related to tax reform. Consolidated sales for the fiscal 2018 full year were $1.58 billion, an increase of 4.2%. For the year, consolidated operating income declined to $129 million from $133 million in fiscal 2017, and the consolidated operating margin was 8.2% versus 8.8% last year. The company reported net income attributable to La-Z-Boy Incorporated of $81 million or $1.67 per diluted share. For fiscal 2018 compared with fiscal 2017, net income of $86 million or $1.73 per share. The reduction for the current year period was primarily due to tax reform charges. Our consolidated gross margin decreased 0.8 percentage points in fiscal 2018, primarily a result of the decline in the upholstery segment's gross margin, stemming from the raw material price increases that Kurt mentioned earlier. The gross margin in the case goods segment increased 0.2 percentage points for the year due to increased volume and a shift in our product mix to newer, higher margin collections, which was offset somewhat by higher freight expense on imported product. In our retail segment, the gross margin declined 0.2 percentage points for the year. Offsetting some of the inflationary pressures to our gross margin was an improvement of 0.2 percentage points in…

Thank you, Mike, and good luck. I too see a promising future for La-Z-Boy. We are playing the long game and are making prudent and strategic investments across the company to ensure it continues to evolve in a dynamic marketplace. A solid balance sheet and consistent cash flows are enabling us to invest in our brand and our global supply chain, which we believe are key to long-term success, while providing the ability to pursue a multidimensional e-commerce strategy to capture a new and younger customer. In this changing environment, our leadership team challenges itself every day to drive growth, continue to create innovative product and gaining market share by leveraging our supply chain in support of such endeavors. I'm invigorated by what is yet to come, and I'm confident in this company's long-term prospects as we capitalize on our strong legacy of innovation and our uncompromising commitment to evolve and meet the challenges in a changing world. We want to thank you for your interest in La-Z-Boy Incorporated. And we'll turn over the call to Kathy to provide some instructions for getting into the queue for our questions. Kathy?

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

Thank you, Kathy. [Operator Instructions] Thank you. The first question today comes from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Good morning. Good morning, guys and I appreciate you taking my questions. And Mike, congrats on the retirement. It's been a pleasure to work with you, and I wish you nothing but the best going forward.

Thanks, Bobby.

I just want to quickly follow-up on some of the raw material comments. Maybe just to help us understand, what is - what are the current trends that you're seeing in some of those items, like steel and foam? Has it finally started to level out where we can then understand as you play a little bit of the pricing catch-up, the back half will look a little better or is the trajectory still kind of inflationary on - if we think about on the graph?

So you have to quantify this, Bobby, as to what we know today. We have had to take over the last 12 months two price increases because of the inflationary pressure, particularly on steel, lumber and foam. The last one of which went into effect June 1st. And should nothing else change, we believe by the second quarter of fiscal '19, we should be at that equilibrium. But as soon as I say that, we are now also faced with some challenges on tariffs and have no clear path to know whether or not the raw material increases have topped out. We have no indication that we've got anything coming in the future that we have planned on. But we really didn't expect the second round of increases last fall either. So we'll just have to see what happens, and you really can't get ahead of it. You have to wait until you deal with the raw materials and then decide how much you pass on and how much you keep.

Okay. That's helpful. The tariff issues, is that potentially on like some of the Canadian tariffs for your business that's up there?

Yeah. There's a tariff of approximately 10% being enacted on all furniture coming from America going into Canada. And then we learned late last week that there is the potential to have a tariff on the actuators that are coming from China that you - are used at most of the industry's power products.

Okay…

And then there's the announcement of a plan for more tariffs coming. So it is an uncertain time as far as our cost inputs.

Okay. Thank you. And then lastly from me. Was there some delivery impacts or maybe written orders late in the quarter. Because the written order business during the quarter was fairly strong. The delivered business wasn't quite as strong. So I was just curious if there's any timing issues there. I noticed in the 10-K, the backlog was up pretty nicely in upholstery?

Yeah. We have seen a steady increased progression. I mean, you saw the written sales was almost 4% for the network in Q4, and the average for the year was about 2.7%. So there was some acceleration. And these are all -- there's always a little bit of timing issues because of the way the backlog and our predominance of custom orders work. But nothing significant and that gap will close over time as eventually the increased written business gets delivered. So we would expect most of that to get delivered out in the fourth - in the first quarter.

I appreciate you guys taking my questions. And best of luck in the next fiscal year.

Thanks, Bobby.

Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi. Good morning, everyone. And Melinda, welcome to the team. And Mike, let me add my best wishes to you as you move into retirement. As well, we really enjoyed working with you.

Thanks, Brad.

I wanted to follow-up on Bobby's last question, just about the sales trends. And I was particularly encouraged by the same-store sales results. I mean, I think that 3.9 is the strongest in 2.5 years. So echoing Bobby's comment, I was a little surprised that the total revenues in the upholstery didn't clock in quite as strong. Could you give us a little more color about what you're seeing from some of the national and independent dealers of La-Z-Boy? And how you're expecting that side of the business to grow as we look to the year ahead?

So my response to that, Brad, is it's - our sales do not go up linearly every quarter. So in this environment, we had a 4 - a little over 4% growth for the year. Last quarter, we had a 6% growth this year. This quarter, it was 2%. The average is around that 4%. We would anticipate given our recent sales increases and what you see or what was written in the fourth quarter, we would anticipate our first quarter deliveries to be better than flat in upholstery. And so they're mostly just the ebb and flow of holidays, inventory, markets, things of that nature. But we're pretty happy with the year at 4% and think there is nothing fundamentally different. And you would see an improved number there in the first quarter.

That's helpful. Thank you, Kurt. And then with respect to the outlook for gross margin, with the price increase that you put through June 1, is it set up where if 1Q sort of plays out similar to 4Q, where the rate of gross margin decline would moderate in 1Q, it'll still be down but moderate? And then do you think you could be that closer to flat in 2Q or there are still too many headwinds out there with freight and some other factors?

So in our planning, Brad, our gross margin, I think, got as high as 40 points - 40%. And I think we were at 39 something here in the fourth quarter. That's not a big gap. And the two things that would drive that is more volume through the plants to pick up absorption and then the pricing versus - the raw material pricing versus the selling price. So I don't think we're that far apart. In our - in the furniture industry, our gross margins are pretty respectable even at this level. But in our planning, it was to not only take the price increase on the actual cost but actually have our margin pick up as well. So if it was a perfect world, nothing changed, we got volume at or above the previous year, yes, our margin should be back to where we've been, our historical high. But I wouldn't expect it to grow a whole hell of a lot beyond that.

Great. That’s really helpful color. I appreciate it.

[Operator Instructions] The next question is coming from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Good morning. And thank you for taking the questions. Mike, certainly enjoy your retirement. I'm sure you're looking forward to it. And welcome aboard, Melinda, to the La-Z-Boy team.

Thank you.

So for first, I just wanted to ask as far as – you know, obviously, that you are dealing with inflation. You have increased share prices to offset these raw material prices going up. What is your expectation as far as unit volume? I mean, do you think it will decline again or do you think it could flatten out? So I'm just wondering about what your expectations for unit volume in light of these price increases that you're taking?

So we're not planning on a one for one relationship between pricing and - pricing going up, volume going down. We still have opportunities with a number of our different channels of distribution, expanded channels of distribution, the Internet business, same-store sales at the La-Z-Boy stores. We -- we're not planning on a unit reduction. But the honest question, Anthony, is it all depends on how the consumer reacts. So the industry has been faced with this inflationary pressures and the cost of furniture is up x amount, and no one will know how she reacts to that until we go through the next three or six months. So stay tuned for that. But it's certainly not our plan to go backwards in units. And if we get the other - the next hurdle of more tariffs, that's another thing we'll have to take into our pricing element.

Right. Understood. And as far as your SG&A, there was a commentary in the 10-K that you reduced your discretionary SG&A spending. I was wondering if there are additional levers that you can pull to better manage SG&A?

So I think we managed SG&A really well. And there is always discretionary spending you can do. We try not to do much of it that effects our customers or our employees. But we examine every expenditure we make and try to do that. On the other hand, part of the reduction in our SG&A, particularly in the fourth quarter, was even though we had a good year in La-Z-Boy, we had higher expectations. And so we did not achieve the 100% level of our payouts in our compensation. So that had an impact on lower SG&A. That is not our plan for next year. Our plan is to make that up. So if you see SG&A go up next year and it's primarily in the comp area, we'll be happy to defend that.

Got it. Okay. And so as far as the incentive compensation, was that all kind of reversed in the fourth quarter or is that - I was just wondering about the - how that flowed throughout the year because typically, your fourth quarter does have higher SG&A. I think it was close to $5 million lower than a year ago?

So we look at it every quarter. We look at our forecast. We look what we have reserved and planned, and we make adjustments as we go. Being the fourth quarter always is our largest quarter, it has a little more impact and on some of the things you don't know the final answers on certain targets to the end of the year. But we watch that number and make judgments throughout the whole year.

Got it. Okay. And last question, kind of a longer term, so obviously, store traffic continues to be an issue for all brick-and-mortar retailers. So when you look at your store base between your dealer stores and your company stores, is your expectation to kind of more or less kind of keep it flat for the next few years or - I'm just wondering how we should think about that? Thank you.

So our response to that, Anthony, would be that our traffic is consistent with most other retailers in the country right now. The customer is using the Internet a lot more for information, and to make choices, she is visiting less stores. And that phenomenon is not going to change. But the customers that do come into the stores are -- have a higher propensity to buy because they've done their research, and they've chosen La-Z-Boy as one of the places they want to visit and buy. So we watch the combination of traffic, ticket and conversion. And our traffic was down in the fourth quarter, and we still had same-store sales of 4%. So I think that's a good indicator of the things we're trying to do to keep growing our business.

Okay. Thank you. Best of luck.

Thanks, Anthony.

Our next question is a follow-up from the line of Bobby Griffin with Raymond James. Please proceed with your question.

Actually, it's the old guy. It's Budd, back in for Bobby on this one. So Mike, I just wanted to also wish you the best going forward, so good luck on that. And Melinda, welcome to the fray of the investors of La-Z-Boy.

Thank you.

Thanks, Budd.

I do have - Mike or- and Kurt, I do have a few follow-up questions that I'd like to ask. One - and Anthony, I think, talked a little bit about it, and you talked a little bit about it, Kurt, in explaining the corporate overhead in the fourth quarter, at least as we can do the numbers with the publicly available data, it looks like it was down about $4 million year-over-year. Is that pretty much all the reversal of the accrual of incentive comp? You also talked about it in your script about some discretionary expenses. Can you give us - maybe quantify the dollars of how they impacted the fourth quarter?

So Budd, I would say that probably three quarters of the reduction in corporate was related to either stock comp or performance comp. The rest of it is just ebbs and flows of our expenses, of us just trying to maintain some things, maybe some projects that we delayed into the summer, some things. So there's nothing - I mean, I think it's the lowest it was going to be for the quarter. So I don't expect it to stay that low. We still are -- as Kurt has talked about, our IT and the work that we do to make sure that we're staying ahead of the game on that and us -- and not getting behind the eightball, what we're going to continue to keep investing in that. Not that we're going to have a huge expense over what we've been spending, but we're going to stay pretty consistent on that. So we don't expect it to stay down there. But we - as Kurt mentioned, Anthony, we will continue to look at every expenditure and make sure that we're spending money on things that are enhancing the customer's experience and help - and looking at our employees as well, so.

I could tell you as one, we're rooting for you to make the incentive comp. But we would like to see that. I think that would benefit everybody so…

Hoping [ph] it.

Raw materials, as you normally give us a dollar amount, and I know it's a lens that's pretty cloudy because of all the moving parts. But knowing what you know today, what's the dollar impact of raw material increase year-over-year for the new fiscal year?

I don't - Budd, I don't have that number off the top of my head and because of the flow of when various price increases come in. So I would say that I think we took at least half, maybe a little more of all the price increases in last fiscal year. But we have another 40 plus percent here to flush through here in the first four, five months of the new year. So we took a price increase in June 1st that we haven't seen any benefit from yet, but we will. And we'll get the full benefit in Q2. But - and the magnitude of it was similar to the first one because the magnitude...

How much was that, Kurt? I don't think we knew the...

I don't - again, I don't have those right off the top of my head. But it - I think - so I know - I kind of know what the price increase values were, but not the actual raw material cost. We can get that for you and let you know.

Okay. That would be great. Because I think you said you'll be in an equilibrium. So if we know what the percentage price increase is, theoretically, we can probably get an idea of the dollar amount of the raw material increases. I think you also said that units were down slightly in the fourth quarter. Can you quantify that? Is that - and I think you were talking about upholstery, if I remember it right?

So we've quantified in the K, Budd, that our upholstery units for the entire year were down around 2%.

And in the fourth quarter, we don't get the quarterly break-out in the K?

You want it weekly?

If you care, but no. But quarterly, well, we usually get it - we'd love you to file a 10-Q for the fourth quarter as well?

I'm sure. I don't think it was - I think it was consistent pretty much throughout the year. I don't - the fourth quarter wasn't a - our end. The fourth quarter a year ago was up 6% on a comparable basis. So I - I don't think there's anything alarming about it. As I answered in the first question, we were up 6% in the third quarter. We were up 4% for the year. I don't think we'll be flat in the first quarter of next year so - on the upholstery business. So it's just kind of the ebb and flow of the way the business is.

Sure. And I know your upholstery margins are spectacular anyway. So that's - we understand that. We were just...

Thank you for recognizing that.

I always have. And that is the - you and I both know that's the crown jewel of La-Z-Boy and always has been and that they are spectacular. But we have a job to do, and unfortunately, we look at it that way as well. A lot of noise in the industry recently about the China situation. Obviously, you're now situated with stuff, over which you have no control. The - there has been, at least from those of us who watch it, a price war between some of the Chinese importers that has led to a lot of disruption for some of the manufacturers I think you probably felt a little bit in motion. Where does it sit - what's the situation with that today, where is that going? Is there likely to be any administrative action as a result of that?

Well, I can't comment, Budd, on what we may or may not do or what upholstered furniture companies may do. I think we're all watching with a keen interest on what's going in bedding. And I think the article in furniture today, last week, was that there were 4 million more inexpensive mattresses shipped into the U.S. last year and I think at prices that make some of us gasp at what they are. So there is a lot of talk about the bedding industry taking some action, and I think that would be appropriate. And so we're going to see what the outcome of that is and determine what our next steps could be as an industry.

And then your China partner, I think, also has made some other relationships. How is that relationship working with you - for you?

Our China partner - our relationship in China is very strong. There is over 250 La-Z-Boy stores now in Mainland China, and they are aggressively buying up some other companies in Europe and in China for manufacturing. So they are on an aggressive acquisition mode. And as far as we can tell, they are buying some very quality companies. Some of which we use as suppliers, too. So on an overall basis, our partnership has gotten even tighter with things they have done from an acquisition standpoint.

And was your China business up in the fourth quarter?

Again, I don't have that in front of me.

But first, Budd, we only get the royalty from that. We don't get the sales on that.

Okay. That is correct. I understand that. Okay, finally, from me, CapEx. We thought CapEx was going to come in a bit higher in the fourth quarter. Was that just the timing, and is that somewhat related to what - the increase in CapEx and in fiscal '19 expected?

Yes. That's pretty much it. But some of our projects, I mean, I think the England office or their plant or something, they had so much rain in the spring. We couldn't pour the foundation in the time we wanted to do it and...

In some of the innovation center, we got put off until May or June...

So both of our - most of our projects are a little behind their time lines, not due to anything other than weather and timing. Plus, our projects are - our major spends are all in the state of Tennessee. And Tennessee is a hot state right now for growth and manufacturing jobs, and there's the challenge to get contractors to work on buildings and all. So we're just - it's just taking a little longer, but they're great projects. They're going to be a great asset to the company when they're finished. But a lot of them are having a 60 or 90 day delay.

Right. And that is some of the carryover and why our number for '19 is a little larger.

Got you. Mike, again, best of luck. Kurt, best of luck to you Melinda, welcome again. And I look forward to seeing the innovation center and maybe the new offices of England if you will allow us to come visit at some point in time.

You're always welcome, Budd.

Thank you, sir. Thank you, gentlemen and lady thank you very much.

Thank you, Budd.

Our final question today comes from the line of Matt Kupersmith with Iron Compass. Please go ahead with your question.

Hi. Thanks for taking the question. If I look at the last six quarters, I observed that the written comp is consistently positive, and the delivered comp for each of the last six quarters was down. Can you just explain how that divergence can exist over that period of time? And then more broadly discuss how you think investors should use each of those two metrics?

Yes. Great question. And it - they are two different metrics, and that's why you can't run the math succinctly. We believe for investors, giving you the written same-store sales for the entire network of stores, which is 350, which includes the 146 we own and all of the dealers that we have that own La-Z-Boy stores. That's an accumulation of their written business every quarter, which they report to us. We think that is the best leading indicator of what's going on in our business since the La-Z-Boy stores represent almost half of the La-Z-Boy-branded business. Okay? The other number we give you is the delivered sales, not the written. The delivered sales of the same stores that we owned a year ago so comp sales delivered on 146 stores that we own. So there's timing differences. There's - one is all dealers, one is just our dealers. I think over time, they have a way of leveling out. But any given quarter, there is -- there could be a three or four point differential.

Okay. But over six quarters, there has been a pretty material differential. And I guess, does that imply that your company-owned stores are consistently doing worse than your dealer-owned stores?

I would say they're not doing as well. I wouldn't say they're doing consistently worse. So they are slightly - as we've said, they're running a couple of points behind what our independent dealers do. One of the issues for us is that we - over time, we've had to take back a lot of the markets that weren't performing well and start over. And that's one of the reasons our performance hasn't been quite as well as the independent dealers, and the longevity of a number of the families that we have that owned La-Z-Boy stores in these markets for years and years is a benefit they have that works to their advantage. But we keep closing that gap. We don't think it's going to last forever. But right now, there is a couple of point differences between the independent dealers and the stores that we operate.

But we have some markets that do well and some that we're working on. So it's not all evenly across our markets.

Is it possible to give the delivered comp for your whole network to be consistent?

No, no, no. That - they're not - we don't own them. They're not part of our public numbers. They have different fiscal years. They have all kinds of -- that is not possible or probable.

Do you have those numbers though?

We get annual financial statements from our customers. But we don't get into that level of detail with independent dealers who aren't connected to the company.

We do not have that information.

Okay. All right. Thank you.

You’re welcome.

Thank you. Ladies and gentlemen, this will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.