Greetings and welcome to the La-Z-Boy Incorporated Fiscal 2019 Second Quarter Results Call. At this time, all 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 your host, Kathy Liebmann, Director of Investor Relations and Corporate Communications. Thank you, you may begin.

Thanks, Michelle. Good morning and thank you for joining us to discuss our fiscal 2019 second quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer; and Melinda Whittington, Senior Vice President and Chief Financial Officer. Kurt will open and close the call, and Melinda will speak to the financials midway through. We will then open the call to questions. Slides will accompany this presentation and you may view them through our webcast link which will be available for one year and 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 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. Yesterday afternoon we reported our results for the fiscal 2019 second quarter. We posted a double-digit consolidated sales increase of 12% fueled by solid base business growth and the consolidation of our recent acquisitions. Sales in our Upholstery business grew 4%, the La-Z-Boy furniture galleries network posted it's 7th consecutive increase for written same-store sales, and the company's owned retail segment turned in a solid 4% positive comp for delivered same-store sales. Beyond this solid base we are pleased with the early performance of our two recent acquisitions; Joybird, an e-commerce retailer and manufacture of upholstered furniture, and the Arizona based La-Z-Boy furniture gallery stores. I will speak in more detail about both of them in a few minutes. We are presenting our results on both a GAAP and non-GAAP basis to better help you understand the underlying business trends excluding purchase accounting adjustments on the acquisitions which Melinda will go into great detail later on. As such, our GAAP operating margin was 6.5% for the quarter, and 7.3% on a non-GAAP basis. Importantly, we are delivering top quartile operating margins for the wholesale furniture industry with our results exhibiting the power of our brands, world-class supply chain, and our integrated retail model even as we weather high input costs and tariff uncertainty. Additionally, we continue to make strategic investments across the business to strengthen our operations and drive long-term results. Finally, over the past 12 months we generated $111 million in cash from operating activities and returned $60 million to shareholders through dividends and share purchases. And yesterday our Board of Directors voted to increase our quarterly dividend to shareholders to $0.13 per share, representing an 8% increase. We are proud of what we have accomplished to-date and believe we are well positioned…

Thanks, Kurt. Let me begin by again noting that this quarter we move to presenting both, GAAP and non-GAAP numbers which exclude purchase accounting adjustments required by GAAP for our acquisitions. We believe this approach makes it easier for investors to see the performance of our core underlying businesses. Our acquisitions this quarter included the Arizona stores, and then additional store in Massachusetts which are included in our retail segment, and Joybird which is reflected in corporate and other as detailed in our 10-Q. For consistency, we have adjusted prior periods similarly for the impact of purchase accounting from prior acquisitions. For this year's second quarter, we recorded $3.9 million or $0.06 per share in purchase accounting charges composed of four items. The amortization of $7.5 million of the initial payment for Joybird which for accounting purposes is considered compensation expense and will be amortized over two years; the amortization of the fair value of the Joybird trade name which will be amortized over an 8-year useful life; minor interest expense charged over a 5-year period on the $25 million of future guaranteed payments; and incremental expense recognized upon the sale of inventory acquired at fair value which will be recognized over several quarters. As we noted last quarter, we expect these items to total $0.12 to $0.14 per diluted share in fiscal 2019. Going forward, in addition to these items, we may also have impacts to our GAAP earnings for changes in the fair value of the Joybird contingent consideration liability. Recall, there are two future earnout opportunities based on Joybird's financial performance in fiscal 2021 and 2023. The range of contingent consideration is zero to $65 million, and therefore, the quarterly valuation of this obligation could vary widely dependent on Joybird's financial success over the next five years.…

Thank you, Melinda. As our industry faces some of the highest input costs in history and the uncertainty of tariffs, we are proud to have consistently delivered top quartile operating results. Moving forward, I believe La-Z-Boy Incorporated is well positioned to continue to perform at a very high level, with the strength of our brand, our vibrant store system, our vast distribution network, diversified global supply chain, and our strong balance sheet, as well as the exciting prospects for the Joybird business; we are confident we will drive long-term growth and returns to shareholders. We thank you very much for your interest in La-Z-Boy Incorporated. And I will now turn over the call to Kathy to provide the instructions for getting into the queue.

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

[Operator Instructions] Our first question comes from the line of Budd Bugatch with Raymond James.

Congratulations on the [cash flow] [ph]. Can you talk a little bit about -- on Joybird, just go back over where you are in the integration; have you started manufacturing any of that product yet? And maybe give us a little bit of color on maybe what it's operating results were in the quarter?

The first thing we've done Budd is to help them make their own Tijuana plant that was part of the acquisition more efficient. And so our La-Z-Boy supply chain team has spent a lot of time with them relaying out their plant, looking at some of the products flow-through the plant, we've provided some automated cutting equipment in the plant and ramp-up their capacity. And I think the Tijuana plant probably has 60% to 80% more capacity itself now than it did prior to the acquisition; so that's the first thing. The second thing is, we have not yet started making the product in our plants although we're ready to do so. We're having -- as you would expect, a little bit of systems issue to be sure that it's integrated into our financial systems and our ordering systems and all that, we expect to have that taken care of mid-December, and after the first of the year we will be shipping selected styles, mostly some of their higher runners, we will be shipping those out of the La-Z-Boy plants in January. So great cooperation between the two teams, we're all learning a lot of things from each other. And my strong position is that having manufacturing capacity as we head into 2019 is not going to be a problem for Joybird.

And they did $18.5 million this quarter; I know it wasn't on your books but what kind of growth did that represent for them year-over-year?

Well, if you take the $55 million which was their past 12 -- when we bought them, their past 12 months run rate; so that's a run rate of $13.5 million, $14 million at tops, so I would compare that to the $18.5 million.

And Melinda on SG&A, it grew in the quarter for obviously the acquisitions and other things about what $25 million or so year-over-year. How do we get to kind of a run rate for modeling purposes that we can do?

I think what you see in SG&A now is more consistent with the run rate for the rest of the year because we now have Joybird, and obviously, it's financial statements look a little bit different -- stronger gross margin, more SG&A investment; so layer on that we've talked about the fact that the comp expense will be higher throughout the balance of the year. The only -- so I think the rates that you see in Q2 looks more like what you'll see for the balance of the year, pretty consistent with what we had called out earlier on our expectations, so just have little more visibility now into how the acquisitions impact each of those line items.

And Budd, you'd see also with the Arizona purchase that now retail is an even higher percentage of our overall mix, and retail carries a little bit higher SG&A; so that's playing into that formula as well.

Okay. You talked a little bit, gave us for third quarter of $0.03 to $0.04 for purchase accounting and an $0.08 incentive comp either for the year or for the fourth quarter. What do those look like for modeling purposes as well?

So consistent with what we said last quarter, we see $0.08 for the remaining quarter, so, both third and fourth on the comp side of things. Purchase accounting; we've called $0.12 to $0.14 on the year, so $0.06 of that came through this quarter, so that leaves, call it, $0.03 to $0.04 for the next two quarters.

There was a 90 basis point difference in the margin for upholstered segment, I think, year-over-year you've called out, obviously, the increased cost and mix issue. If you could take costs out of that, what would the margin in Upholstery have been? I know you've measured that on your variance analysis, I'm sure.

I'm not sure when you say 'when you take the cost of out it.'

Well, I mean to tell you the cost delta, the increased cost, or what the cost over price recovery costs you in that quarter. What was the delta for…

I would tell you, Budd, that it wasn't until later in the quarter that all the price increases went through, and so, we didn't have a full quarter of the prices, but now, headed into the third quarter, we do. But, we also -- we don't get any margin on tariffs, the tariffs when they're enacted, you don't have much time to react, so you have a backlog for a while that you're not charging for the tariffs, and that comes in. We've had transportation increases, like everybody, and actually, we gave some additional compensation to our drivers, so we didn't lose any, which is very competitive. So, there is a little of still little bit cost creeping going on. We opened a distribution center and moved our big distribution center in Washington D.C., and that cost us about $0.5 million. So there is a number of puts and takes, nothing that is alarming but we're also trying to manage -- and these are all judgments that you make at various times, the price elasticity of furniture in saying, 'So, what's the worst-case scenario?' A little margin drop or a volume drop, where you don't get the fixed pickup from the plants and all. So we're navigating through that as all this happens. We're pretty positive about our competitive advantage on tariffs, and that we're not China-centric, so we're putting all into the formula and trying to do what we think is right for our customers and right for us, so we've still got some moving pieces and are balancing out what happens to the balance of the year.

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

Congrats on the nice results in the quarter here. I wanted to just talk a little bit more about the cadence of the business and the price increases that you're putting through, and how if at all that's all been affecting demand and may affect demand going forward. I guess, just starting with the price increases, where do we stand here today in terms of what your customers are paying versus about a year ago? How much are prices up?

Well, it depends on which customers that you're talking about. Obviously, there is more price and quite frankly, currency differences heading into Canada, and they have a retaliatory tariff on U.S. goods coming up to Canada of about 10%, and also, the other price increases, but I'd go back even further, Brad. Tariffs by itself is -- those price increases for us since our competitive advantage is not unmanageable, but it comes on the previous 18 months of a bunch of raw material increases that we've passed on; so the cumulative effect of this, and particularly if it goes to 25% is the broader concern I think for the industry. And I don't have all the numbers in front of me of each compounding price increase that we've taken, Brad, but I'm pretty sure in the U.S. it's more than 10% on our cost, so -- but then we also have taken increases on freight and everything. So, there is definitely inflation in the industry.

And so as we think about the strong comp, for example, the strong 4.4% comp you did, that really is particularly impressive given the tougher comparison last year. How much of that is coming because prices were moving up? And do you think there is any demand pull-forward that you saw maybe because price increases were coming? How are you thinking about that?

No, we haven't seen much demand pull-forward, and our dealers -- and obviously, to get that result, our customers are accepting these increases and dealing with it. We've seen some changes in the mix of people maybe gravitating to some more value-oriented products or people. In our business, you can buy a little less expensive cover on a frame and some of that change-around, but we'll have a much better picture of the movement in our mix and margin here as we get through the holidays and have a little more volume, but there is some ebb and flow here that's not an exact science.

And then on the Joybird side, I was hoping to just ask about their margins and their profitability, and if we strip out the purchase accounting side of things, could you just talk a little bit about how quickly you could ramp some of the synergies and efficiencies that you all are bringing to the table here? And at what point that might move to being more of maybe a breakeven business? And at what point you might be able to find some further opportunities to reinvest in more marketing or something like that, even at a breakeven rate; how are you thinking about the margins there?

I'll take that one. We feel pretty good about how Joybird is progressing, as we mentioned, and it's on-track with initial expectations. What we've said before is that across the two acquisitions, we expected to be exiting the year with them in aggregate profitable, not enough to move the needle but profitable on a non-GAAP basis and we're still on-track for that. You can see in our disclosures in the Q that -- if you look at Joybird as part of corporate and other, that there -- we're not talking about huge dollars that business is losing even today. So we feel good about the trajectory there, we certainly see profitability certainly in the reasonably near-term as businesses go, but as we talked before -- Kurt mentioned that we're looking at how high is up for that business, and so the opportunity for us will be to decide how much we want to invest back into that business to fuel it because it's obviously a higher growth opportunity for us and we want to make sure we're appropriately leveraging that, but without being a big drag on the total company.

And I would add, unless something happens with the economy and all of that our expectation is that next year the Joybird business will be profitable, but as Melinda said, so -- and we'll be making their product here starting in January; so we'll be making a margin like we do on our integrated retail and our wholesale plants, and so then we have the decision, and it will ebb and flow. How much do we want to use the volume or how much profit do we want to make on that? If we're making a strong profit in manufacturing the furniture, we may be more apt to push the volume side of it in the beginning. So, we'll kind of let you know as we go around what our intention is as this thing plays out some more.

[Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

So, I just wanted to follow-up on Joybird. So as mentioned that you are spending more money on advertising; is this a strategy that you expect to continue, at least in the near-term?

So I think the comment Anthony was, they spend more money on advertising as compared to the rest of our business because that's the business -- that's their real SG&A, it is to push the digital component of their transaction. And you know, it's like all your advertising expenses, you're trying to spend and then grade how you did, did you get the projected results on that spend? What do you do? And we're just -- I think they're entering a new area that they always were running this business with a governor on it because they had capacity constraints, and now with the vast improvement in their Tijuana plant and us getting ready to make it, they're not going to have that, so they don't have to worry about pushing the volume side higher, and to do that, they may spend more marketing dollars but will get to the commensurate benefit of more volume.

As far as the potential 25% tariff is concerned, when you look at your product segments, so where do you think you have the most pricing elasticity and where [indiscernible]?

I don't look at our business segments having any more or less product elasticity. I think because our overall tariff percentage is going to be so low compared to somebody that has a higher percentage of their business in China, I think we'll be in an advantageous position. Remember, 80% plus of our Casegoods come from Vietnam, all of our bedroom and dining room; and only one-third of our fabric and leathers are going to have a tariff, and that is on the kit price, not the finished good price. So we have very little finished good products coming from China. We have some leather sofas, but we have very little as a percentage of sales that are going to take the entire increase in tariff. So while I'm not a huge fan of tariffs, I think we are as well positioned as anybody else in the industry.

So the two-thirds that are going for Mexico -- is that as good as it gets or is there an opportunity to get even more of those fabric and leathers to Mexico for cutting?

That's a great question, Anthony. I will tell you our strategy and we're always open to reconsider some things, but we certainly have had the ability to cut and sew everything we do for our La-Z-Boy upholstery business in Mexico. We have chosen based on our risk mitigation to leave a portion -- the one-third portion -- with our other suppliers around the world because we don't want to put all of our eggs in the supply chain in one country and one facility, and then something happens there and we don't have any other partners we can work with to meet the demand of our upholstery business if something would go wrong. So, could we do it all? Yes. Would that be a good thing if there was some other challenge that happened in our Mexico facility? We don't think so, and we think the strategy we've laid out to hedge a little, to keep some in China is proper at this time but we continue to evaluate that.

And lastly, any comments on the Black Friday weekend?

It's a little early to get all the data in and the feedback from our broad array of customers, but I can tell you that our company-owned retail had a strong same-store sale in November, consistent with what we've reported this last quarter. And we were pleased with the performance of that segment of our business, but we don't have the intelligence on all of our other retail partners.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Thank you for being on the call today. If you have any follow-up questions, please get in touch with me, and I'll review whatever you need. Have a great day. Thank you. Bye, bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.