Good day, ladies and gentlemen, and welcome to your La-Z-Boy Fiscal 2019 Third Quarter Results Conference Call. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Kathy Liebmann. Ma'am, the floor is yours.

Thank you, Christi. Good morning and thank you for joining us to discuss our fiscal 2019 third quarter results. With us today are Kurt Darrow, La-Z-Boy's Chairman, President and CEO; and Melinda Whittington, Senior Vice President and CFO. 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 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 fiscal 2019 third quarter results. Consolidated sales increased 13%, reflecting solid growth across the entire enterprise, including the base businesses and those recently acquired. We also grew consolidated operating income on a GAAP and non-GAAP basis with all three segments posting improved performance. EPS for the quarter was the highest in any third quarter in more than a decade and the company-owned retail segment turned in a delivered same-store increase of plus 6.7%, and doubled its operating income. Additionally, we generated strong operating cash during the period, which provides us with the ability to continue to make strategic investments in the business to drive growth. A good quarter overall, highlighting our strong portfolio of brands, our vast distribution network, our global supply chain, and a very solid balance sheet. I'll now take a few minutes to review each business. First, Upholstery, sales in this segment increased 4.2% from last year's third quarter, driven by improvements in mix, selling prices, and the surcharge pass-throughs for tariffs, which I'll discuss in more detail in a few minutes. Operating margin was 10.3% on a GAAP basis, and non-GAAP basis up from last year's third quarter, GAAP operating margin of 9.9% and non-GAAP of 9.7%. While there were a number of puts and takes that impacted operating margin for the quarter, we continue to turn in top quartile operating margins in our industry. During the period, inflationary pressures throughout our supply chain and a shift in product mix were offset by higher selling prices and a one-time impact of a redesign of our employee benefit programs, which Melinda will discuss in her remarks. As a reminder, last year's third quarter also included a charge for a legal settlement. On the product side,…

Thanks, Kurt, and good morning everyone. To start, let me remind you all that last quarter we began presenting our results on both a GAAP and a non-GAAP basis which excludes purchase accounting adjustments required by GAAP for acquisitions. We believe this will better help you understand business trends and performance of the core underlying businesses. In fiscal 2019, we acquired Joybird, which is reflected in corporate and other and 10 La-Z-Boy furniture gallery stores, nine in Arizona and one in Massachusetts reflected in our retail segment. These make up the majority of our current year purchase accounting adjustments. For consistency, we have adjusted prior periods similarly for the impact of prior acquisitions. For this year's third quarter, we recorded $1.5 million or $0.02 per share and purchase accounting charges slightly below our previous estimate of $0.03 to $0.04 per share. As a reminder the current year purchase accounting adjustments are primarily 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 is amortized over two years, the amortization of the fair value of the Joybird trade name, which will be amortized over an eight year useful life. Minor interest expense over a five year period on the $25 million of future guaranteed payments and the incremental expense recognized upon the sale of inventory acquired at fair value which we recognized over several quarters as it fell through. We expect purchase accounting adjustments for Q4 to be in the range of $0.03 to $0.04 per share bringing total impact on the year to $0.11 to $0.12. 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…

Thank you, Melinda. Overall, we are pleased with the strategic direction of our business and the opportunity for long-term success. Looking at Q4, rather record-breaking weather trends have driven the slower start and questions with respect to a potential increase in tariffs. However we have a very solid foundation in place to grow our business. With the strongest brand in the industry, a world class supply chain, a vast distribution network, and the addition of Joybird with a strong financial position, we have all the components effectively to canvas the marketplace and increase our share in the growing consumer segments. We thank you for your interest in La-Z-Boy Incorporated and I will turn over the call to Kathy to provide the instructions for getting into the queue. Kathy?

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

Thank you. The floor is now open for questions. [Operator Instructions] And we'll take our first question from Bobby Griffin with Raymond James.

Good morning everybody, thank you for taking my questions.

Good morning.

First I want to talk about the delivered comps in the quarter in the company-owned retail segment. It's been a nice shift in trends there over the last couple of quarters with greater than 4% comps. Kurt, can you maybe just expand upon some of the initiatives that are going on the stores to drive the improved performance?

Well, good morning, Bobby. I would tell you that our team is, I'm so proud of them and they are executing at a very high level. There's not a lot of secrets at retail when the sales people read [ph] the customer and move forward with the purchase pathway. It's all about gaining trust and listening, and our ability to do more in home design work, our ability to sell higher tickets, our ability to sell rooms, all that is playing in our favor. And in addition, the conversion that we have in that -- the number of people who were closing versus who walks-in is slightly improving. So there was no one time silver bullet, there is no -- secrets here other than a number of years of putting together a plan that would lead to this kind of result getting a leadership in all of our regions and all of our stores, and we're very pleased, and obviously we can't ignore the impact that Arizona has made, but I want to be clear that the base business performed at a very high level, and given the reports that have been out in the industry from a lot of our competitors in the last 30 or 45 days, a nearly 7% comp is a pretty stellar achievement.

Absolutely, I appreciate that detail. Has there been any notable change in traffic trends, or is it more just better conversion and a better mix of the design services? And then maybe can you just refresh us now for your company-owned stores what percentage of sales are design in custom sales?

So, I would say that our traffic is still slightly down, but not nearly as down as much as it was a couple of years ago. So hopefully, we've reached a plateau and traffic will -- I think encouragingly though our traffic particularly in the big holidays has been positive, and that's where we've been able to capitalize on that, but our design business in the home is above 30% and much higher than that in Arizona. And our custom business, I think if you would add the two, Bobby, it would probably be pushing 50%. Now the custom business, just to be clear, could be a different color on a recliner, and it doesn't really connotate [ph] a room purchase and all, but the fact that we have domestic manufacturing and we can get product to the customer fast, we do a lot of custom business on other colors of a pattern that the customer likes.

All right. And then lastly for me, just can you maybe help us from a modeling standpoint, understand, I guess the future timing and impact from the ongoing price increases from raw materials and then the tariff aspect? Is the 2% benefit that was caught out in the 10-Q from tariffs this quarter something that we should assume going forward for the next couple of quarters and kind of same type question for the raw material type pricing benefits?

Well, you have to tell us what's going to happen with tariffs, so I can answer that question. So Bobby, I don't have the exact numbers. And each of these in isolation is not in our opinion, that hard to overcome, but you had 18 months of raw materials going up. And at one point, steel, poly, lumber were all, at all-time highs. We see that plateauing and maybe starting to come down a little bit, but if there's a -- I read last night there could be another delay before decisions made on tariffs, so if that -- if there's a stay for 90 days or 120 days to get us to the summer that same 2% and 3% would be going -- would be on our pricing going forward, and in reverse, the same tariffs would stay in place from Canada from product going into Canada until some resolution of this has come to.

Okay. That's helpful from a modeling standpoint. I appreciate the time and the details, and best of luck going forward.

Thank you, Bobbie.

And our next question comes from Brad Thomas with KeyBanc Capital.

Yes. Good morning, Kurt, Melinda, and Kathy, and congratulations on a strong quarter here.

Thank you.

Thank you.

Okay. I wanted to follow-up on the comments about the recent trends. If I heard you right I think you said that the written same-store sales was up -- sorry, was down 3.2%, and I was wondering if you add any more color around the trends by month just so we get a better sense of how much might have been that difficult weather in January. And then I guess as you think about written same-store sales would in anticipation of tariffs have affected the orders and pulled forward new orders in the earlier periods, I guess how should we think about that?

So, the easy one is the tariffs. I don't think there was any pull forward. It's not significant enough to hedge in the fact that it could stay in effect for who knows how long. We did not really see any of that. As far as the same-store sales, Brad, just to be clear, we were down -- the system was down a little less than 1% like 0.6% in written for November, December, January and the only month that was negative was January. So given the weather, given some other things and I'm not using weather as an excuse, because we have it all the time, but that did affect January. You mentioned the number of 3.2% that was our same-store sales increase for the network in calendar year '18. So our sales were slightly…

Got you.

-- our same-store sales were slightly up in November, December, and down a few points in January. So there was a deceleration at the end of the quarter but we don't think it's systemic and we're glad the bad weather is coming today across the U.S. instead of Presidents' weekend.

Got you, got you. Okay. And then, just to follow-up on the new marketing campaign with Kristen Bell from a cost perspective anything we should be aware of as we think about lumpiness of expenses associated with that new advertising? And then from a benefit perspective, when would you expect to hopefully see a lift from this new campaign?

Very good question, Brad, what we are planning to do is similar to what we did when we launched our first spokesperson with Brooke. In the initial launch both ourselves and with our dealer participation, we will spend somewhat more money on the launch than we would do in a normal, but it will average out as we go through a 12 or 18 month period. But we do put some additional media weight behind the launch to get that message out. And our hope for this is that Kristen speaks to a little bit different audience than Brooke, and is a fresh face and a different point of view, and we think that the brand can use that and we had a very long and prosperous run with Brooke and we were grateful for that but felt it was time for a change and think she's going to bring a new perspective to the brand.

Great, thank you, Kurt.

You're welcome.

And our next question comes from Anthony Lebiedzinski from Sidoti.

Yes. Good morning and thank you for taking the question. So I just wanted to follow-up on the previous question in regards to the design program and custom orders. Can you give us a sense as to how that was about a year ago, so just so we know how that's growing so far for you?

And I cannot off the top my head, when you have your follow-up conversations with the team you can -- they can look into that detail, but it has steadily grown. I can tell you that, and that and the size of the tickets that we're doing is also increasing, but I want everybody to be focused on, that the economics behind all of this is great. But when we do an in-home design room with a customer the odds of her being a much more satisfied customer and coming back and purchasing us from us again and doing another room, that's the greatest benefit for this, was building this customer for life. So the economics come with it but we're trying to build a long-term business here and having that connection with the consumer is fantastic.

That's very good. Thanks. Thanks for that, Kurt. And you mentioned that Arizona is doing very well for you, which is a continuation from where that business was trending when you acquired it. Can you give us a sense as to whether there are any notable regional differences in the performance for your stores?

The only comment I'd make at that Anthony is, we -- I mentioned in my prepared remarks about the impact that tariffs are having in Canada and so our Canadian stories which for years outperformed the U.S. stores for a number of years. Our Canadian stores are not doing as well as the U.S. stores right now through -- I don't want to do through no fault of their own but the price of their product and their consumers understanding of that has had some challenge. Now again, Canada and the retail side is about 10% of our business so it isn't -- it isn't a devastating number yet but it does from cretins if tariff for us got up to 25% it may have a -- some impact on demand. So then we're watching that very closely, but other than that we don't see a huge differential in the U.S. about sales growth.

Got it. Okay. And as far as your new innovation center in Dayton Tennessee, what do you expect us -- what should we expect will be the biggest benefits of having that up and running?

I think the first benefit is our ability to attract a lot of new talent and smart people of different points of view. We've given them a great place to work and all the tools that they need. So it is -- that step one without the great people nothing's going to happen. Number two, we should be able to put out a longer and a more robust pipeline of things we do in an innovation side to keep us at the forefront of things changing in the industry. So we've always prided ourselves in the original start of this company was in the innovation of the recliner mechanism. So, lots of things with cushioning, with power, with all kinds of remotes and all. We're investing heavily in that and we want to be a leader in trying to forge our own pathway.

Okay. Thank you very much and best of luck.

Thank you.

And our last question comes from Dillard Watt with Otisville [ph].

Thanks. To clarify, Dillard Watt from Stifel for the crowd. Maybe let's talk a little bit about Joybird, you spent a good amount of time saying some things about what you've brought over to Joybird from the La-Z-Boy side on the manufacturing and operations. So anything you've learned from Joybird that you're bringing in either be technology, e-commerce tools anything like that that you're starting to use on the integration into the legacy company?

That's a great question, Dillard. When two companies are sort of polar opposites about the way they think about certain things, the first couple of quarters is all been about let's keep the business growing, let's do all the behind-the-scenes things, and we are learning from each other, but we -- frankly, most of the things that La-Z-Boy has brought to the table are not really in place yet. So most of all their growth and all the production that they've had since we were able to help them expand their Tijuana capacity, most of that's been on the Joybird side. So we still have more benefit coming from using our distribution systems and arm our own manufacturing on the eastern side of the U.S. But there are learnings and our two teams are communicating and we have people going back and forth to California and Michigan, collaborating and there's a lot more to come but to call out something specific right now, it's probably a little premature. But that is one of the reasons we brought them and one of the reasons they do some things differently and probably better than we do and we have the same. We do a lot of things better than them, just for the fact that we've been making furniture for 90-plus years. And they've been making furniture for less than five, so there should be some synergies. But the pace of going, we bought them when their run rate was about $55 million. And now in the last two quarters in any case the run rate will be closer to $80 million that's a good first, six to nine months' worth of work by everybody. And as we get more and more of these things in place, we see this for the next couple of years as a percentage, probably our highest growth business.

Absolutely, and maybe on the on the consumer demand side, is there anything you can glean either from web traffic, web traffic at Joybird or La-Z-Boy, that gives you a little bit of comfort that perhaps we are just in a bit of a pause or a weather issue with actual traffic into the stores.

Well, there is a correlation between our web traffic and our actual results and our store traffic and - but our web traffic has been pretty stellar. The consumer when she is looking for things isn't anticipating the weather is not going to be very good in a couple of days, so I think most of it if I had to gauge right now is weather related. And even after some day and we had some days during the end of January and so far in February where maybe as many as 30% of our stores were closed for a couple days across the Midwest and the East Coast, but then two days after the weather, the business bounce back -- bounces back. So the consumer really wants something and the weather comes, she still needs to do something with her with her house or with her room and so we don't see that being a long-term problem. So right now and again based on what our own retail did for Presidents Day weekend there's a degree of optimism. However, you never really make up the days that you were closed. So that does have some effect on the run rate in the business in the short-term.

Great. Thank you very much.

Thank you, Dillard.

[Operator Instructions] And there appear to be no further questions at this time.

Okay. Thank you very much everyone for participating in this morning's call. If you have any follow-up questions, please get in touch with me. Have a great day.

Thank you.

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