Q4 2003 Falcon Products Earnings Conference Call - Final.

Publication: Fair Disclosure Wire

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Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Ladies and gentlemen, thank you for standing by and welcome to the Falcon Company's 4th quarter earnings release. At this time all participants are in a listen only mode. Later we will conduct a question and answering session. Instructions will be given at that time.

If you should require assistance during the call, please press star then zero. And as a reminder this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Frank Jacobs, Chairman and Chief Executive Officer. Please go ahead.

FRANK JACOBS, CHAIRMAN, DIRECTOR, AND CEO, FALCON PRODUCTS, INC.: Thanks, Lois. Good morning, everybody. Thanks for joining us. With me this morning on the call is David Morley, our President and Chief Operating Officer, and Bob Branstetter, our Corporate Controller.

I would like to start by saying that Mike Dreller, our Chief Financial Officer, has taken a job elsewhere and we are in the process of recruiting a new CFO. We wish Mike well in his new endeavors and thank him for his service over the years.

During the call, we will review our 4th quarter results for fiscal 2003. Bob will start with the financial review and then David will review our operations. First Bob, you've got a standard disclose our.

BOB BRANSTETTER, CONTROLLER, FALCON PRODUCTS, INC.: Before we begin the presentation let me remind you, as in all presentations of this type, forward-looking information will be discussed. As you know, the actual results of operations may differ materially from those discussed here. Additional information concerning factors that could cause such a difference can be found in the company's periodic reports filed with the Securities and Exchange Commission.

FRANK JACOBS: Okay, guys, listen. I want to talk a few minutes before I have Bob start with the numbers. 2003 was a challenging year. We've taken control of our future through restructuring our operating platforms, cost reductions, and our new financing package. With that largely behind us, we are well positioned to move forward.

As we approached the decision to refinance our Tranche B facility, we felt it was important for people to understand the commitment that the board of directors had behind our plan. Prior to initiated discussions with potential financial institutions, insiders, primarily board members, including David and myself, put $4.2 million into the company in the form of convertible debentures. This was done by the people who know the company best as an indication of support for the direction we are going. In total, the restructured facility will provide us with increased liquidity and flexibility to effectively operate our business well into the future.

Okay, Bob. Turn it over to you.

BOB BRANSTETTER: Thanks, Frank, and good morning, everyone. I'll spend a few minutes reviewing our financial results for the 4th quarter of fiscal 2003. I will then turn it over to David Morley who will provide an update on our business.

Net sales for the quarter were $65.7 million compared with $75.8 million in the 4th quarter of 2002, a 13.4% decrease. Sales were impacted during the quarter by the successful completion of the Boston Market remodeling program, which was completed during the 1st quarter of this year. Excluding the sales decline related to Boston Market, net sales for the quarter decreased by 3.2%. Cost of sales was $58.6 million for the quarter and includes a charge of $5.5 million to write-down the carrying costs of inventory, compared with $58.2 million in the 4th quarter of 2002.

Gross margin for the quarter, including the inventory charge was $7.1 million, compared with $17.6 million in the 4th quarter of the prior year. The decrease in gross margin is due to the decline in volume and pricing, and product mixed pressures; limited primarily to the hospitality market, as well as the inventory charge. The companies continued cost reduction measures, partially offset these unfavorable effects.

Selling general and administrative expenses were $11.9 million during the quarter, compared with $11.7 million in the 4th quarter of 2002. As a percentage of sales, SG&A expenses were 18.1% in 2003, and 15.4% in 2002. Interest expense was $5 million in the 4th quarter of 2003, compared to $4.3 million in the 4th quarter of 2002.

During the 4th quarter, the company recorded a $2.6 million pretax restructuring charge related to its decision to consolidate its Canton, Mississippi manufacturing operations. The company will close the Canton facility and transfer production into the other plants by the end of February. The company expects that the savings associated with the closure of Canton will be approximately $4.4 million annually and will begin to accrue during the 2nd quarter of this year.

The company reported a net loss for the quarter of $16 million or $1.77 per diluted share, including the charges I have discussed. In addition, the company's 4th quarter results were negatively impacted by the recording of valuation allowance to reduce its deferred tax assets. That compares to a 4th quarter 2002 reported net earnings of $1.2 million or 13 cents per diluted share. Excluding the impact from the charges in the 4th quarter of 2003, the company would have reported a net loss for the quarter of $2.9 million or 32 cents per diluted share. The company's future net earnings will be favorably impacted by the reversal of the deferred tax valuation allowance as the company returns to profitability.

For fiscal 2003, the company reported a net loss of $22.5 million or $2.49 per diluted share including non recurring charges, compared with net earnings of $.7 million or 8 cents per diluted share including a non recurring gain in 2002. The 2003 results include charges related to the restructuring of the company's manufacturing facilities, the freezing of benefits under the company's defined benefit pension plan, the write-off of deferred debt issuing costs, the write-down of inventory costs, and the recording of the deferred tax allowance. These charges totaled $18.3 million or $2.02 per diluted share. Depreciation amortization charges for fiscal 2003 were $8.2 million and adjusted EBITDA for fiscal 2003 was $20.1 million.

I'd like to give you an update on the status of our Zacatecas, Mexico facility. The signed letter of intent expired and the potential buyer was not able to come up with the financing, so we are in the process of closing this facility. We will complete the closure over the next few weeks and don't expect the closure costs to exceed more than $.5 million dollars for the remainder of the year.

Now, I'd like to briefly discuss the company's new financing arrangements. As of the end of the year, the company was not in compliance with the financial covenants under its existing senior secured credit agreement and on January 15th, 2004, the company amended and restated the credit agreement. The new agreement provides the company with increased total availability at a reduced interest rate and, at the same time, we reset financial covenants as we move forward.

The new agreement essentially replaces the $35 million term loan B of our previous agreement with the new $50 million term loan B. The interest rate on the new term loan B is 15% total, with 6% cash interest and 9% fixed. This is reduced from 16.5% total interest of which 12% was cash and 4.5% was fixed under the previous agreement.

Also subsequent to the end of the fiscal year, during December 2003, the company sold $4.2 million of new junior subordinated, convertible debentures that are due in 2010. The convertible debentures were primarily sold to directors of the company and have provided the company with additional liquidity. The debentures are subordinated to the existing senior subordinated notes and carry interest at 12%.

Now, we'll turn it over to Dave Morley for some additional comments.

DAVE MORLEY, PRESIDENT, COO, DIRECTOR, FALCON PRODUCTS, INC.: Thanks, Bob. Good morning, everyone. I think almost everyone on the phone today would agree that 2003 was a tougher year than anyone expected. Our initial focus during the year was to drive down costs and capitalize on targeted market opportunities. We laid out an aggressive pathway to reduce costs, streamline our supply chain, and continue to improve responses to our customers. The fundamental change in our thinking was that we should only have fixed capital employed where we're adding unique value. We need to be able to source commodity products or components from the low cost sources anywhere in the world. This adds value to our customers and stockholders.

The first step was the redesign of the European wood frame supply chain. This allowed the faster delivery from Europe and reduced costs. This further allowed us to close the Zacatecas facility.

The second step was the reallocation of production from our Canton facility to [Morristown]. We largely completed these actions in the 1st quarter. Furthermore, we froze our pension plan.

These decisions drive future competitiveness and steadily increasing profitability over the last three quarters of 2004. The combined effect of these initiatives in 2004 will be an incremental 8 to $10 million in savings. In addition, going in 2003, we targeted education, Epic, and McDonald's to drive volume. As discussed in these calls, we also assumed a stable hospitality market that proved to be incorrect. We will discuss this more late, but we succeeded with education and Epic, while McDonald's got off to a slower start than they projected.

The next priority in 2003 became the creation of a new credit facility. As Bob discussed, this new facility will provide us with increased liquidity, at lower cost to operate our business in the current economic environment, and the capital to grow our business in the future. We ran a competitive process for our financing after the equity investment for insiders that Frank discussed. We had 6 firms interested in participating. We took three firms to full term sheets, post due diligence, and are pleased to be working with Oak Tree Capital in addition to Fleet Capital.

Now, I'm going to provide an update on our markets and the 4th quarter performance. The 4th quarter continued the trends earlier in the year. We had strength in the contract office market and food service market, and weakness continued in the hospitality market. Importantly, we performed with or ahead of the market in each case. We had very strong performance in food service during the quarter. Bob reported our sales increased by 11% during the quarter, excluding the impact from the earlier completion of Boston Market. The increase is a reflection of increased market share, particularly in the national account segment of the market.

All of the top QS -- or many of the top QSR brands have announced refurbishment programs. In fact, our McDonald's orders grew -- our non- McDonald's orders grew, in 2003, by over 20%. Just two weeks ago, McDonald's announced that they will re-image 15 to 1800 stores in 2004, compared to 700 stores in 2003. Their intent is to make the new stores points of destination. They said that their remodeling was largely done late in the year, but that the stores were providing, 'above market returns,' and they were expanding the project.

McDonald's has made a substantial turnaround recently. They're doing extensive marketing research to determine the drivers of the improvement across the three main variables of menu,...

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