Q1 2005 The Rowe Companies Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen. And welcome to the quarter 1 2005 Rowe Companies earnings conference call. My name is Liz, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to your host for today's call, Mr. Gene Morphis, Chief Financial Officer. Please go ahead, sir.

GENE MORPHIS, CFO, THE ROWE COMPANIES: Thank you, Liz. Good morning everyone. Thank you for joining our first fiscal quarter conference call. With us here today are Gerry Birnbach, our Chairman, and Tom Reid, our Director of Financial Reporting. I'll go through the numbers on the first quarter, then turn it over to Gerry for his comments and for your questions. But first I'll refer you to our comments on forward-looking statements which were included in our earnings release.

Further, as discussed in our 8-K filing on Monday, our previously issued financial statements included in the Company's fiscal 2004 annual report on Form 10-K and in our quarterly reports on form 10-Q filed during fiscal 2004, as well as the related reports of our independent registered public accounting firm should not be relied upon, as a result of our revision to our accounting for lease transactions as a result of the recent views expressed by the office of the Chief Accountant of the SEC. As soon as practical, we will file an amended 10-K to reflect these changes.

Now for the first quarter. As we presented in our release, sales were 65.7 million compared to the prior year quarter's net shipments of 70.4 million. Gross margin was 20.5 million, which was below the prior year quarter, quarters result of 24.8 million. While gross profit margin for the quarter was 34.1% compared to 35.2 for the same period last year.

Manufacturing costs increased due to several factors. The most important being difficulty in maintaining full daily production due to ongoing problems with both the use of technology and the physical flow of certain raw materials. Sales and administrative expenses for the quarter were 25 million 322, compared to 23 million 858 in the prior year quarter, principally due to higher retail warehouse, retail delivery and occupancy expenses associated with new store growth and increased selling expense in both manufacturing and retail operations. Interest expense for the quarter declined to 522,000 from 711,000, in the prior year period, principally as a result of the exploration of an interest rate swap agreement. Other income of 786,000 also included a benefit from settlement of litigation of $680,000.

Net loss from continuing operations for the first quarter totalled 2 million 903, or $0.22 per diluted share, compared to a profit in the prior year period of 180,000 or $0.01 per diluted share. As also announced earlier during the quarter, we completed the sale of one of our two investment properties previously included in discontinued operations. The Company reported a gain on disposition of 2 million 683, or $0.20 per share. Net loss for the quarter including the results of discontinued operations and a gain on disposition of investment property was 149,000 or $0.01 per share, compared to net earnings in the prior year of 72,000 or $0.01 per share.

Some miscellaneous balance sheet comments. Our capital spending was just at 2.5 million, which reflected what we think was probably a record number of store openings for us in the first quarter in our Storehouse group, and days sales outstanding in accounts receivable were 44 days, and inventory increased about 3.6 million over year-end, as we improved our in-stock position in both Rowe Furniture and in Storehouse.

I'll now turn it over to Gerry for his comments, and then we will answer your questions.

GERRY BIRNBACH, CHAIRMAN OF THE BOARD & PRESIDENT, THE ROWE COMPANIES: Let me give you an update on our manufacturing difficulties. As you know, we've always been a long term fundamental view of our opportunities and business strategy. It was this view that led us to replace our legacy technology with a new integrated platform.

At the same time, we changed our production flow process to take advantage of some new system capabilities. This combination of system and manufacturing process changes has proven to be much more difficult than we planned. We've recently seen some performance gains, and we have discovered some software programs that we weren't using effectively. These changes should produce positive results in the next few weeks.

However, you know that I'm really basically very conservative, so I'm not going to tell you that this is better until we have a solid, consistent performance improvement. I must emphasize that the decrease in Rowe Furniture shipments during the quarter was not due to weak or bad business, although retail business is difficult. Our manufacturing backlog increased during the quarter to an all-time record. In fact, at the end of this month, it's up 115% over a year ago. Our production problems also adversely affected Storehouse deliveries. Our Storehouse written business for the quarter was quite strong with a 4.4% increase. And in the month of March, it's running about 12% ahead. But Storehouse open orders increased because I also anticipate, that a good portion of those Storehouse open orders will be fulfilled this quarter, as increased Rowe Furniture production allows us to catch up with the demand.

Some of you may have noticed Rowe Furniture was selected to manufacture for Jonathan Avila. Jonathan is a well-known home furnishings and interior designer with a loyal following. We introduced the new Jonathan Avila products in a special launch earlier this month in …