Leon's Furniture Limited (LNF) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to our Annual Meeting for 2020. As most of you know, my name is Mark Leon, and I'm conducting this meeting as Chairman of the Corporation, and Mr. John Cooney will act as Secretary of this meeting. Before we carry on with the meeting, I'd like to acknowledge the executive team participating today. Mike Walsh, the President of Leon's Division; Dave Freeman, the President of our Brick Division; Costa Pefanis is our Chief Financial Officer; Edward Leon, our Chief Executive Officer and President of the Leon's Furniture Group; and Mr. Terrence Leon, our Vice Chairman. This management group has not only achieved record sales and profits in 2019 but is also working tirelessly to meet the challenges we currently face. The Board and our shareholders thank you all for your efforts. I'd like to offer a special thank you to Edward Leon, our CEO, because, as we know, the buck stops with our CEO. Terry, Eddy and I are Directors of the corporation. I'd also like to acknowledge the other directors of the corporation who are also present this afternoon, either in person or via the Internet: Mr. Peter Eby; Mr. Alan Lenczner; Ms. Mary Ann Leon; Mr. Frank Gagliano; Mr. Joseph Leon; and our Director nominee, the Honorable Lisa Raitt. The purpose of today's meeting is threefold: number one, to receive the corporation's financial statements for the year ended December 31, 2019; number two, to elect the directors for the ensuing year; and thirdly, to appoint the corporation's auditors. These matters are set out in the management information circular, access to or a copy of which has been provided to all shareholders. Before we get into the formal part of the meeting, I'd like to acknowledge the fact that our current longest-standing director will be retiring as a director after this meeting. Of course, I'm speaking about Mr. Peter Eby, who became a director of our company in 1977. Our fathers at the time chose very wisely when they ask Peter to sit on our Board. He is an individual who has brought wisdom, vision and common sense to the table. Peter is pragmatic, yet diplomatic and tactful. Our faith in Peter is such that for many years, he has served as Chairman of our Audit Committee. And I'd like to illustrate how much trust we do have it, Peter, by relaying to you this short story. Back in 2013, our company was presented with an opportunity to buy the Brick Warehouse. Needless to say, this was the most significant decision our company has ever considered. The risk reward for such a move was monumental. We had to borrow hundreds of millions of dollars and for the first time in our history, we went to significant debt. However, we had enough confidence in our experience and determination to move forward. We made our directors aware of our plans and ultimately, they give us their blessings. However, because the Leon family as a whole owns the majority control of our shares, we needed their blessings as well. So on a quiet Sunday afternoon, we call the family meeting in our boardroom. At that meeting, we're over 30 Leon family members who are about to be asked to give our management group their approval for this bold move to buy the Brick. There was one person at that meeting who had a different last name. And that person was Peter Eby. Peter was so highly respected by the family for his business acumen and experience. We thought the family would appreciate hearing his counsel. After hearing from management and from Peter, the family decided unanimously to forge ahead. Hopefully, this will give you some idea of how much we will miss Peter. So Peter, on behalf of more than 8,000 associates, our Board of Directors and the entire Leon family, we thank you from the bottom of our hearts for your dedication and service to this company and to our family. We wish you great happiness and good health for many more years. God bless you, Peter. And I'm wondering whether, Peter, you would like to say a few words to the meeting.

Well, thank you, Mark, for your kind comments. It's been a privilege to have been a Director of Leon's over these many years. From day 1, I have been impressed with the integrity and dedication of the executives of the company. And over the years, I have got to know many Leon's from many generations. But they all have same basic character features, and that's honesty, decency and hard work, that has clearly been nurtured in all of them. So it's been a pleasure for me, and I only wish you the best for every continued success in the future. Thanks.

Thank you so much, Peter. Before we move on, I'd also just like to mention, as I said, Peter was the Chairman of our Audit Committee for many years. And now Mary Ann Leon, who has served with Peter for many years on our Audit Committee, has been appointed the new Chair of the Committee. Mary Ann is more than qualified to fill this position. Besides her CA and her CPA designations, Mary Ann has more than 30 years' experience in corporate finance, public accounting and nonprofit sectors. We continue to appreciate Mary Ann's great service to this company, and we thank you, Mary Ann, for taking on this great responsibility. We're going to continue with the meeting. Over the last 111 years, the conditions in which Leon's Furniture has operated have always been changing. Yet, we have consistently managed to outperform our industry peers. With over 300 stores from coast to coast, we have unequal geographic presence in Canada. Yet, we still see an opportunity to grow our retail network through both expansion and acquisition. One of the attractions of combining Leon's and the Brick was a complementary footprint of their respective operations. The manner in which our anticipated synergies prove to be successful should not be understated. I can't state that strongly enough. Great credit must be given to the leadership of this company and all the associates in both divisions, Leon's and the Brick, for this noteworthy retail accomplishment. As you know, our retail stores have been dramatically affected by the current pandemic. However, parts of our operation are open for delivery or curbside pickup for our online sales. We do provide essential products and services to Canadians, including home appliances and mattresses. We are also Canada's largest service provider for home appliances. If a fridge breaks down or if a range stops working, we have technicians from coast to coast who will go to a customer's home and repair the product. Over the last 111 years, our company has been through World Wars, depressions, recessions, natural disasters and personal tragedies. Some how, some way, through the grace of God as well as the dedication and perseverance of generations of our company associates, we have not only survived, we have flourished to become one of the world's most successful home furnishing retailers. The hardest decision our company has ever made was to lay off so many of our associates as this worldwide pandemic took hold. In our long and storied history, we have never had to resort to massive layoffs. However, in this case, it truly was a matter of survival. To all of our associates who have been laid off, we want you to know we are doing whatever we possibly can to mitigate the hardships that this has caused to you and your families. We can only hope that as soon as these storm clouds begin to clear, you will be back, and we will together be stronger than ever. To all of our associates who are coming in every day to help us provide essential goods and services to people across our great country, we thank you from the bottom of our hearts. It is because of each and every one of you, unloading trucks, delivering products, processing bills, providing service and sales support. You are the reason we will survive. Years from now, you will be able to look back and say with great pride, I was there. I did my part to help this great company through the most challenging time in its history. At this time, I also think it's important to recognize the significant contributions made every day by other members of our organization. The owners and operators of Leon's and the Brick franchise stores across Canada continue to make our company proud. These entrepreneurs and their families have put their faith and trust in our corporation. They serve their customers in small towns and big cities with great professionalism. Our franchise divisions are battling through the challenges of this pandemic like the rest of us. As a corporation, we are side by side in the trenches with them, doing whatever possible to navigate successfully through these troubled times. We thank you and all your franchise associates for your continued efforts. Finally, no matter how many times it's been said and it can't be said enough to our frontline workers, who are first responders through all the volunteers, who have worked so tirelessly putting their health in jeopardy, our company is thankful. Indeed, the whole country is in your debt for providing the care, the concern and the compassion to the people we love who are so important in our lives. You're all heroes to your fellow citizens and your efforts will not be forgotten. We thank each and every one of you. Having said all this, we should not lose sight of the fact that last year broke all sales and profit records for our company. 2019 was a record year through and through. Once again, we managed to outperform most, if not all, of our industry peers. And we have done so by giving our customers the best combination of selection, service and value and by constantly embracing change and innovation. 2020 will provide all retailers with significant challenges. We are fortunate that our company had the vision to recognize the importance of online shopping early in the game. While other retailers were slow to react, we have been able to develop our e-commerce capability to near state-of-the-art levels. Our transition to Shopify Plus platform in 2018 continues to pay dividends through innovations we can bring to our customers. Now during this pandemic crisis, with restrictions on certain brick-and-mortar stores, we are well positioned to meet our customers' needs. What happens during this next year really is anyone's guess. What we will say is this, the 8,000 associates across this country and our management team are dedicated and determined. This company has the will to overcome. And if there is a way, we will find it. The next item of business is the appointment of scrutineers to report on the holders of shares enjoying voting rights at this meeting, whether in person or by proxy. As Chairman of this meeting, I appoint [ Serena Lang Coy ] as scrutineer of the meeting. The bylaws of our corporation provide that a quorum for a meeting of shareholders shall be no less than 2 shareholders in number holding or representing by proxy, not less than a majority of the issued shares of the corporation. The scrutineer advises me that there is a quorum present, and I propose to proceed with the business of the meeting. A complete report on the attendance will be presented before this meeting is closed. In the meantime, I declare that this meeting is regularly called and properly constituted for the transaction of business. The notice calling this meeting and the management information circular has been made available to all the shareholders of the corporation, and there has been filed with me by the secretary of the meeting, proof of service of the Notice of the Meeting. Accordingly, with the consent of the meeting, we will dispense with the reading of the Notice of the Meeting. While the scrutineer is preparing her report on attendance, I propose to proceed with the business of the meeting. The financial statements for the corporation as of December 31, 2019, together with the report of the auditors thereon, are included in the annual report and instructions to access these documents have been mailed to the shareholders with the Notice of the Meeting. In accordance with current corporate practice and the bylaws of the company, the directors have approved the financial statements, and therefore, the shareholders will not be asked for their approval. Therefore, I wish to announce the results for the first quarter ended March 31, 2020. In our first quarter of 2020, total system-wide sales were $598 million, which includes $497 million of corporate sales and $100 million of franchise sales compared to $597 million in the first quarter of 2019, which includes $499 million of corporate sales and $97 million of franchise sales. This is an increase of 0.2%. As a result of the above, adjusted net income for the first quarter of 2020 was $13,933,000 or $0.16 per common share compared to $9,400,000 million or $0.12 per common share in 2019, which represents an increase of 33.3%. Our 3-month statements are available under the Download Materials section of the webcast. As previously announced, we paid a quarterly $0.16 dividend on April 9, 2020. Today, we are announcing that the directors have declared a quarterly dividend of $0.12 per common share payable on the sixth day of July 2020 to shareholders of record at the close of business on the fifth day of June 2020. This represents a 25% reduction from our previous dividend. In light of the economic uncertainty that currently exists, the Board believes this to be the prudent course of action. Before our meeting concludes today, company management will be available to answer any questions you may have. We invite those watching the webcast to use the box at the bottom of the screen to submit questions. I will now call upon the scrutineer to report on attendance.

Mr. Chairman, I report that 12 shareholders are present at this meeting, and they hold [ 47,338,760 ] shares. I further report that the total number of shares represented by proxy at this meeting is [ 23,630,092 ] shares. Therefore, the total number of shares represented by shareholders present and by proxy is 71,142,472 shares.

Thank you, [ Serena ]. The scrutineer's report confirms that the requisite quorum of shareholders is present and that the meeting is properly constituted. I direct that the scrutineers' report on attendance be annexed to the minutes of the meeting. The next item of business is the election of 8 directors. Each director is to be elected to hold office until the next Annual Meeting of Shareholders or until his or her successor is elected or appointed. At this time, I'd like to introduce everyone to the Honorable Lisa Raitt. Lisa Raitt served in the House of Commons, representing Milton, Ontario from 2008 to 2019. Most recently, she served as Deputy Leader of the Official Opposition, the Conservative Party of Canada. While in government, Ms. Raitt served as Canada's Minister of Natural Resources, Minister of Labour and Minister of Transport and as part of the Official Opposition served as Finance Critic and Justice Critic. Prior to her election in the House of Commons, Lisa was the President and Chief Executive Officer of the Toronto Port Authority. She had previously served as the Toronto Port Authority's General Counsel and Harbourmaster. Lisa is a graduate of St. Francis Xavier University and holds a Masters of Science degree from the University of Guelph. She earned her law degree from Osgoode Hall Law School at York University and was a Harold G. Fox Scholar furthering her advocacy training in the U.K. Also recently, Lisa became the Vice Chair of Global Investment Banking for the Canadian Imperial Bank of Commerce. On top of all these accomplishments, Lisa brings with her common sense, determination and a sense of humor that's rooted in her East Coast upbringing. While growing up in Sydney, Nova Scotia, Lisa learned that setting high standards for herself and working hard to achieve them would allow her to accomplish any goals. Lisa is well aware of what it takes to be successful. Upon Lisa's election to our Board, she has also agreed to sit on our Audit Committee, along with our current member Frank Gagliano and our new Chair, Mary Ann Leon. The Board is very happy and excited to welcome Lisa to our family of directors, and we very much look forward to our membership on the Board. Lisa, if you'd like to say a few words.

Very shortly. Thank you very much, Mark, for that kind introduction. I'm absolutely delighted and honored to be asked to come on to the Board of Directors of one of Canada's most highly respected retailers who, for over 100 years, like Mr. Eby said, has been the epitome service of integrity and, of course, professionalism. So thank you very much. I look forward to helping the company be more successful than it even is today, and I want to contribute to their legacy over the next 100 years.

Sounds good to me, Lisa. Thank you so much for your participation, and we really do look forward to you sitting on the Board with us and sitting with our -- becoming part of our family, really. We look very much forward to it. So having said that, I'm now going to declare the meeting open for director nominations. Would someone please present his or her motion in that regard?

Mr. Chairman, my name is John Cooney, a shareholder, and I nominate Mark Joseph Leon; Terrence Thomas Leon; Edward Florian Leon; Alan John Lenczner; Mary Ann Leon; Frank Gagliano; Joseph Michael Leon II, and the Honorable Lisa Raitt, our election (sic) [ be elected ] as Directors of the corporations to serve until the next Annual Meeting of Shareholders or until their successors are elected or appointed.

Mr. Chairman, my name is Costa Pefanis, a shareholder, and I second the motion.

Thank you both very much. If there are no further nominations, I declare the nominations closed. The corporation has adopted a majority voting policy, which requires separate votes for each director. If a director nominee does not receive the support of a majority of the votes cast at a meeting of shareholders, the director will be expected to tender his or her resignation from the Board of Directors of the corporation following such meeting. It is now in order for someone to make and someone to second a motion electing each Director of the corporation.

Mr. Chairman, my name is John Cooney, a shareholder, and I move that each of Mark Joseph Leon; Terrence Thomas Leon; Edward Florian Leon; Alan John Lenczner; Mary Ann Leon; Frank Gagliano; Joseph Michael Leon II; and the Honorable Lisa Raitt be elected as a Director of the corporation to hold office until the next Annual Meeting of Shareholders or until his or her successor is elected or appointed.

Mr. Chairman, I second the motion.

Thank you both very much. Now we're going to -- we have to elect each one separately. So all in favor of the election of Mark Joseph Leon as a Director of the company, please raise your hand. [Voting]

Thank you. All in favor of the election of Terrence Thomas Leon as Director of the company, please raise your hand. [Voting]

Thank you. All in favor of the election of Edward Florian Leon as Director of the company, please raise your hand. [Voting]

Thank you. All in favor of the election of Alan John Lenczner as Director of the company, please raise your hand. [Voting]

Thank you. All in favor of the election of Mary Ann Leon as Director of the company, please raise your hand. [Voting]

Thank you. All in favor of the election of Frank Gagliano as Director of the company, please raise your hand. [Voting]

Thank you. All in favor of the election of Joseph Michael Leon as Director of the company, please raise your hand. [Voting]

Thank you. And lastly, all in favor of the election of the Honorable Lisa Raitt as a Director of our company, please raise your hand. [Voting]

Thank you. I declare that this motion carried and those nominated to have been elected as directors of the corporation for the meet -- ensuing year or until their successors are elected or appointed. The next item of business is the appointment of auditors for the current year. It is, therefore, now in order for a motion to be passed appointing auditors for the current year.

Mr. Chairman, my name is John Cooney, a shareholder, and I move that Ernst & Young be and they are hereby appointed auditors of the corporation to hold office until the next Annual Meeting of Shareholders at such remuneration as may be fixed by the directors and the directors be and they are hereby authorized to fix such remuneration.

Mr. Chairman, my name is Terry Leon, a shareholder, and I second the motion.

Thank you, both. I now put the motion to the meeting. All those in favor of the motion, please so signify. [Voting]

Thank you. Contrary, if any? [Voting]

Thank you. I declare that motion carried. At this point in the meeting, I'm going to open the floor to questions. And I would ask our Vice Chairman, Mr. Terry Leon, to review any questions that have been sent in and to either answer them himself or direct them to be answered by the appropriate person. So Terry, go ahead.

Thank you, Mr. Chairman. And just before I begin with the questions, I'd like to let everyone know about an exciting new website that's just put in -- been created and put in place under our Investor Relations. It's an Investor Relations website specifically for Investor Relations, and you can access it through your e-commerce sites or other websites through our various trade names. The easiest way to get there is through lflgroup.ca or under the Investor Relations heading for any of our trade names that are throughout the website. It's a brand new and exciting site. I think all of our investors will love seeing it, and it's not only for information purposes, but it's also got interactive qualities as well. So we look forward to you using it and enjoying it and bringing a lot more information to you much more quickly than in the past. And now I'll begin with the questions, Mr. Chairman.

And the first question which I think I will direct towards Eddy Leon is as more people work from home, a trend which is most likely to continue, you see an increase in demand for office-style furniture. Is there more Leon's can do to be better positioned to take advantage of this trend?

I would believe so because it hasn't been a huge category for us. We've always been in it. We've always shown a selection of products, but now that we've introduced a new feature on our sites, which is an expanded assortment, that involves showcasing product that we don't necessarily have available in our own warehouse. We're able to expand our offerings really exponentially in almost every category. So that will definitely be one of them that we look at.

Thank you, Eddy. Next question, I will direct to Costa, our CFO. Do you believe that Leon's capital structure, cash and equivalents less liabilities is sufficient for the company to successfully navigate the current economic stress?

Well, thanks for the question. I believe that as everyone will see in our press release for the first quarter and the MD&A, we spelled out in significant detail that the company's unrestricted liability of close to $300 million that the company can draw upon that we haven't drawn upon to date is available for us under very favorable terms, both from cash and investments as well as a revolver of $175 million. In addition to that, given the fact that we've always conservatively managed our business, our balance sheet also at historical cost records our land and building, which is unencumbered, yet represents a significant value and security for us to further utilize in the future if we choose to.

Thank you, Costa. This next question, I'll take myself. There are potentially many weak competitors. Do you believe that this will lead to structural changes in the industry and create opportunity for Leon's? If so, how? Yes. So we do think it will lead to opportunities for the company. There have been changes taking place over the course of the last several years in any event, a lot of the small competitors have gone by the wayside. As you know, our industry is very fractured and is made up for the most part by a lot of small independents. And this pandemic and economic difficulty is probably going to make it more difficult for them to continue even though it's been that way to a certain extent for the last several years. So not only in our industry, but in several industries throughout the economy, you're going to probably see some changes, some lessening of small independents, which will give those who -- companies that are in a strong capital position, as Costa has just indicated, we are, the opportunity to grow maybe more quickly than we would have in the past. And not only some of the small independents, but some of the larger medium-sized companies, we also be under a little bit of stress. So what will probably happen is that this process will speed up what was already in the works and will allow us to look at several opportunities down the road once this immediate crisis passed. The next question goes to Costa again. The debt securities, what is the average duration type of debt? Who is managing the debt and do they have specific criteria as to what can or can't be bought? Costa?

Thanks for the question again. Going back to the way that we manage our balance sheet from a conservative nature, the professional portfolio managers that manage our capital, specifically in this case, our investments in debt, are given guidelines in terms of the amount or the types of credit risk that they're able to take on. Specifically, that represents credit qualities that are, A, A-, traditionally government bonds, corporates that have investment-grade ratings and over durations that allow us to be flexible in terms of taking advantage of or protecting ourselves against various changes in the interest rate environment.

Thank you, Costa. I'm going to -- I'll refer this question to both Mike Walsh and Dave Freeman. And maybe Mike, you can go first, followed by Dave. What is each brand doing to support their respective franchise division?

We'll work closely with our franchise division, supporting them, whether it's from competition open up in their local market to helping them find ways to reduce the cost on furniture and mattresses. And really work closely to -- we have an Executive Committee that we have a conference call with once a month to make sure that we're meeting their needs, and we really have a good following with them in an open relationship.

Great. Thanks for the question. Primarily, the Brick from a financial perspective, we've been able to leverage longer term for some of them where required and really brought them on board in terms of everything that was available from a government perspective to make sure whether it was small loans or support for their staff. And then, of course, for their workers helping to leverage their benefit programs through our larger buying system here to make sure that they felt support the entire time.

Thank you, Dave. This next question, I think I'm going to pass to Eddy again. How do you think about your fast-growing e-commerce business? Do you think it will be additive to your large store base or cannibalize it?

That's the million-dollar question that's been already been asked by a number of analysts what have you. We believe that, obviously, we're going to enjoy a much higher percentage of Internet sales a post-COVID to what it was pre-COVID. But having said that, because of the 500% increase that we've been experiencing, I think, again, realistic to expect that to continue once we open our doors again. So there will be a rebalancing, of course, back to the traditional way of shopping. And we're hoping that we can still continue to grow our business through our bricks and mortars, while actually increasing the rate of growth on the e-commerce side by virtue of the fact that people who haven't had access or know about us are getting to know about us through that channel. I think they're liking what they see. And I think it will continue to grow on its own. So very excited actually on both fronts.

And one further question in the same area, Eddy, on average, what percentage of sales are from online versus in-store?

Well, again, the situation post-COVID is dramatically different from what it was pre. Pre-COVID industry averages are around 5% in our industry. And post-COVID, they're hovering up around 40% to 50% of sales by virtue of the fact that in many cases, that's the only availability that consumers have to our goods and services.

And one final question for you again, Eddy. Please provide an update on what plans Leon's has with our large amount of owned real estate.

Well, we're constantly working through the long timely process of having the appropriate zoning and government support around being able to turn some of this nonproductive property into something that we would be very happy as a return. And that can involve all kinds of things. I mean we have various sites around the country that are in different stages that we'll be able to monetize sooner than others. But the overall intent, we have someone that specifically works on that area of the business. It's a full-time commitment of looking at the best opportunities, how to prioritize their time and money around getting them from the densities that they be at now to a much higher intensification.

Thank you, Eddy. Mr. Chairman, I will pass it back to you.

Thank you very much, Terry, and thank all our participants for your answers to those questions. Much appreciated. Before I make a motion to terminate the meeting, I think it's important. I'd just like to emphasize again the extreme satisfaction that our company has and our Board has in the efforts of our management team and all our associates, Mike and the Leon's division and Dave and the Brick division, and all the associates that make up both companies have worked extremely hard and extremely smart to get us to this position. This past quarter is much better than personally I anticipated. And I think that's totally due to the dedication and perseverance and hard work of all our people, right, from Mike and Dave, down to our supervisory staff, down to home office staff. Everybody -- when I say 8,000 associates, it's a team effort. It really is a team effort. I congratulate both divisions and please pass on my congratulations to all your people. Tell them how proud we are of everyone. It's very important. The other thing I want to mention is the Internet sales, the online sales have been astounding. And the reason for that, as Lisa alluded to it, is our company has been in business for over 110 years. People trust us. People know that we have integrity. When you buy online, you'd like to think that you're buying from someone you can trust. And now that we've provided the customers with a platform that is easy to get through, that's actually fun to look at our product, get spend remarkable. What's happened to our Internet sales? And the fact that our company had the vision and our people have the vision to put these systems and procedures in place to allow us to capitalize on this very tragic situation is remarkable. Again, all credit goes to the leadership of our company. The Internet sales, like Eddy alluded to, are a significant portion of our overall sales right now. And I'm sure that, as time goes on, we will get stronger and stronger in our online sales. And we have the systems and we have the facilities, and we have the people to ensure that, that continues. But I wanted to make sure that everybody understood that. And again, I just welcome Lisa as our new Board member, I welcome Mary Ann as our new Chair of the Audit Committee. I once again thank Peter for his many, many years of dedication and service. We're going to miss Peter terribly. And I thank everybody that's participated in this meeting. And having said that, I'm going to ask for a motion to terminate this meeting. I can't hear you, John. I see you, but I can't hear you.

You're on mute, John.

Mr. Chairman, I move that we terminate the meeting.

I second that motion.

All in favor? [Voting]

Any opposed? [Voting]

Carried. Once again, we thank you all for your participation. Hopefully, next year at this time, this pandemic will be a painful memory and the world will be back to some sense of normalcy. We look forward to seeing our shareholders live and in person at our next annual meeting. Stay safe and stay healthy. Thank you all again, and good day.