Q2 2022 La-Z-Boy Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the La Z Boy fiscal 2022 second quarter Conference call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Kathy Liebmann ma'am the floor is yours.
Thank you, Matt and good morning, everyone. Thank you for joining us to discuss our fiscal 2022 second quarter results with US. This morning are Melinda Whittington, <unk>, President and Chief Executive Officer and Bob.
[music] Chief Financial Officer.
Linda will open and close the call and Bob will speak to segment performance and the financials Midway through we'll 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 problem.
This should be available for one week beginning this afternoon.
Before we begin the presentation I'd like to remind you that some statements made in today's call include forward looking.
About <unk> future performance and other matters, although we believe these statements to be reasonable our actual results could differ materially.
The most significant risk factors that could affect our future results are described in our annual report on Form 10-K, we encourage you to review those risk factors as well as other key information detailed in our SEC filings.
Also our earnings release is available under the news and events tab.
On the Investor Relations page of our website and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slide deck.
That I would like to now turn over the call to Melinda Whittington, <unk>, President and Chief Executive Officer.
Yeah.
Thanks, Kathy and good morning, everyone.
Yesterday afternoon, following the close of market, we reported our fiscal 'twenty two second quarter results delivering very strong sales growth as well as solid margin progress since Q1.
We are delivering on plan and controlling the.
Controllable even in these times of significant widespread global supply chain disruption.
Across the lazy Boy Enterprise, we delivered all time record high sales of $576 million with sales, 29% ahead of the pre pandemic fiscal 'twenty.
This quarter, our business is much larger today than pre pandemic.
And we believe our momentum is sustainable we are poised to grow on this base of nearly $2 $1 billion in trailing 12 month sales.
Also as expected operating margins improved sequentially as.
Our delivered sales for the quarter reflected pricing and surcharges actions taken to offset unprecedented rising raw material costs.
All in all we are pleased with the momentum and growth we are experiencing during these challenging times.
Looking forward demand continues to be strong.
Across the enterprise and our backlog remains at all time highs, even as we continue to increase capacity to service our customers and consumers.
During Q2 of last year businesses were just reopening and consumers are resuming furniture purchases at the time.
Written same store sales for the lazy boy furniture galleries network were unusually strong up 34%.
Off that base written same store sales for the lazy boy furniture galleries network decreased 6% in fiscal 'twenty two second quarter.
However, comparing this.
Quarter to the pre pandemic fiscal 'twenty second quarter written same store sales for the lazy boy furniture galleries network increased an impressive 26% for a compounded annual growth rate of 12% across the two years.
Similarly, while written same store sales for our company owned retail.
Segment decreased 7% versus the unusual prior year period.
Written sales increased at a compounded annual growth rate of 12% across the last two years.
For Joy Bird, primarily an e-commerce business.
It continued its strong growth trajectory.
Accelerating to rate, 56% more business. This Q2 than in last year's second quarter, and delivering an extremely impressive compounded annual growth rate of 40% across the last two years.
As we focus on addressing the strong ongoing demand in accumulated backlogs.
We continue to make strategic investments to increase capacity and improve capabilities and are producing more units than ever to service customers.
We're continuing to add manufacturing cells, and now employ almost 40% more manufacturing personnel than pre pandemic.
<unk> in Mexico additional cells are coming online at our <unk> facility and the first sales at our new <unk> plants are expected to begin operations in January with that location of fully operational by fiscal year end.
And we continue to work to minimize supply chain.
Questions from those associated with lack of component parts, such as electronic chips to those inherent in hiring and training new workers until they reach normal productivity levels.
As we mentioned last quarter, where possible our procurement team is significantly increasing inventory for key components to minimize.
Disrupts disruption, while also working to diversify our supply chain with multiple sources in various geographies to protect against continued supply chain volatility.
In addition, early in Q3, we acquired the <unk> upholstery manufacturing business in the UK.
Minimized.
<unk> has been manufacturing lazy boy product for sale in the UK and Ireland. Since 2008. This expansion of in house manufacturing capability will provide greater certainty of supply to our customers in the UK and is a key step in building an integrated supply.
Hey chain network for Lazy Boy International.
Also during the quarter, we continued to return value to shareholders with a dividend payment and $15 million in share repurchases, bringing our total cash returned to shareholders in the first half of the year to $64 million across dividends.
And share repurchase.
And finally, we were pleased to announce last month the expansion of our board of directors to 12 members with the addition of Erica Alexander who serves as the Chief Global Officer Global operations for Marriott International Eric.
Erica has held various leadership roles.
And several of Marriott's largest brands and will bring a wealth of operational experience perspective and expertise to lazy boy.
Importantly, as we manage the current operational challenges across the business. We're also addressing the long term with our work on century.
Vision, our winning strategy for growth through our centennial anniversary in 2027 and beyond.
As I noted last quarter century vision includes three key pillars.
The first is to leverage and reinvigorate the lazy boy brand.
This includes leveraging the lazy boy comfort.
Message a renewed focus on aging down the core consumer and accelerating our omnichannel offering.
To date.
Marketing platform featuring Kristen Bell.
Excuse me has been successful in driving brand recognition, including young.
Including among younger consumers.
To say the lazy boy brand is relevant to them.
Our objective is to build on this sentiment and last month, we produced a new series of commercials that showcase how lazy boys range of products meet our consumers' needs.
At the same time throughout the course of century vision, we will expand the.
Vibrant lazy boy furniture galleries store base to approximately 400 locations across North America.
And we will strengthen the entire network through Remodels and relocations with some 30 projects on tap for this fiscal year.
While the purchase journey may start digitally our consumer's.
Like to visit our stores to shop, providing us with a great opportunity to deliver the flagship lazy boy furniture galleries store experience.
Most importantly, our goal is to connect with consumers along their purchase journey through multiple means whether that's online or in person.
With.
With respect to company owned stores, we've become very successful running our retail business, where we benefit from the integrated wholesale retail margin.
We continue to acquire independent La Z boy furniture galleries stores to round out our portfolio, where it makes sense for us and the dealer.
We recently signed.
Agreement to purchase five stores in the Alabama, and Tennessee markets from a retiring dealer that will be accretive as we quickly and seamlessly integrate them into our portfolio. When we close the transaction later in the third quarter.
The second pillar century vision relates to Joy bird.
And where we have a sustainably profitable direct to consumer model and exciting and relevant brand with significant potential we are fueling joy bird to drive disproportionate profitable growth through an increase in digital marketing spend to drive awareness and customer acquisition.
Ongoing investments in technology.
An expansion of product assortment and additional small format urban stores in high traffic areas. We're excited to open a new store in La this month and have an additional stores slated to open by the end of the fiscal year.
In markets, where we have joined bird small format stores we.
We consistently see a geo lift in the online sales demonstrating the appeal of an omnichannel model across all brands and retail formats.
We also recently opened a virtual store at <unk> La headquarters for online shoppers to chat call and video conference into <unk>.
<unk> added retail environment, which has proven to be very successful both in terms of consumer satisfaction and closing sales.
And the third pillar of century vision is to leverage and enhance our enterprise capabilities to support the growth of our consumer brands as well as enable the potential for tack on.
Dedications that can benefit from our supply chain expertise and accelerate the lazy boy incorporated growth story.
Strengthening digital capabilities across the entire lazy boy enterprise and improving the agility of our supply chain. So that it can more broadly support all our customer brands will be key focus.
Areas moving forward.
All in as we execute century vision, we expect to grow the top line higher than industry averages and delivered double digit operating margins. We are proud of our near term results and excited for our future.
Now, let me turn the call over to Bob to review the results.
<unk> was in the quarter.
Thank you Melinda and good morning, everyone.
As a reminder, we present our results on both a GAAP and non-GAAP basis.
We believe the non-GAAP presentation, better reflects underlying trends and performance of the business.
Our fiscal 'twenty, two second quarter non-GAAP results.
<unk>, excluding <unk> <unk> per share charge related to purchase accounting for acquisitions in prior periods and a <unk> <unk> per share gain related to our business realignment, primarily due to a sale and leaseback of our facility, which are detailed in our press release and in the <unk>.
Tables in the appendix section of our conference call slides.
On.
So elevated basis fiscal 'twenty, two second quarter sales increased 25% to a record $576 million versus the prior year quarter and increased sequentially from the fiscal 'twenty, two first quarter, reflecting continued strong demand and ongoing capacity increases as well as the effects of pricing and surcharges.
<unk>.
Compared with the pre pandemic fiscal 'twenty second quarter sales were 29% higher for a compounded annual growth rate of about 14% over the last two years.
Consolidated GAAP operating income increased $54 million versus the prior year period and non-GAAP operating.
<unk> income increased to $52 million.
Consolidated GAAP operating margin was nine 4% and non-GAAP operating margin was 9% up sequentially from the first quarter.
GAAP diluted EPS was <unk> 89.
The fiscal 'twenty, two second quarter versus.
Versus 75 in the prior year quarter.
Non-GAAP diluted EPS was <unk> 85 in the current year quarter versus ADT and last year's quarter.
My comments from here will focus on our non-GAAP reporting unless specifically stated otherwise.
I will now review our results.
By segment.
Demand for product across all businesses remained strong.
Starting with our wholesale segment delivered sales for the quarter grew 28% to $439 million compared with the prior year period and increased 12% sequentially from Q1.
Compared with the prepay.
In fiscal 'twenty second quarter sales were 25% higher for a compounded annual growth rate of 12%.
Non-GAAP operating margin for the wholesale segment was nine 1% versus 12, 2% in last year's second quarter.
Primarily reflecting higher raw material and freight costs.
Startup costs for new facilities and labor challenges.
Partially offset by pricing and surcharges.
Fixed cost leverage on higher volume and lower marketing spend as a percentage of sales.
All in we were pleased with the results and the progress made sequentially from the first quarter operating margin of four 7%.
Pandemic.
Turning to the retail segment.
For the quarter delivered sales increased 19% to $192 million.
Delivered same store sales increased 17% versus a year ago quarter.
Compared with a pre pandemic fiscal 'twenty second quarter delivered sales increased.
<unk> percent for a compounded annual growth rate of 14% again, demonstrating the strength of the lazy boy brand and our furniture Gallery store system in this environment as well as ongoing strong execution at the store level with sales metrics positive across the board.
Non-GAAP operating margin increased to a second quarter record.
A record of 12, 5% versus nine 4% in the prior year quarter, driven primarily by fixed cost leverage on the higher delivered sales volume as well as expense management.
Sales for <unk>, which are reported in corporate and other increased 37% to $40 million versus the prior year.
Quarter.
On a two year basis compared with the pre pandemic fiscal 'twenty second quarter delivered sales increased an impressive 93% for a compounded annual growth rate of 39%.
Reflecting the momentum <unk> building and the direct to consumer marketplace as we continue to acquire customers and strengthened.
Brand awareness through new digital marketing channels.
For the quarter <unk> increased both its web and in store traffic conversion and average ticket.
<unk> is sustaining profitability and with a focus on accelerating disproportionate growth. We will continue to invest in joy bird marketing to drive broader brand.
Awareness and customer acquisition.
Putting all of this together consolidated non-GAAP gross margin for the entire company for the fiscal 'twenty, two second quarter decreased 500 basis points versus the prior year quarter, primarily driven by significant increases in raw material and freight costs start up costs associated.
Expansion of our manufacturing capacity and labor challenges in our wholesale businesses.
These items were partially offset by pricing and surcharges in our wholesale business.
<unk> non-GAAP SG&A as a percentage of sales for the quarter decreased 280 basis points primarily reflect.
With fixed cost leverage on the higher sales volume, mainly in our retail segment as well as lower marketing spend as a percentage of sales.
Our effective tax rate on a GAAP basis for the fiscal 'twenty two second quarter was 26, 6% versus 26% in the second quarter of fiscal 'twenty one.
<unk>, our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes.
We expect our effective tax rate for the full fiscal 'twenty two year to be between 25, five and 26, 5%.
Yes.
Turning to cash.
Year to date, we generated $15 million.
And cash from operating activities.
We ended the period with $297 million in cash and no debt and held $31 million in investments to enhance returns on cash.
Year to date, we invested $59 million and higher inventory levels to protect against supply chain disruptions and.
To support increased production and delivered sales.
We also spent $33 million in capital year to date, primarily related to improvements to our retail stores plant upgrades at our manufacturing and distribution facilities.
New upholstery manufacturing capacity in Mexico and technology upgrades.
As a note.
Last month, we entered into a new five year $200 million unsecured revolving credit facility, which replaced our $150 million ABL facility.
The new facility has a $100 million accordion feature, allowing us to expand our borrowing capacity to support future growth.
It also provides the option to request.
To extend the term beyond five years for two additional periods of one year each.
Borrowings under the facility may be used for general corporate purposes, and working capital.
As of today, we have no borrowing against the facility.
Regarding cash returned to shareholders during.
During the quarter we.
We continued to buy back shares spending $15 million repurchasing more than 400000 shares of stock in the open market.
Leaving $8 6 million shares and our existing authorized share repurchase program.
Year to date, we have returned $51 million to shareholders via share repurchase.
We also paid $6 6 million.
And dividends to shareholders in the second quarter.
And subsequent to quarter end, demonstrating its confidence in the company's long term growth prospects. The board of directors increased the regular quarterly dividend by 10% to $16.05 per share.
As we look to the future from a capital allocation.
Some perspective over the long term, we will target to invest roughly half of operating cash flow back into the business via Capex and M&A and return the remainder to shareholders via dividends and share repurchases.
Before turning the call back to Melinda, Let me highlight several important items for the remainder of fiscal 2022.
<unk>.
As noted demand trends were strong across the business and remains significantly higher than pre pandemic levels.
With a high backlog and plans for our continued increase in capacity as new assembly cells come online we.
We expect a strong year of shipments.
Accordingly, we expect a continued increase in production.
<unk>, particularly in Q4.
Raw material and freight costs remain high and global supply chain disruptions continue.
Industry experts predict it will take multiple quarters before we see resolution of the west coast shipping backups.
Electronic chip shortages continue which impact.
Production power furniture.
Across multiple areas, we expect to face continued supply chain disruptions with respect to having all component parts available to finished units and complete orders, particularly for our company owned retail segment, which tends to disproportionately sell our higher end products.
Given the COVID-19 related shutdown in Vietnam.
We expect our case goods business to experience a significant temporary decline in sales and margin in the third quarter, reflecting a delay in shipments as manufacturing facilities restart there and product gets on the water.
Finally, we will continue to monitor the escalating free environment to determine if further.
Further pricing action as needed.
Pulling all this together we are actively managing supply inputs and recognize that we will likely continue to experience uncertainty and disruption for the foreseeable future, particularly in the third quarter.
Quarterly trends will also be impacted by our third and fourth quarters containing 12.
<unk> in 2014 production weeks, respectively compared to 13 production weeks in our second quarter.
Recall fiscal 2022 will include 53 weeks of results.
Taking all of these factors into consideration, we expect sales and margin in Q3 to be similar to Q2.
And expect sales and margin to accelerate in the fourth quarter to enable consolidated lazy board of results to finish the fiscal year with a full year non-GAAP operating margin at or near double digits.
Finally, as we make investments in the business to strengthen the company for the future.
Including work related to our central vision strategy.
We expect capital expenditures to be in the range of $75 to $85 million for fiscal 'twenty two.
Spending will support updating our lazy boy furniture galleries stores updates to our plants and distribution facilities and Neosho, Missouri.
New upholstery manufacturing capacity.
New Mexico and investments in technology solutions across the organization.
And now I will turn the call back to Melinda.
Thanks, Bob.
I'm extremely proud of our organization and our business partners for delivering these strong results in very challenging times.
The team is doing a great job navigating the uncertain environment and is setting us up for strong business growth as we move forward both in the near term and as we execute our century vision.
The best is yet to come for La Z boy and quite frankly, as we deliver profitable growth and long term value.
All stakeholder.
They call it.
We thank you for your time this morning, and I'll turn the call back to capital.
Thank you Melinda will begin the question and answer period now Matt. Please review the instructions for getting into the queue to ask questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments.
Please press star one on your phone at this time, we do ask the while posting a question. Please pickup your handset if you're listing on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Our first question is coming from Bobby Griffin from Raymond James Your line is live.
Good morning.
Thank you for taking my questions good morning, Bobby.
I guess first I wanted to just touch on maybe the last comments about the guide and what kind of intertwined with what's going on in Vietnam.
It looks like if you kind of do deliveries per week of production being similar in <unk> sales would imply.
The production the weekly delivery stepping up a little bit sequentially. So maybe you can just talk about that site line and the confidence in being able to get the weekly.
Revenue per week of production to step up a little bit sequentially, and then update us on what is going on there in Vietnam understanding different capacity challenges with Covid.
Shutdowns, but is it opening backlog now in good confidence in what's going on there and all around them.
Thanks, Bobby.
On the sequential growth of our business on a production week basis, we continue to bring online new cells in our Mexico facilities and continue to work on increasing production.
Our U S plants.
And despite only having 12 weeks of production in Q3, our expectation is we'll be able to get out the same.
Out of sales and that's how we that's how we've been planning and we've been working against and that's why we're providing that.
Those comments.
The Vietnam piece is one.
<unk>.
We've been watching very very closely it's been down since sometime in July it is now starting to come up.
Our biggest challenge is the fact that everything that we had ordered from them in July is all pretty much gotten.
We received that and were now shipping that out it's going to take a while to fill up that supply chain.
<unk> start getting product on the water coming over here and that's why during Q3, we expect to see some some some pressure on the case goods business and on our overall business as it relates to.
Paying for that product paying for the freight before it comes over and not being able to actually realize the sales.
Until the later later in the quarter.
Quarter and into Q4.
Okay, and then Bob to that point I mean, do you find that customers mostly.
Case goods products using people are ordering a combination of products.
Are you able to just subset in.
Certain products and we delivered 10 weeks that products are going to be delivered in 16 weeks, because theres that lull in getting.
Getting the case gets over from Vietnam.
It's getting handled with the customer.
It's certainly about communication we also.
Sure.
Did a pretty good job of getting ahead of some of this as things were starting to shut down again investing in some inventory. So we've been able to maybe stave off.
Some of that.
Some of that law, knowing that things were shutting down and be able to provide product a little bit longer than maybe some businesses have been able to.
And then get ahead of being able to restart that chain as quickly as possible and as you said communicate on timeline so that people.
Our goal.
Maybe in these crazy times, you can deliver as quickly as you'd like but you can at least communicate to let the realities are and deliver on this.
Okay and then my second question is kind of on the comments on cash flow generation and 50% back into the business and 50% to the shareholders clearly investments in.
Inventory and then the Covid benefit last year.
Impacted the current trailing cash flow from operations, but if we go back before that when we think about some of the working capital metrics of Lazy boy are those working capital metrics still the right range to use when we think about getting back out into a normal environment. So we look at what.
Business historically kind of generates on the balance sheet from a cash flow perspective, and that's like a good proxy to take forward. When you think about your 50 50 split.
And distribution of cash flow.
Alright, yes, probably they are absolutely.
Don.
<unk> will be okay. So when does that go back to that or Bob because.
Thats really a function of what happens with the economy, what happens with consumer demand and those types of things, but yes.
Time, we will revert back to what you saw before.
Okay, yes, it wasn't going to make you predict when normalized quite yet Bob.
Don't worry I wasn't going to try.
Try to.
Yes.
And then below that you referenced the acquisition in the UK just maybe any quick comments on the current acquisition environment, either for independent galleries or bolt ons like like that UK acquisition.
Yes.
So speak to a couple of things the UK acquisition doesn't matter.
That had been a long term supplier for our for our business and it became available and was a great opportunity for us to really shore up.
Sure up our supply for international for a meaningful piece of our international business.
And we believe there'll be some synergies for that over time.
<unk> also always.
About opportunistically when.
If and when dealers are interested in selling.
Their businesses and.
If they fit in well to our portfolio, we would look at those and so we just announced it won't close till Q3, but we just announced the stores of Alabama and one.
Let's see.
So that investment will go there and then we continue to look for to your 0.1 of the opportunistic items, but.
The non furniture gallery opportunistic, we'll be more spread out and probably longer term as we continue to work on our own capabilities and be ready to make the most out of anything we do.
Thank you so much for answering my questions and best of luck here in the remainder of the calendar year.
Thanks, Bob I appreciate your time.
Thank you. Your next question is coming from Brad Thomas from Keybanc Capital markets. Your line is live.
Hi, good morning.
Hey, Bob and Kathy and congrats.
And results here.
I wanted to absolutely.
Thanks.
I wanted to ask a little bit more about the cadence of the written business.
And obviously when you look at the comparison and the cadence of the business on a two year basis on a three year basis.
It really.
They stand out that this is particularly tough comparisons for you here.
Did accelerate on a two and three year basis, but I guess I was hoping.
To see if there was any more color you can give us around.
If perhaps there had been some pull forward of orders into the prior quarter due to price increases or any changes in how promotional you are.
Or being because there is limited inventory just how we should think about.
What the run rate as of sort of the underlying demand here and then what levers going forward you may be pulling to keep pushing demand and capitalizing on the environment.
Yes, I'll start and then Bob.
I can certainly add in.
I think it's.
<unk> play or is there anything particularly unusual.
In the quarter no I think overall in the.
Demand the level at which we're writing continues to be incredibly strong.
Certainly versus versus pre pandemic levels.
The one thing that that.
Trying to think about comparisons if you go back to the base period, a year ago, because we were more or less shut down and a lot of our retailers were more or less shut down for that Q1, and really just coming back from the worst of the of the pandemic.
I think there's Q2 had a disproportionately heavy quarter. So that was just when we were seeing the beginning of a sort of this surge towards focus on home and nesting and so I think that accordingly.
No.
It was 30%, 34% I think for the if I'm remembering right for the entire franchise.
<unk> network kind of lift in Q2 last year, so I think that might be the more of the the unusual quarter. If you will that might have almost had two quarters of demand in this new world.
But beyond that getting onto this year. We're just we're quite pleased with the fact that we continue.
<unk>.
At very strong levels and believe we can continue to sustain that.
And.
Linda.
Oh, sorry go ahead Bob.
Written sales in Q2 in absolute dollars were consistent in Q2 versus Q1, so we didn't see a drop off in consumer.
To run it again, it's against a base that was completely distorted due to due to COVID-19.
And that's why we gave the three year look over 12%, 12% compounded annual.
Annual growth rate, which.
We believe is a very strong indication of a healthy business healthy and growing and growing business.
Gotcha that's helpful. Bob Thank you.
And Melinda question that we've asked pretty regularly is just around.
Pricing and how the consumer has has responded to the price increases you put through can you just give us an update again on kind of.
How much prices are tracking.
For U S.
And.
What data or analysis, you've been able to do that.
Make sure that that's still going to be palatable and while it can be seeing material pushback here.
Yeah at this point since pre pandemic with the pricing we took over the summer we're at like most in our industry Athens.
High teens and overall pricing.
And there is no doubt there is <unk>.
And elasticity to that.
But that pricing is all out there in the market now and again reflected in kind of these written orders that youre seeing today. So.
Thus far the consumer continues to be.
So that's it and investing in their home.
That's really helpful. Thanks, so much.
Alright, Thanks, Brett.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
Your next question is coming from.
Adam Anthony <unk> from Sidoti Your line is live.
Good morning, and thank you for taking the questions.
So on the impressive results for the quarter.
Just wondering if you guys could quantify perhaps the.
The costs all the startup costs for the new facilities how much.
<unk> was that.
On the margin.
We're not we're not specific specifically calling out the basis point drag on the margin on that.
Ben.
It's changed.
It's morphing over there over the period as new ones come online.
And then Neil ones get more efficient.
So.
Our preference right now is not to provide hard to isolate what that number was honestly weaknesses.
Both through okay.
That's fine.
<unk>.
Or is there so.
Just curious, though so once you have all the manufacturing capacity opening youre about to open another facility.
In Mexico I believe in January so.
Just wondering how much capacity will you have once everything is fully operational and then I guess the second part of that question is that when demand, perhaps normalize at some point and what is your ability to flex that down.
Needed.
Yes.
By the time by the end of this fiscal year. There was there was that final plant will be up and running it still won't be that'd be efficiencies, we expect and we will continue to see the efficiencies down in Mexico improve.
<unk>.
The folks down there to get better and better at making refer richer.
That capacity is going to enable us to.
Works begin to work against our backlog right now with all the work we're doing increasing our capacity.
We're just holding the backlog, we're not really making any cuts into it and if you recall.
In this six to seven month range as it relates to how far behind we are so the capacity that we're adding.
Expected.
And once we get that this additional capacity in the Coke that's going in this quarter as well as next quarter and gets up to speed that we'll be able to start working down that backlog that we've got.
<unk> will enable us to see.
<unk> sales than what we currently are showing right now and that's why we're talking about.
The acceleration of sales into Q4, which will eventually get into Q1 and Q2 of next fiscal year as well.
The.
The question regarding what happens when things return to normal.
You'll have to tell me what normal is where right now we're in a position where we've got a very large.
Large backlog.
Okay.
The market appears to be I wouldn't say stabilizing, but it's not dropping off and sustaining the gains that is.
It has so we're going to need that capacity to be able to continue to service that business and in addition to the work that we're doing as part of century vision, we will see.
And a higher growth rate of our overall business, we will use that capacity to manage that growth rate.
And that said if for some reason there is some something that happens out there that sees demand drop we.
We have the ability relative to.
We've talked before about reducing overtime reducing.
<unk> work shifts.
We can shifts and things like that to moderate.
The capacity, we see attrition in our plants all the time, it's difficult work, so there's opportunities to naturally slow down production.
If that's required that's not what our plan is our plan is to continue to grow our business, but thats.
See our capacity is in such a place that going down is probably easier than going out.
Always important with our business to keep in mind. This is an <unk> process. We're in the final assembly of furniture is really done by People's hands and so it makes it.
So a little more challenging to put like a per unit on the capella.
Capacity side of things because it's really you can you can drive efficiencies you can drive extra shifts its all about the people, but it's also it also as Bob said is a great opportunity for us.
It makes it easier to decrease your capacity than it is to increase your capacity in many ways because of just you could always take advantage of natural attrition.
Tim.
Got it Okay, and then just just to kind of follow up as far as the production capacity.
What would you say is your ability to hire and retain workers, whether theres, a big difference between U S and Mexico.
I mean, we've had to be agile no doubt.
Our biggest plants.
The lion's share of our manufacturing for the vast majority of our business, which is U S. Based is in U S and we're making we've made significant investments over the last couple of years in those U S plants, including <unk>.
Thanks.
An entire revamped remodel of our Neosho, Missouri plant.
And at the same time right now for expansion to meet this capacity.
Expansion of capacity to meet this demand.
We are finding more opportunity for hiring in Mexico right now so a lot of the near term expansion has been more in Mexico, driven as we've called out.
Got it okay.
That's all I had.
And best of luck going forward.
Thank you Anthony.
Thank you there are no further questions in the queue I will now hand, the conference back to management for closing remarks. Please go ahead.
Thank you everybody for listening to our call.
Today, if you have further questions. Please give me a call I will be available have a great day.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Yeah.