It is not a measure of how the product is used in the home. The second issue is finished goods testing and what that means. Finished goods testing is intended to determine how the product acts when it is used in the home. The distinction between the testing protocols is critical. Because sensationalized reports provide little context, customers are understandably concerned. What matters for our customers and our brand is whether these products contribute any significant formaldehyde to the air in their homes. They do not.
We are confident that our flooring is safe and we intend to see that it stays that way. As I said, the whole point of the CARB regulatory process is to set emissions standards for formaldehyde for composite wood products — and not to regulate how the finished product will act in the home. In , CARB enacted a measure that limits formaldehyde emissions from composite wood products, including medium density fiberboard, which is often referred to as MDF. CARB only regulates products sold in California. It does not apply in other states. And California is the only state with formaldehyde emission standards applicable to composite wood products.
So, what are the emission standards? For our purposes, the MDF cores must test at or below 0. The agency has drafted proposed national emission standards for composite wood products that are similar to the CARB standard, but they are not yet final. So, what is CARB certification?
It starts at the manufacturing level. It monitors manufacturer quality assurance programs. And it provides independent audits and inspections. Third-party certification is at the heart of the CARB regulation. And the rigorous certification process shows why: As a condition of their certification, manufacturers must have significant quality assurance protocols and procedures in place to make sure their fiberboard cores comply with the CARB standards. They have to have their own testing facility inspected and approved by the certifier, and the fiberboard cores are subject to randomly selected testing, multiple times a year, as determined by the Third Party Certifier.
Manufacturers are also required to conduct small-scale quality tests once per 8 or 12 hour shift for each production line, unless the Third Party Certifier permits testing once every 48 hours based on demonstrated long term compliance. A retailer or importer, such as Lumber Liquidators, must, among other things, meet the following requirements: First, they must only sell products that comply with the CARB emission standards.
Second, they must maintain records showing the date of purchase and supplier of the product, and document the precautions taken to ensure the products comply with the emission standards. This includes communicating the requirement for suppliers to comply with the CARB regulations and obtaining written documentation that this is happening. Let me walk you through the process.
To begin with, each supplier is subject to our multi-step certification and compliance review process. Our suppliers are either themselves certified under California regulations or represent that they source their composite wood raw materials from TPC-certified manufacturers.
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Suppliers must provide evidence of CARB certification of the core manufacturer before they will even be considered as a vendor. As part of our compliance efforts, we regularly review the CARB website to confirm the certification of the applicable core manufacturer. Our contracts with suppliers require them to adhere to applicable CARB regulations.
Further, on each commercial invoice from our laminate suppliers, the supplier represents that the delivered product is CARB compliant. We make announced and unannounced visits to our mills to conduct inspections and to select samples of both cores and finished product for testing. Composite wood cores are tested according to CARB test procedures as a monitoring activity. As an added safety measure, we also test finished goods as sold using standard ASTM test methods.
As there currently are no finished goods emissions standards, test results are compared to the CARB phase 2 emissions limits applicable to the composite wood core contained in the finished good. Let me take a minute to describe our testing protocols in greater detail because we believe it is important and has been misunderstood by many. First, there is testing at the manufacturing level. As I explained a few minutes ago, this is the fiberboard core testing performed by the manufacturer during regular production and the third-party certifier as part of the certification process.
This is the minimum testing required by the CARB regulation. We have added a second level of testing. We have also added a third level of testing. We randomly select a sample of the finished product as it is packaged for sale. We then use the same ASTM emission test used for core testing, and again, use independent labs. We notify the supplier. We initiate additional compliance review activities to confirm ongoing supplier compliance.
As warranted, the supplier will be required to successfully implement further corrective or preventive actions before shipments can resume. To provide better context, it is helpful to know how laminate flooring is constructed. We have included a diagram to show where testing fits into our fabrication process. Generally, there are five components of a laminate floor board. From top to bottom, it includes a transparent protective wear layer, a decorative layer, the MDF core, the melamine balancing layer, and an optional foam underlayment. The first two types of testing in our process are applied only to the MDF core.
As we have discussed, this is the only part of the product that CARB regulates. The core is tested as part of the third party certification process and as part of our heightened compliance standards. After this testing, the core is used to make the flooring products. The melamine balancing layer is first added by way of a heated press. Next, the decorative layer and protective layer are also added using a heated press. Finally, the finished product is made by profiling the edges and by adding the underlayment.
It is at this final stage that Lumber Liquidators, using independent labs, test the finished product. And CARB and others have indicated that the laminating process can help to further reduce emissions. Lumber Liquidators is proud of the detailed safety protocols we follow, which we believe go beyond what CARB requires. Let me explain the extra steps we take.
Second, Lumber Liquidators is one of the only flooring retailers that we know of to invest in, install, and operate a lab with emission-testing capabilities. This is a state of the art facility. It includes two temperature and humidity controlled conditioning rooms, and two formaldehyde emission chambers that mirror the capabilities of CARB and other state of the art emission testing facilities. CARB considers the emissions of the core MDF, but we do this testing to make sure that the entire product is also safe.
Fourth, we perform supplier site audits. Lastly, we perform quarterly invoice and supplier document reviews to verify CARB compliance. These are all extra steps we take to make sure our products are safe. As I have mentioned, the laminating process, also known as fabrication, can help to further reduce the formaldehyde emissions of the finished good as it is intended for use.
However, as this process is done under extreme heat, pressure, and other factors, the underlying MDF core is fundamentally altered as a result. Process variables such as temperate, pressure, the types of resins used to adhere the facings to the MDF core, and a host of other process treatments can materially impact both the physical properties and the formaldehyde emissions of the underlying composite wood core. As we start to discuss the topic of deconstructive testing the test that 60 Minutes used , I want to read from an Federal Wood Industries Coalition release from yesterday.
This type of testing is not required by CARB to demonstrate compliance. It should only be used by professionals who understand its use and limitations. When CARB finalized its regulation, it told the stakeholders that it was going to try to figure out a way to determine whether finished goods sold in California were CARB compliant.
The SOP described how to prepare a finished good by deconstruction, or ripping it apart, for formaldehyde emission testing. But one important thing to understand about this document is that it does not discuss how to interpret the results. We have been engaged with CARB over many months, provided them with additional information and, like others in the industry, have expressed our concerns on the validity and applicability of the deconstructive testing method. CARB has indicated to us that no one in the industry is expected to conduct deconstructive testing for compliance purposes and we know of no further action that has been taken by CARB with respect to our products or the suppliers and manufacturers that provided these products to us.
Deconstructive testing is controversial for many reasons. Several industry groups have outlined specific problems with the testing process, and you can find links to their statements on our website. At this time let me give you some additional insight on the controversy. First, it does not measure a product the way it is actually used in a home. The procedure attempts to remove the outer protective layers in order to reach the regulated core.
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As you remove the surface of the fiberboard it becomes less dense. So, deconstruction exposes the less dense areas of the core, which promotes formaldehyde release because the higher density areas, which act as barriers, have been stripped away. Another problem is that it is impossible to remove the glues and resins, some of which include formaldehyde. This formaldehyde, which was not part of the original regulated core, can be absorbed by the original core and then be released as a part of the deconstructed core.
The testing method also has not been validated by independent accreditation bodies. And, as I mentioned in discussing the SOP, there is no established standard for evaluating the results. In fact, CARB released a study that compared emissions between finished products, raw platforms, and deconstructed products and found wide variability in the results. In short, there are many questions that need to be debated and addressed. And deconstructive testing has not been approved as an official enforcement procedure.
So what does all this mean?
We believe CARB, as it should, is regularly looking at the entire industry, up and down the supply chain, to ensure compliance. We know they are using deconstructive testing as part of this process, but they have indicated that they do not expect the industry to use this testing method. We know that we engage third parties to conduct random testing on our regulated core products and on the finished goods we receive.
We know that when we find issues, we address them.
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We know that tests on some deconstructed samples have had elevated levels, but we believe that the results of deconstructive tests have little or no bearing on the safety of the finished product. Now the issue of formaldehyde in our laminated products sourced in China has also come up in the context of a Proposition 65 claim.
Proposition 65 is a well-known ballot initiative in California that gives private citizens the right to sue businesses for failing to provide warnings regarding trace exposures to certain chemicals, including known formaldehyde. The plaintiffs allege that our products expose consumers to formaldehyde and are unlawfully sold without a California Proposition 65 warning. We believe these claims lack merit for at least two important reasons. First, we have provided standard Prop. Second, any formaldehyde exposures from our flooring are well below the California warning threshold. Notably, the Plaintiffs are using deconstructive testing results in an effort to support their claims even though Proposition 65 is intended to reflect how a product would actually be used and — as we have discussed — deconstructive testing does not test the product in the condition as the product is actually used.
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As you may be aware, we have filed a counterclaim against the plaintiffs asserting a number of actions. The green circles show the requirements in the existing regulations. The yellow circles show the requirements in the proposed draft regulations. And the red circles show what is not a current requirement or a proposed requirement.
As you can see, there is quite a bit of variation between the three regulations, between the current and proposed requirements, and between the requirements for manufacturers and retailers. Prop 65 is the only regulation that has a threshold related to emissions from finished products, above which a consumer warning is required.
The takeaway is that all of this is still in flux. I would now like to turn the call over to Dan for a more detailed business update. Thank you Rob and good morning everyone. I will provide some details around our sourcing, sales mix and current trends, but first I would like to take a step back and look at the growth of the Company since , achieved through a combination of store base expansion and sales increases at comparable stores. Since our initial public offering in November , we have been able to grow in a highly-fragmented market by offering the customer values that previously had been absorbed in multi-step distribution, the resale of branded products or the lack of scale.
This has allowed our sales to grow at a compound annual growth rate of I will not revisit that event here, but for those interested, it is well covered in our K, including the 6-month breakouts. Through , we have been building an infrastructure under a maturing company, while maintaining a strong advertising spend. In fact, gross margin has expanded basis points through , and has included numerous strategic initiatives including the acquisition of certain assets of Sequoia Floorings in September As many of you know, the operations we acquired from Sequoia, including quality control and assurance, product development and logistics, were services Sequoia only provided to Lumber Liquidators.
With this acquisition, we began a multi-year investment in quality control and assurance that continues today. In fact, the primary driver of our gross margin expansion since has been successful expansion and marketing of our assortment, including sales mix shifts to both premium products and the attachment of moldings and accessories. Bellawood is our flagship brand, and we now offer it in solid hardwood, engineered hardwood and bamboo.
As I mentioned earlier, all of our flooring is sold under 18 proprietary brands and we offer up to flooring varieties. We have invested significantly in the marketing of our product brands and the Lumber Liquidators name, and we plan to continue that approach in the future.
We source directly from mills all over the world, with the primary drivers of the sourcing country being:. We are in one of those times now with the dollar significantly strengthening against the Euro and Canadian dollar. As a manufactured product not requiring a native species, laminates are produced all over the world. Since laminates are a manufactured product, the style and look of the paper is the primary consideration of how the product may fit in our assortment.
If we decide to add the product, we then consider the primary components of cost, which include:. During that two-month period, comparable store net sales were up 9. Over the first 9 days following the broadcast on Sunday evening, March 1 st :. As a reminder: Our average sale is a large, discretionary transaction with a purchase cycle that can be days long. As a result, it is very difficult to extrapolate trends measured over a 9 day period to longer periods of time.
It is even more difficult while experiencing significant volatility. If the 7. As a note, we intend to issue a press release to provide an update on our actual net sales for the first quarter on Thursday, April 2 nd. During our earnings call and business update on February 25 th , I had called out a number of items that would impact the first quarter gross margin. At that time, we believed the items noted would reduce the gross margin in the first quarter of to approximately We now believe changes in our March sales, sales mix and average selling price is likely to reduce the first quarter gross margin by up to an additional basis points to a low of approximately As with net sales, it is very difficult to extrapolate a small number of days to a longer period of time.
Though we are unable to currently forecast full year net sales or profitability, we have reviewed our cash flow sensitivity for the nine months ended December 31, and we believe our cash flow from operations, together with existing liquidity sources, will be sufficient to fund our operations and anticipated capital expenditures for the foreseeable future. As a part of this analysis, we reviewed a level of sales where existing cash and cash flow from operations, less capital expenditures, would reduce available cash to zero.
Again, this is not our estimate of the values, only what we believe are conservative values for this analysis. We also used our planned structure for the majority of expenses including such key items as payroll, occupancy, and legal and professional fees before we were aware of the broadcast. We assumed our plans would not change based on current trends. Obviously, over a period of time, the business structure can be changed to align with the top line, but for this analysis, holding the values constant is conservative. Using our conservative estimate of cash on hand at March 31 st , reasonable inventory levels and the low end of our capital expenditures outlook, we believe net sales would have to fall Until we gain further clarity surrounding this event, we are unable to provide an outlook for full year net sales, gross margin or earnings per share.
As I mentioned, we intend to update our net sales through the end of the first quarter on Thursday, April 2 nd. At that time or on our first quarter earnings call, currently planned for late April, we will update you on volatility and any demand trends we believe can be meaningfully extrapolated over longer periods of time. At this time, I can provide an update on certain plans for operations. We had previously announced our plan to open 30 to 35 new stores in With a deluge of entertainment available on multiple screens, U.
Many of them are opting for cheaper ways to watch the shows and movies they love. Pit them against each other to get the best deal you can. Invest in an antennae : Remember those? Thank you for reading the Journal-News and for supporting local journalism. Subscribers: log in for access to your daily ePaper and premium newsletters. Thank you for supporting in-depth local journalism with your subscription to the Journal-News. Get more news when you want it with email newsletters just for subscribers.
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