HNI Corp (HNI) 2002 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the HON's Industry's Third Quarter 2002 result.

At this time all participants are in a listen-only mode, later we will conduct a question and answer session, instructions will be given at that time.

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I would now like to turn the conference over to our host Ms. Melinda Ellsworth.

Please go ahead.

Thank you.

Good morning and thank you for joining us today for the Hon Industries conference call to discuss our third quarter 2002 results announced earlier today.

I am Melinda Ellsworth, Vice President, Treasurer and Investor Relations for Hon Industries.

If you have not received the copy of the release, please call 563-264-7043 and we will get a copy right out to you.

Joining me on the line today from Hon Industries is Jerry Dittmer, Vice President and Chief Financial Officer and Jack Michaels, Chairman, President, and CEO.

Jack will begin with brief remarks and then open the call for questions.

Before we start, please be advised that the statements made by the company during this call that are not historical facts are forward-looking statements.

These statements may include, but are not limited to statements of business plans and objectives, capital structure and other financial items.

Forward-looking statements may differ from actuality and reline on other subjects of risk factors that could cause forward-looking statements in the conference call to differ materially from actual results are discussed in the companies new release and its form 10-K and other periodic filings with the Securities and Exchange Commission.

The company assumes no obligation to update any forward-looking statements made during the call.

I now have pleasure of turning the call over to Jack Michaels.

Jack.

Good morning and thank you for joining us.

I am going to start with the first words of my conference today the same that I have used for the last several conference calls, so I hope before long I could change this that we have good news and bad news.

I hope some day I can say we have good news and good news.

But the good news is the fact that the internal metrics continue to remain strong.

In fact many cases are reaching an all time high.

And those internal metrics include our gross profits, as well as our inventory turns and other metrics.

We continue to outperform the industry clearly we both in market share and in financial results are clearly outperforming our competitors.

The bad side of the news this morning is that the industry and the general economy continue to be very challenging.

We noted that over the last 18 months to 2 years and hopefully this will be changing in the not too distant future.

Our third quarter results are as indicated in our press release this morning showed that our sales are down 2.8 percent for the quarter, office furniture is down 2.5 percent and our Hot products is down 4.2 percent.

As far as, our earnings per share concern, in the third quarter of this year, we reported 46 cents a share, which beat the consensus of 45 cents a share and there was a 4.2 percent decrease from a year earlier in the same quarter where we reported 48 cents a share.

However, earning back goodwill during that quarter, the goodwill amortization would have been at 50 cents a share, quarter.

The EPS on a pro forma basis decreased from 46, down to the 50 cents, which was an 8 percent decline in total.

Gross profit was 35.9 percent versus 35 percent in the third quarter a year earlier.

We had some small negative impact from steel prices, from the steel tear up that was approved by the federal government and that resulted in an additional cost of about a million and a half dollars during the quarter.

However, it was offset by our continuous program of rapid continuous improvement, our new product introductions restructuring initiative that we reviewed with you previously and obviously the hard work by all of our dedicated member owners of our cooperation.

On the SG&A cost that increased 2 percent or 2.5 million dollars from the third quarter of 2001, primarily was a result of brand equity building whereby we spent nearly a million dollars incrementally over the third quarter of last year.

New product development was also approximately one million dollar, incremental expense over the third quarter and then it was the compensations charges at the corporate level or debenture burn out related to an acquisition and that was roughly 3.3 million dollars.

The third quarter 2001 included approximately 2.2 million on a pre-tax basis or 2 cents per share of goodwill amortization that is not included obviously in 2002 due to a change in accounting standards.

You will note therefore that our core SG&A costs continued to decrease year-over-year.

On the year-to-date basis, our sales were down 8.8 percent; office furniture is down 10.4 percent, hearth product is down 3.4 percent.

Earnings per share, year-to-date 2002 reported as a dollar 7, excluding the restructuring would be a dollar 11.

Last year, year-to-date 2001, reported was 86 cents a share, excluding the restructuring would have been a dollar 12 and adding back the goodwill amortization would relate to, would bring it to a dollar 19.

So, on a pro forma basis the earnings per share are down 6.7 percent from a dollar 19 to a dollar 11.

Cash flow from operations was 103.2 million dollars compared to 144.3 million last year.

And let me just cover some of the important elements here.

Our inventory levels increased from year-end due to production shutdown that we had at the year-end of 2001.

Current levels, however are below the third quarter of 2001.

Annualized third quarter turns of 19.2 versus 16.8 last year, so, you can see threw our rapid improvement programs another actions taken we have continued to improve our inventory trends.

Receivables are again was that increase from year-end due to seasonality and unusually strong collections at the end of 2001 that is however below the third quarter 2001 levels.

Our day sales outstanding or DSOs are 37.8 versus 37.6, so, basically flat compared to a year earlier.

Our long-term debt decrease is a result of part service debentures are now classified as current liabilities and that we stated to you was included in the first quarter of this year.

We had a redemption of higher coupon Industrial Development Revenue bonds to a roughly 16 million dollars, so our total debt-to-capital is now at 11 percent.

Capital expenditures year-to-date are 16.7 million versus 32.2 million in 2001, so just half and these capital expenditures are for new products and productivity improvements.

The new products that we are working on will be launched on early in 2003 some as early as January and then proceed through to June of next year.

Depreciation and amortization in the third quarter was 17.2 million and year-to-date is 51.8 million.

We did repurchase some stock during the third quarter, we have repurchased thirty million one hundred or 30,100 shares, excuse me, for a total cost of 749,000 dollars or an average of 24.88 cost per share.

There still remains 77.8 million remaining of the latest board authorized amounts.

Now let me turn to the various segments, down of our two-core business.

Let me start with office furniture.

Office furniture in the third quarter represented 77 percent of our sales and 78 percent of the operating profit before unallocated corporate expense.

Sales as I said earlier were down 2.5 percent for the third quarter or, and 10.4 percent year-to-date.

This compares to the BIFMA shipments August year-to-date which they have not released September's numbers yet down 23 percent.

So you can see we are definitely gaining market share. 2001 our share on the year-to-date basis was 12 percent through August 2002 with 13.8 percent.

So we are very proud of fact and very pleased that we are gaining dramatic market share because we believe that our products offer compelling value to the end-users.

Contrary to some other reports that have been so indicated liked in The New York Times last Sunday, we don't build just cheap product on a ready to order basis, in fact I will tell you that both our retail and commercial segment as well as contract segment we have gained share throughout the year in both of these segments.

Returning now to our operating profit as a percent of sales, 2002 year-to-date were 10.7 percent, 2001 we were 10 percent.

Now I'll turn to our hearth product segment.

Our sales were down 4.2 percent for the third quarter and 3.4 percent on a year-to-date basis.

This decline of sales is primarily due to turnigng out less profitable product lines.

Both at Hon tech as well as Hon services.

From the Hon tech manufactures as well as our distribution on the Hon services.

Our operating profit as a percent of sales 2002 on a year-to-date basis is 9.1 percent; in 2001 on a year-to-date basis it was 8.1 percent.

So, if you see, we continued to make improvements during the year and the third quarter was basically flat.

Third quarter 01 was 11.6 percent and third quarter 02 was 11.5 percent.

So, our improvement throughout the year has come from cost reductions, moving that organization to a lean enterprise, and obviously discontinuation of goodwill amortization.

The competitive environment there we have seen has change somewhat.

Pricing in the marketplace is difficult.

We have two competitors that are in chapter 11; we have a third competitor that has financial distress.

So, as I said all of these are putting pricing pressures in the marketplace.

Let me turn now to the outlook for 2002, for the remainder of 2002.

Obviously there are no signs of any real recovery and the economy as we see it.

We think it will continue to be challenging and the office furniture industry will remain soft.

The DRI forecast that the trader's association [Inaudible] prepared has indicated that the fourth quarter will be down 14 percent this year compared to a year ago.

Obviously this continues to be concerning but again we will outperform the industry.

Some key indicators in the new home construction market looks stronger, as we just saw September numbers were very strong and this normally translates the increased demand for Hon products in later quarters.

We track very closely mortgage applications, we believe that our sales will attract roughly 6 months later than mortgage applications.

So, we believe that we will see some strong future sales here but again referring back to my earlier comments, there will be very competitive pricing pressure, particularly on the lower-end product.

Our fourth quarter seasonally is our second strongest quarter, our third quarter being our strongest.

But again as I said earlier, we expect to outperform the industry, or both industries that we perform in, but we will be slightly weaker than we were in the third quarter.

Steel tariffs, I mentioned this earlier; it cost us a million and a half dollars than the third quarter.

We think it will cost us 4-5 million dollars in the fourth quarter.

We continue to work on alternative materials and supplier.

We are also working with our trade association, as well as the National Association of Manufactures to see what actions that can be taken to mitigate the dramatic increases we have seen in the steel that we purchase for our products.

Our comparable gross profit margins in the fourth quarter we think it will be, will be somewhere around 35 percent slightly down from the 35.9 percent we have achieved in the third quarter.

To help off set the cost increases that we are seeing we planned prices increases; there are a few products that price increases are going in effect in the fourth quarter of this year.

An additional products price increases will become effective early, some as early as the first of January 2003.

Obviously it's too early for us to tell the magnitude of what will actually stick in the marketplace but we do believe that it would be largely absorbed in the marketplace and will help offset the steel tariffs primarily for 2003.

So those were kind of the highlights as I see it for the third quarter.

Just to recap, as I said there was good news and bad news and the market continues to be soft as you are seeing from the industry numbers coming in.

We are clearly outperforming the industry, we are gaining share, our profitability remains high, obviously it's not what we would like to see it, but it continues to remain high and most importantly we continued to invest for the long-term to create shareholder value.

So with that I conclude my remarks and we will be happy to answer any questions.

Thank you.

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And our first question will come from the line of Pam Singleton with Merrill Lynch.

Please go ahead.

Good morning everyone.

Good morning, Pam.

Jack, could you talk a little bit about, you know, the relative performance of Hon versus, you know, your more dealer-based businesses in the quarter?

Well, you know, when you say Hon versus the dealer-based, mean Hon?

Well, Hon versus Allsteel Dunlop.

Okay, keep in mind that, you know, the majority, by far the majority, in fact, the overwhelming majority of Hon products goes through dealers, you know, even though sales go into wholesalers obviously, you want the dealers, so and our sales through the retail channels are really not that great.

Actually, both segments are gaining market share throughout the quarter, the Hon side is a little greater, but clearly, we are gaining market share in both segments.

Okay.

And on, Jack, could you talk a little bit about the impact of higher steel as it relates to some of your competitors up North, I mean, I am thinking about in office, as well as in hearth, I mean, is that a disadvantage?

No, I don't think so.

I mean, you know our competitors are using steel, as well as we do and as I look at the various product categories that use steel and compared that to our competitors, I don't think there is any major differences.

Okay.

And just update us on; you know, your thoughts about offshore sourcing and, you know, where Hon strategies are right now?

Well, clearly offshore sourcing is having an impact in the marketplace particularly in the seating in the retail channel; in fact, it's had a major impact there.

We have for several years been sourcing component parts for our seating product offshore, we have began importing some finished goods in seating from offshore and I think as we see, you know, looking forward I think we are going to see a greater impact of, you know, sourcing offshore, you know, obviously more than we have ever seen in the past.

So, there's been very minimal, but I think it will be a significant amount as we move forward over the next, you knowI don't really know Pam whether it's 3, 5, 10 years, but we are seeing more of it, we are doing more of it, I think our competitors are doing more of it.

And, you know, obviously the costs advantages have been there, as well as we are seeing good quality and good performance from those products.

So, I think it will be changing to a large extent the dynamics of our business as we move forward.

Okay, that sort of affects the question on any impact form the lock out on the West Coast?

No, we were, you know, we haven't seen any of that, you know, that has been forecasted that there would be, you know, a strike there and we had built up some inventories.

So, now we were adequately covered.

I would say the biggest concern we have on availability of materials, it has been on steel as we have moved, you know, as the steel tariff was imposed then that basically cut off, sourced (in steel coming to North America and therefore there has been, you know, we have not been shutdown, but I would tell you that it's a struggle almost daily to ensure that we have sufficient steel at our locations to continue to operate.

Thanks.

Great quarter.

You are welcome.

Thanks, Pam.

Thank you and our next question will come from the line of Budd Bugatch from Raymond James.

Please go ahead.

Good morning, Jack.

Good morning, everybody.

If I could, just bear with me for a second and see if I understand your logic.

You talked about, the 4 to 5 million dollars of steel increased cost in the fourth quarter.

How is that split between hearth and offices that are relatively in proportion to the sales?

Yeah.

Right.

Okay.

When I look at that, if I assume something of materials of nearly 40 percent of costs, of cost of goods sold that comes out to be about, maybe about 5 percent of the materials cost and as I look at what the steel's increase did for the big steel and they just reported looked like 10 percent of revenues.

The point is that as you go into 2003, is that 4 to 5 million dollars a quarter, is that the right number, does it go up to 60 million dollars a quarter?

Bugatch, you know, I don't really know at this point I you know, we are just in the froze of the we are in negotiations for next year but the 4 to 5 million might be a low number on a quarterly basis next year but in fact it's too early to tell at this point because one of the things that we are doing is looking at as I said earlier our alternate materials and suppliers and we are doing some evaluation with alternative suppliers as we speak so you know, I just can't give you an answer precise answer that question right now.

Okay, but I am trying to frame kind of a worst-case scenario's so I know...

I appreciate it and you know, we are in the same boat trying to determine impact on cost.

However we do believe that in our price increases are going to be off setting if not all at least a large portion of those increases next year.

I guess the part of the next place, where are you going to put the price increases in office or in hearth or both?

Both.

Okay.

When I say both while I mean I want you to understand it's selective I mean we just not putting this something across the board obviously you look at the competitive environment you know, Pam'squestion about you know, global sourcing and so there is always elements when so but I will go across all of our product lines.

You see that's what worries the most, is it I heard you on the face of weak demand markets, you face with situation where our government has put us at a disadvantage in terms of steel pricing and we already can't import the steel now at the lower prices in the raw form that doesn't better funds foreign supplier from taking that steel over there and importing that steel in finished products here at a lower price, so that disadvantage really hits it doubly and you are going to lose share or threaten to lose share, and you are trying the lowest prices in the face of that because your end product prices have gone up and yes that goods are going to come in now from off shore at even in higher advantage than they have now and how do we do that, how do we compare that?

Well I think what you find is happening if you look at steel prices a broad they have also increased.

Because of the concern was you know, where was that capacity going to be going so everybody try to protect their own turf and so we saw price increase worldwide and so it wasn't the result of the tariff increase here actually was broader than just in the United States, now was it in every countries no it wasn't obviously you know, China and some of the other sources don't necessarily follow our trends certain in the western world, so it may, you may find that there may be more poor in sourcing than we,ve have seen in the past then in fact, I think, you know the industry is conforming with that as we speak.

I had not seen that.

That's exactly the worry that I hear others who have steel issues worried about is that they are going to see the steel come in the form of actually finished product which is not subjective to that same tariff.

Right and that is in the case of a finished product or even any part that has an operation performed It doesn't have to be a finished product it could be a component part .

That could be an issue and obviously that is the reason why, as I said earlier, we are were working with, you know, trade association, the National Association of Manufacture's Organization.

I get those email's everyday almost.

Right.

Well actually [Inaudible] we just got a fax in this morning [Inaudible] is going to be located.

They have not thus far taking on the issue, and so now we are going to be looking at what action should be taken.

Let me just one other [place if I could.

I am confused about this as well.

In the phase of good home demand and existing home and new home demand, hearth is down and, I know you talked about product pruning.

So, maybe you can quantify how much of that impacted your revenues in the third quarter and why you have not had a revenue gain in the phase of such a strong home activity.

The impact has come from two parts.

One is the home construction has remained strong.

In fact, as we saw September number very very strong.

But the type of housing has been in the lower cost housing which as we saw as a result it has taken two things to impact.

One is lower-placed fireplaces and secondly, some old [Inaudible] put it in fireplaces.

So, that has been one impact.

The other has been, as you rightly pointed out and as I indicated, some pruning of products and that cost us about a 11 to 12 million dollars in the quarter.

And does that continue in Q4 as well or when do we anniversary that?

It will continue in fourth quarter as well.

At the same level?

Yeah, basically.

For how many more quarters?

When do we just continue those prices?

It will discontinue in year end.

At year-end, We are finished with that till the first quarter will be more like a market response.

Yeah, perhaps.

Thanks, Jack.

Good luck.

It's a very challenging time.

Thanks, Budd.

Thank you and our next question will come from the line of Margaret Wailand with UBS Warburg, please go ahead.

Good morning guys.

Hi, Margaret, good morning.

Congratulations on doing such a great job on a tough environment.

Would you give us an idea Jack, the market you have gained?

What kind of an end-market are they and do you think they are sustainable?

Yeah, our market share by indicated margin of one, you know we gone through August of this year.

This is the only numbers we have from this month.

Our share is 13.8; the same period a year ago we were 12.

I look at incoming order rates and I see them continuing to expanse that we are gaining more, more market share, I think as we move forward.

So I think they are sustainable.

Which end-market segment?

Pardon.

]: Which segments of the markets?

Both the, well, in three segments.

The retail, the commercial and the contract segments.

And within each of those I understand but who's actually buying furniture, is it for office, is it for government, is it for industrial?

Well, we have been relatively small in government.

Obviously that's one of our thrusts.

So it's been primarily in offices.

: Okay.

And then the second question is coming for Jerry for the fourth quarter.

What kind of guidance should we assume with this extra gross margin, you know the decline in the gross margin [Inaudible] ?

The gross margin for the fourth quarter being seasonally adjusted, our third quarter is always higher.

We see our gross margins being very comparable to last year's fourth quarter.

Which is about just under 35 percent, yeah.

And then what about SG&A?

We see SG&A being slightly under last year but, you know, very comparable again to last year.

Okay.

Do you think that 40 cents number is okay?

[I can't get and exact EPS number but, you know it's probably under ballpark.

But you really to take, you have to run to your marvel seats.

You are the group of margin.

And you also have to remember, you know, we have talked a little bit about steel and also sales a little bit.

If you look at the fiscal numbers for the fourth quarter.

And yeah we think we still outperforming, but I think Jack had mentioned is just and we isn't to get to on that 14 percent for the fourth quarter that they we are estimating.

]: Okay and Jack what do you make of business estimate for next year?

I don't.

I don't, I mean don't understand that I, you know, I kind of disregard it quite frankly.

Yeah, sounds very impressive.

I have expressed my feelings to the BITMA organization and to DRI,I mean thinks that the fourth quarter is going to go up 25 percent next year, I don't see that happening.

I would like to see it but I don't believe it.

Yeah.

I think, I think next year will continue to be challenging, I don't think it will be perhaps as severe as this year but I think it's going to continue to be challenging, I don't see anything out there as key drivers that will make it, you know, substantially different than this.

Yeah.

And then lastly, the price increase, what kind of percent is you talking about there?

Already it varies from 2 percent to 7 percent.

Okay, and how much of that would usually stay?

Again, it's going to be difficult, but I think in the contract segment it's going to be dependant upon, you know, this project-driven, bit-driven where as in the retail commercial segment, that's not as prevalent, so I would say that I would think probably, 80 percent of it ought to stick.

I might be optimistic of that, but that's what I'm hoping for.

To get everything out of.

Okay, thank you, very much.

You are welcome.

Thank you and again if you do have a question or a comment, please press one at this time.

Thank you and at this time we have no further questions in queue.

All right, just like to thank everybody for joining us this morning.

We know that these are very challenging times as you have indicated this morning and we think we are performing well in a difficult environment.

We've been able to adjust more quickly than others, I believe, in responding to the market conditions and as a result of that, have continued to maintain good profitability.

So, we just want to conclude by saying thank you and look forward to our next conference call.

Thank you ladies and gentlemen.

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