HNI Corp (HNI) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HON INDUSTRIES, Incorporated fourth quarter and year end 2002 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question and answer session.

Instructions will be given at that time.

If you should require any assistance during the call today, please press zero and then star.

As a reminder this conference is being recorded and I would now like to turn the conference over to our host, Melinda Ellsworth.

Please go ahead.

Thank you.

Good morning and thank you for joining us today for the HON INDUSTRIES conference call to discuss fourth quarter and year-end 2002 results announced earlier today.

I want to take a moment to apologize for being a bit late here on our call.

We had a few internal phone difficulties so we're pleased to have you with us today.

I am Melinda Ellsworth, Vice President, Treasurer and Investor Relations for HON INDUSTRIES.

If you have not received a copy of the release, please call 563-264-7043 and we'll get one sent 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 we'll open the call for questions.

Before we start, please be advised that 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-look statements may differ from actuality and relying on them is subject to risk.

Factors that could cause forward-looking statements in the conference call to differ materially from actual results are discussed in the company's news 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 the pleasure of turning the call over to Jack Michaels.

Jack?

Good morning and thank you for joining us.

I thought I would start the conference call by sharing with you some thoughts that I have regarding the fourth quarter and then also some concerns moving forward as we get into 2003.

The fourth quarter, I think was a good quarter for us.

We're pleased with our results.

We're pleased with the sales growth.

We're obviously pleased with our earnings.

The EPS of 48 cents a share equaled our best ever fourth quarter which actually went back to 1998.

But having said that, you know, I still have some concerns as we look forward.

I'll cover those a little further in my outlook statements.

But let me come back and start with the fourth quarter results.

As you have seen from the news release, our sales were up 4.9%.

Office furniture was actually up 7.5%.

And that was really as a result of continuation of new products that we introduced.

Also we had some new products that were purchased by some of our stocking customers and we continued with our RCI involvement.

We were able to improve our delivery and logistics system.

So, as you saw in release, that equated to about $12 million in total.

There was about $4 million in the new products and about $8 million, if you will, in the improved deliveries and logistics systems.

Our hearth products were down 1.8%, and that's a result of our continuing to prune out non profitable or less profitable lines.

We started that in 2002, earlier in the year and we continued through the fourth quarter.

We believe that's mainly behind us at this point.

EPS, for the fourth quarter as I indicated earlier, was 48 cents a share.

I'm going to walk you through some numbers here so if you'll just bear with me for a moment.

If you exclude the change in the effective tax rate, and you notice that we have lowered our tax rate from 36 to 35%, our fourth quarter would equate to 46 cents.

On an apples to apples comparison.

Compared to fourth quarter a year ago when we reported 40 cents, but adding back the goodwill amortization into that quarter would result in earnings of 42 cents, okay.

I'm sorry to go through those with you but I think it's important for you to understand.

So, on an apples to apples basis, EPS increased 9.5%.

In other words, it went from 42 cents a share a year ago to 46 cents a share this year.

Gross profits were [INAUDIBLE] We continue to do well.

We were 35.1% verses 34.8% in the quarter of last year.

We're very pleased with those results.

I've indicated those to you before.

Our internal metrics continue to look very good.

And we absorbed a negative impact of about $3.5 million due to the steel price increases as a result of the 201 approved by the President.

We had had several new products introduced during the quarter.

And more [INAUDIBLE] -- I'm going to cover that a little later.

Our rapid continuous improvement and business simplification continues to yield improvements in our operations.

Obviously we benefited from prior restructuring initiatives that we undertook and they are completed.

Those that we've already announced.

And obviously I cannot -- be remiss if I didn't thank our member owners for their dedication and hard work during the quarter.

SG&A as a percent of sales was 25.7% versus 26.1% a year ago in the fourth quarter.

The dollars of SG&A increased 3% or $3.8 million in the quarter.

Over the prior quarter.

The prior quarter a year ago.

That was result of increased freight on increased sales which was approximately $1.4 million.

Brand equity building, this is incremental that we continue to build for our brands.

We have talked about that as part of our long-term strategy and that equated to roughly an additional million dollars of expenditures.

New product development.

Again, was $1.1 million.

We're pleased not only with the development but the introduction and the acceptance obviously in the marketplace.

And then lastly, we had incentive-base the compensation that was incremental at $2.2 million compared to a year ago.

That's the result of our improved results in the fourth quarter.

So, the fourth quarter a year ago included approximately $2.2 million or 2 cents per share of goodwill and other intangible amortization that obviously are not included due to accounting changes in 2002.

So, office furniture represented 74% of our sales.

And 64% of our operating profit before unallocated corporate expense.

Obviously the balance was in our hearth business.

2002 year end results, sales were down 5.6%.

Office furniture was actually down 6.4%.

And hearth products down 2.9%.

And I'll make some comments about those a little later.

EPS for 2002, we reported $1.55.

If you exclude the restructuring charge, that we took during the year, we would be at $1.59 then if you excluded the effect of the tax rate change, it would be $1.56.

So, let me compare that then to 2001.

Where we reported $1.26 but if you exclude the restructuring charge we took in 2001, it would be $1.52.

And adding back the goodwill amortization would be $1.62.

So, apples to apples, the EPS was down 3.7%.

In other words, from $1.62 to $1.56.

I would like to make a point on the comment on the tax rates.

You know, we've worked very hard over the years to have an effective tax program and due to that hard work, we were able, principally due to research and development credits, to lower our tax rate from the 36 to the 35%.

And again, it is thanks to our dedicated members and owners.

Gross profit for the full year increased some 34.1% in 2001.

To 35.4 for the full year.

So, we continue to improve.

I would say to you I think we're probably about as high as we're going to go on gross profit.

I hope I'm wrong but we obviously continue to work on improvements like containing costs but we have some concerns as we move forward and I'll cover that later, you know, notably around steel price increases that we'll be receiving.

Let me continue with SG&A, as a percent of sales it increased from 25.9 to 26.8 for the year.

Again, we had lower overall sales volume, okay.

We built -- we continue to build our brand equity as we did in the fourth quarter but for the full year, we probably spent approximately $3 million.

New product development incrementally was like $4.5 million for the year.

And then the incentive-based compensation was roughly $10 million but $4 million of it was related to an acquisition that we discussed with you during the third quarter.

Office furniture for the total year was 76% of sales and 75% of our operating profits again before the restructuring charge in unallocated corporate expense.

So, as you can see, we're pretty equal between office furniture as a percent of our sales and percent of our profits and therefore, our hearth is roughly 24 and 25%.

So, very equal.

So, one of the questions I normally get is you know, from those that don't follow us that closely, that the fact is that you know, our office furniture and hearth products, the business units, are about the same level of profitability.

Cash flow from operations was $202.4 million versus $227.8 million a year earlier but I want to call your attention to the fact that in 2001, the cash flow was favorably impacted by large reduction at the year end from the 2000 balances in trade receivables and inventory due to large volume decrease.

But more importantly, we maintained those reduced levels in 2002 and in fact, as you look at our accounts receivable day sales outstanding, there's 36.8 days versus 37.8 days in 2001.

So, we continue to improve.

The tremendous improvement was in our inventory turns.

We actually went from 17.6 in 2001 to 22.5 in 2002.

And again, that speaks -- those are results of our rapid continuous improvement programs.

That we have, a continuous flow throughout our facilities.

Our cash position is strong.

We have -- we had it year end. $155.5 million which included short-term investments.

Capital expenditures for the year were $25.9 million versus $36.9 million last year.

And the nearly $26 million we spent in capital expenditures were for two primary areas.

New products and productivity improvements.

In fact, we have capacity available to support our planned future growth.

So, we made no expenditures during the year for capacity.

You'll notice in our balance sheet that you received in the press release that our long-term debt reduced -- considerable reduction, and that's because the debentures from an acquisition were reclassified to current based on their due dates.

So they moved from long to short-term.

And we also had a retirement of the industrial development revenue bonds and a [INAUDIBLE] debt during the year.

So, our total debt, including capital leases both short-term and long-term is approximately $50 million.

That's primarily convertible debentures due to acquisitions that really cannot be paid off at this time but will be paid off by early 2004.

Depreciation and amortization.

In the fourth quarter was $17 million and for the year was $68.8 million.

As far as stock repurchase, common stock repurchases during the year, we repurchased 614,580 shares.

For $15.7 million or an average price of $25.6.

There still remains $62.8 million of the board-authorized amount for stock repurchases.

Let me move on and break it down and give you some more details in the office furniture and the hearth product segment.

In the office furniture segments, sales for the quarter were up 7.5%.

Again, this was primarily as I said earlier, due to the new products purchased by stocking customers and improved delivery logistics which, in fact, did reduce our backlog but our backlog only moved from $94 million down to $87 million, okay.

So, year over year.

Again, backlog is -- we look at it because of its starts being extended.

In other words, if it starts being increased -- increasing, we would be concerned because of our short delivery times to our customers so we typically are much lower in our backlog than our competitors.

Sales were down for the year 6.4% in office furniture.

Now, if I compare that to the vista [ph] shipments which just came out this week, which were down 19% for the year, you can see we have gained considerable market share.

In fact, as you look at our 2002 sales as a percent of the BIFMA [ph] shipments, we're 14.4% this year versus 12.4% in 2001, up clearly 2 percentage points which I believe is excellent.

I just think people would love to have that opportunity to increase your market share by 2 percentage points which tells me that I think we're doing the right things.

We've got the right products, we've got the right programs.

We're obviously servicing our customers well.

Including our end user.

So, in essence, what we're doing is offering compelling value and we feel very good about that.

Our overall operating margins in the fourth quarter were 9.6% for office furniture versus 9.3% in 2001.

So, for the year, we were 10.4% versus 9.9% a year ago.

The fourth quarter -- you know, we did absorb, as I said earlier, the impact of steel by the tune of $3.5 million then there was some shift in mix.

Okay.

On the hearth products segment, sales were down 1.8%.

That was a planned reduction because we wanted to rid ourselves of less profitable product lines that we didn't feel would really contribute to us, you know, going forward.

And so for the year, we were down 2.9%.

We did, however, improve our margins.

That's because we continued our cost reduction through RCI.

Our profitability from our own distribution is improving nicely.

We're pleased with the results we're achieving there.

And we obviously had the discontinuance of the goodwill amortization.

So, for the fourth quarter, the operating margins a year ago were 13.3%.

And this year, they're 15.3%.

So, nice improvement.

For the full year, we're 9.6% a year ago, increasing to 10.8% for the full year in 2002.

Okay.

So, you can see our fourth quarter is obviously a very strong fourth quarter.

Let me move on now and talk just for a few seconds about 2003 outlook.

Many of you have seen the global insight which was the previous DRI organization that BIFMA [ph] employs to do their forecasting.

And we also included it in our news release that they have forecasted the industry to be up 5% in 2003.

However, they show a 2% decline in the first quarter with -- but with improvement as the year progresses.

I will tell you that I think the 2% decline might be a little optimistic.

There is tremendous unstable political and economic conditions and I think it is going to be a challenge for us, at least in the initial part of this year.

Specifically, I think the question -- I know Secretary Powell is now speaking to the U.N. but -- but this whole question about Iraq, I think has people very nervous.

We have definitely seen orders, you know, be softer since the first of the year.

And so that continues to be a concern to us.

As we look out.

At least in the early part of this year.

I do believe that we'll continue to outperform the industry as we have been for the last several years.

I think we'll continue.

I think we have good growth opportunities also on our hearth business.

I think we have tremendous new products we're introducing.

We have extended our brands.

We've actually changed the name of that division from Hearth Technologies to Hearth and Home Technologies which really says we're entering into some more special products for the home that sell through the same channels that we currently sell, you know, the hearth products.

And we have outdoor living products.

We have an outdoor living environment, if you will. that includes not only fireplaces but outdoor cooking systems and heating systems for the outdoors.

We have healthy home products.

Notably around the whole question of air, clean air, in your home.

And in our distribution, our own distribution, we are building our first prototype store in Egan, [ph] Minnesota, which is a suburb of Minneapolis.

We've changed that division's name to Fireside Hearth and Home.

Again, emphasizing the home products.

We believe that that gives us great opportunity and market extensions.

So, we'll learn a lot from this prototype store.

We have planed a second store.

Already for this year.

And we're obviously working with our alliance partners to learn -- that we would share experiences with and from our store to help them in their revenue growth as well as their profitability.

We will be -- continue to be faced with steel price increases.

Due to the steel tariffs.

We obviously are working hard to mitigate the negative impact through alternative suppliers and even alternative materials.

But we forecast that this could impact us to the tune of $14 million to $15 million for the year but, frankly, there are still uncertainties out there particularly in the second half of the year.

In essence we have prices pretty well firmed up for the first six months but you'll -- there will be questions raised about the second six months and it is really too early for us to make any speculative comments at this point.

We're obviously working with various organizations to try to mitigate this continuation of increases but only time will tell at this point.

Obviously we continue to focus on long-term shareholder value creation.

We're doing that through our brand equity building.

Of our key brands, our new products and new markets.

We are planning to spend approximately $40 million in Cap Ex next year.

I know of some you may have questions around pricing.

We did move pricing on selected products January 1 and that was in the order of magnitude of 2% to 3%.

We planned -- our objective really is to offset the steel price increases and other increases we might receive during the year with price increases.

Again, keep in mind it was just selected products January 1, we have planned in the range of 2% to 7% price increases, certainly not across the board but on selected products and some of those will be phased in throughout the year.

The last comment I would have is that since we will be announcing a new President on the 13th of February, a new HON INDUSTRIES President, I thought I would inform you of that today.

Certainly not the name.

We'll give you the name on the 13th.

This is part of the board of directors planned succession and it will be an internal candidate.

So this is very much in line with our planning and succession development so there should be no surprises there.

With that I conclude by just saying again, I'm pleased with our fourth quarter results.

I would like to be able to sit here and tell you that I think we've seen a turnaround but I will be very honest to you and say that I have concerns as we look forward even into the early part of 2003 and as I indicated earlier, I -- maybe we'll get some clarification from the U.N. today.

Maybe not.

But I do believe it is having a major impact on our economy.

And obviously on our industry.

With that, I'll sign off and I would be happy to take any questions or comments that you might have.

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Again, ladies and gentlemen, if you do have a question, please press the 1 at this time.

Our first question is from the line of Budd Bugatch [ph] with Raymond James.

Please go ahead.

Good morning.

This is Brian Gordon.

Unfortunately Budd wasn't able to be on the call this morning.

First question is kind of just a detail-oriented question.

Do you believe that the reduction tax rate will be sustainable for the year?

Yes.

Brian, yes, we do.

Okay.

Second question has to deal with the volume increase that you saw in office.

Is roughly $23 million.

If I have what you said earlier correctly, you're saying that roughly $4 million of that was due to new products purchased by your stocking customers and 8% was better logistics to those customers.

Which reduced our backlog, correct.

Which reduced the backlog.

What do you attribute the other $11 million to?

Well, we just continue to gain share.

I think we're continuing to, you know, in our base business.

I just think we're doing quite well.

You know, it was in products that I think appealed to those that are looking for greater and greater value in these difficult times so I think it's just nothing more than that.

Do you think any of that was ordering ahead of the new year price increases?

Yeah, it was.

I said I probably -- the improved delivery and logistics system and lowering it, our backlog was in part that.

And probably to the tune of maybe $4 million of that.

Of the $8 million there.

So, it wasn't a big number but it was still attractive obviously.

Okay.

Let's see.

Any guidance on how we should be looking at hearth margins for this year versus 2002?

They ramped up quite considerably over the course of the year.

How sustainable are those margins?

I think they're sustainable.

I think we made some fundamental changes in our business.

Remember, I talked about pruning out less profitable products.

We did that in some of our base business as well as some of our own distribution.

And we've continued to work diligently on our cost structure and so I think what we've accomplished will definitely be sustainable.

Could they improve from the 10.8% the end of this year?

They might but you know, I'm still concerned back on the purchase material side.

You know, we do buy a lot of steel there.

We buy other commodities.

So, I just -- I am concerned about that.

I know I said with increased prices but at this point, there's so much uncertainty that I really -- loss to give you a real good feel and do much forecasting at this point, Brian.

Okay.

Final question deals with order trends you saw during the fourth quarter and perhaps through the first few weeks of this year in both hearth and in office.

Our order trends in the fourth quarter were strong.

Obviously, because we have such short lead times so we were able to get out.

So, we had strong trends in the fourth quarter.

As I said earlier, perhaps I didn't convey it as well as I should have, on the office furniture side, we have seen softening of orders since the first of the year.

And I attribute it to all of the concern about the economy, et cetera.

The hearth side has continued to be stronger.

But on the office furniture, it has been softer.

And if I heard you correctly, you believe that it could actually be below what BIFMA [ph] is currently forecasting?

I think the industry could be below.

I think we'll still outperform the industry.

But frankly, Global Insights or the previous DRI have not been terribly accurate in this forecasting.

Their forecast each quarter have continued to be reduced.

Simply because, you know, the industry has been dropping and -- but I think they might be optimistic with with only a 2% decline in this first quarter.

I think it could be larger but you know, I really -- I don't really know at this point.

There's so much uncertainty out there.

Given what you're seeing right now in your hearth orders, do you think that could be positive for the quarter versus the prior year?

Yeah, I think the hearth will be.

Okay.

Well, thank you very much.

You're welcome, Brian.

Thank you.

We have a question from the line of Craig Kennison with Robert W. Baird.

Please go ahead.

Thanks and congratulations on an outstanding quarter on many fronts.

First question has to do with just following up on the hearth side of the business.

Is there any way you can quantify the revenue associated with the pruning activity in 2002?

Yeah, it was about $11 to $12 million.

And in 2003, are we still pruning or have we finished that activity?

As I said in the call, I think we're basically finished there.

And then can you quantify the revenue impact of some of these new market opportunities and the outdoor cooking and central vacuum area?

Well, the industries in both of those are quite large.

I think the outdoor cooking and barbecue area, if I recall the numbers correctly, I think it is like a $4 billion industry and other -- I don't know the exact number for central vacs but if you look at total specialty products and home, it is probably another $8 billion or something of that order magnitude.

There's great opportunities.

I think we look at ourselves and say that maybe in that segment of our industry, maybe we're planning in a $13 to $14 billion industry.

But those are some guesstimates on our part.

In terms of the market share gains you've experienced on the office furniture side, can you segment that from contract to retail and say where you might be gaining more share or whether it's just a mix shift toward more the retail and away from the contract market?

No, actually, as we looked throughout the year, we actually gained -- we believe, share in each of the segments but you know, the fact is since we -- there are estimates and nobody reports them directly from an industry point of view.

It is hard for us to say concretely that we did but we do believe that -- we did gain share, but we do believe that we were successful in gaining share even in our newest company which is [INAUDIBLE] as we went to the performance contractor.

We gained share there.

That's terrific.

Then, can you comment on corporate and other -- that expense line.

Can you remind me again what are the key expenses in that line item?

I'm going to ask Jerry to make comments on that.

That includes all of our corporate costs.

It includes our tech center and our new product development that we have at corporate.

It includes our interest expense.

Our interest income.

Those types of corporate expenses.

Okay.

And then that line tends to be variable from quarter to quarter.

Can you provide me an insight into the seasonality of that number and how we should think about that going forward?

Well, [INAUDIBLE] medical healthcare costs run through there.

So, it is really -- the seasonality of it really changes as we go through the course of the year.

And there really is no set way that we can really say it is going to be up or down from one quarter to the other.

It kind of flows with our business.

You'll see it come down next year just because only having $50 million in debt, we'll have much less interest expense next year going forward.

So, I think we ended the year at $35 million in that line item.

We should be below that for '03?

Correct.

My final question has to do just with the dividend policy and whether you're considering any dividend increase in whether that policy has changed at all.

Well, we have -- our board of directors have adopted a guideline and that will be something we'll be reviewing with our board at our February 12th meeting.

Terrific.

Thanks again.

You're quite welcome, Craig.

We have no additional questions.

Please continue.

Well, if there aren't additional questions, again, I would just like to thank you for joining us this morning.

I think for the long-term, we're doing the right things.

I think we're making the appropriate investments for the long term.

As I said earlier in new products and building our brands.

And continuing to work on our cost structure.

So, but I have the concern again as I said about the general economy.

So, again, thank you very much for joining us today.

Bye.

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